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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-13106
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ESSEX PROPERTY TRUST, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Maryland 77-0369576
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
925 East Meadow Drive, Palo Alto, California 94303
(Address of principal executive offices) (Zip code)
(650) 494-3700
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Common Stock, $.0001 par value New York Stock Exchange
Rights to purchase Series A Junior
Participating New York Stock Exchange
Preferred Stock, par value $.0001
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [_] No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [X]
As of March 24, 2000, the aggregate market value of the voting stock held
by non-affiliates of the registrant was $447,420,276. The aggregate market
value was computed with reference to the closing price on the New York Stock
Exchange on such date. This calculation does not reflect a determination that
persons are affiliates for any other purpose.
As of March 24, 2000, 18,090,886 shares of Common Stock ($.0001 par value)
were outstanding.
LOCATION OF EXHIBIT INDEX:
The index exhibit is contained in Part IV, Item 14, on page number 36.
DOCUMENTS INCORPORATED BY REFERENCE:
The following document is incorporated by reference in Part III of the
Annual Report on Form 10K: Proxy statement for the annual meeting of
stockholders of Essex Property Trust, Inc. to be held April 25, 2000.
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TABLE OF CONTENTS
FORM 10-K
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Page No.
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PART I
<S> <C>
Item 1Business....................................................... 1
Item 2Properties..................................................... 19
Item 3Legal Proceedings.............................................. 22
Item 4Submission of Matters to a Vote of Security Holders............ 22
PART II
Item 5Market for Registrant's Common Stock and Related Stockholder
Matters............................................................. 23
Item 6Summary Financial and Operating Data........................... 25
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 26
Item 7AQuantitiative and Qualitative Disclosures About Market Risk... 34
Item 8Financial Statements and Supplementary Data.................... 34
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 34
PART III
Item 10Directors and Executive Officers of the Registrant............ 35
Item 11Executive Compensation........................................ 35
Item 12Security Ownership of Certain Beneficial Owners and
Management.......................................................... 35
Item 13Certain Relationships and Related Transactions................ 35
PART IV
Item 14Exhibits, Financial Statements Schedules and Reports on Form
8-K................................................................. 36
Signatures........................................................... S-1
</TABLE>
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PART I
Forward Looking Statements
Certain statements in this Report on Form 10-K which are not historical
facts may be considered forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended, including statements
regarding the Company's expectations, hopes, intentions, beliefs and
strategies regarding the future. Forward looking statements include statements
regarding the Company's expectation as to the timing of completion of current
development projects, expectation as to the total projected costs and rental
rates of current development projects, beliefs as to the adequacy of future
cash flows to meet operating requirements and to provide for dividend payments
in accordance with REIT requirements and expectations as to the amount of non-
revenue generating capital expenditures for the year ended December 31, 2000,
potential acquisitions and developments, the anticipated performance of
existing properties, future acquisitions and developments and statements
regarding the Company's financing activities. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors including,
but not limited to, that the actual completion of development projects will be
subject to delays, that the total projected costs of current development
projects will exceed expectations, that such development projects will not be
completed, that future cash flows will be inadequate to meet operating
requirements and/or will be insufficient to provide for dividend payments in
accordance with REIT requirements, that the actual non-revenue generating
capital expenditures will exceed the Company's current expectations, as well
as those risks, special considerations, and other factors discussed under the
caption "Other Matters/Risk Factors" in Item 1 of this Report on Form 10-K for
the year ended December 31, 1999, and those other risk factors and special
considerations set forth in the Company's other filings with the Securities
and Exchange Commission (the "SEC") which may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements.
Item 1. Business
Description of Business
Essex Property Trust, Inc. ("the Company" or "Essex") is a self-
administered and self-managed equity real estate investment trust ("REIT")
engaged in the ownership, acquisition, development and management of
multifamily apartment communities. The Company's multifamily portfolio
consists of ownership interests in 68 properties (comprising 15,106 apartment
units), 30 of which are located in Southern California (Los Angeles, Ventura,
Orange and San Diego counties), 16 of which are located in Northern California
(the San Francisco Bay Area) and 22 of which are located in the Pacific
Northwest (18 in the Seattle metropolitan area and 4 in the Portland, Oregon
metropolitan area). The Company also has ownership interests in an office
building located in Northern California (Palo Alto) which houses the Company's
headquarters, and three retail shopping centers located in the Pacific
Northwest (the "Commercial Properties," and together with the Company's 68
multifamily residential properties, the "Properties"). The Company and
affiliated entities and joint ventures also have entered into commitments for
the development of 1,904 units in nine multifamily communities; five in
Northern California, two in Southern California and two in the Pacific
Northwest.
The Company was incorporated in the state of Maryland in March 1994. On
June 13, 1994, the Company commenced operations with the completion of an
initial public offering ("the Offering") in which it issued 6,275,000 shares
of common stock at $19.50 per share. The net proceeds of the Offering of
$112.1 million were used to acquire an approximate 77.2% general partnership
interest in Essex Portfolio, L.P. (the "Operating Partnership").
The Company conducts substantially all of its activities through the
Operating Partnership. The Company currently owns an approximate 89.7% general
partnership interest and senior members of the Company's management and
certain outside investors own approximately 10.3% limited partnership
interests in the Operating Partnership. As the sole general partner of the
Operating Partnership, the Company has control over the management of the
Operating Partnership and over each of the Properties.
1
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Business Objectives
The Company's primary business objective is to maximize funds from
operations and total returns to stockholders through active property and
portfolio management including redevelopment of properties. The Company's
strategies include:
. Active Property Marketing and Management. Maximize, on a per share
basis, cash available for distribution and the capital appreciation of
its property portfolio through active property marketing and management
and, if applicable, redevelopment.
. Selected Expansion of Property Portfolio. Increase, on a per share
basis, cash available for distribution through the acquisition and
development of multifamily residential properties in selected major
metropolitan areas located in the west coast region of the United
States.
. Optimal Portfolio Asset Allocations. Produce predictable financial
performance through a portfolio asset allocation program that seeks to
increase or decrease the investments in each market based on changes in
regional economic and local market conditions.
. Management of Capital and Financial Risk. Optimize the Company's capital
and financial risk positions by maintaining a conservative leverage
ratio and minimizing the Company's cost of capital. The Company
evaluates financing alternatives including alternative financing sources
through joint ventures, broadening the Company's access to capital.
Business Principles
The Company was founded on, has followed, and intends to continue to follow
the business principles set forth below:
Property Management. Through its long-standing philosophy of active
property management and a customer satisfaction approach, coupled with a
discipline of internal cost control, the Company seeks to retain tenants,
maximize cash flow, enhance property values and compete effectively for new
tenants in the marketplace. The Company's regional portfolio managers are
accountable for overall property operations and performance. They supervise
on-site managers, provide training for the on-site staff, monitor fiscal
performance against budgeted expectations, monitor property performance
against the performance of competing properties in the area, prepare operating
and capital budgets for executive approval, and implement new strategies
focused on enhancing tenant satisfaction, increasing revenue, controlling
expenses, and creating a more efficient operating environment.
Business Planning and Control. Real estate investment decisions are
accompanied by a multiple year plan, to which executives and other managers
responsible for obtaining future financial performance must agree. Performance
versus plan serves as a significant factor in determining compensation.
Property Type Focus. The Company focuses on acquisition and development of
multifamily residential communities, containing between 75 and 600 units.
These types of properties offer attractive opportunities because such
properties (i) are often mispriced by real estate sellers and buyers who lack
the Company's ability to obtain and use real-time market information, (ii)
provide opportunities for value enhancement since many of these properties
have been owned by parties that are either inadequately capitalized or lack
the professional property management expertise of the Company.
Geographic Focus. The Company focuses its property investments in markets
that meet the following criteria:
. Major Metropolitan Areas. The Company focuses on metropolitan areas
having a regional population in excess of one million people. Real
estate markets in these areas are typically characterized by a
relatively greater number of buyers and sellers and are, therefore, more
liquid. Liquidity is an important element for implementing the Company's
strategy of varying its portfolio in response to changing market
conditions.
2
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. Supply Constraints. The Company believes that properties located in real
estate markets with limited development or redevelopment opportunities
are well suited to produce increased rental income. When evaluating
supply constraints, The Company reviews: (i) availability of developable
land sites on which competing properties could be readily constructed;
(ii) political barriers to growth resulting from a restrictive local
political environment regarding development and redevelopment (such an
environment, in addition to the restrictions on development itself, is
often associated with a lengthy development process and expensive
development fees); and (iii) physical barriers to growth, resulting from
natural limitations to development, such as mountains or waterways.
. Rental Demand Created by High Cost of Housing. The Company concentrates
on markets in which the cost of renting is significantly lower than the
cost of owning a home. In such markets, rent levels are higher and
operating expenses and capital expenditures, as a percentage of rent,
are lower in comparison with markets that have a lower cost of owning a
home.
. Job Proximity. The company believes that most renters select housing
based on its proximity to their jobs and on related commuting factors.
The Company obtains local area information relating to its residential
properties and uses this information when making multifamily residential
property acquisition decisions. The Company also reviews the location of
major employers relative to its portfolio and potential acquisition
properties.
Following the above criteria, the Company is currently pursuing investment
opportunities in selected markets of Northern and Southern California and the
Pacific Northwest.
Active Portfolio Management Through Regional Economic Research and Local
Market Knowledge. The Company was founded on the belief that the key elements
of successful real estate investment and portfolio growth include extensive
regional economic research and local market knowledge. The Company utilizes
its economic research and local market knowledge to make appropriate portfolio
allocation decisions that it believes result in better overall operating
performance and lower portfolio risk. The Company maintains and evaluates:
. Regional Economic Data. The Company evaluates and reviews regional
economic factors for the markets in which it owns properties and where
it considers expanding its operations. The Company's research focuses on
regional and sub-market supply and demand, economic diversity, job
growth, market depth and the comparison of rental price to single-family
housing prices.
. Local Market Conditions. Local market knowledge includes (i) local
factors that influence whether a sub-market is desirable to tenants;
(ii) the extent to which the area surrounding a property is improving or
deteriorating; and (iii) local investment market dynamics, including the
relationship between the value of a property and its yield, the
prospects for capital appreciation and market depth.
Recognizing that all real estate markets are cyclical, the Company
regularly evaluates the results of regional economic and local market research
and adjusts portfolio allocations accordingly. The Company actively manages
the allocation of assets within its portfolio. The Company seeks to increase
its portfolio allocation in markets projected to have economic growth and to
decrease such allocations in markets projected to have declining economic
conditions. Likewise, the Company also seeks to increase its portfolio
allocation in markets that have attractive property valuations and to decrease
such allocations in markets that have inflated valuations and low relative
yields. Although the Company is generally a long-term investor, it does not
establish defined or preferred holding periods for its Properties.
Current Business Activities
The Company conducts substantially all of its activities through the
Operating Partnership, of which it owns an approximate 89.7% general
partnership interest. The approximate 10.3% limited partnership interests in
the Operating Partnership are owned by directors, officers and employees of
the Company and certain third-party investors. As the sole general partner of
the Operating Partnership, the Company has operating control over the
management of the Operating Partnership and each of the Properties. From time
to time, the Company may invest in properties through the acquisition of an
interest in another entity, based upon the criteria described above. The
Company does not plan to invest in any securities of other entities not
engaged in real estate activities.
3
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The Company has elected to be treated as a real estate investment trust
("REIT") for federal income tax purposes, commencing with the year ended
December 31, 1994. The Company provides some of its fee-based asset management
and disposition services as well as third-party property management and
leasing services through Essex Management Corporation ("EMC"), in order to
maintain compliance with REIT tax rules. The Company owns 100% of EMC's 19,000
shares of nonvoting preferred stock. Executives of the Company own 100% of
EMC's 1,000 shares of common stock.
In July 1999, the Operating Partnership completed the sale of 2,000,000
units of its 9.30% Series D Cumulative Redeemable Preferred Units to two
related institutional investors in a private placement, at a price of $25.00
per unit. The net proceeds from this sale were approximately $48,925,000. In
September 1999, the Operating Partnership completed the sale of 2,200,000
units of its 9.25% Series E Cumulative Redeemable Preferred Units to an
institutional investor in a private placement, at a price of $25.00 per unit.
The net proceeds from this sale were approximately $53,400,000.
During 1999, WBP I Holding Corp. (formerly known as "Tiger/Westbrook Real
Estate Fund, L.P."), and WBP II Holding Corp. (formerly known as
"Tiger/Westbrook Real Estate Co-Investment Partnership, L.P.") (collectively,
"Tiger/Westbrook") converted 1,415,313 shares of its ownership in the
Company's 8.75% Convertible Preferred Stock, Series 1996A (the "Convertible
Preferred Stock") into 1,617,501 shares of Common Stock. At December 31, 1999,
Tiger Westbrook owned 184,687 shares of Convertible Preferred Stock.
In March 1999, the Company's Board of Directors authorized the Operating
Partnership to purchase up to 500,000 shares of the Company's Common Stock, or
approximately 3% of the issued and outstanding Common Stock of the Company, at
a total price per share not to exceed $29.00 in the open market or through
negotiated or block transactions. During 1999, the Operating Partnership
purchased 261,900 shares of the Company's outstanding Common Stock. The
weighted average price paid for the shares was $27.17.
In September 1999, the Company formed a program in which directors and
management of the Company can participate indirectly in an investment in the
Company's common stock. The participants have entered into a swap agreement
with a securities broker whereby the securities broker has acquired, in open
market transactions, 223,475 shares of the Company's common stock. The
agreement terminates in five years at which time the settlement amount is
determined by comparing the original purchase price of the stock plus interest
at a rate of LIBOR plus 1.5% to the termination date market value of the
shares and all dividends received during the investment period. In certain
circumstances the participants may be required to provide collateral to the
securities broker. The Company has guaranteed performance of the participants
with respect to any obligations relating to the swap agreement.
Acquisitions
During 1999, the Company acquired ownership interests in nine multifamily
properties consisting of 2,450 units with an aggregate purchase price of
approximately $213,700,000. These investments were primarily funded by sales
of preferred units and issuance of common units by the Operating Partnership,
the contribution of equity from joint venture partners, cash generated from
operations, proceeds from the dispositions of properties, proceeds from new
and assumed loans and the Company's line of credit. Of the nine properties
purchased in 1999, eight properties (2,351 units) are located in Southern
California and one (99 units) is located in Northern California.
4
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Multifamily property ownership interests acquired in 1999 are as follows:
<TABLE>
<CAPTION>
Purchase
Price
(in
Property Name Location Units millions)
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<S> <C> <C> <C>
Southern California
Coronado at Newport South(1)............ Newport Beach, CA 715 $ 64.0
Coronado at Newport North(1)............ Newport Beach, CA 732 62.0
Avondale at Warner Center............... Woodland Hills, CA 446 35.0
Loraine................................. Glendale, CA 132 13.5
Columbus................................ Glendale, CA 83 7.7
Fairways(2)............................. Newport Beach, CA 74 7.5
Glenbrook............................... Pasadena, CA 84 7.0
Euclid.................................. Pasadena, CA 85 6.7
Northern California
Mt. Sutro Terrace(3).................... San Francisco, CA 99 10.3
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Total Acquisitions.................... 2,450 $213.7
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</TABLE>
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(1) The Company holds an approximate 49.9% ownership interest in the joint
venture that owns this property.
(2) The Company purchased a leasehold interest in this property with a
remaining term of 28 years.
(3) The Company holds an approximate 46% ownership interest in the joint
venture that owns this property.
In October 1999, the Company entered into a joint venture and received an
approximate 49.9% equity interest (Coronado at Newport joint venture). The
Company contributed its investment of Coronado at Newport North to the joint
venture. At the same time, the partners purchased Coronado at Newport Beach
South. Generally, profit and loss is allocated to the partners in accordance
with their ownership interests. In addition to its equity earnings, the
Company is entitled to management and redevelopment fees from the joint
venture and incentive payments based on the financial success of the joint
venture.
In December 1999, the Company entered into a joint venture and received an
approximate 20% equity interest. The Company contributed its investment in
Riverfront Apartments, Casa Mango Apartments, and Westwood Apartments into the
joint venture (AEW joint venture). The Company also contributed land and
development rights for a development community located in Oxnard, California.
Generally, profit and loss are allocated to the partners in accordance with
their ownership interests. In addition to its equity earnings, the Company is
entitled to management and development fees from the joint venture and
incentive payments based on the financial success of the joint venture.
Dispositions
In 1999, the Company sold its former headquarters building and one
multifamily property located in Southern California for an aggregate sales
price of $29,500,000. The proceeds were used to fund acquisitions of
multifamily properties, and to repay borrowings under the Company's line of
credit.
Development
Development communities are defined by the Company as new apartment
properties that are being constructed or are newly constructed and in a phase
of lease-up and have not yet reached stabilized operations. As of December 31,
1999, the Company had nine development communities, with an aggregate of 1,904
multifamily units. During 1999, the Company announced three new development
communities and also reached stabilized operations at two apartment properties
containing 480 units that were previously reported as development communities.
In connection with the properties currently under development, the Company has
directly, or in some cases through its joint venture entities, entered into
contractual construction related
5
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commitments with unrelated third parties. As of December 31, 1999, the Company
is committed to fund approximately $78,700,000. The following table sets forth
information regarding the development communities at December 31, 1999.
<TABLE>
<CAPTION>
Project Project Cost
Estimated Cost(1) Incurred(1)
As of As of
12/31/99 12/31/99 Projected/
Development Communities Location Units (in millions) (in millions) Actual Stabilization
- ----------------------- -------- ----- ----------------- ------------ --------------------
<S> <C> <C> <C> <C> <C>
Presale transactions(2)
The Carlyle............. San Jose, CA 132 $ 19.0 $ .5 March 2000
Waterford............... San Jose, CA 238 36.0 .8 July 2000
Joint Venture
transactions(3)
Fountain Court.......... Seattle, WA 320 34.0 34.0 March 2000
Vintage @ the Rose...... Oxnard, CA 404 54.7 18.7 February 2002
Direct Development(4)
Bel Air (Canyon Point).. San Ramon, CA 114 18.2 18.1 January 2000
Mirabella (Marina
View).................. Marina del Rey, CA 188 33.7 32.1 March 2000
Station Park............ Pleasant Hill, CA 106 15.3 14.9 January 2000
Perry Creek............. Bothell, WA 132 15.0 8.2 December 2000
Essex at Lake Merritt... Oakland, CA 270 63.2 8.4 December 2002
----- ------ ------
Total Development
Communities.......... 1,904 $289.1 $135.7
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</TABLE>
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(1) Project estimated cost and cost incurred as of December 31, 1999 includes
total estimated and incurred costs for the development projects.
(2) The Company has contracted with independent third parties to acquire these
projects upon completion based on a formula as defined in the presale
purchase agreements.
(3) The Company is a 51% and 20% partner in the entities which are developing
Fountain Court and Vintage @ the Rose, respectively.
(4) The Company is the sole owner of these development projects.
The Company intends to continue to pursue the development of multifamily
communities to the extent that the market conditions and the specific project
terms are considered favorable.
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Redevelopment
Redevelopment communities are defined by the Company as existing properties
owned or recently acquired which have been targeted for investment by the
Company with the expectation of increased financial returns. Redevelopment
communities typically have apartment units that are under construction and as
a result, may have less than stabilized operations. The Company is entitled to
receive redevelopment fee income on the joint venture redevelopment
communities. As of December 31, 1999, the Company had the following seven
redevelopment communities.
<TABLE>
<CAPTION>
Estimated Renovation Cost(5)
Redevelopment At December 31, 1999 Projected
Communities(1) Location Units (in millions) Completion
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<S> <C> <C> <C> <C>
Coronado @ Newport
North(2)............... Newport Beach, CA 732 $13.6 December 2001
Hillcrest Park.......... Newbury Park, CA 608 9.6 June 2001
Westwood(3)............. Cupertino, CA 116 2.7 December 2000
Hampton Place
(Loraine).............. Glendale, CA 132 2.3 September 2000
Windsor Terrace......... Pasadena, CA 122 1.9 June 2000
Hampton Court
(Columbus)............. Glendale, CA 83 1.6 September 2000
Foothill/Twincreeks(4).. San Ramon, CA 176 .4 June 2000
----- -----
Total Redevelopment
Communities.......... 1,969 $32.1
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</TABLE>
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(1) The Company owns 100% of each redevelopment community unless otherwise
noted.
(2) The Company holds an approximate 49.9% interest in the joint venture that
owns this property.
(3) The Company holds a 20% interest in the joint venture that owns this
property.
(4) The redevelopment for this property includes renovation of the leasing
center only.
(5) Represents the projected cost of renovation of the apartment community
excluding the original cost of land and buildings.
Offices and Employees
The Company is headquartered in Palo Alto, California, and has regional
offices in Seattle, Washington, Portland, Oregon, Calabasas, California and
Tustin, California. As of December 31, 1999, the Company had approximately 542
employees.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances on, or in such property.
Such laws often impose liability without regard as to whether the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The presence of such substances, or the failure to properly
remediate such substances, may adversely affect the owner's or operator's
ability to sell or rent such property or to borrow using such property as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances or wastes also may be liable for the costs of removal or
remediation of such substances at the disposal or treatment facility to which
such substances or wastes were sent, whether or not such facility is owned or
operated by such person. In addition, certain environmental laws impose
liability for release of asbestos-containing materials ("ACMs"), into the air,
and third parties may seek recovery from owners or operators of real
properties for personal injury associated with ACMs. In connection with the
ownership (direct or indirect), operation, management and development of real
properties, the Company could be considered an owner or operator of such
properties or as having arranged for the disposal or treatment of hazardous or
toxic substances and, therefore, may be potentially liable for removal or
remediation costs, as well as certain other costs, including governmental
fines and costs related to injuries of persons and property.
7
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All of the Properties have been subjected to preliminary environmental
assessments, including a review of historical and public data ("Phase I
assessments"), by independent environmental consultants. Phase I assessments
generally consist of an investigation of environmental conditions at the
Property, including a preliminary investigation of the site, an identification
of publicly known conditions occurring at properties in the vicinity of the
site, an investigation as to the presence of polychlorinated biphenyl's
("PCBs"), ACMs and above-ground and underground storage tanks presently or
formerly at the sites, and preparation and issuance of written reports. As a
result of information collected in the Phase I assessments, certain of the
Properties were subjected to additional environmental investigations,
including, in a few cases, soil sampling or ground water analysis to further
evaluate the environmental conditions of those Properties.
The environmental studies revealed the presence of groundwater
contamination on certain of the Properties. Certain of these Properties had
contamination which was reported to have migrated on-site from adjacent
industrial manufacturing operations, and one Property was previously occupied
by an industrial user that was identified as the source of contamination. The
environmental studies noted that certain of the Properties are located
adjacent to and possibly down gradient from sites with known groundwater
contamination, the lateral limits of which may extend onto such Properties.
The environmental studies also noted that contamination existed at certain
Properties because of the former presence of underground fuel storage tanks
that have been removed. There are asbestos-containing material in a number of
the properties, primarily in the form of ceiling texture, floor tiles and
adhesives, which are generally in good condition. At properties where radon,
hydrogen sulfide and/or methane has been identified as a potential concern,
the Company has implemented remediating measures and additional testing. Based
on its current knowledge, the Company does not believe that future liabilities
associated with asbestos, radon, hydrogen or methane will be material. Based
on the information contained in the environmental studies, the Company
believes that the costs, if any, it might bear as a result of environmental
contamination or other conditions at these Properties would not have a
material adverse effect on the Company's financial condition, result of
operations, or liquidity.
Certain Properties that have been sold by the Company were identified as
having potential groundwater contamination. While the Company does not
anticipate any losses or costs related to groundwater contamination on
Properties that have been sold, it is possible that such losses or costs may
materialize in the future.
Except with respect to one Property, the Company has no indemnification
agreements from third parties for potential environmental clean-up costs at
its Properties. The Company has no way of determining at this time the
magnitude of any potential liability to which it may be subject arising out of
unknown environmental conditions or violations with respect to the properties
formerly owned by the Company. No assurance can be given that existing
environmental studies with respect to any of the Properties reveal all
environmental liabilities, that any prior owner or operator of a Property did
not create any material environmental condition not known to the Company, or
that a material environmental condition does not otherwise exist as to any one
or more of the Properties. The Company has no insurance coverage for the types
of environmental liabilities described above.
Insurance
The Company carries comprehensive liability, fire, extended coverage and
rental loss insurance for each of the Properties. There are, however, certain
types of extraordinary losses for which the Company does not have insurance.
All of the Properties are located in areas that are subject to earthquake
activity. The Company has obtained earthquake insurance for all the
Properties. This earthquake insurance is subject to an aggregate limit of
$40.0 million payable upon a covered loss in excess of a $7.5 million self-
insured retention amount and a 5% deductible. The Company may selectively
exclude properties from being covered by earthquake insurance based on
management's evaluation of the following factors: (i) the availability of
coverage on terms acceptable to the Company, (ii) the location of the property
and the amount of seismic activity affecting that region, and, (iii) the age
of the property and building codes in effect at the time of construction.
Despite earthquake coverage on all of the Company's Properties, should a
property sustain damage as a result of an earthquake, the Company may incur
losses due to deductibles, co-payments and losses in excess of applicable
insurance, if any.
8
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Although the Company carries certain insurance for non-earthquake damages
to its properties and liability insurance, the Company may still incur losses
due to uninsured risks, deductibles, co-payments or losses in excess of
applicable insurance coverage.
Competition
The Company's Properties compete for tenants with similar properties
primarily on the basis of location, rent charged, services provided, and the
design and condition of the improvements. Competition for tenants from
competing properties affects the amount of rent charged as well as rental
growth rates, vacancy rates, deposit amounts, and the services and features
provided at each property. While economic conditions are generally stable in
the Company's target markets, a prolonged economic downturn could have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
The Company also experiences competition when attempting to acquire
properties that meet its investment criteria. Such competing buyers include
domestic and foreign financial institutions, other REIT's, life insurance
companies, pension funds, trust funds, partnerships and individual investors.
Working Capital
The Company expects to meet its short-term liquidity requirements by using
its working capital, cash generated from operations, and its amounts available
on its line of credit. The Company believes that its future net cash flows
will be adequate to meet operating requirements and to provide for payment of
dividends by the Company in accordance with REIT qualification requirements.
The Company has credit facilities in the committed amount of approximately
$100,000,000. At December 31, 1999 the Company had an outstanding balance of
$10,500,000 under these facilities.
Other Matters/Risk Factors
Debt Financing
At December 31, 1999, the Company had approximately $384,108,000 of
indebtedness (including $91,820,000 of variable rate indebtedness, of which
$58,820,000 is capped at interest rates ranging from 7.1% to 7.3%).
Essex is subject to the risks normally associated with debt financing,
including the following:
. cash flow may not be sufficient to meet required payments of principal
and interest;
. inability to refinance existing indebtedness on encumbered Properties;
and
. the terms of any refinancing may not be as favorable as the terms of
existing indebtedness.
Uncertainty of Ability to Refinance Balloon Payments
At December 31, 1999, the Company had an aggregate of approximately
$384,108,000 of mortgage debt and line of credit borrowings, some of which are
subject to balloon payments of principal. The Company does not expect to have
sufficient cash flows from operations to make all of such balloon payments
when due under these mortgages and the line of credit borrowings. At December
31, 1999, these mortgages and the line of credit borrowings had the following
scheduled maturity dates: 2000--$53.7 million; 2001--$2.8 million; 2002--
$24.8 million; 2003--$30.5 million, 2004--$2.7 million, 2005 and thereafter--
$269.6 million. The Company may not be able to refinance such mortgage
indebtedness. The Properties subject to these mortgages could be foreclosed
upon or otherwise transferred to the mortgagee. This could mean a loss to the
Company of income and asset value. Alternatively, the Company may be required
to re-finance the debt at higher interest rates. If the Company is unable to
make such payments when due, a mortgage lender could foreclose on the property
securing the mortgage, which could have a material adverse effect on the
financial condition and results of operations of the Company.
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Risk Of Rising Interest Payments
At December 31, 1999, the Company had approximately $58,820,000 of long-
term variable rate indebtedness bearing interest at a floating rate tied to
the rate of short-term tax exempt securities (which matures at various dates
from 2014 through 2026) and $10,500,000 of variable rate indebtedness under
its line of credit bearing interest at 1.15% over LIBOR and $22,500,000 of
venture rate indebtedness under a construction loan bearing interest at 2.00%
over LIBOR (both of which mature in 2000). Although the $58,820,000 of long-
term variable rate indebtedness is subject to an interest rate protection
agreement, which may reduce the risks associated with fluctuations in interest
rates, an increase in interest rates may have an adverse effect on net income
and results of operations of the Company.
Risk That Interest Rate Hedging Arrangements Cannot Be Refinanced Or Replaced
The Company has, from time to time, entered into agreements to reduce the
risks associated with increases in interest rates, and may continue to do so.
Although these agreements may partially protect against rising interest rates,
these agreements also may reduce the benefits to the Company when interest
rates decline. There can be no assurance that any such hedging arrangements
can be refinanced or that the Company will be able to enter into other hedging
arrangements to replace existing ones if interest rates decline. Furthermore,
interest rate movements during the term of interest rate hedging arrangements
may result in a gain or loss on the Company's investment in the hedging
arrangement. In addition, if a hedging arrangement is not indexed to the same
rate as the indebtedness that is hedged, the Company may be exposed to losses
to the extent that the rate governing the indebtedness and the rate governing
the hedging arrangement change independently of each other. Finally,
nonperformance by the other party to the hedging arrangement may subject the
Company to increased credit risks. In order to minimize counterparty credit
risk, the Company's policy is to enter into hedging arrangements only with
large financial institutions that maintain an investment grade credit rating.
Acquisition Activities: Risks That Acquisitions Will Fail To Meet
Expectations
The Company intends to continue to acquire multifamily residential
properties. There are risks that acquired properties will fail to perform as
expected. Estimates of future income, expenses and the costs of improvements
necessary to allow the Company to market an acquired property as originally
intended may prove to be inaccurate. In addition, the Company expects to
finance future acquisitions, in whole or in part, under various forms of
secured or unsecured financing or through the issuance of partnership units by
the Operating Partnership or additional equity by the Company. The use of
equity financing, rather than debt, for future developments or acquisitions
could dilute the interest of the Company's existing stockholders. If new
acquisitions are financed under existing lines of credit, there is a risk
that, unless substitute financing is obtained, further availability under the
lines of credit for new development may not be available or may be available
only on disadvantageous terms. Also, the Company may not be able to refinance
its existing lines of credit upon maturity, or the terms of such refinancing
may not be as favorable as the terms of the existing indebtedness. Further,
acquisitions of properties are subject to the general risks associated with
real estate investments. See "Adverse Effect to Property Income and Value Due
to General Real Estate Investment Risks."
Risks That Development Activities Will Be Delayed Or Not Completed
The Company pursues multifamily residential property development projects
from time to time. Development projects generally require various governmental
and other approvals, the receipt of which cannot be assured. The Company's
development activities generally entail certain risks, including the
following:
. funds may be expended and management's time devoted to projects that may
not be completed;
. construction costs of a project may exceed original estimates possibly
making the project economically unfeasible;
. development projects may be delayed due to, among other things, adverse
weather conditions;
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. occupancy rates and rents at a completed project may be less than
anticipated; and
. expenses at a completed development may be higher than anticipated.
These risks may reduce the funds available for distribution to the
Company's stockholders. Further, the development of properties is also subject
to the general risks associated with real estate investments. See "Adverse
Effect to Property Income and Value Due to General Real Estate Investment
Risks."
The Geographic Concentration Of The Properties And Fluctuations In Local
Market May Adversely Impact Income
Significant amounts of rental revenues for the year ended December 31,
1999, were derived from Properties concentrated in Northern California (the
San Francisco Bay Area), Southern California (Los Angeles, Ventura, Orange and
San Diego counties), and the Pacific Northwest (the Seattle, Washington and
Portland, Oregon metropolitan areas). As a result of this geographic
concentration, if a local property market performs poorly, the income from the
Properties in that market could decrease. As a result of such a decrease in
income, the Company may be unable to pay expected dividends to the Company's
stockholders. The performance of the economy in each of these areas affects
occupancy, market rental rates and expenses and, consequently impacts the
income generated from the Properties and their underlying values. The
financial results of major local employers may also impact the cash flow and
value of certain of the Properties. Economic downturns in the local markets in
which the Company owns properties could have a negative impact on the
financial condition and results from operations of the Company.
Competition In The Multifamily Residential Market May Adversely Affect
Operations And The Rental Demand For the Company's Properties
There are numerous housing alternatives that compete with the multifamily
Properties in attracting residents. These include other multifamily rental
apartments and single family homes that are available for rent in the markets
in which the Properties are located. The Properties also compete for residents
with new and existing homes and condominiums that are for sale. If the demand
for the Company's Properties is reduced or if competitors develop and/or
acquire competing properties on a more cost-effective basis, rental rates may
drop, which may have a material adverse affect on the financial condition and
results of operations of the Company.
The Company also faces competition from other real estate investment
trusts, businesses and other entities in the acquisition, development and
operation of properties. Some of the competitors are larger and have greater
financial resources than the Company. This competition may result in increased
costs of properties the Company acquires and/or develops.
Debt Financing On Properties May Result In Insufficient Cash Flow
Where possible, the Company intends to continue to use leverage to increase
the rate of return on its investments and to provide for additional
investments that the Company could not otherwise make. There is a risk that
the cash flow from the Properties will be insufficient to meet both debt
payment obligations and the distribution requirements of the real estate
investment trust provisions of the Internal Revenue Code of 1986, as amended.
The Company may obtain additional debt financing in the future, through
mortgages on some or all of the Properties. These mortgages may be recourse,
non-recourse, or cross-collateralized. As of December 31, 1999, the Company
had 34 properties encumbered by debt. Of the 34 properties, 20 are secured by
deeds of trust relating solely to those properties, and with respect to the
remaining 14 properties, three cross-collateralized mortgages are secured by
eight properties, three properties, and three properties, respectively. The
holders of this indebtedness will have a claim against these Properties and to
the extent indebtedness is cross-collateralized, lenders may seek to foreclose
upon properties which are not the primary collateral for their loan. This may,
in turn, accelerate other indebtedness secured by Properties. Foreclosure of
Properties would cause a loss to the Company of income and asset value.
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Increase In Dividend Requirements As A Result Of Preferred Stock May Lead To
A Possible Inability To Sustain Dividends
In 1996, the Company sold its 8.75% convertible preferred stock, Series
1996A (the "Convertible Preferred Stock") to Westbrook Real Estate Fund I,
L.P. (formerly known as Tiger/Westbrook Real Estate Fund, L.P.) and Westbrook
Real Estate Co-Investment Partnership I, L.P. (formerly know as
Tiger/Westbrook Real Estate Company Investment Partnership L.P.). Westbrook
Real Estate Fund, L.P. and Westbrook Real Estate Co-Investment Partnership I,
L.P. are collectively referred to herein as "Westbrook". In 1998 and 1999, the
Operating Partnership issued $210 million in aggregate of Series B Cumulative
Redeemable Preferred Units (the "Series B Preferred Units"), Series C
Cumulative Redeemable Preferred Units, (the "Series C Preferred Units"),
Series D Cumulative Redeemable Preferred Units (the "Series D Preferred
Units") and Series E Cumulative Redeemable Preferred Units (the "Series E
Preferred Units"). The Series B Preferred Units, the Series C Preferred Units,
the Series D Preferred Units and the Series E Preferred Units are collectively
referred to herein as the "Preferred Units".
The terms of the Convertible Preferred Stock provides that dividends may be
paid on shares of Common Stock only if full, cumulative cash dividends have
been paid on all shares of Convertible Preferred Stock in an annual amount
equal to the greater of (i) $2.1875 per share (8.75% of the $25.00 per share
price), or (ii) the dividends (on an as-converted basis) paid with the respect
to the Common Stock plus, in both cases, any accumulated but unpaid dividends
on the Convertible Preferred Stock.
The terms of the preferred stock into which each series of Preferred Units
are exchangeable provide for certain cumulative preferential cash
distributions per each share of preferred stock. These terms also provide that
while such preferred stock is outstanding, no distributions may be authorized,
declared or paid on the Common Stock unless all distributions accumulated on
all shares of such preferred stock have been paid in full. The distributions
payable on such preferred stock and on the Convertible Preferred Stock may
impair the Company's ability to pay dividends on its Common Stock.
If the Company wishes to issue any Common Stock in the future (including,
upon exercise of stock options), the funds required to continue to pay cash
dividends at current levels will be increased. The Company's ability to pay
dividends will depend largely upon the performance of the Properties and other
properties that may be acquired in the future.
The Company's ability to pay dividends on the Company's stock is further
limited by the Maryland General Corporation Law. Under the Maryland General
Corporation Law, the Company may not make a distribution on stock if, after
giving effect to such distribution, either:
. the Company would not be able to pay its indebtedness as it becomes due
in the usual course of business; or
. the Company's total assets would be less than its total liabilities.
If the Company cannot pay dividends on its stock, its status as a real
estate investment trust may be jeopardized.
Existing Registration Rights And Preemptive Rights May Have An Adverse Effect
On The Market Price Of The Shares
Registration rights are held by the senior members of the Company's
management and certain outside investors (collectively, the "Founders") who as
of December 31, 1999 owned approximately 10.3% limited partnership interests
in the Operating Partnership. These rights include certain "demand" and
"piggyback" registration rights with respect to shares of Common Stock
issuable in connection with the exchange of their limited partnership
interests in the Operating Partnership. The aggregate 10.3% limited
partnership interests held by the Founders in the Operating Partnership is
exchangeable for an aggregate of 2,082,381 shares of Common Stock. In
addition, the Operating Partnership has invested in certain real estate
partnerships. Certain partners in
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such limited partnerships have the right to have their limited partnership
interests in such partnerships redeemed for cash or, at the Company's option,
for 757,113 shares of Common Stock. These partners also have certain "demand"
and "piggyback" registration rights with respect to the shares of Common Stock
that may be issued in exchange for such limited partnership interests. All of
the registration rights discussed above could materially adversely affect the
market price for the shares of Common Stock. In addition, the holders of the
Convertible Preferred Stock have preemptive rights to purchase a pro rata
share of shares of Common Stock that may be offered in the future. These
preemptive rights could have a material adverse effect on the market price for
the shares of Common Stock.
The Influence of Executive Officers, Directors and Significant Stockholders
and the Consent Requirements Of The Holders Of the Convertible Preferred
Stock May Be Detrimental To Holders of Common Stock
As of December 31, 1999, George M. Marcus, the Chairman of the Company's
Board of Directors, beneficially owned 1,981,655 shares of Common Stock
(including shares issuable upon exchange of limited partnership interests in
the Operating Partnership and assuming exercise of all vested options). This
represents approximately 11.0% of the outstanding shares of Common Stock. Mr.
Marcus currently does not have majority control over the Company. However, he
currently has, and likely will continue to have, significant influence with
respect to the election of directors and approval or disapproval of
significant corporate actions. Consequently, his influence could result in
decisions that do not reflect the interests of all stockholders of the
Company.
Under the partnership agreement of the Operating Partnership, the consent
of the holders of limited partnership interests is generally required for any
amendment of the agreement and for certain extraordinary actions. Through
their ownership of limited partnership interests and their positions in the
Company, the Company's directors and executive officers, including Messrs.
Marcus and Millichap, have substantial influence on the Company. Consequently,
their influence could result in decisions that do not reflect the interests of
all stockholders of the Company.
The holders of the Convertible Preferred Stock have certain consent rights
to actions the Company may take. The Company may not, among other things, make
certain revisions to its corporate structure and operations, without the
approval of holders of two-thirds of the outstanding shares of Convertible
Preferred Stock, voting as a separate class. This includes (i) revisions that
would affect the rights, priority and preferences of the Convertible Preferred
Stock, (ii) the merger or consolidation of the Company or the Operating
Partnership with another entity, (iii) the sale of all or substantially all of
the Company's assets, (iv) changing the geographic concentration of the
portfolio of Properties, and (v) undergoing a change in control of either the
Company or the Operating Partnership.
The Voting Rights Of Preferred Stock May Allow Holders Of Preferred Stock To
Impede Actions That Otherwise Benefit Holders Of Common Stock
In general, the holders of the preferred stock into which the Company's
Preferred Units are exchangeable do not have any voting rights. However, if
full distributions are not made on any outstanding preferred stock for six
quarterly distributions periods, the holders of preferred stock who have not
received distributions, voting together as a single class, will have the right
to elect two additional directors to serve on the Company's Board of
Directors. These voting rights continue until all distributions in arrears and
distributions for the current quarterly period on the preferred stock have
been paid in full. At that time, the holders of the preferred stock are
divested of these voting rights, and the term and office of the directors so
elected immediately terminates.
In addition, the Company may not authorized or create any class of series
of stock that ranks senior to this preferred stock with respect to (1) the
payment of dividends, (2) rights upon liquidation, dissolution or winding-up
of the Company, or (3) amend, alter or repeal the provisions of the Company's
Charter or Bylaws, that would materially and adversely affect these rights
without the consent of the holders of two-thirds of the outstanding shares of
each series of preferred stock (as applicable), each voting separately as a
single class. Also, while any shares of preferred stock are outstanding, the
Company may not (1) merge or consolidate with another entity, or
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(2) transfer substantially all of its assets to any corporation or other
entity, without the affirmative vote of the holders of at least two-thirds of
each series of preferred stock, each voting separately as a class, unless the
transaction meets certain criteria. These voting rights of the preferred stock
may allow holders of preferred stock to impede or veto actions by the Company
that would otherwise benefit the holders of the Company's Common Stock.
Exemption Of Westbrook and George Marcus From The Maryland Business
Combination Law May Allow Certain Transactions Between The Company And
Westbrook And/Or George Marcus To Proceed Without Compliance With Such Law
The Maryland General Corporation Law establishes special requirements for
"business combinations" between a Maryland corporation and "interested
stockholders" unless exemptions are applicable. An interested stockholder is
any person who beneficially owns ten percent or more of the voting power of
the then-outstanding voting stock. Among other things, the law prohibits for a
period of five years a merger and other similar transactions between the
Company and an interested stockholder unless the Board of Directors approved
the transaction prior to the party becoming an interested stockholder. The
five year period runs from the most recent date on which the interested
stockholder became an interested stockholder. The law also requires a
supermajority stockholder vote for such transactions after the end of the five
year period. This means that the transaction must be approved by at least:
. 80% of the votes entitled to be cast by holders of outstanding voting
shares; and
. 66% of the votes entitled to be cast by holders of outstanding voting
shares other than shares held by the interested stockholder with whom
the business combination is to be effected.
However, as permitted by the statute, the Board of Directors irrevocably
has elected to exempt any business combination by the Company with Westbrook
and its affiliates from the "business combination" provision of the Maryland
General Corporation Law. In addition, the Board of Directors similarly
exempted George M. Marcus, William A. Millichap, who are the chairman and a
director of the Company, respectively, and The Marcus & Millichap Company
("M&M") or any entity owned or controlled by Messrs Marcus and Millichap and
M&M. Consequently, the five-year prohibition and the super-majority vote
requirement described above will not apply to any business combination between
the Company and either Westbrook (or its affiliates), Mr. Marcus, Mr.
Millichap, or M&M. As a result, the Company may in the future enter into
business combinations with Westbrook (or its affiliates) or Messrs Marcus and
Millichap and M&M, without compliance with the super-majority vote
requirements and other provisions of the Maryland General Corporation Law.
Anti-Takeover Provisions Contained In The Operating Partnership Agreement,
Charter, Bylaws, The Convertible Preferred Stock And Certain Provisions Of
Maryland Law Could Delay, Defer Or Prevent A Change In Control Of the
Company
While the Company is the sole general partner of the Operating Partnership,
and generally has full and exclusive responsibility and discretion in the
management and control of the Operating Partnership, certain provisions of the
Operating Partnership's Partnership Agreement place limitations on the
Company's ability to act with respect to the Operating Partnership. Such
limitations could delay, defer or prevent a transaction or a change in control
of the Company that might involve a premium price for the stock or otherwise
be in the best interest of the stockholders or that could otherwise adversely
affect the interest of the stockholders. The Partnership Agreement provides
that if the limited partners own at least 5% of the outstanding units of
limited partnership interest in the Operating Partnership, the Company cannot,
without first obtaining the consent of a majority-in-interest of the limited
partners in the Operating Partnership, transfer all or any portion of the
Company's general partner interest in the Operating Partnership to another
entity. Such limitations on the Company's ability to act may result in the
Company being precluded from taking action that the Board of Directors
believes is in the best interests of the Company's stockholders. In addition,
as of December 31, 1999, two individuals together held more than 50% of the
outstanding units of limited partnership interest in the Operating
Partnership, allowing such actions to be blocked by a small number of limited
partners.
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The Company's charter authorizes the issuance of additional shares of
Common Stock or preferred stock and the setting of the preferences, rights and
other terms of such preferred stock without the approval of the holders of the
Common Stock. The Company must obtain the approval of the holders of two-
thirds of the outstanding shares of Convertible Preferred Stock in order to
authorize, create or issue any class or series of stock that ranks equal or
senior to the Convertible Preferred Stock. Although the Company has no
intention to issue any additional shares of Convertible Preferred Stock or
other preferred stock at the present time, the Company may, subject to the
consent of the holders of Convertible Preferred Stock, establish one or more
series of preferred stock that could delay, defer or prevent a transaction or
a change in control of the Company. Such a transaction might involve a premium
price for the Company's stock or otherwise be in the best interests of the
holders of Common Stock. Also, such a class of preferred stock could have
dividend, voting or other rights that could adversely affect the interest of
holders of Common Stock.
The Company's charter, as well as its stockholder rights plan, also
contains other provisions that may delay, defer or prevent a transaction or a
change in control of the Company that might be in the best interest of the
Company's stockholders. The Company's stockholder rights plan is designed,
among other things, to prevent a person or group from gaining control of the
Company without offering a fair price to all of the Company's stockholders.
Also, the Bylaws may be amended by the Board of Directors (subject to the
consent of the holders of the Convertible Preferred Stock in certain
circumstances) to include provisions that would have a similar effect,
although the Company presently has no such intention. The Charter provides
that the Company must obtain the approval of the holders of the Convertible
Preferred Stock holding two-thirds of the outstanding shares of Convertible
Preferred Stock before the Company or the Operating Partnership may merge or
consolidate with any other entity or sell all or substantially all of the
assets. Also, the terms of the Convertible Preferred Stock require that the
Company must obtain the approval of the holders of more than 50% of the
outstanding shares of Convertible Preferred Stock before undergoing a change
in control (as defined in the Charter). Additionally, the Charter contains
ownership provisions limiting the transferability and ownership of shares of
capital stock, which may have the effect of delaying, deferring or preventing
a transaction or a change in control of the Company. For example, subject to
receiving an exemption from the Board of Directors, potential acquirers may
not purchase more than 6% percent in value of the stock (other than qualified
pension trusts which can acquire 9.9%). This may discourage tender offers that
may be attractive to the holders of Common Stock and limit the opportunity for
stockholders to receive a premium for their shares of Common Stock.
In addition, the Maryland General Corporations Law restricts the voting
rights of shares deemed to be "control shares." Under the Maryland General
Corporations Law, "control shares" are those which, when aggregated with any
other shares held by the acquirer, entitle the acquirer to exercise voting
power within specified ranges. Although the Bylaws exempt the Company from the
control share provisions of the Maryland General Corporations Law, the
provisions of the Bylaws may be amended or eliminated by the Board of
Directors at any time in the future, provided that it obtains the approval of
the holders of two-thirds of the outstanding shares of the Convertible
Preferred Stock. Moreover, any such amendment or elimination of such provision
of the Bylaws may result in the application of the control share provisions of
the Maryland General Corporations Law not only to control shares which may be
acquired in the future, but also to control shares previously acquired. If the
provisions of the Bylaws are amended or eliminated, the control share
provisions of the Maryland General Corporations Law could delay, defer or
prevent a transaction or change in control of the Company that might involve a
premium price for the stock or otherwise be in the best interests of its
stockholders.
The Company's Guarantee of the Deliver of the Director and Executive Stock
Purchase Program May Lead to Liability For the Company
In September 1999, the Company formed a program in which directors and
management of the Company can participate indirectly in an investment in the
Company's Common Stock. The participants have entered into swap agreement with
a securities broker whereby the securities broker has acquired, in open market
transactions, 223,475 shares of the Company's Common Stock. The agreement
terminates in five years, or earlier under
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certain circumstances, at which time the settlement amount is determined by
comparing the original purchase price of the stock plus interest at a rate of
LIBOR plus 1.5% to the termination date market value of the shares and all
dividends received during the investment period. In certain circumstances the
participants may be required to provide collateral to the securities broker.
The Company has guaranteed performance of the participants with respect to any
obligations relating to the swap agreement. Due to this guarantee, if the swap
agreement, upon its termination, results in a net loss to participants, the
Company could be liable for paying the loss. Further, if collateral is
required to be advanced to the securities broker, the Company could be
obligated to make such advances, which in turn could be costly to the Company.
Bond Compliance Requirements May Limit Income From Certain Properties
At December 31, 1999, the Company had approximately $58.8 million of tax-
exempt financing relating to the Inglenook Court Apartments, Wandering Creek
Apartments, Treetops Apartments, Meadowood Apartments and Camarillo Oaks
Apartments. This tax-exempt financing subjects these Properties to certain
deed restrictions and restrictive covenants. The Company expects to engage in
tax-exempt financings in the future. In addition, the Internal Revenue Code of
1986, as amended, (the "Code") and its related regulations impose various
restrictions, conditions and requirements excluding interest on qualified bond
obligations from gross income for federal income tax purposes. The Code also
requires that at least 20% of apartment units be made available to residents
with gross incomes that do not exceed 50% of the median income for the
applicable family size as determined by the Housing and Urban Development
Department of the federal government. In addition to federal requirements,
certain state and local authorities may impose additional rental restrictions.
These restrictions may limit income from the tax-exempt financed properties if
the Company is required to lower rental rates to attract residents who satisfy
the median income test. If the Company does not reserve the required number of
apartment homes for residents satisfying these income requirements, the tax-
exempt status of the bonds may be terminated, the obligations under the bond
documents may be accelerated and the Company may be subject to additional
contractual liability.
Adverse Effect To Property Income And Value Due To General Real Estate
Investment Risks
Real property investments are subject to a variety of risks. The yields
available from equity investments in real estate depend on the amount of
income generated and expenses incurred. If the Properties do not generate
sufficient income to meet operating expenses, including debt service and
capital expenditures, cash flow and ability to make distributions to
stockholders will be adversely affected. The performance of the economy in
each of the areas in which the Properties are located affects occupancy,
market rental rates and expenses. Consequently, the income from the Properties
and their underlying values may be impacted. The financial results of major
local employers may have an impact on the cash flow and value of certain of
the Properties as well.
Income from the Properties may be further adversely affected by, among
other things, the following factors:
. the general economic climate;
. local economic conditions in which the Properties are located, such as
oversupply of space or a reduction in demand for rental space;
. the attractiveness of the Properties to tenants;
. competition from other available space;
. the Company's ability to provide for adequate maintenance and insurance;
and
. increased operating expenses.
Also, as leases on the Properties expire, tenants may enter into new leases
on terms that are less favorable to the Company. Income and real estate values
may also be adversely affected by such factors as applicable laws (e.g., the
Americans With Disabilities Act of 1990 and tax laws), interest rate levels
and the availability and
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terms of financing. In addition, real estate investments are relatively
illiquid and, therefore, the Company's ability to vary its portfolio promptly
in response to changes in economic or other conditions may be adversely
affected.
The Company's Joint Ventures And Joint Ownership Of Properties And Partial
Interests In Corporations And Limited Partnerships Could Limit the Company's
Ability To Control Such Properties And Partial Interests
Instead of purchasing properties directly, the Company has invested and may
continue to invest as a co-venturer. Joint venturers often have shared control
over the operation of the joint venture assets. Therefore, it is possible that
the co-venturer in an investment might become bankrupt, or have economic or
business interests or goals that are inconsistent with the Company's business
interests or goals, or be in a position to take action contrary to the
Company's instructions or requests, or to Company policies or objectives.
Consequently, a co-venturer's actions might subject property owned by the
joint venture to additional risk. Although the Company seeks to maintain
sufficient control of any joint venture to achieve its objectives, the Company
may be unable to take action without the Company's joint venture partners'
approval, or joint venture partners could take actions binding on the joint
venture without consent. Additionally, should a joint venture partner become
bankrupt, the Company could become liable for such partner's share of joint
venture liabilities.
From time to time, the Company, through the Operating Partnership, invests
in corporations, limited partnerships or other entities that have been formed
for the purpose of acquiring, developing or managing real property. In certain
circumstances, the Operating Partnership's interest in a particular entity may
be less than a majority of the outstanding voting interests of that entity.
Therefore, the Operating Partnership's ability to control the daily operations
of such an entity may be limited. Furthermore, the Operating Partnership may
not have the power to remove a majority of the board of directors (in the case
of a corporation) or the general partner or partners (in the case of a limited
partnership) of such an entity in the event that its operations conflict with
the Operating Partnership's objectives. In addition, the Operating Partnership
may not be able to dispose of its interests in such an entity. In the event
that such an entity becomes insolvent, the Operating Partnership may lose up
to its entire investment in and any advances to the entity.
Investments In Mortgages and Other Real Estate Securities
The Company may invest in securities related to real estate which could
adversely affect its ability to make distributions to stockholders. The
Company may purchase securities issued by entities which own real estate and
may also invest in mortgages. These mortgages may be first, second or third
mortgages that may or may not be insured or otherwise guaranteed. The Company
anticipates that such investment in mortgage receivables will not in the
aggregate be significant. In general, investments in mortgages include the
following risks:
. that the value of mortgaged property may be less than the amounts owed;
. that interest rates payable on the mortgages may be lower than the
Company's cost of funds; and
. in the case of junior mortgages, that foreclosure of a senior mortgage
would eliminate the junior mortgage.
If any of the above were to occur, cash flows from operations and the
Company's ability to make expected dividends to stockholders could be
adversely affected.
Possible Environmental Liabilities
Investments in real property create a potential for environmental
liabilities on the part of the owner of such real property. The Company
carries certain insurance coverage for this type of environmental risk. The
Company has conducted environmental studies which revealed the presence of
groundwater contamination at certain properties; such contamination at certain
of these properties was reported to have migrated on-site from adjacent
industrial manufacturing operations. The former industrial users of the
properties were identified as the source of
17
<PAGE>
contamination. The environmental studies noted that certain properties are
located adjacent to any possible down gradient from sites with known
groundwater contamination, the lateral limits of which may extend onto such
properties. The environmental studies also noted that at certain of these
properties, contamination existed because of the presence of underground fuel
storage tanks, which have been removed. In general, in connection with the
ownership, operation, financing, management and development of real
properties, the Company may be potentially liable for removal or clean-up
costs, as well as certain other costs and environmental liabilities. The
Company may also be subject to governmental fines and costs related to
injuries to persons and property.
General Uninsured Losses
The Company carries comprehensive liability, fire, extended coverage and
rental loss insurance for each of the Properties. There are, however, certain
types of extraordinary losses for which the Company does not have insurance.
Certain of the Properties are located in areas that are subject to earthquake
activity. The Company has obtained certain limited earthquake insurance
coverage. The Company may sustain losses due to insurance deductibles, co-
payments on insured losses or uninsured losses, or losses in excess of
applicable coverage.
Changes In Real Estate Tax And Other Laws
Generally the Company does not directly pass through costs resulting from
changes in real estate tax laws to residential property tenants. The Company
also does not generally pass through increases in income, service or other
taxes, to tenants under leases. These costs may adversely affect funds from
operations and the ability to make distributions to stockholders. Similarly,
compliance with changes in (i) laws increasing the potential liability for
environmental conditions existing on properties or the restrictions on
discharges or other conditions or (ii) rent control or rent stabilization laws
or other laws regulating housing may result in significant unanticipated
expenditures, which would adversely affect funds from operations and the
ability to make distributions to stockholders.
Changes In Financing Policy; No Limitation On Debt
The Company has adopted a policy of maintaining a debt-to-total-market-
capitalization ratio of less than 50%. The calculation of debt-to-total-
market-capitalization is as follows:
total property indebtedness
---------------------------------------------------- = debt-to-total-
market-capitalization
total property indebtedness + total equity market capitalization
As used in the above formula, total market capitalization is equal to the
aggregate market value of the outstanding shares of Common Stock (based on the
greater of current market price or the gross proceeds per share from public
offerings of the outstanding shares plus any undistributed net cash flow),
assuming the conversion of all limited partnership interests in the Operating
Partnership into shares of Common Stock and the conversion of all shares of
Convertible Preferred Stock into shares of Common Stock and the gross proceeds
of the preferred units of the Operating Partnership. Based on this calculation
(including the current market price and excluding undistributed net cash
flow), the Company's debt-to-total-market-capitalization ratio was
approximately 29.7% as of December 31, 1999.
The Company's organizational documents and the organizational documents of
the Operating Partnership do not limit the amount or percentage of
indebtedness that may be incurred. Accordingly, the Board of Directors could
change current policies and the policies of the Operating Partnership
regarding indebtedness. If these policies were changed, the Company and the
Operating Partnership could incur more debt, resulting in an increased risk of
default on the Company obligations and the obligations of the Operating
Partnership, and an increase in debt service requirements that could adversely
affect the financial condition and results of operations of the Company. Such
increased debt could exceed the underlying value of the Properties.
18
<PAGE>
Failure To Qualify As A Real Estate Investment Trust
The Company has operated as a qualified real estate investment trust under
the Internal Revenue Code of 1986, as amended, commencing with the taxable
year ended December 31, 1994. Although the Company believes that it has
operated in a manner which satisfies the real estate investment trust
qualification requirements, no assurance can be given that the Company will
continue to do so. A real estate investment trust is generally not taxed on
its net income distributed to its stockholders. It is required to distribute
at least 95% of its taxable income to maintain qualification as a real estate
investment trust. Qualification as a real estate investment trust involves the
satisfaction of numerous requirements (some on an annual or quarterly basis)
established under the highly technical and complex Internal Revenue Code of
1986, as amended, provisions for which there are only limited judicial or
administrative interpretations and involves the determination of various
factual matters and circumstances not entirely within the Company's control.
If the Company fails to qualify as a real estate investment trust in any
taxable year, it would generally be subject to federal and state income tax
(including any applicable alternative minimum tax) at corporate rates on its
taxable income for such year. Moreover, unless entitled to relief under
certain statutory provisions, the Company would also be disqualified from
treatment as a real estate investment trust for the four taxable years
following the year of disqualification. This treatment would reduce net
earnings available for investment or distribution to stockholders because of
the additional tax liability for the years involved. In addition,
distributions would no longer be required to be made.
Other Matters
Certain Policies of the Company
The Company intends to continue to operate in a manner that will not
subject it to regulation under the Investment Company Act of 1940. The Company
has in the past five years and may in the future (i) issue securities senior
to its Common Stock, (ii) fund acquisition activities with borrowings under
its line of credit and (iii) offer shares of Common Stock and/or units of
limited partnership interest in the Operating Partnership as partial
consideration for property acquisitions. The Company from time to time
acquires partnership interests in partnerships and joint ventures, either
directly or indirectly through subsidiaries of the Company, when such
entities' underlying assets are real estate. In general, the Company does not
(i) underwrite securities of other issuers or (ii) actively trade in loans or
other investments.
The Company primarily invests in multifamily properties in Northern
California (the San Francisco Bay Area), Southern California (Los Angeles,
Ventura, Orange and San Diego counties), and the Pacific Northwest (the
Seattle, Washington and Portland, Oregon metropolitan areas). The Company
currently intends to continue to invest in multifamily properties in such
regions, but may change such policy without a vote of the stockholders.
The policies discussed above may be reviewed and modified from time to time
by the Board of Directors without the vote of the stockholders.
Item 2. Properties
The Company's property portfolio (including partial ownership interests)
consists of the following 72 Properties: 68 multifamily residential Properties
containing 15,106 apartment units, one office building, which houses the
Company's headquarters, with approximately 17,400 square feet and three retail
properties with approximately 236,000 square feet. The Properties are located
in Northern California (the San Francisco Bay Area), Southern California ( Los
Angeles, Ventura, Orange and San Diego counties), and the Pacific Northwest
(the Seattle, Washington and Portland, Oregon metropolitan areas). The
Company's multifamily Properties accounted for approximately 97% of the
Company's revenues for the year ended December 31, 1999. The 68 multifamily
residential Properties had an average occupancy rate (based on "Financial
Occupancy", which refers to the percentage resulting from dividing actual
rents by total possible rents as determined by valuing occupied
19
<PAGE>
units at contractual rates and vacant units at market rents) during the year
ended December 31, 1999 of approximately 96%. As of December 31, 1999, the
headquarters building was 100% occupied by the Company and the three retail
centers had an occupancy rate of 99%. With respect to stabilized multifamily
properties with sufficient operating history, occupancy figures are based on
Financial Occupancy. With respect to commercial properties or properties which
have not yet stabilized or have insufficient operating history, occupancy
figures are based on "Physical Occupancy" which refers to the percentage
resulting from dividing leased and occupied square footage by rentable square
footage.
For the year ended December 31, 1999, none of the Company's Properties had
book values equal to 10% or more of total assets of the Company or gross
revenues equal to 10% or more of aggregate gross revenues of the Company.
Multifamily Residential Properties
The Company's multifamily properties are generally suburban garden
apartments and townhomes comprising multiple clusters of two and three story
buildings situated on three to fifteen acres of land. The multifamily
properties have on average 222 units, with a mix of studio, one, two and some
three bedroom units. A wide variety of amenities are available at each
apartment community, including, covered parking, wood-burning fireplaces,
swimming pools, clubhouses with complete fitness facilities, volleyball and
playground areas and tennis courts.
Most of the multifamily Properties are designed for and marketed to people
in white-collar or technical professions. The Company selects, trains and
supervises a full team of on-site service and maintenance personnel. The
Company believes that its customer service approach enhances its ability to
retain tenants and that its multifamily Properties were built well and have
been maintained well since acquisition.
Office Buildings
The Company's corporate headquarters are located in a two-story office
building with approximately 17,400 square feet located at 925 East Meadow
Drive, Palo Alto, California. The Company acquired this property in 1997.
The following tables describe the Company's Properties as of December 31,
1999. The first table describes the Company's multifamily residential
properties and the second table describes the Company's commercial properties.
<TABLE>
<CAPTION>
Rentable
Multifamily Residential Square Year Year
Properties(1) Location Units Footage Built Acquired Occupancy(2)
- ----------------------- ----------------- ----- --------- ----- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Northern California
Bristol Commons(3)...... Sunnyvale, CA 188 142,668 1989 1995 98%
Eastridge............... San Ramon, CA 188 174,104 1988 1996 96%
Foothill Gardens........ San Ramon, CA 132 155,100 1985 1997 94%
Marina Cove(4).......... Santa Clara, CA 292 250,294 1974 1994 98%
Mt. Sutro Terrace(5).... San Francisco, CA 99 64,095 1973 1999 98%
Oak Pointe.............. Sunnyvale, CA 390 294,180 1973 1988 98%
Plumtree................ Santa Clara, CA 140 113,260 1975 1994 97%
The Shores(3)........... San Ramon, CA 348 275,888 1988 1995 96%
Stevenson Place......... Fremont, CA 200 146,296 1971 1982 98%
Summerhill Commons...... Newark, CA 184 139,012 1987 1987 98%
Summerhill Park......... Sunnyvale, CA 100 78,584 1988 1988 96%
Treetops(3)............. Fremont, CA 172 131,270 1978 1996 97%
Twin Creeks............. San Ramon, CA 44 51,700 1985 1997 94%
Westwood (6)............ Cupertino, CA 116 135,288 1963 1998 96%(7)
Wimbledon Woods......... Hayward, CA 560 462,400 1975 1998 94%
Windsor Ridge........... Sunnyvale, CA 216 161,892 1989 1989 97%
----- --------- ---
3,369 2,776,031 97%
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Rentable
Multifamily Residential Square Year Year
Properties(1) Location Units Footage Built Acquired Occupancy(2)
- ----------------------- ------------------ ------ ---------- ----- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Pacific Northwest
Seattle, Washington
Metropolitan Area
Anchor Village(8)........ Mukilteo, WA 301 245,928 1981 1997 90%
Bridle Trails(3)......... Kirkland, WA 92 73,448 1986 1997 97%
Brighton Ridge........... Renton, WA 264 201,300 1986 1996 95%
Castle Creek............. Newcastle, WA 216 191,935 1997 1997 93%
Emerald Ridge............ Bellevue, WA 180 144,036 1987 1994 96%
Evergreen Heights........ Kirkland, WA 200 188,340 1990 1997 94%
Foothill Commons(3)...... Bellevue, WA 360 288,317 1978 1990 94%
Inglenook Court.......... Bothell, WA 224 183,624 1985 1994 96%
Laurels at Mill Creek.... Mill Creek, WA 164 134,360 1981 1996 96%
Maple Leaf(3)............ Seattle, WA 48 35,584 1986 1997 94%
The Palisades(3)......... Bellevue, WA 192 159,792 1977 1990 98%
Park Hill @ Issaquah(9).. Issaquah, WA 245 277,778 1999 1999 85%(10)
Sammamish View........... Bellevue, WA 153 133,590 1986 1994 96%
Spring Lake(3)........... Seattle, WA 69 42,325 1986 1997 95%
Stonehedge Village(3).... Bothell, WA 196 214,872 1986 1997 94%
Wandering Creek.......... Kent, WA 156 124,366 1986 1995 95%
Wharfside Pointe......... Seattle, WA 142 119,290 1990 1994 94%
Woodland Commons(3)...... Bellevue, WA 236 172,316 1978 1990 95%
Portland, Oregon
Metropolitan Area
Jackson School
Village(11)............. Hillsboro, OR 200 196,896 1996 1996 84%
Landmark................. Hillsboro, OR 285 282,934 1990 1996 94%
Meadows at Cascade Park.. Vancouver, WA 198 199,377 1989 1997 93%
Village at Cascade Park.. Vancouver, WA 192 178,144 1989 1997 93%
------ ---------- ---
4,313 3,788,552 95%
<CAPTION>
Rentable
Multifamily Residential Square Year Year
Properties(1) Location Units Footage Built Acquired Occupancy(2)
- ----------------------- ------------------ ------ ---------- ----- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Southern California
Avondale @ Warner
Center.................. Woodland Hills, CA 446 331,072 1970 1999 90%
The Bluffs II(12)........ San Diego, CA 224 126,744 1974 1997 97%
Bunker Hill(3)........... Los Angeles, CA 456 346,672 1968 1998 95%
Camarillo Oaks(3)........ Camarillo, CA 564 459,072 1985 1996 97%
Casa Mango(6)............ Del Mar, CA 96 88,112 1981 1997 97%
Cochran Apartments....... Los Angeles, CA 58 51,468 1989 1998 96%
Hampton Court
(Columbus).............. Glendale, CA 83 71,573 1974 1999 88%(7)
Coronado @ Newport
North(11)............... Newport Beach, CA 732 459,677 1968 1999 83%(7)
Coronado @ Newport
South(11)............... Newport Beach, CA 715 498,716 1968 1999 92%
Euclid................... Pasadena, CA 85 69,295 1972 1999 96%
Fairways................. Newport Beach, CA 74 107,160 1972 1999 95%
Glenbrook................ Pasadena, CA 84 73,101 1972 1999 95%
Highridge(8)............. Rancho Palos, CA 255 290,250 1972 1997 95%
Hillsborough Park........ La Habra, CA 235 215,510 1999 1999 99%(10)
Hillcrest Park
(Mirabella)............. Newbury Park, CA 608 521,968 1973 1998 97%(7)
Huntington Breakers(3)... HuntingtonBeach,CA 342 241,763 1984 1997 97%
Kings Road............... Los Angeles, CA 196 132,112 1979 1997 96%
Hampton Place (Loraine).. Glendale, CA 132 141,591 1999 1970 88%(7)
Meadowood(3)............. Simi Valley, CA 320 264,568 1986 1996 98%
Monterra Del Mar
(Windsor Terrace)....... Pasadena, CA 122 74,475 1972 1997 88%(7)
Park Place............... Los Angeles, CA 60 48,000 1988 1997 96%
Pathways................. Long Beach, CA 296 197,720 1975 1991 96%
Riverfront(6)............ San Diego, CA 229 231,006 1990 1997 98%
Tara Village............. Tarzana, CA 168 173,600 1972 1997 98%
Trabuco Villas........... Lake Forest, CA 132 131,032 1985 1997 97%
Villa Rio Vista.......... Anaheim, CA 286 242,410 1968 1985 96%
Villa Scandia............ Ventura, CA 118 71,160 1971 1997 99%
Village Apartments....... Oxnard, CA 122 122,120 1974 1997 98%
Wilshire Promenade....... Fullerton, CA 128 108,470 1992 1997 97%
Windsor Court............ Los Angeles, CA 58 46,600 1988 1997 96%
------ ---------- ---
7,424 5,937,017 96%
------ ---------- ---
Total/Weighted Average 15,106 12,501,600 96%
====== ========== ---
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Number Rentable
of Square Year Year
Property Name(1) Location Tenants Footage Built Acquired Occupancy(2)
---------------- -------- ------- -------- ----- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Office Buildings
925 East Meadow Drive.... Palo Alto, CA 1 17,404 1988 1997 100%
--- ------- ---
Shopping Centers
Canby Square(8).......... Canby, OR 18 102,403 1976 1990 95%
Powell Villa Center(8)... Portland, OR 8 63,645 1959 1990 100%
Garrison Square(8)....... Vancouver, WA 15 69,790 1962 1990 100%
--- ------- ---
Total Shopping Centers 41 235,838
--- -------
Total Commercial
Properties 42 253,242 99%
=== ======= --- ===
</TABLE>
- --------
(1) Unless otherwise specified, the Company has a 100% ownership interest in
each Property.
(2) For multifamily residential Properties, occupancy rates are based on
Financial Occupancy for the year ended December 31, 1999; for the
Commercial Properties, occupancy rates are based on Physical Occupancy as
of December 31, 1999.
(3) This Property is owned by a single asset limited partnership in which the
Company has a minimum 99.0% limited partnership interest.
(4) A portion of this Property on which 84 units are presently located is
subject to a ground lease, which, unless extended, will expire in 2028.
(5) The Company has an approximate 46% limited partnership interest in this
property.
(6) The Company has a 20.0% ownership interest in this property
(7) Financial occupancy does not includes the impact of units that were
offline and not occupied due to redevelopment activity.
(8) The Company has a 1.0% limited partnership interest in this property.
(9)The Company has as approximate 45% limited partnership interest in this
property.
(10) Financial occupancy on development properties that have reached
stabilization is computed from the date of stabilization through December
31, 1999
(11) The Company has an approximate 49.9% ownership interest in this property.
(12) The Company has an 84.0% limited partnership interest in this property.
(13) This property is subject to a ground lease, which, unless extended, will
expire in 2027.
Item 3. Legal Proceedings
Neither the Company nor any of the Properties is presently subject to any
material litigation nor, to the Company's knowledge, is there any material
litigation threatened against the Company or the Properties. The Properties
are subject to certain routine litigation and administrative proceedings
arising in the ordinary course of business, which, taken together, are not
expected to have a material adverse impact on the Company's financial position
results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1999, no matters were submitted to a vote of
security holders.
22
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The shares of the Company's common stock are traded on the New York Stock
Exchange ("NYSE") under the symbol ESS.
Market Information
The Company's common stock has been traded on the NYSE since June 13, 1994.
The high, low and closing price per share of common stock reported on the NYSE
for the quarters indicated are as follows:
<TABLE>
<CAPTION>
Quarter Ended High Low Close
------------- ------- ------- -------
<S> <C> <C> <C>
December 31, 1999.................................. $34.000 $33.688 $34.000
September 30, 1999................................. $34.938 $34.125 $34.938
June 30, 1999...................................... $35.500 $34.313 $35.375
March 31, 1999..................................... $26.250 $25.688 $26.125
December 31, 1998.................................. $31.750 $28.500 $29.750
September 30, 1998................................. $33.500 $26.940 $31.000
June 30, 1998...................................... $34.500 $30.190 $31.000
March 31, 1998..................................... $34.940 $33.250 $34.310
</TABLE>
The closing price as of March 24, 2000 was $35.56.
Holders
The approximate number of holders of record of the shares of the Company's
common stock was 168 as of March 24, 2000. This number does not include
stockholders whose shares are held in trust by other entities. The actual
number of stockholders is greater than this number of holders of record.
Return of Capital
Under provisions of the Internal Revenue Code of 1986, as amended, the
portion of cash dividend that exceeds earnings and profits is a return of
capital. The return of capital is generated due to the deduction of non-cash
expenses, primarily depreciation, in the determination of earnings and
profits. The status of the cash dividends distributed for the years ended
December 31, 1999, 1998 and 1997 for tax purposes is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Taxable portion.................................... 100.00% 85.00% 100.00%
Return of capital.................................. -- 15.00% --
------ ------ ------
100.00% 100.00% 100.00%
====== ====== ======
</TABLE>
The most significant factor that caused an increase in the 1998 return of
capital percentage over 1999 and 1997 was that in 1998 the Company incurred a
loss on the early extinguishment of debt of $4,718,000 compared to $214,000
and $361,000 in 1999 and 1997.
23
<PAGE>
Dividends and Distributions
Since its initial public offering on June 13, 1994, the Company has paid
regular quarterly dividends to its stockholders. From inception, the Company
paid the following dividends per share of common stock:
<TABLE>
<CAPTION>
Quarter Ended 1994 1995 1996 1997 1998 1999
------------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
3/31...................... N/A $0.4175 $0.4250 $0.4350 $0.4500 $.5000
6/30...................... $0.0800 $0.4175 $0.4250 $0.4350 $0.5000 $.5500
9/30...................... $0.4175 $0.4250 $0.4350 $0.4500 $0.5000 $.5500
12/31...................... $0.4175 $0.4250 $0.4350 $0.4500 $0.5000 $.5500
</TABLE>
Future distributions by the Company will be at the discretion of the Board
of Directors and will depend on the actual funds from operations of the
Company, its financial condition, capital requirements, the annual
distribution requirements under the REIT provisions of the Internal Revenue
Code, applicable legal restrictions and such other factors as the Board of
Directors deems relevant. There are currently no contractual restrictions on
the Company's present or future ability to pay dividends.
Dividend Reinvestment and Share Purchase Plan
The Company has adopted a dividend reinvestment and share purchase plan
designed to provide holders of Common Stock with a convenient and economical
means to reinvest all or a portion of their cash dividends in shares of Common
Stock and to acquire additional shares of Common Stock through voluntary
purchases. Boston EquiServe, which serves as the Company's transfer agent,
administers the dividend reinvestment and share purchase plan. For a copy of
the plan, contact Boston EquiServe at (800) 945-8245.
Stockholder Rights Plan
In 1998, the Company adopted a stockholder rights plan that is designed to
enhance the ability of all of the Company's stockholders to realize the long-
term value of their investment. The rights plan is designed, among other
things, to prevent a person or group from gaining control of the Company
without offering a fair price to all of the Company's stockholders.
On October 13, 1998, the Board declared a dividend of one preferred share
purchase right (a "Right") for each outstanding share of Common Stock. Each
Right entitles the registered holder to purchase from the Company one one-
hundredth of a share of Series A Junior Participating Preferred Stock, par
value $.0001 per share, of the Company, at a price of $99.13 per one-hundredth
of a share, subject to adjustment. The description and terms of the Rights are
set forth in a Rights Agreement dated as of November 11, 1998, between the
Company and BankBoston, N.A. as Rights Agent.
Recent Sales of Unregistered Securities
In July 1999, the Operating Partnership sold 2,000,000 of its 9.30% Series
D Cumulative Redeemable Preferred Units (the "Series D Preferred Units"), to
two related institutional investor in return for a total contribution to the
Operating Partnership of $50 million. The Series D Preferred Units will become
exchangeable, on a one for one basis, in whole or in part at any time ten year
after the issue date (or earlier under certain circumstances) for shares of
the Company's 9.30% Series D Cumulative Redeemable Preferred Stock, par value
$.0001 per share (the "Series D Preferred Stock"). Pursuant to the terms of a
registration rights agreement, entered into in connection with this private
placement, the holders of Series D Preferred Stock will have certain rights to
cause the Company to register such shares of Series D Preferred Stock.
In September 1999, the Operating Partnership sold 2,200,000 of its 9.25%
Series E Cumulative Redeemable Preferred Units (the "Series E Preferred
Units") to an institutional investor in a private placement, in return for a
total contribution of $55 million. The Series E Preferred Units will become
exchangeable, on a one for one basis, in whole or in part at any time ten
years after the issue date (or earlier under certain circumstances) for
24
<PAGE>
shares of the Company's 9.25% Series E Cumulative Redeemable Preferred Stock,
par value $.0001 per share (the "Series E Preferred Stock"). Pursuant to the
terms of a registration rights agreement, entered into in connection with this
private placement, the holders of Series E Preferred Stock will have certain
rights to cause the Company to register such shares of Series E Preferred
Stock.
The Series D Preferred Units and the Series E Preferred Units were issued
by the Operating Partnership in privately negotiated transactions to
accredited institutional investors in reliance on the exemption provided by
Section 4(2) of the Securities Act.
Item 6. Summary Financial and Operating Data
The following tables set forth summary financial and operating information
for the Company from January 1, 1995 through December 31, 1999.
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------
1999 1998 1997 1996 1995
--------- -------- ------- ------- -------
(Dollars in thousands, except per share
amounts)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues
Rental....................... $ 137,262 $119,397 $79,936 $47,780 $41,640
Other property income........ 3,165 2,645 1,464 756 702
Interest and other income.... 5,618 3,217 3,169 2,157 1,598
--------- -------- ------- ------- -------
Total revenues............. 146,045 125,259 84,569 50,693 43,940
--------- -------- ------- ------- -------
Expenses
Property operating
expenses.................... 41,706 37,933 25,826 15,505 13,604
Depreciation and
amortization................ 26,150 21,948 13,992 8,855 8,007
Amortization of deferred
financing costs............. 566 718 509 639 1,355
General and administrative... 4,263 3,765 2,413 1,717 1,527
Other expenses............... -- 930 138 42 288
Interest..................... 21,268 19,374 12,659 11,442 10,928
--------- -------- ------- ------- -------
Total expenses............. 93,953 84,668 55,537 38,200 35,709
--------- -------- ------- ------- -------
Income before gain on sales,
minority interests and
extraordinary item.......... 52,092 40,591 29,032 12,493 8,231
Gain on sales of real
estate...................... 9,524 9 5,114 2,477 6,013
Minority interests........... (17,838) (9,554) (4,469) (2,648) (3,486)
Extraordinary item-loss on
early extinguishment of
debt........................ (214) (4,718) (361) (3,441) (154)
--------- -------- ------- ------- -------
Net income.................... 43,564 26,328 29,316 8,881 10,604
========= ======== ======= ======= =======
Net income per share--
diluted...................... $ 2.36 $ 1.36 $ 1.92 $ 1.12 $ 1.69
========= ======== ======= ======= =======
Weighted average common
stock outstanding--diluted
(in thousands).............. 18,491 16,809 15,285 7,348 6,275
Cash dividend per common
share........................ $ 2.15 $ 1.95 $ 1.77 $ 1.72 $ 1.69
<CAPTION>
As of December 31,
----------------------------------------------
1999 1998 1997 1996 1995
--------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in real estate
(before accumulated
depreciation)................ 929,076 889,964 730,987 393,809 284,358
Net investment in real
estate....................... 832,471 812,175 702,716 354,715 244,077
Real estate under
development.................. 120,414 53,213 20,234 -- --
Total assets.................. 1,062,313 931,796 738,835 417,174 273,660
Total property indebtedness... 384,108 361,515 276,597 153,205 154,524
Stockholders' equity.......... 387,693 389,800 398,915 222,807 84,729
<CAPTION>
As of December 31,
----------------------------------------------
1999 1998 1997 1996 1995
--------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Debt service coverage
ratio(1)..................... 4.7x 4.3x 4.4x 2.9x 2.6x
Gross operating margin(2)..... 70% 68% 68% 68% 67%
Average same property monthly
rental rate per apartment
unit(3)(4)................... $ 950 $ 944 $ 852 $ 798 $ 749
Average same property monthly
operating expenses per
apartment unit(3)(5)......... $ 259 $ 256 $ 257 $ 248 $ 241
Total multifamily units (at
end of period)............... 15,106 12,267 10,700 6,624 4,868
Multifamily residential
property occupancy rate(6)... 96% 96% 96% 97% 97%
Total properties (at end of
period)...................... 72 63 59 36 30
</TABLE>
25
<PAGE>
- --------
(1) Debt service coverage ratio represents earnings before interest expense,
taxes, depreciation and amortization ("EBITDA") divided by interest
expense.
(2) Gross operating margin represents rental revenues and other property
income less property operating expenses, exclusive of depreciation and
amortization divided by rental revenues and other property income.
(3) Same property apartment units are those units that the Company has
consolidated for the entire two years ended as of the end of the period
set forth. Same property apartment units vary at each year end. Percent
changes in averages per unit do not correspond to total same property
revenues and expense percent changes as discussed in Item 7--Management's
Discussion and Analysis.
(4) Average same property monthly rental rate per apartment unit represents
total scheduled rent for the same property apartment units for the period
(actual rental rates on occupied apartment units plus market rental rates
on vacant apartment units) divided by the number of such apartment units
and further divided by the number of months in the period.
(5) Average same property monthly expenses per apartment unit represents total
monthly operating expenses, exclusive of depreciation and amortization,
for the same property apartment units for the period divided by the total
number of such apartment units and further divided by the number of months
in the period.
(6) Occupancy rates are based on Financial Occupancy which refers to the
percentage resulting from dividing actual rents by total possible rents as
determined by valuing occupied units at contractual rates and vacant units
at market rates.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion is based on the consolidated financial statements
of Essex Property Trust, Inc. ("Essex" or the "Company") as of and for the
years ended December 31, 1999, 1998 and 1997. This information should be read
in conjunction with the accompanying consolidated financial statements and
notes thereto.
Substantially all the assets of the Company are held by, and substantially
all operations are conducted through, Essex Portfolio, L.P. (the "Operating
Partnership"). The Company is the sole general partner of the Operating
Partnership and, as of December 31, 1999, 1998, and 1997 owned an approximate
89.7%, 89.9% and 89.9% general partnership interest in the Operating
Partnership, respectively. The Company has elected to be treated as a real
estate investment trust (a "REIT") for federal income tax purposes.
Certain statements in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Annual
Report which are not historical facts may be considered forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as
amended, including statements regarding the Company's expectations, hopes,
intentions, beliefs and strategies regarding the future. Forward looking
statements include statements regarding the Company's expectation as to the
timing of completion of current development projects, expectation as to the
total projected costs of current development projects, beliefs as to the
adequacy of future cash flows to meet operating requirements, and to provide
for dividend payments in accordance with REIT requirements and expectations as
to the amount of non-revenue generating capital expenditures for the year
ended December 31, 2000, potential acquisitions and developments, the
anticipated performance of existing properties, future acquisitions and
developments and statements regarding the Company's financing activities. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors including, but not limited to, that the actual completion of
development projects will be subject to delays, that the total projected costs
of current development projects will exceed expectations, that such
development projects will not be completed, that future cash flows will be
inadequate to meet operating requirements and/or will be insufficient to
provide for dividend payments in accordance with REIT requirements, that the
actual non-revenue generating capital expenditures will exceed the Company's
current expectations, as well as those risks, special considerations, and
other factors discussed under the caption "Other Matters/Risk Factors" in Item
1 of this Annual Report on Form
26
<PAGE>
10-K for the year ended December 31, 1999, and those other risk factors and
special considerations set forth in the Company's other filings with the
Securities and Exchange Commission (the "SEC") which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements.
General Background
The Company's property revenues are generated primarily from multifamily
property operations, which accounted for greater than 96% of its property
revenues for the years ended December 31, 1999, 1998, and 1997. The Company's
properties ("the Properties") are located in Northern California (the San
Francisco Bay Area), Southern California (Los Angeles, Ventura, Orange and San
Diego counties) and the Pacific Northwest (The Seattle, Washington and
Portland, Oregon metropolitan areas). The average occupancy level of the
Company's portfolio has exceeded 95% for the last five years.
The Company has elected to be treated as a real estate investment trust
("REIT") for federal income tax purposes, commencing with the year ended
December 31, 1994. The Company provides some of its fee based asset management
and disposition services as well as third-party property management and
leasing services through Essex Management Corporation ("EMC"), in order to
maintain compliance with REIT tax rules. The Company owns 100% of EMC's 19,000
shares of nonvoting preferred stock. Executives of the Company own 100% of
EMC's 1,000 shares of Common Stock.
Since the Company's initial public offering (the "IPO") in June 1994, the
Company has acquired ownership interests in 58 multifamily residential
properties and its headquarters building, of which 12 are located in Northern
California, 29 are located in Southern California, 14 are located in the
Seattle Metropolitan Area and 3 are located in the Portland Metropolitan Area.
In total, these acquisitions consist of 11,954 units with total capitalized
acquisition costs of approximately $950.7 million. Additionally, since its
IPO, the Company has acquired ownership interests in three multifamily
development properties that have reached stabilized operations. These
development properties consist of 680 units with total capitalized development
costs of $63.5 million. As part of its active portfolio management strategy,
the Company has disposed of, since its IPO, seven multifamily residential
properties (five in Northern California, one in Southern California and one in
the Pacific Northwest) consisting of a total of 915 units, six retail shopping
centers in the Portland, Oregon metropolitan area and its former headquarters
building located in Northern California at an aggregate gross sales price of
approximately $100.6 million resulting in a net realized gain of approximately
$21.6 million and a deferred gain of $5.0 million.
The Company is developing nine multifamily residential communities, with an
aggregate of 1,904 multifamily units. In connection with these development
projects, the Company has directly, or in some cases through its joint venture
partners, entered into contractual construction related commitments with
unrelated third parties for approximately $234,500,000. As of December 31,
1999, the Company's remaining development commitment is approximately
$78,700,000.
27
<PAGE>
Results of Operations
Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998.
Average financial occupancy rates of the Company's multifamily Same Store
Properties (properties consolidated by the Company for each of the years ended
December 31, 1999 and 1998) increased to 96.4% for the year ended December 31,
1999 from 96.0% for the year ended December 31, 1998. Financial occupancy is
defined as the percentage resulting from dividing actual rental income by
total possible rental income. Total possible rental income is determined by
valuing occupied units at contractual rates and vacant units at market rents.
The regional breakdown of financial occupancy for the Same Store Properties
for the years ended December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Northern California.............................. 97.2% 96.9%
Southern California.............................. 97.1% 96.5%
Pacific Northwest................................ 94.9% 94.5%
</TABLE>
Total Revenues increased by $20,786,000 or 16.6% to $146,045,000 in 1999
from $125,259,000 in 1998. The following table sets forth a breakdown of these
revenue amounts, including the revenues attributable to the Same Store
Properties.
<TABLE>
<CAPTION>
Years Ended
December 31,
Number of ----------------- Dollar Percentage
Properties 1998 1997 Change Change
---------- -------- -------- ------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues
Property revenues
Same Store Properties
Northern California......... 12 $ 37,506 $ 35,943 $ 1,563 4.3%
Pacific Northwest........... 18 30,946 29,611 1,335 4.5
Southern California......... 12 30,042 27,942 2,100 7.5
--- -------- -------- ------- ----
Total property revenues
Same Store Properties.... 42 98,494 93,496 4,998 5.4
===
Property revenues properties
acquired/disposed of
subsequent to January 1,
1998(1)...................... 41,933 28,546 13,387 46.9
-------- -------- ------- ----
Total property revenues... 140,427 122,042 18,385 15.1
-------- -------- ------- ----
Interest and other income..... 5,618 3,217 2,401 74.6
-------- -------- ------- ----
Total revenues............ $146,045 $125,259 $20,786 16.6%
======== ======== ======= ====
</TABLE>
- --------
(1) Also includes one commercial property, redevelopment communities and
development communities.
As set forth in the above table, $13,387,000 of the $20,786,000 net
increase in total revenues is attributable to properties acquired or disposed
of subsequent to January 1, 1998, the commercial property, redevelopment
communities and development communities. During this period, the Company
acquired interests in 11 properties and achieved stabilized operations at one
development community, (the "Acquisition Properties"), and disposed of two
multifamily properties, three retail shopping centers and one commercial
property (the "Disposition Properties").
Of the increase in total revenues, $4,998,000 is attributable to increases
in property revenues from the Same Store Properties. Property revenues from
the Same Store Properties increased by approximately 5.4% to $98,494,000 in
1999 from $93,496,000 in 1998. A significant portion of this increase was
attributable to the 12 multifamily Same Store Properties located in Southern
California, the property revenues of which increased by
28
<PAGE>
$2,100,000 or 7.5 % to $30,042,000 in 1999 from $27,942,000 in 1998. This
$2,100,000 increase is primarily attributable to rental rate increases and an
increase in average financial occupancy to 97.1% in 1999 from 96.5% in 1998.
The 12 multifamily Same Store Properties located in Northern California
accounted for the next largest contribution to the Same Store Properties
revenues increase. The property revenues of these properties increased by
$1,563,000 or 4.3% to $37,506,000 in 1999 from $35,943,000 in 1998. This
$1,563,000 increase is primarily attributable to rental rate increases, and an
increase in average financial occupancy to 97.2% in 1999 from 96.9% in 1998.
The 18 multifamily Same Store Properties located in the Pacific Northwest
accounted for the next largest contribution to the Same Store Properties
revenues increase. The property revenues of these properties increased by
$1,335,000 or 4.5% to $30,946,000 in 1999 from $29,611,000 in 1998. This
$1,335,000 increase is attributable to rental rate increases, and an increase
in financial occupancy to 94.9% in 1999 from 94.5% in 1998.
The increase in total revenue also reflected an increase of $2,401,000
attributable to interest and other income, which primarily relates to income
and fees earned on the Company's investments in joint ventures and interest
income earned on outstanding notes receivable and cash balances.
Total Expenses increased by $9,285,000 or approximately 11.0% to
$93,953,000 in 1999 from $84,668,000 in 1998. The most significant factor
contributing to this increase was the growth in the Company's multifamily
portfolio from 54 properties (10,700 units) at January 1, 1998 to 68
properties (15,106 units) at December 31, 1999. Interest expense increased by
$1,894,000 or 9.8% to $21,268,000 in 1999 from $19,374,000 in 1998. Such
interest expense increase was primarily due to the net addition of mortgage
debt in connection with property acquisitions and investments, which was
offset by an increase in the capitalization of interest charges on the
Company's development and redevelopment communities of $1,678,000 or
approximately 48.0% to $5,172,000 from $3,494,000 in 1998. Property operating
expenses, exclusive of depreciation and amortization, increased by $3,773,000
or 9.9% to $41,706,000 in 1999 from $37,933,000 in 1998. Of such increase,
$4,093,000 is attributable to properties acquired or disposed of subsequent to
January 1, 1998, which was offset by a decrease in operating expenses for the
Same Store Properties. Property operating expenses, exclusive of depreciation
and amortization, as a percentage of property revenues were 29.7% for 1999 and
31.1% for 1998. General and administrative expenses represent the costs of the
Company's various acquisition and administrative departments as well as
corporate and partnership administration and non-operating expenses. Such
expenses increased by $498,000 in 1999 from the amount incurred in 1998. This
increase is largely due to additional staffing requirements resulting from the
growth of the Company. General and administrative expenses as a percentage of
total revenues were 2.9 % for 1999 and 3.0% for 1998.
Net income increased by $17,236,000 to $ 43,564,000 in 1999 from
$26,328,000 in 1998. Net income included an extraordinary loss on early
extinguishment of debt of $214,000 in 1999 compared to $4,718,000 in 1998. Net
income for 1999 also included a gain on sales of real estate of $9,524,000 as
compared with $9,000 in 1998. Net operating income of the Acquisition
Properties and the increase in net operating income from the Same Store
Properties also contributed to the increase in net income.
Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997.
Average financial occupancy rates of the Company's multifamily 1998/1997
Same Store Properties (properties consolidated by the Company for each of the
years ended December 31, 1998 and 1997) decreased to 96.2% for the year ended
December 31, 1998 from 96.6% for the year ended December 31, 1997. The
regional breakdown of financial occupancy for the 1998/1997 Same Store
Properties for the years ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Northern California.............................. 96.9% 97.1%
Southern California.............................. 95.8% 95.2%
Pacific Northwest................................ 95.2% 96.4%
</TABLE>
29
<PAGE>
Total Revenues increased by $40,690,000 or 48.1% to $125,259,000 in 1998
from $84,569,000 in 1997. The following table sets forth a breakdown of these
revenue amounts, including the revenues attributable to the 1998/1997 Same
Store Properties.
<TABLE>
<CAPTION>
Years Ended
December 31,
Number of ---------------- Dollar Percentage
Properties 1998 1997 Change Change
---------- -------- ------- ------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues
Property revenues 1998/1997
Same Store Properties
Northern California........... 11 $ 33,397 $30,627 $ 2,770 9.0%
Pacific Northwest............. 11 21,035 19,510 1,525 7.8
Southern California........... 3 8,509 8,085 424 5.2
--- -------- ------- ------- -----
Total property revenues
1998/1997 Same Store
Properties................. 25 62,941 58,222 4,719 8.1
===
Property revenues properties
acquired/disposed of subsequent
to January 1, 1997............. 59,101 23,178 35,923 155.0
-------- ------- ------- -----
Total property revenues..... 122,042 81,400 40,642 49.9
-------- ------- ------- -----
Interest and other income....... 3,217 3,169 48 1.5
-------- ------- ------- -----
Total revenues.............. $125,259 $84,569 $40,690 48.1%
======== ======= ======= =====
</TABLE>
As set forth in the above table, $35,923,000 of the $40,690,000 net
increase in total revenues is attributable to properties acquired or disposed
of subsequent to January 1, 1997. During this period, the Company acquired 35
properties, (the "1998/1997 Acquisition Properties"), and disposed of two
multifamily properties and six retail shopping centers, (the "1998/1997
Disposition Properties").
Of the increase in total revenues, $4,719,000 is attributable to increases
in property revenues from the 1998/1997 Same Store Properties. Property
revenues from the 1998/1997 Same Store Properties increased by approximately
8.1% to $62,941,000 in 1998 from $58,222,000 in 1997. The majority of this
increase was attributable to the 11 multifamily 1998/1997 Same Store
Properties located in Northern California, the property revenues of which
increased by $2,770,000 or 9.0% to $33,397,000 in 1998 from $30,627,000 in
1997. This $2,770,000 increase is primarily attributable to rental rate
increases, which were offset in part by a decrease in average financial
occupancy to 96.9% in 1998 from 97.1% in 1997. The 11 multifamily 1998/1997
Same Store Properties located in the Pacific Northwest accounted for the next
largest contribution to this 1998/1997 Same Store Property revenues increase.
The property revenues of these properties increased by $1,525,000 or 7.8% to
$21,035,000 in 1998 from $19,510,000 in 1997. This $1,525,000 increase is
primarily attributable to rental rate increases, which were offset in part by
a decrease in average financial occupancy to 95.2% in 1998 from 96.4% in 1997.
The three multifamily 1998/1997 Same Store Properties located in Southern
California accounted for the next largest contribution to this 1998/1997 Same
Store Property revenues increase. The property revenues of these properties
increased by $424,000 or 5.2% to $8,509,000 in 1998 from $8,085,000 in 1997.
This $424,000 increase is attributable to rental rate increases, and an
increase in financial occupancy to 95.8% in 1998 from 95.2% in 1997. The
increase in total revenue also reflected an increase of $48,000 attributable
to interest and other income.
Total Expenses increased by $29,131,000 or approximately 52.5% to
$84,668,000 in 1998 from $55,537,000 in 1997. The most significant factor
contributing to this increase was the growth in the Company's multifamily
portfolio from 29 properties (6,624 units) at January 1, 1997 to 58 properties
(12,267 units) at December 31, 1998. Interest expense increased by $6,715,000
or 53.0% to $19,374,000 in 1998 from $12,659,000 in 1997. Such interest
expense increase was primarily due to the net addition of mortgage debt in
connection with property and investment acquisitions. Property operating
expenses, exclusive of depreciation and amortization, increased
30
<PAGE>
by $12,107,000 or 46.9% to $37,933,000 in 1998 from $25,826,000 in 1997. Of
such increase, $12,356,000 is attributable to properties acquired or disposed
of subsequent to January 1, 1997, which was offset by a decrease in operating
expenses for the Same Store Properties. Property operating expenses, exclusive
of depreciation and amortization, as a percentage of property revenues were
31.1% for 1998 and 31.7% for 1997. General and administrative expenses
represent the costs of the Company's various acquisition and administrative
departments as well as corporate and partnership administration and non-
operating expenses. Such expenses increased by $1,352,000 in 1998 from the
1997 amount. This increase is largely due to additional staffing requirements
resulting from the growth of the Company. General and administrative expenses
as a percentage of total revenues were 3.0% for 1998 and 2.9% for 1997.
Net income decreased by $2,988,000 to $26,328,000 in 1998 from $29,316,000
in 1997. Net income included an extraordinary loss on early extinguishment of
debt of $4,718,000 in 1998 compared to $361,000 in 1997. Net income for 1998
also included a gain on sales of real estate of $9,000 compared with
$5,114,000 in 1997. The net effect of these items were offset by the net
contribution of the 1998/1997 Acquisition Properties and an increase in net
operating income from the Same Store Properties, as offset by a decrease in
net operating income attributable to the 1998/1997 Disposition Properties.
Liquidity and Capital Resources
At December 31, 1999, the Company had $12,348,000 of unrestricted cash and
cash equivalents. The Company expects to meet its short-term liquidity
requirements by using its working capital, cash generated from operations, and
amounts available under lines of credit. The Company believes that its current
net cash flows will be adequate to meet operating requirements and to provide
for payment of dividends by the Company in accordance with REIT qualification
requirements. The Company expects to meet its long-term liquidity requirements
relating to property acquisitions and development (beyond the next 12 months)
by using a combination of some or all of the following sources; working
capital, amounts available on lines of credit, net proceeds from public and
private debt and equity issuances, and proceeds from the disposition of
properties that may be sold from time to time. There can, however, be no
assurance that the Company will have access to the debt and equity markets in
a timely fashion to meet such future funding requirements or that future
working capital and borrowings under the lines of credit will be available, or
if available, will be sufficient to meet the Company's requirements or that
the Company will be able to dispose of properties in a timely manner and under
terms and conditions that the Company deems acceptable.
The Company has a $100,000,000 unsecured line of credit. Outstanding
balances under the line of credit bear interest at the bank's reference rate
or at the Company's option, 1.15% over the LIBOR rate. The line of credit
matures in June 2000. At December 31, 1999 the Company had $10,500,000
outstanding on its line of credit, with interest rates during 1999 ranging
from 6.0% to 8.1%. The Company intends to replace or renew this facility prior
to its expiration.
In addition to the unsecured line of credit, the Company had $373,608,000
of secured indebtedness at December 31, 1999. Such indebtedness consisted of
$314,788,000 in fixed rate debt with interest rates varying from 6.4% to 8.8%
and maturity dates ranging from 2000 to 2026. The indebtedness also includes
$58,820,000 of tax exempt variable rate demand bonds with interest rates paid
during 1999 ranging from approximately 4.7% to 5.4% and maturity dates ranging
from 2020 to 2026. The tax exempt variable rate demand bonds are capped at
interest rates ranging from 7.1% to 7.3%.
The Company's unrestricted cash balance increased $9,800,000 from
$2,548,000 as of December 31, 1998 to $12,348,000 as of December 31, 1999. The
Company generated $83,566,000 in cash from operating activities, used
$120,781,000 of cash in investing activities and obtained $47,015,000 of cash
from financing activities. Of the $120,781,000 net cash used in investing
activities, $88,305,000 was used to purchase and upgrade rental properties and
$74,608,000 was used to fund real estate under development; these expenditures
were offset by $63,421,000 of proceeds received from the disposition of rental
properties. The $47,015,000 net cash provided by financing activities was
primarily a result of $241,150,000 of proceeds from mortgages and other notes
31
<PAGE>
payable and lines of credit, $102,340,000 net proceeds from preferred units
sales, as offset by $229,771,000 of repayments of mortgages and other notes
payable and lines of credit, and $57,069,000 of dividends/distributions paid.
Non-revenue generating capital expenditures are improvements and upgrades
that extend the useful life of the property and are not related to preparing a
multifamily property unit to be rented to a tenant. For the year ended
December 31, 1999, non-revenue generating capital expenditures totaled
approximately $3,793,000 or $315 per weighted average occupancy unit. The
Company expects to incur approximately $320 per weighted average occupancy
unit in non-revenue generating capital expenditures for the year ended
December 31, 2000. These expenditures do not include the improvements required
in connection with the origination of mortgage loans, expenditures for
acquisition properties' renovations and improvements which are expected to
generate additional revenue, and renovation expenditures required pursuant to
tax-exempt bond financings. The Company expects that cash from operations
and/or its lines of credit will fund such expenditures. However, there can be
no assurance that the actual expenditures incurred during 2000 and/or the
funding thereof will not be significantly different than the Company's current
expectations.
The Company is currently developing nine multifamily residential projects,
with an aggregate of 1,904 multifamily units. Such projects involve certain
risks inherent in real estate development. See "Other Matters/ Risk Factors--
Risk that Development Activities Will be Delayed or Not Completed" in Item 1
of this Annual Report on Form 10-K for the year ended December 31, 1999. In
connection with these development projects, the Company has directly, or in
some cases through its joint venture partners entered into contractual
construction related commitments with unrelated third parties for
approximately $234,500,000. As of December 31, 1999, the Company's remaining
commitment to fund the estimated cost to complete is approximately
$78,700,000. The Company expects to fund such commitments by using a
combination of some or all of the following sources; its working capital,
amounts available on its lines of credit, net proceeds from public and private
equity and debt issuances, and proceeds from the disposition of properties, if
any.
On July 28, 1999, the Operating Partnership completed the sale of 2,000,000
units of its 9.30% Series D Cumulative Redeemable Preferred Units to two
institutional investors at a price of $25.00 per unit. The net proceeds from
this sale were approximately $48,925,000. On September 3, 1999, the Operating
Partnership completed the sale of 2,200,000 units of its 9.25% Series E
Cumulative Redeemable Preferred Units to two institutional investors at a
price of $25.00 per unit. The net proceeds from this sale were approximately
$53,400,000. The net proceeds from these sales were used primarily to reduce
outstanding balances under the Company's line of credit.
Pursuant to existing shelf registration statements, the Company has the
capacity to issue up to $342,000,000 of equity securities and the Operating
Partnership has the capacity to issue up to $250,000,000 of debt securities.
The Company pays quarterly dividends from cash available for distribution.
Until it is distributed, cash available for distribution is invested by the
Company primarily in short-term investment grade securities or is used by the
Company to reduce balances outstanding under its line of credit.
Year 2000 Compliance
The date is now past January 1, 2000 and the Company has not experienced
any immediate adverse impact from the transition to the year 2000. However,
the Company cannot provide assurance that its vendors have not or will not be
affected in a manner that is not yet apparent. The Company uses software,
computer technology and other services provided by third party vendors that
may fail due to year 2000 issues. This failure may involve significant time
and expense, and uncorrected problems could potentially harm the Company's
operations. Therefore, the Company will continue to monitor its year 2000
compliance and the year 2000 compliance of its vendors.
32
<PAGE>
Funds from Operations
Industry analysts generally consider Funds from Operations ("Funds from
Operations") an appropriate measure of performance of an equity REIT.
Generally, Funds from Operations adjusts the net income of equity REITS for
non-cash charges such as depreciation and amortization of rental properties
and non-recurring gains or losses. Management considers Funds from Operations
to be a useful financial performance measurement of an equity REIT because,
together with net income and cash flows, Funds from Operations provides
investors with an additional basis to evaluate the performance of a REIT to
incur and service debt and to fund acquisitions and other capital
expenditures. Funds from Operations does not represent net income or cash
flows from operations as defined by generally accepted accounting principles
(GAAP) and is not intended to indicate whether cash flows will be sufficient
to fund cash needs. It should not be considered as an alternative to net
income as an indicator of the REIT's operating performance or to cash flows as
a measure of liquidity. Funds from Operations does not measure whether cash
flow is sufficient to fund all cash needs including principal amortization,
capital improvements and distributions to shareholders. Funds from Operations
also does not represent cash flows generated from operating, investing or
financing activities as defined under GAAP. Further, Funds from Operations as
disclosed by other REITs may not be comparable to the Company's calculation of
Funds from Operations. The following table sets forth the Company's
calculation of Funds from Operations for 1999, 1998 and 1997.
<TABLE>
<CAPTION>
For the year For the quarter ended
ended --------------------------------------------------
12/31/99 12/31/99 9/30/99 6/30/99 3/31/99
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income before gain on
sale of real estate,
minority interests and
extraordinary item..... $ 52,092,000 $14,641,000 $13,426,000 $12,335,000 $11,690,000
Adjustments:
Depreciation and
amortization.......... 26,150,000 6,774,000 7,084,000 6,247,000 6,045,000
Adjustments for
unconsolidated joint
ventures.............. 1,790,000 691,000 366,000 366,000 367,000
Minority interests(1)... (13,061,000) (4,685,000) (3,616,000) (2,397,000) (2,363,000)
------------ ----------- ----------- ----------- -----------
Funds from Operations... $ 66,971,000 $17,421,000 $17,260,000 $16,551,000 $15,739,000
============ =========== =========== =========== ===========
Weighted average number
shares outstanding
diluted(1)............. 20,513,398 20,554,096 20,573,866 20,476,092 20,496,718
<CAPTION>
For the year For the quarter ended
ended --------------------------------------------------
12/31/99 12/31/98 9/30/98 6/30/98 3/31/98
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income before gain on
sale of real estate,
minority interests and
extraordinary item..... $ 40,591,000 $10,933,000 $ 9,998,000 $10,005,000 $ 9,655,000
Adjustments:
Depreciation and
amortization.......... 21,948,000 6,072,000 5,575,000 5,632,000 4,669,000
Adjustments for
unconsolidated joint
ventures.............. 1,393,000 366,000 365,000 366,000 296,000
Non-recurring items:
Provision for
litigation loss..... 930,000 -- 930,000 -- --
Minority interests(1)... (6,367,000) (2,014,000) (1,754,000) (1,692,000) (907,000)
------------ ----------- ----------- ----------- -----------
Funds from Operations... $ 58,495,000 $15,357,000 $15,114,000 $14,311,000 $13,713,000
============ =========== =========== =========== ===========
Weighted average number
shares outstanding
diluted(1)............. 20,510,988 20,522,910 20,523,466 20,549,875 20,550,845
<CAPTION>
For the year For the quarter ended
ended --------------------------------------------------
12/31/99 12/31/97 9/30/97 6/30/97 3/31/97
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income before gain on
sale of real estate,
minority interests and
extraordinary item..... $ 29,032,000 $ 8,483,000 $ 7,899,000 $ 6,907,000 $ 5,743,000
Adjustments:
Depreciation and
amortization.......... 13,992,000 4,129,000 3,555,000 3,220,000 3,088,000
Adjustments for
unconsolidated joint
ventures.............. 941,000 251,000 242,000 448,000 --
Non-recurring items:
Loss from hedge
termination......... 138,000 138,000 -- -- --
Minority interests(1)... (603,000) (162,000) (161,000) (142,000) (138,000)
------------ ----------- ----------- ----------- -----------
Funds from operations... $ 43,500,000 $12,839,000 $11,535,000 $10,433,000 $ 8,693,000
============ =========== =========== =========== ===========
Weighted average number
shares outstanding
diluted(1)............. 17,152,990 19,435,950 17,860,753 16,624,396 14,557,019
</TABLE>
33
<PAGE>
- --------
(1) Assumes conversion of all outstanding operating partnership interests in
the Operating Partnership and Convertible Preferred Stock, Series 1996A,
into shares of the Company's Common Stock. Minority interests have been
adjusted to reflect such conversion.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate changes primarily as a result of
its line of credit and long-term debt used to maintain liquidity and fund
capital expenditures and expansion of the Company's real estate investment
portfolio and operations. The Company's interest rate risk management
objective is to limit the impact of interest rate changes on earnings and cash
flows and to lower its overall borrowing costs. To achieve its objectives the
Company borrows primarily at fixed rates and may enter into derivative
financial instruments such as interest rate swaps, caps and treasury locks in
order to mitigate its interest rate risk on a related financial instrument.
The Company does not enter into derivative or interest rate transactions for
speculative purposes.
The Company's interest rate risk is monitored using a variety of
techniques. The table below presents the principal amounts and weighted
average interest rates by year of expected maturity to evaluate the expected
cash flows and sensitivity to interest rate changes. The Company believes that
the principal amounts of the Company's mortgage notes payable and line of
credit approximate fair value as of December 31, 1999 as interest rates are
consistent with yields currently available to the Company for similar
instruments.
<TABLE>
<CAPTION>
For the Year Ended December 31
-------------------------------------
2000 2001 2002 2003 2004 Thereafter Total
------- ----- ------ ------ ----- ---------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt......... $43,196 2,763 24,832 30,482 2,697 210,818 $314,788
Average interest rate... 7.10% 7.09% 7.09% 7.03% 7.00% 6.99%
Variable rate LIBOR
debt................... $10,500 -- -- -- -- 58,820(1) $ 69,320
Average interest rate... 6.59% -- -- -- -- 5.50%
</TABLE>
- --------
(1) Capped at interest rates ranging from 7.1% to 7.3%
At December 31, 1999 the Company had four forward treasury contracts for an
aggregate notional amount of $60,000,000, fixing the 10 year treasury rate at
between 6.15%-6.26% which limits interest rate exposure on certain future debt
financing and will be settled in 2000. Subsequent to December 31, 1999, three
of the four contracts were sold, resulting in a net realized gain of
approximately $920,000. The value of the unsold contract as of December 31,
1999 was $403,000.
The four forward treasury contracts represent the derivative exposures that
exist as of December 31, 1999. The Company's ultimate realized gain or loss
with respect to interest rate fluctuations will depend on the exposures that
arise during the period, the Company's hedging strategies at that time and
interest rates.
Item 8. Financial Statements and Supplemental Data
The response to this item is submitted as a separate section of this Form
10-K. See Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
34
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on April 25, 2000.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on April 25, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on April 25, 2000.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on April 25, 2000.
35
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(A) Financial Statements and Report of KPMG LLP, independent auditors
<TABLE>
<CAPTION>
Page
----
<S> <C>
(1)Consolidated Financial Statements
Independent Auditors' Report...................................... F-1
Balance Sheets:
Essex Property Trust, Inc. as of December 31, 1999 and December
31, 1998......................................................... F-2
Statements of Operations:
Essex Property Trust, Inc., for the years ended December 31, 1999,
1998 and 1997.................................................... F-3
Statements of Stockholders' Equity:
Essex Property Trust, Inc. for the years ended December 31, 1999,
1998 and 1997.................................................... F-4
Statements of Cash Flows:
Essex Property Trust, Inc. for the years ended December 31, 1999,
1998 and 1997.................................................... F-5
Notes to Consolidated Financial Statements ....................... F-6
(2)Financial Statement Schedule: Real Estate and Accumulated
Depreciation ...................................................... F-22
Essex Property Trust, Inc. for the year ended December 31, 1999
</TABLE>
(B) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December
31, 1999.
(C) Exhibits
36
<PAGE>
Independent Auditors' Report
The Board of Directors
Essex Property Trust, Inc.:
We have audited the accompanying consolidated balance sheets of Essex
Property Trust, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1999. In connection with our audits of the consolidated financial statements,
we have also audited the related financial statement schedule of Real Estate
and Accumulated Depreciation as of December 31, 1999. These consolidated
financial statements and the financial statement schedule are the
responsibility of the management of Essex Property Trust, Inc. Our
responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Essex
Property Trust, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule when considered in relation to the consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
San Francisco, California
February 4, 2000
F-1
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS 1999 1998
------ ----------- ---------
<S> <C> <C>
Real estate:
Rental properties:
Land and land improvements......................... $ 234,497 $ 219,115
Buildings and improvements......................... 694,579 670,849
----------- ---------
929,076 889,964
Less accumulated depreciation........................ (96,605) (77,789)
----------- ---------
832,471 812,175
Investments.......................................... 47,992 10,590
Real estate under development........................ 120,414 53,213
----------- ---------
1,000,877 875,978
Cash and cash equivalents--unrestricted................ 12,348 2,548
Cash and cash equivalents--restricted.................. 17,216 15,532
Notes and other related party receivables.............. 13,654 10,450
Notes and other receivables............................ 9,001 18,809
Prepaid expenses and other assets...................... 3,495 3,444
Deferred charges, net.................................. 5,722 5,035
----------- ---------
Total assets....................................... $ 1,062,313 $ 931,796
=========== =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Mortgage notes payable................................. $ 373,608 $ 325,822
Line of credit......................................... 10,500 35,693
Accounts payable and accrued liabilities............... 28,379 28,601
Dividends payable...................................... 13,248 11,145
Other liabilities...................................... 5,594 5,301
Deferred gain.......................................... 5,002 5,002
----------- ---------
Total liabilities.................................. 436,331 411,564
Minority interests..................................... 238,289 130,432
Stockholders' equity:
8.75% Convertible preferred stock, series 1996A:
$.0001 par value 184,687 and 1,600,000 authorized,
issued and outstanding.............................. 1 1
Common stock, $.0001 par value, 656,497,491 and
659,282,178 shares authorized; 18,049,952 and
16,640,616 shares issued and outstanding............ 2 2
Cumulative redeemable preferred stock; $.0001 par
value, no shares issued and outstanding:
7.875% Series B, 2,000,000 shares authorized......... -- --
9.125% Series C, 500,000 shares authorized........... -- --
9.30% Series D, 2,000,000 shares authorized.......... -- --
9.25% Series E, 2,200,000 shares authorized.......... -- --
Excess stock, $.0001 par value, 330,000,000 shares
authorized;
no shares issued or outstanding...................... -- --
Additional paid-in capital........................... 425,089 431,278
Distributions in excess of accumulated earnings...... (37,399) (41,481)
----------- ---------
Total stockholders' equity......................... 387,693 389,800
----------- ---------
Commitments and contingencies
$ 1,062,313 $ 931,796
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental................................ $ 137,262 $ 119,397 $ 79,936
Other property........................ 3,165 2,645 1,464
----------- ----------- -----------
Total property revenues............. 140,427 122,042 81,400
Interest and other.................... 5,618 3,217 3,169
----------- ----------- -----------
Total revenues...................... 146,045 125,259 84,569
----------- ----------- -----------
Expenses:
Property operating expenses:
Maintenance and repairs.............. 9,222 8,972 6,814
Real estate taxes.................... 10,271 9,109 6,340
Utilities............................ 8,532 7,809 5,074
Administrative....................... 10,582 9,228 5,514
Advertising.......................... 2,187 1,742 1,225
Insurance............................ 912 1,073 859
Depreciation and amortization........ 26,150 21,948 13,992
----------- ----------- -----------
Total property operating expenses... 67,856 59,881 39,818
Interest.............................. 21,268 19,374 12,659
Amortization of deferred financing
costs................................ 566 718 509
General and administrative............ 4,263 3,765 2,413
Loss from hedge termination........... -- -- 138
Provision for litigation loss......... -- 930 --
----------- ----------- -----------
Total expenses...................... 93,953 84,668 55,537
----------- ----------- -----------
Income before gain on the sales of
real estate,
minority interests and
extraordinary item................. 52,092 40,591 29,032
Gain on the sales of real estate........ 9,524 9 5,114
Minority interests...................... (17,838) (9,554) (4,469)
----------- ----------- -----------
Income before extraordinary item.... 43,778 31,046 29,677
Extraordinary loss on early
extinguishment of debt................. (214) (4,718) (361)
----------- ----------- -----------
Net income.......................... 43,564 26,328 29,316
Preferred stock dividends............... (1,333) (3,500) (2,681)
----------- ----------- -----------
Net income available to common
stockholders....................... $ 42,231 $ 22,828 $ 26,635
=========== =========== ===========
Per share data:
Basic:
Income before extraordinary item
available to common stockholders.... $ 2.42 $ 1.65 $ 1.98
Extraordinary item--debt
extinguishment...................... (0.01) (0.28) (0.02)
----------- ----------- -----------
Net income.......................... $ 2.41 $ 1.37 $ 1.96
=========== =========== ===========
Weighted-average number of shares
outstanding during the period........ 17,521,185 16,630,954 13,644,906
=========== =========== ===========
Diluted:
Income before extraordinary item
available to common stockholders.... $ 2.37 $ 1.64 $ 1.94
Extraordinary item--debt
extinguishment...................... (0.01) (0.28) (0.02)
----------- ----------- -----------
Net income.......................... $ 2.36 $ 1.36 $ 1.92
=========== =========== ===========
Weighted-average number of shares
outstanding during the period....... 18,491,242 16,808,943 15,285,288
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity
Years ended December 31, 1999, 1998 and 1997
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Convertible
preferred Distributions
stock Common stock Additional in excess of
-------------- -------------- paid-in accumulated
Shares Amount Shares Amount capital earnings Total
------ ------ ------ ------ ---------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1997................... 1,600 $ 1 16,615 $ 2 $430,804 $(31,892) $398,915
Shares issued from
Dividend Reinvestment
Plan................... -- -- 2 -- 10 -- 10
Net proceeds from
options exercised...... -- -- 24 -- 464 -- 464
Net income.............. -- -- -- -- -- 26,328 26,328
Dividends declared...... -- -- -- -- -- (35,917) (35,917)
------ --- ------ ---- -------- -------- --------
Balances at December 31,
1998................... 1,600 1 16,641 2 431,278 (41,481) 389,800
Shares issued from
conversion of
Convertible Preferred
Stock.................. (1,415) -- 1,618 -- -- -- --
Shares purchased by
Operating Partnership.. -- -- (262) -- (7,119) -- (7,119)
Net proceeds from
options exercised...... -- -- 53 -- 930 -- 930
Net income.............. -- -- -- -- -- 43,564 43,564
Dividends declared...... -- -- -- -- -- (39,482) (39,482)
------ --- ------ ---- -------- -------- --------
Balances at December 31,
1999................... 185 $ 1 18,050 $ 2 $425,089 $(37,399) $387,693
====== === ====== ==== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 43,564 $ 26,328 $ 29,316
Minority interests........................... 17,838 9,554 4,469
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on the sales of real estate........... (9,524) (9) (5,114)
Equity in (income) loss of limited
partnerships.............................. (1,389) (276) 209
Loss on early extinguishment of debt....... 214 4,718 361
Loss from hedge termination................ -- -- 138
Depreciation and amortization.............. 26,150 21,948 13,992
Amortization of deferred financing costs... 566 718 509
Changes in operating assets and
liabilities:
Other receivables........................ 621 (10,207) (1,377)
Prepaid expenses and other assets........ (393) 336 (158)
Accounts payable and accrued
liabilities............................. 5,626 4,831 2,738
Other liabilities........................ 293 1,093 1,815
--------- --------- ---------
Net cash provided by operating
activities............................. 83,566 59,034 46,898
--------- --------- ---------
Cash flows from investing activities:
Additions to rental properties............... (88,305) (163,019) (247,886)
Dispositions of rental properties............ 63,421 26,354 15,470
Increase in restricted cash.................. (1,684) (10,049) (3,831)
Additions to related party notes and other
receivables................................. (6,084) (5,616) (28,761)
Repayments of related party notes and other
receivables................................. 16,504 4,430 21,859
Net (contribution to) distribution from
investments in corporations and limited
partnerships................................ (30,025) 1,255 620
Additions to real estate under development... (74,608) (33,256) (27,422)
--------- --------- ---------
Net cash used in investing activities... (120,781) (179,901) (269,951)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from mortgage and other notes
payable and lines of credit................. 241,150 349,540 204,931
Repayment of mortgage and other notes payable
and lines of credit......................... (229,771) (283,065) (164,580)
Additions to deferred charges................ (1,253) (2,345) (752)
Net proceeds from preferred unit sales....... 102,340 102,150 --
Net proceeds from stock offerings............ -- -- 174,012
Payment of offering related costs............ (93) (323) (711)
Net proceeds from stock options exercised and
shares issued through dividend reinvestment
plan........................................ 930 474 686
Shares purchased by Operating Partnership.... (7,119) -- --
Redemption of Operating Partnership units.... (2,100) -- --
Net payments made in connection with costs
related to the early extinguishment of
debt........................................ -- (4,086) --
Distributions to minority interest/partners.. (18,435) (8,138) (3,910)
Dividends paid............................... (38,634) (35,074) (25,046)
--------- --------- ---------
Net cash provided by financing
activities............................. 47,015 119,133 184,630
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................. 9,800 (1,734) (38,423)
Cash and cash equivalents at beginning of
period....................................... 2,548 4,282 42,705
--------- --------- ---------
Cash and cash equivalents at end of period.... $ 12,348 $ 2,548 $ 4,282
========= ========= =========
Supplemental disclosure of cash flow
information:
Cash paid for interest, net of $5,172, $3,494
and $1,276 capitalized...................... $ 15,860 $ 18,947 $ 12,384
========= ========= =========
Supplemental disclosure of noncash investing
and financing activities:
Real estate under development transferred to
rental properties........................... $ 21,700 $ -- $ --
========= ========= =========
Mortgage note payable assumed in connection
with the purchase of real estate............ $ 15,800 $ 18,443 $ 83,041
========= ========= =========
Issuance of Operating Partnership units in
connection with the purchase of real
estate...................................... $ 7,469 $ -- $ --
========= ========= =========
Consolidation of Fountain Court Apartment
Associates, L.P.:
Real estate under development.............. $ 32,452 $ -- $ --
========= ========= =========
Notes payable and other liabilities........ $ 27,000 $ -- $ --
========= ========= =========
During 1999, the Company contributed $43,077
of real estate and real estate under
development subject to $27,300 of notes
payable in exchange for a $4,437 note
receivable and a $11,340 investment in the
AEW joint venture.
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(Dollars in thousands, except for per share amounts)
(1) Organization and Basis of Presentation
The accompanying consolidated financial statements present the accounts of
Essex Property Trust, Inc. (the Company) which include the accounts of the
Company and Essex Portfolio, L.P. (the Operating Partnership, which holds the
operating assets of the Company). The Company was incorporated in the state of
Maryland in March 1994. On June 13, 1994, the Company commenced operations
with the completion of an initial public offering (the Offering) in which it
issued 6,275,000 shares of common stock at $19.50 per share. The net proceeds
of the Offering of $112,070 were used to acquire a 77.2% general partnership
interest in the Operating Partnership.
The Company has a 89.7% general partner interest and the limited partners
own a 10.3% interest in the Operating Partnership as of December 31, 1999. The
limited partners may convert their 2,082,381 interests into shares of common
stock or cash (based upon the trading price of the common stock at the
conversion date). The Company has reserved shares of common stock for such
conversions. These conversion rights may be exercised by the limited partners
at any time through 2024.
The Company operates and has ownership interests in 68 multifamily
properties (containing 15,106 units) and four commercial properties (with
approximately 290,000 square feet) (collectively, the Properties). The
Properties are located in Northern California (the San Francisco Bay Area),
Southern California (Los Angeles, Ventura, Orange and San Diego counties), and
the Pacific Northwest (Seattle, Washington and Portland, Oregon metropolitan
areas).
All significant intercompany balances and transactions have been eliminated
in the consolidated financial statements.
(2) Summary of Significant Accounting Policies
(a) Real Estate Rental Properties
Rental properties are recorded at cost less accumulated depreciation.
Depreciation on rental properties has been provided over estimated useful
lives ranging from 3 to 40 years using the straight-line method.
Maintenance and repair expenses are charged to operations as incurred.
Asset replacements and improvements are capitalized and depreciated over their
estimated useful lives.
Certain rental properties are pledged as collateral for the related
mortgage notes payable.
When the Company determines that a property is held for sale, it
discontinues the periodic depreciation of that property in accordance with the
provisions of Statement of Financial Accounting Standards No. 121 (SFAS 121).
Assets held for sale are reported at the lower of the carrying amount or
estimated fair value less costs to sell. In addition, whenever events or
changes in circumstances indicate that the carrying amount of a property held
for investment may not be fully recoverable, the carrying amount will be
evaluated. If the sum of the property's expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount
of the property, then the Company will recognize an impairment loss equal to
the excess of the carrying amount over the fair value of the property. No
impairment has been recorded through December 31, 1999. No properties are
classified as held for sale as of December 31, 1999.
(b) Investments
The Company consolidates or accounts for its investments in joint ventures
and corporations under the equity method of accounting based on its ownership
interests in those entities. Under the equity method of
F-6
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(Dollars in thousands, except for per share amounts)
accounting, the investment is carried at cost of acquisition, plus the
Company's equity in undistributed earnings or losses since acquisition.
(c) Revenues
Rental revenue is reported on the accrual basis of accounting.
(d) Income Taxes
Generally in any year in which the Company qualifies as a real estate
investment trust (REIT) under the Internal Revenue Code (the Code), it is not
subject to federal income tax on that portion of its income that it
distributes to stockholders. No provision for federal income taxes has been
made in the accompanying consolidated financial statements for each of the
three years in the period ended December 31, 1999, as the Company believes it
qualifies under the code as a REIT and has made distributions during the
periods in excess of its taxable income.
The status of the cash dividends distributed for the years ended December
31, 1999, 1998 and 1997 for tax purposes is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Taxable portion.............................................. 100% 85% 100%
Return of capital............................................ -- 15 --
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
(e) Interest Rate Protection, Swap, and Forward Contracts
The Company will from time to time use interest rate protection, swap and
forward contracts to reduce its interest rate exposure on current or
identified future debt transactions. Amounts paid in connection with such
contracts are capitalized and amortized over the term of the contract or
related debt. If the original contract is terminated, the gain or loss on
termination is deferred and amortized over the remaining term of the contract.
If the related debt is repaid, the unamortized portion of the deferred amount
is charged to income or the contract is marked to market, as appropriate. The
Company's policy is to manage interest rate risk for existing or anticipated
borrowings.
(f) Deferred Charges
Deferred charges are principally comprised of mortgage loan fees and costs
which are amortized over the terms of the related mortgage notes in a manner
which approximates the effective interest method.
(g) Interest
The Company capitalized $5,172, $3,494 and $1,276 of interest related to
the development of real estate during 1999, 1998 and 1997, respectively.
(h) Stock Based Compensation
The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock based compensation plans.
F-7
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(Dollars in thousands, except for per share amounts)
(i) Cash Equivalents and Restricted Cash
Highly liquid investments with maturities of three months or less when
purchased are classified as cash equivalents. Restricted cash relates to
reserve requirements in connection with the Company's tax exempt variable rate
bond financings and a guarantee the Company has made on a first mortgage loan
held by one of its joint venture partnerships.
(j) Reclassifications
Certain reclassifications have been made to the 1998 and 1997 balances to
conform with the 1999 presentation.
(k) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
(l) New Accounting Pronouncements
In June 1998, the FASB issued Financial Accounting Statement No. 133 (SFAS
133), Accounting for Derivative Instruments and Hedging Activities. The
Company will adopt SFAS 133 for interim periods beginning in 2001, the
effective date of SFAS 133, as amended. Management believes that the adoption
of these statements will not have a material impact on the Company's financial
position or results of operations.
(3) Equity Transactions
During 1998 and 1999, the Operating Partnership sold Cumulative Redeemable
Preferred Units to certain institutional investors in private placements as
follows:
<TABLE>
<CAPTION>
Price Net
Description Date Units per unit proceeds
----------- -------------- --------- -------- --------
<S> <C> <C> <C> <C>
7.875% Series B February 1998 1,200,000 $50.00 $58,275
7.875% Series B April 1998 400,000 50.00 19,500
9.125% Series C November 1998 500,000 50.00 24,375
9.30 % Series D July 1999 2,000,000 25.00 48,925
9.25 % Series E September 1999 2,200,000 25.00 53,400
</TABLE>
Preferred units issued in connection with the above transactions are
included in minority interests in the accompanying consolidated balance sheet.
During 1999, Westbrook Real Estate Fund I, L.P. (formerly known as
Tiger/Westbrook Real Estate Fund, L.P.), and Westbrook Real Estate Co-
Investment Partnership I, L.P. (formerly known as Tiger/Westbrook Real Estate
Co-Investment Partnership, L.P.) (collectively, Tiger/Westbrook) converted
1,415,313 shares of its ownership in the Company's 8.75% Convertible Preferred
Stock, Series 1996A (the Convertible Preferred Stock) into 1,617,501 shares of
Common Stock. The Company has filed a shelf registration statement covering
Tiger/Westbrook's resale of all shares of Common Stock issuable upon
conversion of the Convertible Preferred
F-8
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(Dollars in thousands, except for per share amounts)
Stock. The shelf registration statement was declared effective by the
Securities and Exchange Commission in December 1998. As of December 31, 1999,
Tiger/Westbrook owned 184,687 shares of Convertible Preferred Stock.
Pursuant to existing shelf registration statements, the Company has the
capacity to issue up to $342,000 of equity securities and the Operating
Partnership has the capacity to issue up to $250,000 of debt securities.
(4) Per Share Data
Basic income per share before extraordinary item and diluted income per
share before extraordinary item were calculated as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- --------------------------
Weighted Per- Weighted Per- Weighted Per-
average share average share average share
Income shares amount Income shares amount Income shares amount
------- -------- ------ ------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income before
extraordinary item..... $43,778 $31,046 $29,677
Less: dividends on
preferred stock........ (1,333) (3,500) (2,681)
------- ------- -------
Basic:
Income available to
common stockholders... 42,445 17,521 $2.42 27,546 16,631 $1.65 26,996 13,645 $1.98
===== ===== =====
Effect of Dilutive
Securities:
Convertible limited
partnership units..... -- -- (1) -- -- (1) -- -- (1)
Convertible preferred
stock................. 1,333 786 -- -- (1) 2,681 1,400
Stock options (2)...... -- 184 -- 178 -- 240
------- ------ ------- ------ ------- ------
Diluted:
Income available to
common stockholders
plus assumed
conversions........... $43,778 18,491 $2.37 $27,546 16,809 $1.64 $29,677 15,285 $1.94
======= ====== ===== ======= ====== ===== ======= ====== =====
</TABLE>
- --------
(1) Securities not included because they were anti-dilutive.
(2) The following stock options are not included in the diluted earnings per
share calculation because the options' exercise price was greater than the
average market price of the common shares for the year and, therefore, the
effect would be antidilutive:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ----
<S> <C> <C> <C>
Number of options....................... 295 332 --
Range of exercise prices................ $31.875--34.750 $30.125--34.250 --
</TABLE>
F-9
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(Dollars in thousands, except for per share amounts)
(5) Real Estate
(a) Rental Properties
Rental properties consist of the following as of December 31, 1999 and
1998:
<TABLE>
<CAPTION>
Land and land Building and Accumulated
improvements improvements Total depreciation
------------- ------------ -------- ------------
<S> <C> <C> <C> <C>
December 31, 1999:
Multifamily properties... $ 232,732 $690,955 $923,687 $96,357
Commercial properties.... 1,765 3,624 5,389 248
--------- -------- -------- -------
$ 234,497 $694,579 $929,076 $96,605
========= ======== ======== =======
December 31, 1998:
Multifamily properties... $ 217,337 $651,818 $869,155 $73,638
Commercial properties.... 1,778 19,031 20,809 4,151
--------- -------- -------- -------
$ 219,115 $670,849 $889,964 $77,789
========= ======== ======== =======
</TABLE>
The properties are located in California, Washington and Oregon. The
operations of the properties could be adversely affected by a recession,
general economic downturn or a natural disaster in the areas where the
properties are located.
During the year ended December 31, 1999, the Company sold one property to
an unrelated third party for $11,100 resulting in a gain of $3,085. The
Company also sold one property for a gross sales price of $18,400 resulting in
a gain of $4,708 to an entity controlled by a member of the Company's Board of
Directors, following unanimous approval of the independent board members of
the Company's Board of Directors. During the year ended 1999, the Company sold
an 80% interest in three properties and land with development rights to a
newly formed joint venture. The Company received a 20% interest in the joint
venture for contributing its remaining 20% interest in these properties. The
80% interest was sold for $58,098, resulting in a gain on the sale of $1,731.
During the year ended December 31, 1998, four properties were sold to third
parties for $26,354 resulting in a gain of $9 and a deferred gain of $5,002.
During the year ended December 31, 1997, the Company sold four properties to
third parties for $15,470 resulting in a gain of $5,114.
The Company utilized Internal Revenue Code Section 1031 to defer the
majority of the taxable gains resulting from these sales.
For the years ended December 31, 1999, 1998 and 1997, depreciation expense
on real estate was $25,808, $21,890 and $13,913, respectively.
(b) Investments
In October 1999, the Company entered into two separate joint venture
entities and received an approximate 49.9% equity interest. Together with the
joint venture partners, the Company formed two separate private REITs, Newport
Beach North, Inc. and Newport Beach South, Inc. Newport Beach North, Inc. and
Newport Beach South, Inc. own an approximate 99.65% interest in Newport Beach
North, LLC and Newport Beach South, LLC, respectively. The Company contributed
its investment of Coronado at Newport--North, an acquisition made in the third
quarter of 1999, to Newport Beach North, LLC. At the same time, the partners
in Newport Beach South, LLC purchased Coronado at Newport--South, a 715-unit
apartment community located in Newport Beach,
F-10
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(Dollars in thousands, except for per share amounts)
California, for a contract price of $64,500. The two entities have identical
ownership structures, and generally, profit and loss are allocated to the
partners in accordance with their ownership interests. In addition to its
equity earnings, the Company is entitled to management and redevelopment fees
from the joint venture and incentive payments based on the financial success
of the joint venture.
In connection with formation of the two joint ventures, the entities
obtained non-recourse debt financing for $34,100 and $37,600 for Newport Beach
North, LLC and Newport Beach South, LLC, respectively. The loans bear interest
at LIBOR plus 2.25% and mature in 2002. The joint venture entities plan to
invest a total of approximately $28,000 additionally into the properties for
exterior and interior renovation and such investment is intended to be funded
through additional advances under the loans referred to above.
In December 1999, the Company entered into a joint venture and received an
approximate 20% equity interest in the joint venture. The Company contributed
its investment in Riverfront Apartments, Casa Mango Apartments, and Westwood
Apartments into the joint venture (AEW joint venture). The Company also
contributed land and development rights for a development community located in
Oxnard, California. Generally, profit and loss are allocated to the partners
in accordance with their ownership interests. In addition to its equity
earnings, the Company is entitled to management and development fees from the
joint venture and incentive payments based on the financial success of the
joint venture.
In connection with its formation, the AEW joint venture assumed two
mortgage loans the Company previously had outstanding on the Casa Mango and
Riverfront properties for $7,300 and $20,000, respectively. The loans bear
interest at a fixed rate of 7.4% and mature in 2009.
Investments which are accounted for under the equity method consist of the
following as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Investments in joint ventures:
Direct and indirect LLC member interests of approximately
49.9% in Newport Beach North, LLC and Newport Beach South,
LLC....................................................... $ 28,435 $ --
Limited partnership interest of 20% in AEW joint ventures.. 11,341 --
Class A Member interest of 45% in Park Hill LLC............ 5,516 3,978
Limited partnership interest of 49.9% in Jackson School
Village, L.P.............................................. 2,649 2,473
Limited partnership interest of 46% in Mt. Sutro Terrace
Associates, L.P........................................... 2,223 --
Limited partnership interest of 1% in Portland Shopping
Centers (1)............................................... (234) (183)
Limited partnership interest of 1% in Anchor Village
Apartments (1)............................................ (889) (691)
Limited partnership interest of 1% in Highridge Apartments
(1)....................................................... (1,570) (987)
Limited partnership interest of 51% in Fountain Court
Apartment Associates, L.P................................. -- 5,352
-------- -------
47,471 9,942
-------- -------
Investments in corporations:
Essex Management Corporation--19,000 shares of preferred
stock..................................................... 190 190
Essex Fidelity I Corporation--31,800 shares of preferred
stock..................................................... 331 331
-------- -------
521 521
-------- -------
Other investments............................................ -- 127
-------- -------
$ 47,992 $10,590
======== =======
</TABLE>
F-11
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(Dollars in thousands, except for per share amounts)
- --------
(1) The negative balances result from excess distributions and allocations
over investment cost basis. The Company can receive profits and losses
different from its partnership interest.
(6) Notes from Investees and Other Related Party Receivables
Notes receivable from joint venture investees and other related party
receivables consist of the following as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Notes receivable from joint venture investees:
Note receivable from Highridge Apartments, secured, bearing
interest at 9%, due March 2008............................. $ 1,047 $ 1,047
Note receivable from Highridge Apartments, secured, bearing
interest at 10%, due on demand............................. 2,950 --
Note receivable from Fidelity I, secured, bearing interest
at 8%, due on demand....................................... -- 1,358
Notes receivable from Fidelity I and JSV, secured, bearing
interest at 9.5--10%, due 2015............................. 800 800
Receivable from Highridge Apartments, non-interest bearing,
due on demand.............................................. 3,624 2,928
Receivable from Las Hadas, non-interest bearing, due on
demand..................................................... 1,209 1,209
Receivable from Anchor Village, non-interest bearing, due on
demand..................................................... 1,282 933
Other related party receivables:
Loans to officers, bearing interest at 8%, due April 2006... 633 500
Other related party receivables, substantially all due on
demand..................................................... 2,109 1,675
-------- -------
$ 13,654 $10,450
======== =======
The Company's officers and directors do not have a substantial economic
interest in these joint venture investees.
Other related party receivables consist primarily of accrued interest
income on related party notes receivable and loans to officers, advances and
accrued management fees from joint venture partnerships, and unreimbursed
expenses due from EMC.
(7) Notes and Other Receivables
Notes and other receivables consist of the following as of December 31,
1999 and 1998:
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Receivable from AEW, non-interest bearing, due on demand...... $ 5,529 $ --
Receivable from Newport Beach North and South LLC............. 429 --
Note receivable from the co-tenants in the Pathways property,
secured, interest payable monthly at 9%, principal due June
2001......................................................... -- 4,452
Note receivable from R&V Management, secured, bearing interest
at 12.04%, principal due March 1999.......................... -- 7,879
Note receivable from R&V Management, secured, bearing interest
at 10.0%, principal due June 2000............................ -- 2,814
Other receivables............................................. 3,043 3,664
-------- -------
$ 9,001 $18,809
======== =======
</TABLE>
F-12
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(Dollars in thousands, except for per share amounts)
(8) Related Party Transactions
The Company provides some of its fee-based asset management and disposition
services as well as third-party property management and leasing services
through Essex Management Corporation (EMC). The Company owns 100% of EMC's
19,000 shares of nonvoting preferred stock. Executives of the Company own 100%
of EMC's 1,000 shares of common stock. All general and administrative expenses
of the Company and EMC are initially borne by the Company, with a portion
subsequently allocated to EMC based on a business unit allocation methodology,
formalized and approved by management and the Board of Directors. Expenses
allocated to EMC for the years ended December 31, 1999, 1998 and 1997 totaled
$545, $545 and $987, respectively, and are reflected as a reduction in general
and administrative expenses in the accompanying consolidated statements of
operations.
Included in rental revenue in the accompanying consolidated statements of
operations are rents earned from space leased to Marcus & Millichap Company
(M&M) including operating expense reimbursements of $851, $833 and $709 for
the years ended December 31, 1999, 1998 and 1997, respectively. The Chairman
of M&M is the Chairman of the Company. The commercial property which M&M
occupied was sold in September 1999 to an entity controlled by a member of the
Company's Board of Directors, following approval of the independent members of
the Board of Directors.
During the years ended December 31, 1999, 1998 and 1997, the Company paid
brokerage commissions totaling $105, $0 and $590 to M&M on the purchase and
sales of real estate. The commissions are either capitalized as a cost of
acquisition or are reflected as a reduction of the gain on sales of real
estate in the accompanying consolidated statements of operations. EMC is
entitled to receive a percentage of M&M brokerage commissions on certain
transactions in which the Company is a party.
Interest and other income include interest income of $705, $1,027 and
$1,286 for the years ended December 31, 1999, 1998 and 1997, respectively,
which was earned principally on the notes receivable from related party
partnerships in which the Company owns an ownership interest (Joint Ventures).
Interest and other income also includes management fee income and investment
income earned by the Company from its Joint Ventures of $561, $623 and $139
for the years ended December 31, 1999, 1998 and 1997, respectively.
F-13
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(Dollars in thousands, except for per share amounts)
(9) Mortgage Notes Payable
Mortgage notes payable consist of the following as of December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Mortgage note payable to a pension fund, secured by deeds
of trust, bearing interest at 6.62%, interest only
payments due monthly through October 2001, principal and
interest payments due monthly thereafter, final principal
payment of $90,596 due in October 2008. Under certain
conditions this loan can be converted to an unsecured note
payable................................................... $ 100,000 $100,000
Mortgage notes payable, secured by deeds of trust, bearing
interest at rates ranging from 6.885% to 8.055%, principal
and interest payments due monthly, and maturity dates
ranging from December 2000 through March 2008............. 145,106 96,214
Multifamily housing mortgage revenue bonds secured by deeds
of trust on rental properties and guaranteed by collateral
pledge agreements, payable monthly at a variable rate as
defined in the Loan Agreement (approximately 3.5% for
December 1999 and 1998), plus credit enhancement and
underwriting fees ranging from approximately 1.2 to 1.9%.
The bonds are convertible to a fixed rate at the Company's
option. Among the terms imposed on the properties, which
are security for the bonds, is that twenty percent of the
units are subject to tenant income qualification criteria.
Principal balances are due in full at various maturity
dates from July 2014 through October 2026. These bonds are
subject to interest rate protection agreements through
August 2003, limiting the interest rate with respect to
such bonds to a maximum interest rate of 7.1% to 7.3%..... 58,820 58,820
Mortgage notes payable, secured by deeds of trust, bearing
interest at rates ranging from 7.0% to 8.78%, principal
and interest payments due monthly, and maturity dates
ranging from December 2002 through April 2005. Under
certain conditions this loan can be converted to an
unsecured note payable.................................... 44,158 44,788
Multifamily housing mortgage revenue bonds secured by deed
of trust on rental property, bearing interest at 7.69%,
principal and interest installments due monthly through
June 2018. Among the terms imposed on the property, which
is security for the bonds, is that twenty percent of the
units are subject to tenant income qualifications
criteria.................................................. 8,494 8,727
--------- --------
$ 373,608 $325,822
========= ========
</TABLE>
Multifamily housing mortgage revenue bonds secured by deed
of trust on a rental property and guaranteed by a
collateral pledge agreement, bearing interest at 6.455%,
principal and interest payments due monthly, final
principal payment of $14,800 due January 2026. Among the
terms imposed on the property, which is security for the
bonds, is that twenty percent of the units are subject to
tenant income qualification criteria. The interest rate
will be repriced in February 2008 at the then current tax-
exempt bond rate.......................................... 17,030 17,273
F-14
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(Dollars in thousands, except for per share amounts)
The aggregate scheduled maturities of mortgage notes payable are as
follows:
<TABLE>
<S> <C>
2000............................................................. $ 43,196
2001............................................................. 2,763
2002............................................................. 24,832
2003............................................................. 30,482
2004............................................................. 2,697
Thereafter....................................................... 269,638
---------
$ 373,608
=========
</TABLE>
In October 1997, the Company entered into four forward treasury contracts
for an aggregate notional amount of $60,000, locking the 10-year treasury rate
at between 6.15%-6.26%. These contracts are to limit the interest rate
exposure on identified future debt financing requirements relating to real
estate under development and the refinancing of a $18,101 fixed rate loan.
These contracts will be settled no later than June 2000. Subsequent to
December 31, 1999, three of the four contracts were sold, resulting in a net
realized gain of approximately $920. The value of the unsold contract as of
December 31, 1999 was $403.
In addition, the Company has entered into various other contracts to limit
its interest rate exposure on debt related transactions. During 1999, 1998 and
1997, the Company charged to expense $0, $0 and $138, respectively, of costs
relating to the termination of such contracts.
During the years ended December 31, 1999, 1998 and 1997, the Company
refinanced various mortgages and incurred a loss on the early extinguishment
of debt of $214, $4,718 and $361 related to the write off of the unamortized
mortgage loan fees and prepayment penalties.
(10) Line of Credit
The Company has an unsecured $100,000 line of credit with a commercial bank
with interest payable monthly at the bank's reference rate or at the Company's
option, 1.15% over the LIBOR rate, which expires June 2000. As of December 31,
1999 and 1998, the Company had $10,500 and $35,693 outstanding under its line
of credit. The amount available under the line of credit is reduced by $684,
the amount outstanding under letters of credit obtained by the Company.
As of December 31, 1999, the thirty-day LIBOR rate was approximately 5.8%,
and the prime rate was 8.5%.
(11) Leasing Activity
Rental revenues of the Company include revenues received from its majority-
owned apartment properties, which are rented under short-term leases
(generally, lease terms of three to twelve months). Due to the short-term
nature of the leases, future minimum rental activity is not disclosed by the
Company.
(12) Fair Value of Financial Instruments
Management believes that the carrying amounts of mortgage notes payable,
lines of credit, notes and other related party receivables approximate fair
value as of December 31, 1999 and 1998, because interest rates and yields for
these instruments are consistent with yields currently available to the
Company for similar instruments. Management believes that the carrying amounts
of cash and cash equivalents, restricted cash, accounts payable,
F-15
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(Dollars in thousands, except for per share amounts)
other liabilities and dividends payable approximate fair value as of December
31, 1999 and 1998 due to the short-term maturity of these instruments. See
note 9 for fair value disclosure of interest rate risk management contracts.
(13) Stock Option Plans
The Essex Property Trust, Inc. 1994 Stock Incentive Plan provides
incentives to attract and retain officers, directors and key employees. The
Stock Incentive Plan provides for the grants of options to purchase a
specified number of shares of common stock or grants of restricted shares of
common stock. Under the Stock Incentive Plan, the total number of shares
available for grant is approximately 875,400. The Board of Directors (the
Board) may adjust the aggregate number and type of shares reserved for
issuance. Participants in the Stock Incentive Plans are selected by the
Compensation Committee of the Board, which is comprised of independent
directors. The Compensation Committee is authorized to establish the exercise
price; however, the exercise price cannot be less than 100% of the fair market
value of the common stock on the grant date. The Company's options have a life
of ten years. Option grants fully vest between one year and five years after
the grant date.
In connection with the Company's 1994 initial public offering, the Company
provided a one-time grant of options to M&M to purchase 220,000 shares of
common stock at the initial public offering price of $19.50 per share pursuant
to an agreement whereby Marcus & Millichap Real Estate Investment Brokerage
Company, a subsidiary of M&M, will provide real estate transaction, trend and
other information to the Company for a period of ten years.
The Company has also reserved 406,500 shares of common stock in connection
with the Essex Property Trust, Inc. 1994 Employee Stock Purchase Plan. There
was no activity in this plan during 1999, 1998 and 1997.
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock based compensation plans. Accordingly, no
compensation cost has been recognized for its plans. Had compensation cost for
the Company's plans been determined based on the fair value at the grant dates
consistent with the method of FASB Statement 123, the Company's net income for
the years ended December 31, 1999, 1998 and 1997 would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Net income:
As reported............................................. $43,564 26,328 29,316
Pro forma............................................... 43,489 26,294 29,216
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, the effect of
determining compensation cost consistent with FASB Statement No. 123 on basic
and diluted earnings per share was not material.
The fair value of options granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: risk-free interest rates ranging from 5.14% to
6.39% in 1999; 4.19% to 5.77% in 1998; and from 5.79% to 6.88% in 1997;
expected lives of 7 years for 1999, and 4 years for 1998 and 1997, volatility
of 21.41% for 1999, 18.79% for 1998 and 17.40% for 1997; and dividend yield of
6.6% for 1999, and 6.0% for 1998 and 1997.
F-16
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(Dollars in thousands, except for per share amounts)
A summary of the status of the Company's option plans as of December 31,
1999, 1998 and 1997 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- --------------------------
Weighted-average Weighted-average Weighted-average
Shares exercise price Shares exercise price Shares exercise price
-------- ---------------- -------- ---------------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 909,764 $24.40 828,214 $24.57 529,450 $19.08
Granted................. 161,550 29.18 110,500 30.92 324,905 33.02
Exercised............... (45,535) 17.38 (19,950) 18.73 (23,286) 17.95
Forfeited and canceled.. (71,330) 25.40 (9,000) 24.57 (2,855) 22.91
-------- -------- --------
Outstanding at end of
year................... 954,449 26.24 909,764 25.40 828,214 24.57
======== ======== ========
Options exercisable at
year end............... 579,112 23.31 449,457 21.66 284,575 19.23
Weighted-average fair
value of options
granted during the
year................... $ 3.45 $ 3.19 $ 3.56
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------------------------------- -----------------------------------
Number outstanding Weighted-average Number exercisable
as of December 31, remaining Weighted-average as of December 31, Weighted-average
Range of exercise prices 1999 contractual life exercise price 1999 exercise price
- ------------------------ ------------------ ---------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
$13.90--17.31........... 21,100 5.2 years $15.50 10,000 $15.50
17.38--20.85........... 391,449 4.5 years 19.45 387,199 19.46
24.33--27.80........... 65,750 9.0 years 26.02 3,350 24.88
27.81--31.27........... 182,050 8.3 years 29.74 80,743 29.51
31.28--34.75........... 294,100 8.1 years 33.91 97,820 34.19
------- -------
954,449 579,112
======= =======
</TABLE>
Through December 31, 1999, the Company has granted 18,267 stock units under
the Company's Phantom Stock Unit Agreement to two of the Company's executives.
The units vest in installments in accordance with the vesting schedule set
forth in the Phantom Stock Unit Agreement such that the units will be fully
vested five years from the date of issuance. At that time, the Company expects
to issue to the executives the number of shares of common stock equal to the
number of units vested, or at the Company's option, an equivalent amount in
cash. Dividends are paid by the Company on the vested and unvested portion of
shares. For the years ended December 31, 1999, 1998 and 1997, compensation
cost was $184, $20 and $19, respectively, related to this plan.
(14) Shareholder Rights Plan
On November 12, 1998, the Company's Board of Directors adopted a
Stockholder Rights Plan. A dividend of one right (a Right) per share of common
stock was distributed to stockholders of record on November 21, 1998. Each
Right, expiring November 11, 2008, represents a right to buy from the Company
1/100th of a share of Series A Junior Participating Preferred Stock at a price
of $99.13 per Right.
F-17
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(Dollars in thousands, except for per share amounts)
Generally the Rights will not be exercisable unless a person or group
acquires 15% or more, or announces an offer that could result in acquiring 15%
or more, of the Company's common stock unless such person is or becomes the
beneficial owner of 15% or more of the Company's outstanding common stock and
had a contractual right or the approval of the Company's Board of Directors,
provided that such percentage shall not be greater than 19.9%. Following an
acquisition of 15% or more of the Company's common stock, each Right holder,
except the 15% or more shareholder, has the right to receive, upon exercise,
shares of common stock valued at twice the then applicable exercise price of
the Right, unless the 15% or more shareholder has offered to acquire all of
the outstanding shares of the Company under terms that a majority of the
independent directors of the Company have determined to be fair and in the
best interest of the Company and its shareholders.
Similarly, unless certain conditions are met, if the Company engages in a
merger or other business combination following a stock acquisition where it
does not survive or survives with a change or exchange of its common stock or
if 50% or more of its assets, earning power or cash flow is sold or
transferred, the Rights will become exercisable for shares of the acquiror's
stock having a value of twice the exercise price.
Generally, Rights may be redeemed for $.01 each (in cash, common stock or
other consideration the Company deems appropriate) until the tenth day
following a public announcement that a 15% or greater position has been
acquired of the Company's stock.
(15) Segment Information
In accordance with Financial Accounting Standards Board No. 131,
Disclosures about Segments of an Enterprise and Related Information (FAS 131),
the Company defines its reportable operating segments as the three
geographical regions in which its multifamily residential properties are
located, Northern California, Southern California, and the Pacific Northwest.
Non-segment revenues and net operating income included in the following
schedule consists of revenue generated from the two commercial properties.
Also excluded from segment revenues is interest and other corporate income.
Other non-segment assets include investments, real estate under development,
cash, receivables and other assets.
The accounting policies of the segments are the same as those described in
note 1. The Company evaluates performance based upon net operating income from
the combined properties in each segment.
F-18
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(Dollars in thousands, except for per share amounts)
The revenues, net operating income, and assets for each of the reportable
operating segments are summarized as follows for the years ended and as of
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Year ended
------------------------------
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Revenues:
Northern California.......................... $ 46,960 $ 42,078 $ 33,481
Southern California.......................... 58,371 45,252 20,026
Pacific Northwest............................ 33,316 32,137 23,356
---------- -------- --------
Total segment revenues..................... 138,647 119,467 76,863
Non-segment property revenues.................. 1,780 2,575 4,537
Interest and other income...................... 5,618 3,217 3,169
---------- -------- --------
Total revenues............................. $ 146,045 $125,259 $ 84,569
========== ======== ========
Net operating income:
Northern California.......................... $ 35,962 $ 31,681 $ 24,664
Southern California.......................... 40,122 29,758 12,955
Pacific Northwest............................ 22,284 21,138 14,916
---------- -------- --------
Total segment net operating income......... 98,368 82,577 52,535
Non-segment net operating income............... 353 1,532 3,039
Interest and other income...................... 5,618 3,217 3,169
Depreciation and amortization.................. (26,150) (21,948) (13,992)
Interest....................................... (21,268) (19,374) (12,659)
Amortization of deferred financing costs....... (566) (718) (509)
General and administrative..................... (4,263) (3,765) (2,413)
Loss from hedge termination.................... -- -- (138)
Provision for litigation loss.................. -- (930) --
---------- -------- --------
Income before gain on the sales of real
estate, minority interests, and
extraordinary item........................ $ 52,092 $ 40,591 $ 29,032
========== ======== ========
Assets:
Northern California.......................... $ 216,946 $241,676 $175,116
Southern California.......................... 415,374 355,077 257,714
Pacific Northwest............................ 195,011 198,761 213,125
---------- -------- --------
Total segment net real estate assets....... 827,331 795,514 645,955
Non-segment net real estate assets............. 5,140 16,661 26,992
---------- -------- --------
Net real estate assets..................... 832,471 812,175 672,947
Non-segment assets............................. 229,842 119,621 65,888
---------- -------- --------
Total assets............................... $1,062,313 $931,796 $738,835
========== ======== ========
</TABLE>
F-19
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(Dollars in thousands, except for per share amounts)
(16) Quarterly Results of Operations (Unaudited)
The following is a summary of quarterly results of operations for 1999 and
1998:
<TABLE>
<CAPTION>
Quarter ended Quarter ended Quarter ended Quarter ended
December 31 September 30 June 30 March 31
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1999:
Total revenues before
gain on the sales of
real estate.......... $ 39,510 37,745 34,898 33,890
-------- ------ ------ ------
Gain on the sales of
real estate.......... $ 4,816 4,708 -- --
-------- ------ ------ ------
Extraordinary
item........... $ (124) -- (90) --
======== ====== ====== ======
Net income...... $ 13,159 13,073 8,876 8,454
======== ====== ====== ======
Per share data:
Net income:
Basic............. $ 0.72 0.72 0.50 0.46
======== ====== ====== ======
Diluted........... $ 0.71 0.71 0.49 0.45
======== ====== ====== ======
Market price:
High.............. $ 34.00 34.94 35.50 26.25
======== ====== ====== ======
Low............... $ 33.69 34.13 34.31 26.69
======== ====== ====== ======
Close............. $ 34.00 34.93 35.38 26.13
======== ====== ====== ======
Dividends declared.. $ 0.55 0.55 0.55 0.50
======== ====== ====== ======
1998:
Total revenues before
gain on the sales of
real estate.......... $ 33,088 32,651 31,684 27,836
-------- ------ ------ ------
Gain on the sales of
real estate.......... $ -- 9 -- --
-------- ------ ------ ------
Extraordinary
item........... $ (3,912) (806) -- --
======== ====== ====== ======
Net income...... $ 4,177 6,678 7,548 7,925
======== ====== ====== ======
Per share data:
Net income:
Basic............. $ 0.20 0.35 0.40 0.42
======== ====== ====== ======
Diluted........... $ 0.20 0.34 0.40 0.42
======== ====== ====== ======
Market price:
High.............. $ 31.75 33.50 34.50 34.94
======== ====== ====== ======
Low............... $ 28.50 26.94 30.19 33.25
======== ====== ====== ======
Close............. $ 29.75 31.00 31.00 34.31
======== ====== ====== ======
Dividends declared.. $ 0.50 0.50 0.50 0.45
======== ====== ====== ======
</TABLE>
F-20
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(Dollars in thousands, except for per share amounts)
(17) 401(k) Plan
The Company has a 401(k) pension plan (the Plan) for all full time
employees who have completed one year of service. Employees may contribute up
to 23% of their compensation, limited by the maximum allowed under Section
401(k) of the Internal Revenue Code. The Company matches the employee
contributions for non-highly compensated personnel, up to 50% of their
compensation to a maximum of five hundred dollars (per individual) per year.
Company contributions to the Plan were approximately $58, $46 and $41 for the
years ended December 31, 1999, 1998 and 1997.
(18) Commitments and Contingencies
A commercial bank has issued on behalf of the Company various letters of
credit relating to financing and development transactions for an aggregate
amount of $684 which expired January 2000.
The Company is developing nine multifamily residential projects, which are
anticipated to have an aggregate of approximately 1,904 multifamily units. The
Company expects that such projects will be completed during the next two
years. In connection with these projects, the Company has directly, or in some
cases through its joint venture partners, entered into contractual
construction related commitments with unrelated third parties. As of December
31, 1999, the Company is committed to fund approximately $78,700 relating to
these projects.
Investments in real property create a potential for environmental
liabilities on the part of the owner of such real property. The Company
carries no express insurance coverage for this type of environmental risk. The
Company has conducted environmental studies which revealed the presence of
groundwater contamination at certain properties; such contamination at certain
of these properties was reported to have migrated on-site from adjacent
industrial manufacturing operations. The former industrial users of the
properties were identified as the source of contamination. The environmental
studies noted that certain properties are located adjacent to and possibly
down gradient from sites with known groundwater contamination, the lateral
limits of which may extend onto such properties. The environmental studies
also noted that at certain of these properties, contamination existed because
of the presence of underground fuel storage tanks, which have been removed.
Based on the information contained in the environmental studies, the Company
believes that the costs, if any, it might bear as a result of environmental
contamination or other conditions at these properties would not have a
material adverse effect on the Company's financial position, results of
operations, or liquidity.
The Company is involved in various lawsuits arising out of the ordinary
course of business and certain other legal matters. In the opinion of
management, the resolution of these matters will not have a material adverse
effect on the Company's financial position, results of operations or
liquidity.
In September 1999, the Company formed a program in which directors and
management of the Company can participate indirectly in an investment in the
Company's common stock. The participants have entered into a swap agreement
with a securities broker whereby the securities broker has acquired, in open
market transactions, 223,475 shares of the Company's common stock. The
agreement terminates in five years at which time the settlement amount is
determined by comparing the original purchase price of the stock plus interest
at a rate of LIBOR plus 1.5% to the termination date market value of the
shares and all dividends received during the investment period. In certain
circumstances, the participants may be required to provide collateral to the
securities broker. The Company has guaranteed performance of the participants
with respect to any obligations relating to the swap agreement.
F-21
<PAGE>
Schedule 1
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Real Estate and Accumulated Depreciation
December 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Gross amount carried at close of
Initial cost Costs period
-------------------- capitalized ----------------------------------
Buildings subsequent Buildings
and to Land and and
Property Units Location Encumbrance Land improvements acquisition improvements improvements Total(1)
-------- ----- -------- ----------- ------- ------------ ----------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Encumbered
multifamily
properties
Summerhill Park 100 Sunnyvale, CA $ 2,654 $ 4,918 $ 433 $ 2,655 $ 5,350 $ 8,005
Oak Pointe 390 Sunnyvale, CA 4,842 19,776 4,589 4,845 24,362 29,207
Summerhill
Commons 184 Newark, CA 1,608 7,582 792 1,518 8,464 9,982
Pathways 296 Long Beach, CA 4,083 16,757 7,758 6,163 22,435 28,598
Villa Rio Vista 286 Anaheim, CA 3,013 12,661 2,101 2,986 14,789 17,775
Foothill
Commons 360 Bellevue, WA 2,435 9,821 2,510 2,438 12,328 14,766
Woodland
Commons 236 Bellevue, WA 2,040 8,727 1,353 2,042 10,078 12,120
Palisades 192 Bellevue, WA 1,560 6,242 1,522 1,562 7,762 9,324
------- ------- ------- ------- ------- -------- --------
100,000 22,235 86,484 21,058 24,209 105,568 129,777
------- ------- ------- ------- ------- -------- --------
Wharfside
Pointe 142 Seattle, WA 2,245 7,020 726 2,253 7,738 9,991
Emerald Ridge 180 Bellevue, WA 3,449 7,801 653 3,447 8,456 11,903
Sammamish View 153 Bellevue, WA 3,324 7,501 515 3,329 8,011 11,340
------- ------- ------- ------- ------- -------- --------
19,201 9,018 22,322 1,894 9,029 24,205 33,234
------- ------- ------- ------- ------- -------- --------
Brighton Ridge 264 Renton, WA 2,623 10,800 595 2,654 11,364 14,018
Landmark 285 Hillsboro, OR 3,655 14,200 686 3,697 14,844 18,541
Eastridge 188 San Ramon, CA 6,068 13,628 303 6,089 13,910 19,999
------- ------- ------- ------- ------- -------- --------
27,418 12,346 38,628 1,584 12,440 40,118 52,558
------- ------- ------- ------- ------- -------- --------
Bridle Trails 92 Kirkland, WA 4,191 1,500 5,930 100 1,529 6,001 7,530
Bunker Hill
Towers 456 Los Angeles, CA 18,122 11,498 27,871 445 11,628 28,186 39,814
Camarillo Oaks 564 Camarillo, CA 27,915 10,953 25,254 3,234 11,017 28,424 39,441
Columbus 83 Glendale, CA 4,540 2,407 5,672 181 2,408 5,852 8,260
Evergreen
Heights 200 Kirkland, WA 8,949 3,566 13,395 332 3,645 13,648 17,293
Euclid 85 Pasadena, CA 2,884 2,202 4,794 189 2,375 4,810 7,185
Glenbrook 84 Pasadena, CA 4,474 2,312 4,923 140 2,430 4,945 7,375
Huntington
Breakers 342 Huntington Beach, CA 23,409 9,306 22,720 398 9,312 23,112 32,424
Inglenook Court 224 Bothell, WA 8,300 3,467 7,881 1,330 3,474 9,204 12,678
Lorraine 132 Glendale, CA 8,378 4,288 11,081 -- 4,288 11,081 15,369
Maple Leaf 48 Seattle, WA 2,048 805 3,283 54 825 3,317 4,142
Meadowood 320 Simi Valley, CA 17,030 7,852 18,592 622 7,895 19,171 27,066
Spring Lake 69 Seattle, WA 2,243 838 3,399 65 857 3,445 4,302
Stonehedge
Village 196 Bothell, WA 9,065 3,167 12,603 433 3,196 13,007 16,203
The Bluffs 224 San Diego, CA 8,357 3,405 7,743 176 3,439 7,885 11,324
The Shores(5) 348 San Ramon, CA 18,101 8,789 18,252 (450) 7,099 19,492 26,591
Treetops 172 Fremont, CA 9,800 3,520 8,182 875 3,576 9,001 12,577
Wandering Creek 156 Kent, WA 5,300 1,285 4,980 870 1,296 5,839 7,135
Wilshire
Promenade 128 Fullerton, CA 7,764 3,118 7,385 230 3,137 7,596 10,733
Windsor Ridge 216 Sunnyvale, CA 13,619 4,017 10,315 563 4,019 10,876 14,895
------- ------- ------- ------- ------- -------- --------
351,108 131,894 371,689 34,323 133,123 404,783 537,906
------- ------- ------- ------- ------- -------- --------
<CAPTION>
Depreciable
Accumulated Date of Date lives
Property depreciation construction acquired (years)
-------- ------------ -------------- -------- -----------
<S> <C> <C> <C> <C>
Encumbered
multifamily
properties
Summerhill Park $ 1,814 1988 9/88 3-40
Oak Pointe 10,359 1973 12/88 3-30
Summerhill
Commons 2,861 1987 7/87 3-40
Pathways 5,519 1975 2/91 3-30
Villa Rio Vista 7,742 1968 7/85 3-30
Foothill
Commons 4,847 1978 3/90 3-30
Woodland
Commons 3,854 1978 3/90 3-30
Palisades 3,310 1969/1977(2) 5/90 3-30
------------
40,306
------------
Wharfside
Pointe 1,592 1990 6/94 3-30
Emerald Ridge 1,646 1987 11/94 3-30
Sammamish View 1,468 1986 11/94 3-30
------------
4,706
------------
Brighton Ridge 1,066 1986 12/96 3-30
Landmark 1,679 1990 08/96 3-30
Eastridge 1,564 1988 08/96 3-30
------------
4,309
------------
Bridle Trails 452 1986 10/97 3-30
Bunker Hill
Towers 1,627 1968 3/98 3-30
Camarillo Oaks 2,555 1985 07/96 3-30
Columbus 116 1974 06/99 3-30
Evergreen
Heights 1,157 1990 06/97 3-30
Euclid 112 1972 04/99 3-30
Glenbrook 115 1972 04/99 3-30
Huntington
Breakers 1,700 1984 10/97 3-30
Inglenook Court 2,428 1985 10/94 3-30
Lorraine 207 1970 06/99 3-30
Maple Leaf 240 1986 10/97 3-30
Meadowood 2,105 1986 11/96 3-30
Spring Lake 241 1986 10/97 3-30
Stonehedge
Village 604 1986 10/97 3-30
The Bluffs 666 1974 06/97 3-30
The Shores(5) 1,879 1988 01/97 3-30
Treetops 1,219 1978 01/96 3-30
Wandering Creek 939 1986 11/95 3-30
Wilshire
Promenade 762 1992 01/97 3-30
Windsor Ridge 3,118 1989 03/89 3-40
------------
71,563
------------
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
Gross amount carried at close of
Initial cost Costs period
-------------------- capitalized ----------------------------------
Buildings subsequent Buildings
and to Land and and
Property Units Location Encumbrance Land improvements acquisition improvements improvements Total(1)
-------- ------ -------- ----------- ------- ------------ ----------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unencumbered
multifamily
properties
Avondale at
Warner Center 446 Woodland Hills, CA 10,536 24,522 72 10,556 24,574 35,130
Bristol Commons 188 Sunnyvale, CA 5,278 11,853 792 5,283 12,640 17,923
Castle Creek 216 Newcastle, WA 4,149 16,028 736 4,818 16,095 20,913
Fairway(3) 74 Newport Beach, CA 2,374 5,476 96 2,402 5,544 7,946
Foothill/Twincreeks 176 San Ramon, CA 5,875 13,992 887 5,940 14,814 20,754
Hillsborough
Park 235 La Habra, CA 6,291 15,455 23 6,290 15,479 21,769
Kings Road 196 Los Angeles, CA 4,023 9,527 182 4,030 9,702 13,732
Marina Cove(4) 292 Santa Clara, CA 5,320 16,431 1,333 5,322 17,762 23,084
Meadows @
Cascade 198 Vancouver, WA 2,261 9,070 378 2,334 9,375 11,709
Hillcrest Park 608 Newbury Park, CA 15,318 40,601 712 15,746 40,885 56,631
Park Place/
Windsor
Court/Cochran 176 Los Angeles, CA 4,965 11,806 231 5,014 11,988 17,002
Plumtree 140 Santa Clara, CA 3,090 7,421 523 3,091 7,943 11,034
Stevenson Place 200 Fremont, CA 996 5,582 5,789 998 11,369 12,367
Tara Village 168 Tarzana, CA 3,178 7,535 393 3,210 7,896 11,106
The Laurels 164 Mill Creek, WA 1,559 6,430 291 1,595 6,685 8,280
The Village 122 Oxnard, CA 2,349 5,579 156 2,393 5,691 8,084
Trabucco Villas 132 Lake Forest, CA 3,638 8,640 388 3,841 8,825 12,666
Villa Scandia 118 Ventura, CA 1,570 3,912 152 1,592 4,042 5,634
Village @
Cascade 192 Vancouver, WA 2,103 8,753 118 2,151 8,823 10,974
Wimbledon Woods 560 Hayward, CA 9,883 37,670 619 10,346 37,826 48,172
Monterra del
Mar 122 Pasadena, CA 2,188 5,263 3,420 2,657 8,214 10,871
------ ------- ------- ------- ------ ------- ------- -------
12,118 351,108 228,838 643,235 51,614 232,732 690,955 923,687
====== ------- ------- ------- ------ ------- ------- -------
<CAPTION>
Depreciable
Accumulated Date of Date lives
Property depreciation construction acquired (years)
-------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C>
Unencumbered
multifamily
properties
Avondale at
Warner Center 229 1989 01/97 3-30
Bristol Commons 1,220 1989 01/97 3-30
Castle Creek 673 1997 12/97 3-30
Fairway(3) 103 1972 06/99 3-30
Foothill/Twincreeks 1,379 1985 02/97 3-30
Hillsborough
Park 182 1999 09/99 3-30
Kings Road 799 1979 06/97 3-30
Marina Cove(4) 3,694 1974 6/94 3-30
Meadows @
Cascade 685 1988 11/97 3-30
Hillcrest Park 2,613 1973 3/98 3-30
Park Place/
Windsor
Court/Cochran 736 1988 08/97 3-30
Plumtree 1,668 1975 2/94 3-30
Stevenson Place 4,631 1971 4/82 3-30
Tara Village 777 1972 01/97 3-30
The Laurels 657 1981 12/96 3-30
The Village 473 1974 07/97 3-30
Trabucco Villas 660 1985 10/97 3-30
Villa Scandia 349 1971 06/97 3-30
Village @
Cascade 598 1995 12/97 3-30
Wimbledon Woods 2,234 1975 3/98 3-30
Monterra del
Mar 433 1972 09/97 3-30
------------
96,356
------------
</TABLE>
F-23
<PAGE>
Schedule 1
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Gross annual
Initial cost carried at close of period
--------------------- Costs ----------------------------------
Total capitalized
rentable Buildings subsequent Buildings
square and to Land and and
Property footage Location Encumbrance Land improvements acquisition improvements Improvements Total(1)
-------- -------- ------------- ----------- -------- ------------ ----------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial
properties
925 East Meadow.. 17,404 Palo Alto, CA -- 1,401 3,172 816 1,765 3,624 5,389
------ -------- -------- -------- ------- -------- -------- --------
17,404 -- 1,401 3,172 816 1,765 3,624 5,389
====== ======== ======== ======== ======= ======== ======== ========
Total
multifamily and
commercial
properties(6)..... $351,108 $230,239 $646,407 $52,430 $234,497 $694,579 $929,076
======== ======== ======== ======= ======== ======== ========
<CAPTION>
Depreciable
Accumulated Date of Date lives
Property depreciation construction acquired (years)
-------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C>
Commercial
properties
925 East Meadow.. 249 1984 11/97 3-30
------------
249
============
Total
multifamily and
commercial
properties(6)..... $96,605
============
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Real estate:
Balance at beginning of year................. $889,964 $730,987 $393,809
Improvements................................. 5,554 12,200 4,533
Acquisition of real estate................... 193,634 169,934 345,750
Disposition of real estate................... (160,076) (23,157) (13,105)
-------- -------- --------
Balance at end of year....................... $929,076 $889,964 $730,987
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Accumulated depreciation:
Balance at beginning of year.................... $77,789 $58,040 $47,631
Dispositions.................................... (7,334) (2,183) (3,504)
Depreciation expense--Acquisitions.............. 1,377 2,888 2,086
Depreciation expense............................ 24,773 19,044 11,827
------- ------- -------
Balance at end of year.......................... $96,605 $77,789 $58,040
======= ======= =======
</TABLE>
- ----
(1) The aggregate net cost for federal income tax purposes is $764,618.
(2) Phase I was built in 1969 and Phase II was built in 1977.
(3) The land is leased pursuant to a ground lease expiring 2027.
(4) A portion of land is leased pursuant to a ground lease expiring in 2028.
(5) A portion of The Shores land value was allocated to real estate under
development for the Bel Air (formerly Canyon Point) development project in
the amount of $1,757.
(6) Not included on above schedule is the construction loan for the Fountain
Court development project in the amount of $22,500.
A summary of activity for real estate and accumulated depreciation is as
follows:
F-24
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ESSEX PROPERTY TRUST, INC.
(Registrant)
Dated: March 30, 2000
/s/ Michael J. Schall
By: _________________________________
Michael J. Schall
Executive Vice President and
Chief Financial Officer and Director
(Principal Financial Officer)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacity and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ George M. Marcus Chairman of the Board March 30, 2000
______________________________________
George M. Marcus
/s/ Keith R. Guericke President and Chief March 30, 2000
______________________________________ Executive Officer and
Keith R. Guericke Vice Chairman
/s/ Michael J. Schall Chief Financial Officer March 30, 2000
______________________________________ Executive, Vice President
Michael J. Schall and Director
/s/ Mark J. Mikl Vice President and March 30, 2000
______________________________________ Controller (Principal
Mark J. Mikl Accounting Officer)
/s/ William A. Millichap Director March 30, 2000
______________________________________
William A. Millichap
/s/ Gary P. Martin Director March 30, 2000
______________________________________
Gary P. Martin
/s/ Robert E. Larson Director March 30, 2000
______________________________________
Robert E. Larson
/s/ Thomas E. Randlett Director March 30, 2000
______________________________________
Thomas E. Randlett
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Anthony Downs Director March 30, 2000
______________________________________
Anthony Downs
/s/ David Brady Director March 30, 2000
______________________________________
David Brady
/s/ Issie N. Rabinovitch Director March 30, 2000
______________________________________
Issie N. Rabinovitch
/s/ Willard H. Smith Director March 30, 2000
______________________________________
Willard H. Smith
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Document Page
------- -------- ----
<C> <S> <C>
3.1 Articles of Amendment and Restatement of Essex dated June 22,
1995, attached as Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the Quarter ended June 30, 1995, and
incorporated herein by reference. --
3.2 Articles Supplementary of Essex Property Trust, Inc. for the
8.75% Convertible Preferred Stock, Series 1996A, attached as
Exhibit 3.1 to the Company's Current Report on Form 8-K, filed
August 13, 1996, and incorporated herein by reference. --
3.3 First Amendment to Articles of Amendment and Restatement of
Essex Property Trust, Inc., attached as Exhibit 3.1 to the
Company's 10-Q as of September 30, 1996, and incorporated
herein by reference. --
3.4 Certificate of Correction to Exhibit 3.2 dated December 20,
1996. (1)
3.5 Amended and Restated Bylaws of Essex Property Trust, Inc.,
attached as Exhibit 3.2 to the Company's Current Report on
Form 8-K, filed August 13, 1996, and incorporated herein by
reference. --
3.6 Certificate of Amendment of the Bylaws of Essex Property Trust,
Inc., dated December 17, 1996. (1)
3.7 Articles Supplementary reclassifying 2,000,000 shares of Common
Stock as 2,000,000 shares of 7.875% Series B Cumulative
Redeemable Preferred Stock, filed with the State of Maryland
on February 10, 1998, attached as Exhibit 3.1 to the Company's
Current Report on Form 8-K, filed March 3, 1998, and
incorporated herein by reference. --
3.8 Articles Supplementary reclassifying 500,000 shares of Common
Stock as 500,000 shares of 9-1/8% Series C Cumulative
Redeemable Preferred Stock, filed with the State of Maryland
on November 25, 1998. (2)
3.9 Certificate of Correction to Exhibit 3.2 dated February 12,
1999. (2)
3.10 Articles Supplementary reclassifying 6,617,822 shares of Common
Stock as 6,617,822 shares of Series A Junior Participating
Preferred Stock, filed with the State of Maryland on November
13, 1998, attached as Exhibit 4.0 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, and
incorporated herein by reference. --
3.11 Articles Supplementary reclassifying 2,000,000 shares of Common
Stock as 2,000,000 shares of 9.30% Series D Cumulative
Redeemable Preferred Stock, filed with the State of Maryland
on July 30, 1999, attached as Exhibit 3.1 to the Company's 10-
Q as of June 30, 1999 and incorporated herein by reference. --
3.12 Articles Supplementary reclassifying 2,200,000 shares of Common
Stock as 2,200,000 shares of 9.25% Series E Cumulative
Redeemable Preferred Stock, filed with the State of Maryland
on September 9, 1999, attached as Exhibit 3.1 to the Company's
10-Q as of September 30, 1999 and incorporated herein by
reference. --
4.0 Rights Agreement, dated as of November 11, 1998, between Essex
Property Trust, Inc., and BankBoston, N.A., as Rights Agent,
including all exhibits thereto, attached as Exhibit 1 to the
Company's Registration Statement filed on Form 8-A dated
November 12, 1998, and incorporated herein by reference. --
10.1 Essex Property Trust, Inc. 1994 Stock Incentive Plan (amended
and restated as of April 3, 1997 and previously known as the
1994 Employee Stock Incentive Plan), attached as Exhibit 10.7
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, and incorporated herein by reference.* --
10.2 First Amended and Restated Agreement of Limited Partnership of
Essex Portfolio, L.P. attached as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, and incorporated herein by reference. --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Document Page
------- -------- ----
<C> <S> <C>
10.3 First Amendment to the First Amended and Restated Agreement of
Limited Partnership of Essex Portfolio, L.P. dated February 6,
1998, attached as Exhibit 10.1 to the Company's Current Report
on Form 8-K , filed March 3, 1998, and incorporated herein by
reference. --
10.4 Second Amendment to the First Amended and Restated Agreement of
Limited Partnership of Essex Portfolio, L.P. dated April 20,
1998, attached as Exhibit 10.1 to the Company's Current Report
on Form 8-K, filed April 23, 1998, and incorporated herein by
reference. --
10.5 Third Amendment to the First Amended and Restated Agreement of
Limited Partnership of Essex Portfolio, L.P. dated November
24, 1998. (2)
10.6 Fourth Amendment to the First Amended and Restated Agreement of
Limited Partnership of Essex Portfolio, L.P., dated July 28,
1999, attached as Exhibit 10.1 to the Company's 10-Q as of
June 30, 1999 and incorporated herein by reference. --
10.7 Fifth Amendment to the First Amended and Restated Agreement of
Limited Partnership of Essex Portfolio, L.P., dated September
3, 1999, attached as Exhibit 10.1 to the Company's 10-Q as of
September 30, 1999 and incorporated herein by reference. --
10.8 Form of Essex Property Trust, Inc. 1994 Non-Employee and
Director Stock Incentive Plan, attached as Exhibit 10.3 to the
Company's Registration Statement on Form S-11 (Registration
No. 33-76578), which became effective on June 6, 1994, and
incorporated herein by reference. --
10.9 Form of Essex Property Trust, Inc. 1994 Employee Stock
Incentive Plan, attached as Exhibit 10.2 to the Company's
Registration Statement on Form S-11 (Registration No.
33-76578), which became effective on June 6, 1994, and
incorporated herein by reference. --
10.10 Form of Essex Property Trust, Inc. 1994 Employee Stock Purchase
Plan, attached as Exhibit 10.4 to the Company's Registration
Statement on Form S-11 (RegistrationNo. 33-76578), which
became effective on June 6, 1994, and incorporated herein by
reference.* --
10.11 Form of Non-Competition Agreement between Essex and each of
Keith R. Guericke and George M. Marcus, attached as Exhibit
10.5 to the Company's Registration Statement on Form S-11
(Registration No. 33-76578), which became effective on June 6,
1994, and incorporated herein by reference.* --
10.12 Termination of Non-Compete Agreement between Essex Property
Trust, Inc. and George M. Marcus attached as Exhibit 10.9 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference. --
10.13 Contribution Agreement by and among Essex, the Operating
Partnership and the Limited Partners in the Operating
Partnership, attached as Exhibit 10.6 to the Company's
Registration Statement on Form S-11 (Registration No. 33-
76578), which became effective on June 6, 1994, and
incorporated herein by reference. --
10.14 Form of Indemnification Agreement between Essex and its
directors and officers, attached as Exhibit 10.7 to the
Company's Registration Statement on Form S-11 (Registration
No. 33-76578), which became effective on June 6, 1994, and
incorporated herein by reference. --
10.15 Stock Purchase Agreement dated as of June 20, 1996 by and
between Essex Property Trust, Inc. and Tiger/Westbrook Real
Estate Fund L.P. and Tiger/Westbrook Real Estate Co-Investment
Partnership, L.P., attached as Exhibit 10.1 to the Company's
Current Report on Form 8-K, filed August 13, 1996, and
incorporated herein by reference. --
10.16 Amendment No. 1 to Stock Purchase Agreement dated as of July 1,
1996 by and between Essex Property Trust, Inc. and
Tiger/Westbrook Real Estate Fund, L.P. and Tiger/ Westbrook
Real Estate Co-Investment Partnership, L.P., attached as
Exhibit 10.2 to the Company's Current Report on Form 8-K,
filed August 13, 1996, and incorporated herein by reference. --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Document Page
------- -------- ----
<C> <S> <C>
10.17 First Amendment to Investor Rights Agreement dated July 1, 1996
by and between George M. Marcus and The Marcus & Millichap
Company, attached as Exhibit 10.3 to the Company's Current
Report on Form 8-K, filed August 13, 1996, and incorporated
herein by reference. --
10.18 Agreement by and among M&M, M&M REIBC and the Operating
Partnership and Essex regarding Stock Options attached as
Exhibit 10.14 to the Company's Registration Statement on Form
S-11 (Registration No. 33-76578), which became effective on
June 6, 1994, and incorporated herein by reference. --
10.19 Co-Brokerage Agreement by and among Essex, the Operating
Partnership, M&M REIBC and Essex Management Corporation
attached as Exhibit 10.15 to the Company's Registration
Statement on Form S-11 (Registration No. 33-76578), which
became effective on June 6, 1994, and incorporated herein by
reference. --
10.20 General Partnership Agreement of Essex Washington Interest
Partners attached as Exhibit10.16 to the Company's
Registration Statement on Form S-11
(Registration No.33-76578), which became effective on June 6,
1994, and incorporated herein by reference. --
10.21 Form of Management Agreement between the Operating Partnership
and Essex Management Corporation regarding the retail
Properties attached as Exhibit 10.18 to the Company's
Registration Statement on Form S-11 (Registration No. 33-
76578), which became effective on June 6, 1994, and
incorporated herein by reference. --
10.22 Form of Investor Rights Agreement between Essex and the Limited
Partner of the Operating Partnership attached as Exhibit 10.26
to the Company's Registration Statement on Form S-11
(Registration No. 33-76578), which became effective on June 6,
1994, and incorporated herein by reference. --
10.23 Registration Rights Agreement, dated as of June 20, 1996,
attached as Exhibit 10.8 to Essex's Current Report on Form 8-
K, filed August 13, 1996, and incorporated herein by
reference. --
10.24 Letter Agreement, dated July 1, 1996, among Essex Property
Trust, Inc., Essex Portfolio, L.P., Tiger/Westbrook Real
Estate Fund, L.P. and Tiger/Westbrook Real Estate
Co-Investment Partnership, L.P., attached as Exhibit 10.9 to
the Company's Current Report on Form 8-K, filed August 13,
1996, and incorporated herein by reference. --
10.25 Letter Agreement with Tiger/Westbrook entities re: Limitations
on Ownership of Stock of the Company, attached as Exhibit 10.1
to the Company's 10-Q as of September 30, 1996, and
incorporated herein by reference.
10.26 Phantom Stock Unit Agreement for Mr. Guericke, attached as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997, and incorporated herein
by reference.* --
10.27 Phantom Stock Unit Agreement for Mr. Schall, attached as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997, and incorporated herein
by reference.*
10.28 Replacement Promissory Note (April 15, 1996) and Pledge
Agreement for Mr. Guericke, attached as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, and incorporated herein by reference. --
10.29 Promissory Note (December 31, 1996) and Pledge Agreement for
Mr. Guericke, attached as Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1997, and incorporated herein by reference. --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Document Page
------- -------- ----
<C> <S> <C>
10.30 Replacement Promissory Note (April 30, 1996) and Pledge
Agreement for Mr. Schall, attached as Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, and incorporated herein by reference. --
10.31 Promissory Note (December 31, 1996) and Pledge Agreement for
Mr. Schall, attached as Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1997, and incorporated herein by reference. --
10.32 First Amended and Restated Agreement of Limited Partnership of
Western- Highridge I Investors, effective as of May 13, 1997,
attached as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, and
incorporated herein by reference. --
10.33 Registration Rights Agreement, effective as of May 13, 1997, by
and between the Company and the limited partners of Western-
Highridge I Investors, Irvington Square Associates, Western-
Palo Alto II Investors, Western Riviera Investors, and
Western-San Jose III Investors, attached as Exhibit 10.6 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, and incorporated herein by reference. --
10.34 $100,000,000 Promissory Note between Essex Portfolio, L.P., and
Essex Morgan Funding Corporation, attached as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998, and incorporated herein by
reference. --
12.1 Schedule of Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends. --
21.1 List of Subsidiaries of Essex Property Trust, Inc. --
23.1 Consent of Independent Public Accountants. --
27.1 Article 5 Financial Data Schedule (Edgar Filing Only) --
</TABLE>
- --------
(1) Incorporated by reference to the identically numbered exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
(2) Incorporated by reference to the identically numbered exhibit to the
Company's Annual Report on Form10-K for the year ended December 31, 1998.
* Management contract or compensatory plan or agreement.
<PAGE>
EXHIBIT 12.1
ESSEX PROPERTY TRUST, INC.
Schedule of computation of Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends
(Dollars in thousands, except ratios)
<TABLE>
<CAPTION>
Years ended December 31
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Earnings:
Income before minority interests and
extraordinary item............................. $ 61,616 $ 40,600 $ 34,146
Interest expense................................ 21,268 19,374 12,659
Amortization of deferred financing costs........ 566 718 509
-------- -------- --------
Total earnings.................................. $ 83,450 $ 60,692 $ 47,314
======== ======== ========
Fixed charges:
Interest expense................................ $ 21,268 $ 19,374 $ 12,659
Convertible preferred stock dividends........... 1,333 3,500 2,681
Perpetual preferred unit distributions.......... 12,238 5,595 --
Amortization of deferred financing costs........ 566 718 509
Capitalized interest............................ 5,172 3,494 1,276
-------- -------- --------
Total fixed charges and preferred stock
dividends...................................... $ 40,577 $ 32,681 $ 17,125
======== ======== ========
Ratio of earnings to fixed charges (excluding
preferred stock dividends)..................... 3.09 X 2.57 X 3.28 X
======== ======== ========
Ratio of earnings to combined fixed charges and
preferred dividends............................ 2.06 X 1.86 X 2.76 X
======== ======== ========
</TABLE>
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<C> <S>
1. Essex Portfolio, L.P., a California limited partnership
2. Essex Management Corporation, a California corporation
3. Essex-Palisades Facilitator, a California limited partnership
4. Essex Sunpointe Limited, a California limited partnership
5. Essex Washington Interest Partners, a California general partnership
6. Essex San Ramon Partners L.P., a California limited partnership
7. Essex Bristol Partners, L.P., a California limited partnership
8. Essex Fidelity I Corporation, a California corporation
9. Essex Camarillo Corporation, a California corporation
10. Essex Camarillo L.P., a California limited partnership
11. Essex Meadowood Corporation, a California corporation
12. Essex Meadowood, L.P., a California limited partnership
13. Essex Bunker Hill Corporation, a California corporation
14. Essex Bunker Hill, L.P., a California limited partnership
15. Essex Treetops Corporation, a California corporation
16. Essex Treetops, L.P., a California limited partnership
17. Essex Bluffs, L.P., a California limited partnership
18. Essex Huntington Breakers, L.P., a California limited partnership
19. Essex Stonehedge, L.P., a California limited partnership
20. Essex Bridle Trails, L.P., a California limited partnership
21. Essex Spring Lake, L.P., a California limited partnership
22. Essex Maple Leaf, L.P., a California limited partnership
Fountain Court Apartment Asscociates, L.P. a Washington limited
23. partnership
24. Essex Fountain Court, LLC, a Washington limited liability company
25. Essex Inglenook Court, LLC, a Delaware limited liability company
26. Essex Wandering Creek, LLC, a Delaware limited liability company
27. Essex Fairways, LLC, a Delaware limited liability company
28. Essex Columbus, LLC, a Delaware limited liability company
29. Essex Loraine, LLC, a Delaware limited liability company
30. Essex Glenbrock, LLC, a Delaware limited liability company
31. Essex Fuelide, LLC, a Delaware limited liability company
32. Essex Lorraine, Inc. a California corporation
33. Essex Columbus, Inc. a California corporation
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Essex Property Trust, Inc.;
We consent to incorporation by reference in the registration statements on
Form S-3 (No. 333-68503, No. 333-44467 and No. 333-21989), and the
registration statement on Form S-8 (No. 33-84830) of Essex Property Trust,
Inc. our report dated February 4, 2000 relating to the consolidated balance
sheets of Essex Property Trust, Inc. and subsidiaries as of December 31, 1999
and 1998 and the related consolidated statements of operations, stockholders'
equity and cash flows of Essex Property Trust, Inc. and subsidiaries for each
of the years in the three-year period ended December 31, 1999 and the related
financial statement schedule, which report appears in the December 31, 1999
annual report on Form 10-K of Essex Property Trust, Inc.
KPMG LLP
San Francisco, California
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ESSEX
PROPERTY TRUST, INC. REPORT FOR THE YEAR ENDED DECEMBER 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 29,564
<SECURITIES> 0
<RECEIVABLES> 22,655
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 55,714
<PP&E> 1,049,490
<DEPRECIATION> 96,605
<TOTAL-ASSETS> 1,062,313
<CURRENT-LIABILITIES> 47,221
<BONDS> 384,108
0
1
<COMMON> 2
<OTHER-SE> 387,690
<TOTAL-LIABILITY-AND-EQUITY> 1,602,313
<SALES> 0
<TOTAL-REVENUES> 146,045
<CGS> 0
<TOTAL-COSTS> 67,856
<OTHER-EXPENSES> 4,829
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,268
<INCOME-PRETAX> 43,778
<INCOME-TAX> 0
<INCOME-CONTINUING> 43,778
<DISCONTINUED> 0
<EXTRAORDINARY> 214
<CHANGES> 0
<NET-INCOME> 43,564
<EPS-BASIC> 2.41
<EPS-DILUTED> 2.36
</TABLE>
