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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 333-44467-01
ESSEX PORTFOLIO,L.P.
--------------------
(Exact name of registrant as specified in its charter)
Maryland 77-0369575
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
925 East Meadow Drive, Palo Alto, California 94303
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(Address of principal executive offices) (Zip code)
(650) 494-3700
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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. [ ]
LOCATION OF EXHIBIT INDEX: The index exhibit is contained in Part IV, Item 14,
on page number 33.
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 May 14, 2002.
TABLE OF CONTENTS
FORM 10-K
Page No.
PART I
Item 1 Business.......................................................................1
Item 2 Properties.....................................................................16
Item 3 Legal Proceedings..............................................................20
Item 4 Submission of Matters to a Vote of Security Holders............................20
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters...........21
Item 6 Selected Financial Data........................................................22
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................23
Item 7A Quantitative and Qualitative Disclosures About Market Risk.....................32
Item 8 Financial Statements and Supplementary Data....................................32
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.........................................32
PART III
Item 10 Directors and Executive Officers of the Registrant.............................32
Item 11 Executive Compensation.........................................................32
Item 12 Security Ownership of Certain Beneficial Owners and Management.................32
Item 13 Certain Relationships and Related Transactions.................................32
PART IV
Item 14 Exhibits, Financial Statements Schedules and
Reports on Form 8-K............................................................33
Signatures..............................................................................S-1
As used herein, the terms "Company" and "Essex" mean Essex Property Trust, Inc.,
a Maryland real estate investment trust, those entities controlled by Essex
Property Trust, Inc. and Predecessors of Essex Property Trust, Inc., unless the
context indicates otherwise and the term "Operating Partnership" refers to Essex
Portfolio, L.P., a California limited partnership, formed on March 15, 1994 as
to which the Company owns an approximate 89.0% general partnership interest, as
of December 31, 2001 (except with regard to the section entitled "Other Matters/
Risk Factors," below, wherein all reference to the "Company" shall be deemed to
be references to the Company and the Operating Partnership, unless the context
indicates otherwise).
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 Operating
Partnership's expectations, hopes, intentions, beliefs and strategies regarding
the future. Forward looking statements include statements regarding the
Operating Partnership'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 capital
expenditures, future acquisitions and developments, the anticipated performance
of the Essex Apartment Value Fund, L.P., the anticipated performance of existing
properties, projected stabilization dates for development properties, and
statements regarding the Operating Partnership'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 acquisitions will fail to meet
expectations, 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 Operating Partnership's current
expectations, that the Essex Apartment Value Fund will fail to perform as
anticipated, 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, 2001, and those other risk
factors and special considerations set forth in the Operating Partnership's
other filings with the Securities and Exchange Commission (the "SEC") which may
cause the actual results, performance or achievements of the Operating
Partnership 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 Portfolio, L.P. (the "Operating Partnership") was formed in March 1994 and
commenced operations on June 13, 1994, when the Company, the general partner of
the Operating Partnership, completed its initial public offering (the
"Offering") in which it issued 6,275,000 shares of common stock at $19.50 per
share. The net proceeds from the Offering of $112.1 million were used by the
Company to acquire a 77.2% interest in the Operating Partnership. The Company
has elected to be treated as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986 ("The Code") as amended.
The Company conducts substantially all of its activities through the Operating
Partnership. The Company currently owns an approximate 89.0% general partnership
interest and senior members of the Company's Board of Directors, management and
certain outside investors own approximately 11.0% 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.
The Operating Partnership is engaged in the ownership, acquisition, development
and management of multifamily apartment communities. The Operating Partnership's
multifamily portfolio consists of ownership interests in 92 properties
(comprising 20,762 apartment units), 11,295 units are located in Southern
California (Los Angeles, Ventura, Orange and San Diego counties), 4,023 units of
which are located in Northern California (the San Francisco Bay Area) and 5,444
units of which are located in the Pacific Northwest (4,073 units in the Seattle
Metropolitan area and 1,371 units in the Portland, Oregon metropolitan area).
The Operating Partnership also owns an office building that has approximately
17,400 square feet located in Northern California (Palo Alto) which houses the
Operating Partnership's headquarters and an office building in Southern
California (Woodland Hills) that has approximately 38,940 square feet, of which
the Operating Partnership currently occupies approximately 6,800 square feet.
The Woodland Hills office building has ten third party tenants occupying
approximately 28,700 feet (the "Commercial Properties," and together with the
Operating Partnership's multifamily residential properties, the "Properties").
The Operating Partnership along with its affiliated entities and joint ventures
also have entered into commitments for the development of 1,274 units in five
multifamily communities; two in Northern California and three in Southern
California.
Business Objectives
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The Operating Partnership'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 Operating
Partnership's strategies include:
1
. 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 Operating
Partnership's capital and financial risk positions by maintaining a
conservative leverage ratio and minimizing the Operating Partnership's
cost of capital
Business Principles
- -------------------
The Operating Partnership 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 Operating Partnership seeks to retain tenants,
maximize cash flow, enhance property values and compete effectively for new
tenants in the marketplace. The Operating Partnership's Senior Vice President of
Operations and the 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 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 Operating Partnership focuses on acquisition and
development of multifamily residential communities, containing between 75 and
750 units. These types of properties offer attractive opportunities because such
properties (i) are often mispriced by real estate sellers and buyers who lack
the Operating Partnership'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
Operating Partnership.
Geographic Focus. The Operating Partnership focuses its property investments in
markets that meet the following criteria:
. Major Metropolitan Areas. The Operating Partnership 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 Operating Partnership's strategy of varying its
portfolio in response to changing market conditions.
. Supply Constraints. The Operating Partnership believes that properties
located in real estate markets with limited development opportunities
are well suited to produce increased rental income. When evaluating
supply constraints, the Operating Partnership 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 Operating
Partnership concentrates on markets in which the cost of renting
compares favorably to the cost of owning a home. In such markets, rent
levels tend to be 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 Operating Partnership believes that most renters
select housing based on its proximity to their jobs and related
commuting factors. The Operating Partnership obtains local area
information relating to its residential properties and uses this
information when making multifamily residential property acquisition
decisions. The Operating Partnership also reviews the location of
major employers relative to its portfolio and potential acquisition
properties.
Following the above criteria, the Operating Partnership is currently pursuing
investment opportunities in selected markets of Northern and Southern California
and the Pacific Northwest.
2
Active Portfolio Management Through Regional Economic Research and Local Market
Knowledge. The Operating Partnership 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 Operating
Partnership 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 Operating
Partnership maintains and evaluates:
. Regional Economic Data. The Operating Partnership evaluates and
reviews regional economic factors for the markets in which it owns
properties and where it considers expanding its operations. The
Operating Partnership's research focuses on regional and sub-market
supply and demand, economic diversity, job growth, market depth and
the comparison of rents to down payments and occupancy costs
associated with single-family housing.
. 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 Operating Partnership
regularly evaluates the results of regional economic and local market research
and adjusts portfolio allocations accordingly. The Operating Partnership
actively manages the allocation of assets within its portfolio. The Operating
Partnership 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 Operating Partnership 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 Operating Partnership
is generally a long-term investor, it does not establish defined or preferred
holding periods for its Properties.
Current Business Activities
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As of December 31, 2001, the 89.0% general partnership interest in the Operating
Partnership is owned by the Company. The approximate 11.0% 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 Operating Partnership may invest in properties through the acquisition
of an interest in another entity, based upon the criteria described above. The
Operating Partnership does not plan to invest in any securities of other
entities not engaged in real estate related activities.
The Company, which includes its share of the Operating Partnership's income and
expenses on its tax returns, 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. In order to maintain compliance with REIT tax
rules, 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.
On July 11, 2001, Essex Apartment Value Fund, L.P. (the "Fund"), an investment
fund organized by the Operating Partnership, had its initial closing with three
institutional investors. The Fund will acquire, develop, and manage multifamily
properties located in California, Oregon, and Washington. The Fund's objective
is to add value through rental growth and appreciation, using the Operating
Partnership's development, redevelopment and asset management capabilities. The
total equity committed to the Fund by investors, including the Operating
Partnership, at the initial closing was $105 million. Subsequent to the initial
closing the Fund, several additional equity commitments were received. As of the
final closing in February 2002, equity commitments totaled approximately $250
million. An affiliate of the Operating Partnership, Essex VFGP, L.P. ("VFGP"),
is the Fund's 1% general partner and is a 20.4% percent limited partner. The
Operating Partnership owns a 99% limited partner interest in VFGP. The Fund is
expected to utilize leverage of approximately 65% of the value of the underlying
real estate portfolio. The Operating Partnership, through VFGP, has a 21.4%
interest in the Fund on economic terms identical to the other investors with
respect to capital invested.
Since August 2000, the Operating Partnership has acquired several properties in
anticipation of the Fund's formation. These properties include six apartment
properties having 1,377 apartment units and two development land parcels on
which approximately 368 units are planned for construction. These properties
have an aggregate purchase price of approximately $123 million. In addition, six
of the properties are encumbered by non-recourse mortgages in the aggregate
amount of approximately $81.9 million. On August 13, 2001, the Fund acquired one
asset directly, Marbrisas Apartments, a 500-unit apartment community located in
Chula Vista, California for a contract price of $62.0 million. In connection
with this transaction the Fund assumed an approximately $39.9 million secured
loan.
3
The current portfolio of stabilized properties of the Fund is set forth below:
Fixed Loan
Loan Amount Interest Maturity
Property Name Location Units ($ in millions) Rate Date
- ---------------------------------------------------------------------------------------------
Rosebeach Apartments LaMirada, CA 174 $ 8.5 7.09% Feb-11
Foxborough Homes Orange, CA 90 5.0 7.84% Jul-09
Vista del Rey Tustin, CA 116 8.0 6.95% Feb-11
The Crest at Phillips Ranch Pomona, CA 501 36.1 7.99% Jul-05
Andover Park Apartments Beaverton, OR 240 12.5 6.66% Oct-11
Hunt Club Lake Oswego, OR 256 11.8 7.05% Feb-11
Marbrisas Chula Vista, CA 500 39.9 7.99% Jul-05
----- ------
Total 1,877 $121.8
===== ======
In December 2001, the Fund obtained an unsecured line of credit for an aggregate
amount of $50 million. The line matures in June 2002 but may be extended at the
Fund's option to September 2002. The line bears interest at LIBOR plus 0.875%.
As of December 31, 2001, the line had an outstanding balance of $46.2 million.
In addition to distributions with respect to its pro-rata share of the Fund's
Limited Partnership Interest invested capital, VFGP (1) will receive special
priority distributions from the Fund in the annual amount of 1% of the Fund's
unreformed third party capital, payable quarterly for managing the Fund's
operations, and (2) may receive over the life of the Fund incentive
distributions up to 20% of the cumulative net profits on the Fund's investments,
if the Fund exceeds certain financial return benchmarks, including a minimum 10%
compounded annual return on the Limited Partner's total capital contributions.
VFGP will also be paid fees consistent with industry standards for its property
management, development and redevelopment services with respect to the Fund's
investments. VFGP will not receive transaction fees, such as acquisition,
disposition, and financing or similar fees, in connection with the operation of
the Fund.
Subject to specific exceptions, the Fund will generally be the Operating
Partnership's exclusive investment vehicle for new investments until the earlier
of (i) the date at least 90% of the Fund's aggregate capital commitments have
been invested or committed or reserved for investments or (ii) December 31,
2003. The exceptions are: (1) properties acquired to complete transactions
intended to qualify for non-recognition under Section 1031 of the Internal
Revenue Code, (2) transactions involving properties with 75 units or less, (3)
transactions which require equity securities of the Operating Partnership,
including convertible or exchangeable securities, with a value of at least
$750,000, (4) follow-on investments and re-building of properties which have
been destroyed or damaged, (5) land leases with remaining terms of less than 35
years; and (6) other transactions which are prohibited from being consummated on
behalf of the Fund due to express restrictions or diversification limitations.
The Operating Partnership is not prohibited from utilizing its development and
redevelopment capabilities to improve properties that it currently owns or
acquires pursuant to the preceding exceptions.
The Operating Partnership's executives, Keith Guericke, Michael Schall, John
Eudy, Craig Zimmerman and John Burkart, serve as the Fund's investment committee
and are required to devote such time as is reasonably necessary to achieve the
objectives of the Fund. Investors have the right to suspend their capital
commitments to the Fund if two or more of these executives are no longer
actively involved in the management of the Fund. John Burkart serves as the
portfolio manager and is committed to devote substantially all of his time to
the Fund during the investment period. The Fund also has a five-person advisory
committee representing the investors.
Acquisitions
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During 2001, the Operating Partnership acquired ownership interests in eight
multifamily properties consisting of 1,684 units with an aggregate purchase
price of approximately $171.4 million. These investments were primarily funded
by the contribution of equity from joint venture partners, cash generated from
operations, proceeds from the dispositions of properties, proceeds from new and
assumed loans and the Operating Partnership's line of credit. Of the eight
properties of which the Operating Partnership acquired ownership interest in
2001, seven properties (1,444 units) are located in Southern California and one
(240 units) is located in the Pacific Northwest.
4
Multifamily property ownership interests acquired in 2001 are as follows:
Purchase Price
or
Agreed Upon Value
Property Name Location Units ($ in millions)
- -------------------------------------------------------------------------------------
Southern California
Marbrisas Apartments /(1)/ Chula Vista, CA 500 $ 62.0
Capri at Sunny Hills /(2)/ /(3)/ Fullerton, CA 100 16.7
Hearthstone/(2)/ Santa Ana, CA 140 14.1
Montejo /(2)/ Garden Grove, CA 124 9.6
Treehouse /(2)/ Santa Ana, CA 164 13.1
Valley Park /(2)/ Fountain Valley, CA 160 16.8
Villa Angelina /(2)/ Placentia, CA 256 22.5
Pacific Northwest
Andover Park /(1)/ Beaverton, OR 240 16.6
----- ------
Total 1,684 $171.4
===== ======
/(1)/ The Operating Partnership has a 21.4% interest in the Fund, which owns
this property.
/(2)/ The Operating Partnership holds a 1% special limited partner interest in
the partnerships, which own these multifamily properties. These investments
were made under arrangements whereby EMC became the 1% sole general partner
interest and the other limited partners were granted the right to require
the applicable partnership to redeem their interest for cash. Subject to
certain conditions, the Operating Partnership may, however, elect to
deliver an equivalent number of shares of the Company's Common Stock in
satisfaction of the applicable partnership's cash redemption obligation.
/(3)/ Acquired in an IRC Section 1031 exchange in which the Operating
Partnership disposed of three retail properties located near Portland, OR.
Other Acquisition Related Activities
- ------------------------------------
On March 1, 2001 the Operating Partnership purchased Clarewood Office Building,
an approximately 38,940 square foot office building in Woodland Hills,
California for a contract price of $4.5 million. The Operating Partnership
currently occupies approximately 6,800 square feet. The Operating Partnership's
employees that occupy this space are involved in the following functions:
property operations, development, redevelopment and accounting. The building has
ten third party tenants occupying approximately 28,700 feet. The largest single
tenant occupies approximately 10,900 square feet.
On March 22, 2001, in connection with the acquisition of The Carlyle Apartments
in April 2000, Essex issued 158,202 Operating Partnership units convertible into
Common Stock at the option of the holder. This was the final payment and was
based on an amount that provides Essex with a targeted yield on the property.
Total consideration paid for the property was $26.5 million.
On June 1, 2001 the Operating Partnership completed the partner buyout of Mt.
Sutro Terrace Apartments, a 99-unit apartment community located in San
Francisco, California. The buyout was at the Operating Partnership's option
under a capped pricing formula which terms were agreed to at the time of the
Operating Partnership's initial investment in September 1999. In connection with
the partner buyout the Operating Partnership issued 50,725 Operating Partnership
units, which are convertible into Common Stock at the option of the holder.
On June 29, 2001, the Operating Partnership purchased Moanalua Hillside
Apartments through one of its taxable REIT subsidiaries. Moanalua Hillside
Apartments is a 700-unit apartment community located in Honolulu, Hawaii, which
was acquired for a contract price of $42.2 million. The Operating Partnership is
actively involved in reselling this property to unrelated third parties at a
price in excess of the Operating Partnership's purchase price. However, there
can be no assurance that the sale of the property will close as expected. The
Operating Partnership's net investment is reflected in the Operating
Partnership's financial statements as notes receivable from investees and
related parties and investments.
Dispositions
- ------------
On September 21,2001, two partnerships in which EMC is a 1% general partner and
the Operating Partnership holds a 1% special limited partnership interest, sold
to an unrelated third party the following three retail centers: Canby Square,
Garrison Square and Powell Villa. These properties are located in the Portland,
Oregon metropolitan area and were sold for a contract price of $14.5 million.
The Operating Partnership recognized a previously deferred gain of $3.8 million,
net of disposition related costs, in connection with this transaction. In a tax
deferred exchange transaction, these two partnerships acquired on September 28,
2001, Capri at Sunny Hills, a 100-unit apartment community located in Fullerton,
California for a contract price of $16.7 million.
Development
- -----------
Development communities are defined by the Operating Partnership 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, 2001, the Operating Partnership had five development communities,
with an aggregate of 1,274 multifamily units. During 2001, the Operating
Partnership announced one
5
new development community and also reached stabilized operations at one
apartment property containing 404 units. In connection with the properties
currently under development, the Operating Partnership has directly, or in some
cases through its joint venture entities, entered into contractual construction
related commitments with unrelated third parties. As of December 31, 2001, the
Operating Partnership and its partners are committed to fund approximately
$113.4 million. The following table sets forth information regarding the
development communities at December 31, 2001.
Estimated /(1)/ Incurred /(1)/
Project Cost Project Cost
as of 12/31/01 as of 12/31/01 Projected
Development Communities Location Units ($ in millions) ($ in millions) Stabilization
- ----------------------------------------------------------------------------------------------------------------
Direct Development
The San Marcos /(2)/ Richmond, CA 312 $ 43.8 $ 31.5 Mar. 2003
(formerly Vista Del Mar)
The Essex on Lake Merritt /(2)/ Oakland, CA 270 69.0 51.0 May 2003
Parker Ranch /(3)/ Simi Valley, CA 324 43.0 10.8 Dec. 2004
Joint Venture
Chesapeake /(4)/ San Diego, CA 230 43.0 9.0 Aug. 2004
Kelvin Avenue /(4)/ Irvine, CA 138 22.4 5.5 Dec. 2003
----- ------ -------
Total Development Communities 1,274 $221.2 $107.8
===== ====== =======
/(1)/ Estimated project cost as of December 31, 2001 includes total estimated
and incurred costs for the development projects.
/(2)/ The Operating Partnership is the sole owner of these development projects.
/(3)/ The Operating Partnership has 50% interest in this development project.
/(4)/ The Operating Partnership has a 21.4% interest in the Fund, which owns
this property.
The Operating Partnership is entitled to receive development fee income on the
joint venture development communities.
The Operating Partnership intends to continue to pursue the development of
multifamily communities to the extent that the market conditions and the
specific project terms are considered favorable.
During the year, the Operating Partnership reached stabilized operations at one
property, Tierra Vista, a 404-unit apartment community located in Oxnard,
California.
Redevelopment
- -------------
Redevelopment communities are defined by the Operating Partnership as existing
properties owned or recently acquired which have been targeted for additional
investment by the Operating Partnership with the expectation of increased
financial returns. Redevelopment communities typically have apartment units that
are under construction and as a result, may have less than stabilized
operations. As of December 31, 2001, the Operating Partnership had the following
three-redevelopment communities.
Estimated /(2)/ Incurred
Renovation Cost Total Cost
as of 12/31/01 as of 12/31/01 Projected
Redevelopment Communities /(1)/ Location Units ($ in millions) ($ in millions) Completion
- -----------------------------------------------------------------------------------------------------------------
Plumtree Santa Clara, CA 140 $3.2 $0.1 Sep. 2002
Monterey Villas (The Village) Oxnard, CA 122 3.2 2.4 Jan. 2002
The Lofts at Pinehurst (Villa Scandia) Ventura, CA 118 3.3 0.2 Aug. 2002
--- ---- ----
Total Redevelopment Communities 380 $9.7 $2.7
=== ==== ====
/(1)/ The Operating Partnership owns 100% of each redevelopment community.
/(2)/ Represents the projected cost of renovation of the apartment community
excluding the original cost of land and buildings.
During 2001 the Operating Partnership completed six redevelopment projects,
which comprised 1,806 units and had total project costs in excess of $30
million.
Equity Transactions
- -------------------
On June 28, 2001, the Operating Partnership issued 200,000 Series Z Incentive
Units of limited partner interest (the "Series Z Incentive Units") to eleven
senior executives of the Operating Partnership in exchange for a capital
commitment of $1.00 per Series Z Incentive Unit, for an aggregate offering price
of $200,000. Upon certain triggering events, the Series Z Incentive Units will
automatically convert into common Operating Partnership units based on a
conversion ratio that may increase over time upon satisfaction of specific
conditions. The conversion ratio, initially set at zero, will increase on
January 1 of each year for each participating executive who remains employed by
the Operating Partnership if the Operating Partnership has met a specified
"funds from operations" per share target for the prior year, up to a maximum
conversion ratio of 1.0. In certain change of control situations, the
participating executives will also be given the option to convert their units at
the then-effective conversion ratio. In addition, the Operating Partnership has
the option to redeem Series Z Incentive
6
Units held by any executive whose employment has been terminated for any reason
and the obligation to redeem any such units following the death of the holder.
In such event, the Operating Partnership will redeem the units for, at its
option, either common Operating Partnership units or shares of the Company's
common stock based on the then-effective conversion ratio.
During the year, the Operating Partnership's Board of Directors authorized the
Operating Partnership to purchase from time to time shares of the Company's
Common Stock, in an amount up to $50 million, at a price not to exceed $48.00
per share in the open market or through negotiated or block transactions. The
timing of the repurchase will depend on the market price and other market
conditions and factors. Essex will use working capital or proceeds from the sale
of properties to provide funds for this program. The purpose of the program is
to acquire stock related to real estate transactions involving the issuance of
partnership units in the Operating Partnership and similar interests. Such
repurchased shares may be reissued in connection with the conversion of such
partnership units, the exercise of stock options or other business transactions.
This Program supersedes its common stock repurchase plan as announced on March
25, 1999. In October 2001, the Operating Partnership acquired 100,700 shares of
the Company's outstanding Common Stock. The weighted average exercise price paid
for the shares was $47.88. The amount paid for the shares are reflected as a
reduction of the common stock and additional-paid-in-capital in the Company's
consolidated balance sheets for the year ended December 31, 2001.
In September 1999, the Operating Partnership formed a program in which directors
and management of the Operating Partnership can participate indirectly in an
investment in the Company's common stock. Pursuant to the program, in 1999, the
participants entered into a swap agreement with a securities broker whereby the
securities broker acquired, in open market transactions, 223,475 shares of the
Company's common stock. The agreement by its terms expires in September 2004 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. From August 2001 through January 2002, the directors and
management effected an early termination of the agreement with respect to
120,718 shares of the total 223,475 shares, realizing a gain of approximately
$15 per share. Participants are obligated for any termination or settlement
shortfall. The Operating Partnership is a guarantor of participant obligations
under the program.
Offices and Employees
- ---------------------
The Operating Partnership is headquartered in Palo Alto, California, and has
regional offices in Seattle, Washington, Portland, Oregon, Woodland Hills,
California and Tustin, California. As of December 31, 2001, the Operating
Partnership had approximately 754 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, in or migrating from
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 Operating Partnership 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.
Recently there has been an increasing number of lawsuits against owners and
managers of multifamily properties other than Essex alleging personal injury and
property damage caused by the presence of mold in residential real estate. Some
of these lawsuits have resulted in substantial monetary judgments or
settlements. Insurance carriers have reacted to these liability awards by
excluding mold related claims from standard policies and pricing mold
endorsements at prohibitively high rates. We have adopted programs designed to
minimize the existence of mold in any of our properties as well as guidelines
for promptly addressing and resolving reports of mold to minimize any impact
mold might have on residents or the property.
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 downgradient
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
7
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 or methane has
been identified as a potential concern, the Operating Partnership has
implemented remediating measures and/or additional testing. Based on its current
knowledge, the Operating Partnership does not believe that future liabilities
associated with asbestos, radon, hydrogen sulfide or methane will be material.
Based on the information contained in the environmental studies, the Operating
Partnership 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 Operating Partnership's financial
condition, result of operations, or liquidity.
Certain Properties that have been sold by the Operating Partnership were
identified as having potential groundwater contamination. While the Operating
Partnership 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 Operating Partnership has no
indemnification agreements from third parties for potential environmental
clean-up costs at its Properties. The Operating Partnership 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 Operating Partnership. 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 Operating Partnership, or that a material environmental condition
does not otherwise exist as to any one or more of the Properties. The Operating
Partnership has limited insurance coverage for the types of environmental
liabilities described above.
Insurance
- ---------
The Operating Partnership 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 Operating
Partnership does not have insurance. All of the Properties are located in areas
that are subject to earthquake activity. The Operating Partnership has obtained
earthquake insurance for all the Properties. Most of the Properties are included
in an earthquake insurance program that 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. In the future, the Operating
Partnership 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 Operating Partnership, (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 Operating
Partnership's Properties, should a property sustain damage as a result of an
earthquake, the Operating Partnership may incur losses due to deductibles,
co-payments and losses in excess of applicable insurance, if any.
Although the Operating Partnership carries certain insurance for non-earthquake
damages to its properties and liability insurance, the Operating Partnership may
still incur losses due to uninsured risks, deductibles, co-payments or losses in
excess of applicable insurance coverage.
Competition
- -----------
The Operating Partnership'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 Operating
Partnership's target markets, a prolonged economic downturn could have a
material adverse effect on the Operating Partnership's financial position,
results of operations or liquidity.
The Operating Partnership 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 Operating Partnership expects to meet its short-term liquidity requirements
by using its working capital, cash generated from operations, and its amounts
available on its lines of credit. The Operating Partnership 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 $150,000,000. At December 31, 2001 the Operating
Partnership had an outstanding balance of $74,459,000 under these facilities.
Other Matters/Risk Factors
Our operations involve various risks that could have adverse consequences to us.
These risks include, among others, the following:
Debt Financing
At December 31, 2001, the Operating Partnership had approximately $638,660,000
of indebtedness (including $133,279,000 of variable rate indebtedness, of which
$58,820,000 is capped at interest rates ranging from 7.1% to 7.3%).
8
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, 2001, the Operating Partnership had an aggregate of
approximately $638,660,000 of mortgage debt and line of credit borrowings, some
of which are subject to balloon payments of principal. The Operating Partnership
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, 2001, these mortgages and lines of credit borrowings
had the following scheduled maturity dates: 2002 - $86.8 million (includes lines
of credit balance of $74.4 million as of December 31, 2001); 2003 - $21.9
million; 2004 - $4.0 million; 2005 - $36.0 million; 2006 - $15.1 million; 2007
and thereafter - $474.8 million. The Operating Partnership 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 Operating Partnership of income and asset value.
Alternatively, the Operating Partnership may be required to refinance the debt
at higher interest rates. If the Operating Partnership 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 Operating Partnership.
Risk of Rising Interest Payments
At December 31, 2001, the Operating Partnership 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 2020 through 2026), and $74,459,000 of variable rate indebtedness under its
lines of credit bearing interest at rates ranging from 1.15% - 1.175% over
LIBOR. The long-term variable rate indebtedness of approximately $58,820,000 is
subject to an interest rate protection agreement, which may reduce the risks
associated with fluctuations in interest rates. The remaining $74,459,000 of
long-term variable rate indebtedness is not subject to any interest rate
protection agreement, and consequently, an increase in interest rates may have
an adverse effect on net income and results of operations of the Operating
Partnership.
Current interest rates are at historic lows and potentially could increase
rapidly to levels more in line with recent historic levels. The immediate effect
of significant and rapid interest rate increases would result in higher interest
expense in the Operating Partnership's variable rate indebtedness. The effect of
prolonged interest rate increases could negatively impact the Operating
Partnership's ability to make acquisitions and develop properties at economic
returns on investment and the Operating Partnership's ability to refinance
existing borrowings at acceptable rates.
Risk of Losses on Interest Rate Hedging Arrangements
The Operating Partnership 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 Operating
Partnership when interest rates decline. There can be no assurance that any such
hedging arrangements can be refinanced or that the Operating Partnership 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 Operating
Partnership'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 Operating Partnership 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 Operating Partnership to increased credit
risks. In order to minimize counterparty credit risk, the Operating
Partnership's policy is to enter into hedging arrangements only with large
financial institutions.
Acquisition Activities: Risks That Acquisitions Will Fail To Meet Expectations
The Operating Partnership 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 Operating Partnership to market an acquired property as
originally intended may prove to be inaccurate. In addition, the Operating
Partnership 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 Operating
Partnership 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."
9
Risks That Development Activities Will Be Delayed, Not Completed, and/ or Fail
to Achieve Expected Results
The Operating Partnership 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
Operating Partnership'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;
. 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, 2001,
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). Of our 92 ownership interests in
multifamily residential properties, 65 are located in California. 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 Operating Partnership owns properties could have a negative impact on
the financial condition and results from operations of the Operating
Partnership.
Both the national economy and the economies of the western states in which the
Operating Partnership owns, manages and develops properties have been and
continue to be in a recession. The early indicators of how this affects the real
estate industry in general, and the Operating Partnership in particular, are
slightly reduced occupancy rates, flattening and reductions in market rental
rates.
The Operating Partnership's property type and diverse geographic locations
provide some degree of risk moderation but are not immune to a prolonged down
cycle in the real estate markets in which the Operating Partnership operates.
Although the Operating Partnership believes it is well positioned to meet the
challenges ahead, it is possible that further reductions in occupancy and market
rental rates will result in reduction of rental revenues, operating income, cash
flows, and market value of the Company's shares. Prolonged recession could also
affect the Operating Partnership's ability to obtain financing at acceptable
rates of interest and to access funds from the disposition of properties at
acceptable disposition prices.
Competition In The Multifamily Residential Market May Adversely Affect
Operations And The Rental Demand For The Operating Partnership'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
Operating Partnership'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 Operating Partnership.
The Operating Partnership 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 Operating Partnership. This competition may result
in increased costs of properties the Operating Partnership acquires and/or
develops.
Debt Financing On Properties May Result In Insufficient Cash Flow
Where possible, the Operating Partnership intends to continue to use leverage to
increase the rate of return on its investments and to provide for additional
investments that the Operating Partnership 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 Operating Partnership 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, 2001, the
Operating Partnership had 43 properties encumbered by debt. Of the 43
properties, 24 are secured by deeds of trust relating solely to those
properties, and with respect to the remaining 19 properties, five
cross-collateralized mortgages are secured by eight properties, three
properties, three properties, three properties and two 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,
10
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 Operating Partnership of income and asset value.
Increase In Dividend Requirements As A Result Of Preferred Stock May Lead To A
Possible Inability To Sustain Dividends
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 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 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 Operating
Partnership's management and certain outside investors (collectively, the
"Operating Partnership Holders") who as of December 31, 2001 owned approximately
11.0% 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 11.0% limited
partnership interests held by the "Operating Partnership Holders" in the
Operating Partnership is exchangeable for an aggregate of 2,286,082 shares of
Common Stock. In addition, the Operating Partnership has invested in certain
real estate partnerships. Certain partners in such limited partnerships have the
right to have their limited partnership interests in such partnerships redeemed
for cash or, at the Operating Partnership's option, for 1,511,533 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.
Our Chairman is Involved in Other Real Estate Activities and Investments, Which
May Lead to Conflicts of Interest
Our Chairman, George Marcus, owns interests in various other real estate-related
business and investments. He is the Chairman of The Marcus & Millichap Company
("M&M"), which is the holding company for real estate brokerage and services
companies. M&M has an interest in Pacific Properties, a company that invests in
West Coast multifamily residential properties. The Operating Partnership has
sold an office building which it previously occupied to The Marcus & Millichap
Company.
Mr. Marcus has entered into an agreement with the Operating Partnership whereby
the Operating Partnership has the right of first refusal to acquire multifamily
properties under contract by Marcus & Millichap and its affiliates in situations
where both the Operating Partnership and Marcus & Millichap have offered to
purchase the property. Notwithstanding this agreement, Mr. Marcus and affiliated
entities may potentially compete with the Operating Partnership in acquiring
multifamily properties, which competition may be detrimental to the Operating
Partnership. In addition, due to such potential competition for real estate
investments, Mr. Marcus and affiliated entities may have a conflict of interest
with the Operating Partnership, which may be detrimental to the interests of the
Company's shareholders.
The Influence of Executive Officers, Directors and Significant Stockholders May
Be Detrimental To Holders of Common Stock
As of December 31, 2001, George M. Marcus, the Chairman of the Company's Board
of Directors, wholly or partially owned 1,972,929 shares of Common Stock
(including shares issuable upon exchange of limited partnership interests in the
Operating Partnership and certain other partnerships and assuming exercise of
all vested options). This represents approximately 9.5% 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.
11
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 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, while any shares of preferred stock (into which the preferred units
are exchangeable) are outstanding, the Company (1) may not authorize or create
any class of series of stock that ranks senior to this preferred stock with
respect to the payment of dividends, rights upon liquidation, dissolution or
winding-up of the Company, or (2) 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 (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 George Marcus From The Maryland Business Combination Law May Allow
Certain Transactions Between The Company And 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, 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 Mr. Marcus, Mr.
Millichap, or M&M. As a result, the Company may in the future enter into
business combinations with 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, 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, 2001, 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.
12
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. Although the Company has no intention to issue any additional shares of
preferred stock at the present time, the Company may 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 to include provisions that would have a
similar effect, although the Company presently has no such intention. 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. 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 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 a swap agreement with
a securities broker whereby the securities broker has acquired, in open marked
transactions, 223,475 shares of the Company's Common Stock. The agreement
terminates in five years, or earlier under 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 Operating Partnership 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 Operating Partnership
could be liable for paying the loss. Further, if collateral is required to be
advanced to the securities broker, the Operating Partnership could be obligated
to make such advance, which in turn could be costly to the Operating
Partnership. From August 2001 through January 2002, the directors and management
effected an early termination of the agreement with respect to 120,718 shares of
the total 223,475 shares, realizing a gain of approximately $15 per share.
Bond Compliance Requirements May Limit Income From Certain Properties
At December 31, 2001, the Operating Partnership had approximately $58.8 million
of tax-exempt financing relating to the Inglenook Court Apartments, Wandering
Creek Apartments, Treetops Apartments, Huntington Breakers Apartments and
Camarillo Oaks Apartments. This tax-exempt financing subjects these Properties
to certain deed restrictions and restrictive covenants. The Operating
Partnership 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 Operating Partnership is required to lower rental rates to
attract residents who satisfy the median income test. If the Operating
Partnership 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 Operating Partnership 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.
13
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 Operating Partnership'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 Operating Partnership. 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 terms of financing. In addition, real estate
investments are relatively liquid and, therefore, the Operating Partnership's
ability to vary its portfolio promptly in response to changes in economic or
other conditions may be adversely affected.
The Operating Partnership's Joint Ventures And Joint Ownership Of Properties And
Partial Interests In Corporations And Limited Partnerships Could Limit the
Operating Partnership's Ability To Control Such Properties And Partial Interests
Instead of purchasing properties directly, the Operating Partnership 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 Operating
Partnership's business interests or goals, or be in a position to take action
contrary to the Operating Partnership's instructions or requests, or to
Operating Partnership policies or objectives. Consequently, a co-venturer's
actions might subject property owned by the joint venture to additional risk.
Although the Operating Partnership seeks to maintain sufficient control of any
joint venture to achieve its objectives, the Operating Partnership may be unable
to take action without the Operating Partnership'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 Operating Partnership could become liable for such partner's share
of joint venture liabilities.
From time to time the Operating Partnership, invests in corporations, limited
partnerships, limited liability companies 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.
In addition, the Operating Partnership has and in the future may enter into
transactions that could require it to pay the tax liabilities of partners, which
contribute assets into joint ventures or the Operating Partnership Operating
Partnership for negotiated periods of the years in the event that certain
taxable events, which are within the Operating Partnership's control, occur.
Although the Operating Partnership plans to hold the contributed assets or defer
recognition per Internal Revenue Code Section 1031, this is no assurance that it
will be able to do so and if such tax liabilities were incurred they would have
a material impact on the Operating Partnership's financial position.
Dedicated Investment Activities and Other Factors Specifically Related to the
Fund
The Operating Partnership has recently organized an investment fund, the Essex
Apartment Value Fund, L.P. (the "Fund"), which will be, subject to specific
exceptions, the Operating Partnership's exclusive investment vehicle for new
investment until at least 90% of the Fund's committed capital has been invested
or committed for investments, or if earlier, December 31, 2003. The Operating
Partnership is committed to invest 21.4% of the aggregate capital committed to
the Fund. This Fund involves risks to Essex such as the following: Essex's
partners in the Fund might become bankrupt (in which event Essex might become
generally liable for the liabilities of the Fund) or have economic or business
interests or goals that are inconsistent with the Operating Partnership's
business interests or goals, or fail to approve decisions regarding the Fund
that are in the best interest of the Operating Partnership. Essex will, however,
generally seek to maintain sufficient control over the Fund to permit it to
achieve its business objectives.
Investments In Mortgages And Other Real Estate Securities
The Operating Partnership may invest in securities related to real estate, which
could adversely affect its ability to make distributions to stockholders. The
Operating Partnership 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
Operating Partnership anticipates that such investment in mortgage receivables
will not in the aggregate be significant. In general, investments in mortgages
include the following risks:
14
. 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
Operating Partnership'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 Operating Partnership carries
certain insurance coverage for this type of environmental risk. The Operating
Partnership 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 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 Operating Partnership may be potentially liable for
removal or clean-up costs, as well as certain other costs and environmental
liabilities. The Operating Partnership may also be subject to governmental fines
and costs related to injuries to persons and property.
Recently there has been an increasing number of lawsuits against owners and
managers of multifamily properties other than Essex alleging personal injury and
property damage caused by the presence of mold in residential real estate. Mold
related claims are often excluded from standard insurance policies. Should an
uninsured mold related claim arise against Essex, we could be required to use
our own funds to resolve the claim and to make any needed cleanups to the
involved property.
California has enacted legislation commonly referred to as "Proposition 65"
requiring that "clear and reasonable" warnings be given to consumers who are
exposed to chemicals known to the State to cause cancer or reproductive
toxicity, including tobacco smoke. Although Essex has sought to comply with
Proposition 65 requirements, there can be no assurance that Essex will not be
adversely affected by litigation relating to Proposition 65.
Essex cannot be assured that existing environmental assessments of its
properties reveal all environmental liabilities, that any prior owner of any of
our properties did not create a material environmental condition not known to
Essex, or that a material environmental condition does not otherwise exist as to
any one or more of its properties.
General Uninsured Losses
The Operating Partnership 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 Operating
Partnership does not have insurance. Certain of the Properties are located in
areas that are subject to earthquake activity. The Operating Partnership has
obtained certain limited earthquake insurance coverage. The Operating
Partnership 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 Operating Partnership does not directly pass through costs
resulting from changes in real estate tax laws to residential property tenants.
The Operating Partnership 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
15
undistributed net cash flow), assuming the conversion of all limited partnership
interests in the Operating Partnership 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 33.8% as of December 31, 2001.
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's
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.
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 90% 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership does
not (i) underwrite securities of other issuers or (ii) actively trade in loans
or other investments.
The Operating Partnership 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 Operating
Partnership 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 Operating Partnership's property portfolio (including partial ownership
interests) consists of the following 94 Properties: 92 multifamily residential
Properties containing 20,762 apartment units, one office building, which houses
the Company's headquarters, with approximately 17,400 square feet and an
approximately 38,940 square foot office building in Southern California. 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 Operating Partnership's multifamily Properties accounted for in
excess of 95% of the Operating Partnership 's revenues for the year ended
December 31, 2001. The 92 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 units at contractual rates and vacant units at market rents)
during the year ended December 31, 2001 of approximately 95%. As of December 31,
2001, the headquarters building was 100% occupied by the Operating Partnership
and the Southern California office building was 91% occupied. With respect to
stabilized multifamily properties with sufficient operating history, occupancy
figures are based on Financial Occupancy. With respect to office buildings or
multifamily 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.
16
For the year ended December 31, 2001, none of the Operating Partnership's
Properties had book values equal to 10% or more of total assets of the Operating
Partnership or gross revenues equal to 10% or more of aggregate gross revenues
of the Operating Partnership.
Multifamily Residential Properties
- ----------------------------------
The Operating Partnership'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 226 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 Operating Partnership selects, trains
and supervises a full team of on-site service and maintenance personnel. The
Operating Partnership 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 Operating Partnership'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 Operating Partnership acquired this property
in 1997. The Operating Partnership also has an office building in Southern
California (Woodland Hills), an approximately 38,940 square feet of which the
Operating Partnership currently occupies approximately 6,800 square feet. The
building has ten third party tenants occupying approximately 28,700 feet. The
largest single tenant occupies approximately 10,900 square feet. The Operating
Partnership acquired this property in 2001.
17
The following tables describe the Operating Partnership's Properties as of
December 31, 2001. The first table describes the Operating Partnership's
multifamily residential properties and the second table describes the Operating
Partnership's office buildings.
Rentable
Square Year Year
Multifamily Residential Properties (1) Location Units Footage Built Acquired Occupancy(2)
- --------------------------------------------------------------------------------------------------------------------------
Northern California
Brookside Oaks (3) Cupertino, CA 170 119,980 1973 2000 96%
The Point at Cupertino (Westwood)(4) Cupertino, CA 116 135,288 1998 95%(6)
1963(5)
Stevenson Place Fremont, CA 200 146,296 1982 92%
1971(7)
Treetops (8) Fremont, CA 172 131,270 1978 1996 95%
Wimbledon Woods Hayward, CA 560 462,400 1975 1998 92%
Summerhill Commons Newark, CA 184 139,012 1987 1987 92%
Marina Cove (9) Santa Clara, CA 292 250,294 1974 1994 98%
Plumtree Santa Clara, CA 140 113,260 1994 92%(6)
1975(10)
Mt. Sutro Terrace (8) San Francisco, CA 99 64,095 1973 1999 97%
The Carlye (8) San Jose, CA 132 129,216 2000 2000 95%
Waterford Place San Jose, CA 238 219,642 2000 2000 92%
Bel Air (8) San Ramon, CA 391,136 1995 96%
462 1988(11)
Eastridge San Ramon, CA 188 174,104 1988 1996 97%
Foothill Gardens San Ramon, CA 132 155,100 1985 1997 96%
Twin Creeks San Ramon, CA 44 51,700 1985 1997 96%
Bristol Commons (8) Sunnyvale, CA 188 142,668 1989 1995 97%
Oak Pointe Sunnyvale, CA 390 294,180 1973 1988 96%
Summerhill Park Sunnyvale, CA 100 78,584 1988 1988 97%
Windsor Ridge Sunnyvale, CA 216 161,892 1989 1989 96%
----- --------- --
4,023 3,360,117 95%
Pacific Northwest
Seattle, Washington Metropolitan Area
Emerald Ridge Bellevue, WA 180 144,036 1987 1994 92%
Foothill Commons (8) Bellevue, WA 360 288,317 1978 1990 94%
The Palisades (8) Bellevue, WA 192 159,792 1977 1990 96%
Sammamish View Bellevue, WA 153 133,590 1986 1994 97%
Woodland Commons (8) Bellevue, WA 236 172,316 1978 1990 92%
Inglenook Court Bothell, WA 224 183,624 1985 1994 95%
Salmon Run at Perry Creek Bothell, WA 132 117,125 2000 2000 94%
Stonehedge Village (8) Bothell, WA 196 214,872 1986 1997 94%
Park Hill at Issaquah (12) Issaquah, WA 245 277,778 1999 1999 89%
Wandering Creek Kent, WA 156 124,366 1986 1995 97%
Bridle Trails (8) Kirkland, WA 92 73,448 1986 1997 97%
Evergreen Heights Kirkland, WA 200 188,340 1990 1997 95%
Laurels at Mill Creek Mill Creek, WA 164 134,360 1981 1996 95%
Anchor Village (3) Mukilteo, WA 301 245,928 1981 1997 94%
Castle Creek Newcastle, WA 216 191,935 1997 1997 96%
Brighton Ridge Renton, WA 264 201,300 1986 1996 95%
Fountain Court (8) Seattle, WA 320 207,037 2000 2000 90%
Linden Square Seattle, WA 183 142,271 1994 2000 94%
Maple Leaf (8) Seattle, WA 48 35,584 1986 1997 98%
Spring Lake (8) Seattle, WA 69 42,325 1986 1997 99%
Wharfside Pointe Seattle, WA 142 119,290 1990 1994 92%
Meadows at Cascade Park Vancouver, WA 198 199,377 1989 1997 94%
Village at Cascade Park Vancouver, WA 192 178,144 1989 1997 93%
Portland, Oregon Metropolitan Area
Andover Park (13) Beaverton, OR 240 227,804 1992 2001 91%
Jackson School Village (8) Hillsboro, OR 200 196,896 1996 1996 92%
Landmark Hillsboro, OR 285 282,934 1990 1996 94%
Hunt Club (13) Lake Oswego, OR 256 198,056 1985 2000 92%
----- --------- --
5,444 4,680,845 94%
Southern California
Barkley Apartments (14) (15) Anaheim, CA 161 139,835 1984 2000 97%
Vista Pointe (16) Anaheim, CA 286 242,410 1968 1985 97%
Camarillo Oaks (8) Camarillo, CA 564 459,072 1985 1996 94%
Marbrisas Apartments (13) Chula Vista, CA 500 540,116 1991 2001 94%
Casa Mango (4) Del Mar, CA 96 88,112 1981 1997 98%
Valley Park (3) Fountain Valley, CA 160 169,788 1969 2001 93%
Capri at Sunny Hills (3) Fullerton, CA 100 128,100 1961 2001 97%
18
Rentable
Square Year Year
Multifamily Residential Properties (1) Location Units Footage Built Acquired Occupancy(2)
- ----------------------------------------------------------------------------------------------------------------------------
Wilshire Promenade Fullerton, CA 128 108,470 1992 1997 95%
Montejo (3) Garden Grove, CA 124 103,280 1974 2001 93%
Hampton Court (Columbus) (8) Glendale, CA 83 71,573 1999 93%
1974(17)
Hampton Place (Loraine) (8) Glendale, CA 132 141,591 1999 92%
1970(18)
Huntington Breakers (8) HuntingtonBeach, CA 342 241,763 1984 1997 92%
Hillsborough Park La Habra, CA 235 215,510 1999 1999 96%
Rosebeach (13) La Mirada, CA 174 172,202 1970 2000 98%
Trabuco Villas Lake Forest, CA 132 131,032 1985 1997 96%
Pathways Long Beach, CA 296 197,720 1975 1991 99%
Bunker Hill (8) Los Angeles, CA 456 346,672 1968 1998 95%
City Heights (16) Los Angeles, CA 687 424,170 1968 2000 93%
Cochran Apartments Los Angeles, CA 58 51,468 1989 1998 97%
Kings Road Los Angeles, CA 196 132,112 1979 1997 97%
Park Place Los Angeles, CA 60 48,000 1988 1997 97%
Windsor Court Los Angeles, CA 58 46,600 1988 1997 97%
Mirabella Marina Del Rey, CA 188 176,860 2000 2000 95%
Hillcrest Park (Mirabella) Newbury Park, CA 608 521,968 1998 92%
1973(19)
Coronado at Newport North (20) Newport Beach, CA 732 459,677 1999 92%(6)
1968(21)
Coronado at Newport South (20) Newport Beach, CA 715 498,716 1968 1999 96%
Fairways (8)(22) Newport Beach, CA 74 107,160 1972 1999 94%
Foxborough (Woodland Apartments) (13) Orange, CA 108,000 2000 86%(6)
90 1969(23)
Mariners Place Oxnard, CA 105 77,254 1987 2000 98%
Tierra Vista (4) Oxnard, CA 404 387,144 2001 2001 96%(24)
Monterey Villas (Village Apartments) Oxnard, CA 122 122,120 1997 83%(6)
1974(25)
Monterra del Mar (Windsor Terrace) Pasadena, CA 123 74,475 1999 94%
1972(26)
Monterra del Rey (Glenbrook) Pasadena, CA 84 73,101 1999 86%(6)
1972(27)
Monterra del Sol (Euclid) Pasadena, CA 85 69,295 1999 93%
1972(28)
Villa Angelina (3) Placentia, CA 256 217,600 1970 2001 94%
Crest, The (13) Pomona, CA 501 498,036 1986 2000 91%
Highridge (3) Rancho Palos, CA 255 290,250 1972 1997 94%
Bluffs II, The (29) San Diego, CA 224 126,744 1974 1997 97%
Riverfront (4) San Diego, CA 229 231,006 1990 1997 98%
Hearthstone (3) Santa Ana, CA 140 154,820 1970 2001 93%
Tree House (3) Santa Ana, CA 164 135,762 1970 2001 95%
Meadowood (8) Simi Valley, CA 320 264,568 1986 1996 94%
Tara Village Tarzana, CA 168 173,600 1972 1997 97%
El Encanto (13) Tustin, CA 116 92,760 2000 94%
1969(30)
The Lofts at Pinehurst (Villa Scandia) Ventura, CA 118 71,160 1971 1997 98%
Avondale at Warner Center Woodland Hills, CA 446 331,072 1970 1999 94%
------ ---------- --
11,295 9,462,744 94%
------ ---------- --
Total/Weighted Average 20,762 17,503,706 95%
====== ========== ==
Number Rentable
of Square Year Year
Office Buildings (1) Location Tenants Footage Built Acquired Occupancy (2)
- ---------------------------------------------------------------------------------------------------------
925 East Meadow Drive Palo Alto, CA 1 17,404 1988 1997 100%
22110-22120 Clarendon Street Woodland Hills, CA 11 38,940 1982 2001 91%
-- ------ ---
Total Office Buildings 12 56,344 94%
== ====== ===
19
(1) Unless otherwise specified, the Operating Partnership 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, 2001; for the Office
Buildings, occupancy rates are based on Physical Occupancy as of December
31, 2001.
(3) The Operating Partnership holds a 1% special limited partner interest in
the partnerships, which own these multifamily properties. These investments
were made under arrangements whereby EMC became the 1% sole general partner
interest and the other limited partners were granted the right to require
the applicable partnership to redeem their interest for cash. Subject to
certain conditions, the Company may, however, elect to deliver an
equivalent number of shares of the Company's Common Stock in satisfaction
of the applicable partnership's cash redemption obligation.
(4) The Operating Partnership has a 20.0% ownership this property.
(5) The Operating Partnership completed a $2.7 million redevelopment on this
property in 2001.
(6) Financial Occupancy includes the impact of units that were not occupied due
to redevelopment activity at this property.
(7) The Operating Partnership completed an approximately $4.5 million
redevelopment on this property in 1998.
(8) This Property is owned by a single asset limited partnership in which the
Operating Partnership has a minimum 99.0% limited partnership interest.
(9) 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.
(10) The Operating Partnership is in the process of performing a $3.2 million
redevelopment on this property.
(11) The Operating Partnership completed construction of 114 units of the
property's 462 total units in 2000.
(12) The Operating Partnership has as approximate 45% limited partnership
interest in this property.
(13) The Operating Partnership has a 21.4% interest in this property owned by
the Fund.
(14) The Operating Partnership has a 30% special limited partnership interest in
this property, which own these multifamily properties. These investments
were made under arrangements whereby EMC became the general partner and the
existing partners were granted the right to require the applicable
partnership to redeem their interest for cash. Subject to certain
conditions, the Company may, however, elect to deliver an equivalent number
of shares of the Company's Common Stock in satisfaction of the applicable
partnership's cash redemption obligation.
(15) The property is subject to a ground lease, which, unless extended, will
expire in 2082.
(16) The Operating Partnership owns the land of this property and has entered
into a leasehold interest for which it receives a monthly payment for the
34-year term of the lease. The Operating Partnership may be required to
sell its interest in the property anytime following the seventh anniversary
of the date that the leasehold was created.
(17) The Operating Partnership completed an approximate $1.6 million
redevelopment on this property in 2000.
(18) The Operating Partnership completed an approximate $2.3 million
redevelopment on this property in 2000.
(19) The Operating Partnership completed an $11.0 million redevelopment on this
property in 2001.
(20) The Operating Partnership has an approximate 49.9% ownership interest in
this property.
(21) The Operating Partnership completed a $13.6 million redevelopment on this
property in 2001.
(22) This property is subject to a ground lease, which, unless extended, will
expire in 2027.
(23) The Operating Partnership completed a $1.7 million redevelopment on this
property in 2001.
(24) Financial occupancy on development properties that have reached
stabilization is computed from the date of stabilization through December
31, 2001.
(25) The Operating Partnership is in the process of performing a $3.2 million
redevelopment on this property.
(26) The Operating Partnership completed a $1.9 million redevelopment on this
property in 2000.
(27) The Operating Partnership completed a $1.9 million redevelopment on this
property in 2001.
(28) The Operating Partnership is in the process of performing a $1.7 million
redevelopment on this property.
(29) The Operating Partnership has an 85.0% limited partnership interest in this
property.
(30) The Operating Partnership is in the process of performing a $3.3 million
redevelopment on this property.
Item 3. Legal Proceedings
Neither the Operating Partnership nor any of the Properties is presently subject
to any material litigation nor, to the Operating Partnership's knowledge, is
there any material litigation threatened against the Operating Partnership 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
Operating Partnership's financial position, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 2001, no matters were submitted to a vote of
security holders.
20
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Unregistered Sales of Securities
On March 22, 2001, in connection with the acquisition of The Carlyle Apartments
in April 2000, Essex issued 158,202 Operating Partnership units convertible into
Common Stock at the option of the holder. This was the final payment and was
based on an amount that provides Essex with a targeted yield on the property.
Total consideration paid for the property was $26.5 million. This private
placement of Units was completed pursuant to the exemption from registration
contained in Section 4(2) of the Securities Act of 1933, as amended.
On June 1, 2001, in connection with the completion of its acquisition of the Mt.
Sutro Terrace Apartments, the Operating Partnership issued 50,725 Operating
Partnership Units, which are convertible into common stock of the Company at the
option of the holder. This private placement of operating partnership units was
completed pursuant to the exemption from registration contained in Section 4(2)
of the Securities Act of 1933, as amended.
On November 1, 2001, the Operating Partnership acquired ownership interests in
partnerships which own the following five multifamily properties: Villa
Angelina, Valley Park Apartments, Hearthstone Apartments, Treehouse Apartments,
and Montejo Apartments. Each property is owned by a separate limited partnership
in which the Operating Partnership has a 1% special limited partnership interest
and the 1% sole general partnership interest. The other limited partners were
granted the right to require the applicable partnership to redeem their interest
for cash. Subject to certain condition, the Company may elect to deliver an
aggregate of 461,163 shares of the Company's common stock in lieu of the
combined partnerships' redemption obligation. This private placement of limited
partnerships interests was completed pursuant to the exemption from registration
set forth in Section 4(2) of the Securities Act of 1933, as amended.
21
Item 6. Selected Financial Data
The following tables set forth summary financial and operating information for
the Operating Partnership from January 1, 1997 through December 31, 2001.
As of December 31,
-------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- -------
(Dollars in thousands, except per share amounts)
OPERATING DATA:
REVENUES
Rental $177,954 $162,959 $137,262 $119,397 $79,936
Other property income 5,528 4,812 3,165 2,645 1,464
Interest and other income 22,152 10,969 5,618 3,217 3,169
-------- -------- -------- -------- -------
Total revenues 205,634 178,740 146,045 125,259 84,569
-------- -------- -------- -------- -------
EXPENSES
Property operating expenses 52,923 46,690 41,706 37,933 25,826
Depreciation and amortization 36,295 30,765 26,150 21,948 13,992
Amortization of deferred financing costs 657 639 566 718 509
General and administrative 7,498 6,062 4,263 3,765 2,413
Other expenses -- -- -- 930 138
Interest 39,105 30,384 21,268 19,374 12,659
-------- -------- -------- -------- -------
Total expenses 136,478 114,540 93,953 84,668 55,537
-------- -------- -------- -------- -------
Income before gain on sales, minority interests and
extraordinary item 69,156 64,200 52,092 40,591 29,032
Gain on sales of real estate 3,788 4,022 9,524 9 5,114
Minority interests (196) (372) (549) (462) (463)
Extraordinary item-loss on early extinguishment of debt -- (119) (214) (4,718) (361)
-------- -------- -------- -------- -------
Net income $ 72,748 $ 67,731 $ 60,853 $ 35,420 $33,322
======== ======== ======== ======== =======
Net income per unit - diluted $ 2.59 $ 2.38 $ 2.37 $ 1.41 $ 1.94
======== ======== ======== ======== =======
Weighted average common unit outstanding -
diluted (in thousands) 21,004 20,731 20,513 18,682 17,149
As of December 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- ------- -------
BALANCE SHEET DATA:
Investment in real estate (before accumulated
depreciation) 1,175,200 1,156,408 929,076 889,964 730,987
Net investment in real estate 1,018,931 1,036,909 832,471 812,175 702,716
Real estate under development 93,256 38,231 120,414 53,213 20,234
Total assets 1,329,458 1,281,849 1,062,313 931,796 738,835
Total property indebtedness 638,660 595,535 384,108 361,515 276,597
Partners' capital 631,727 629,441 623,603 517,281 424,402
As of December 31,
---------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
OTHER DATA:
Interest coverage ratio (1) 3.7x 4.2x 4.7x 4.3x 4.4x
Gross operating margin (2) 71% 72% 70% 68% 68%
Average same property monthly rental rate per
apartment unit (3) (4) $ 1,153 $ 1,039 $ 950 $ 944 $ 852
Average same property monthly operating expenses
per apartment unit (3) (5) $ 293 $ 271 $ 259 $ 256 $ 257
Total multifamily units (at end of period) 20,762 18,673 15,106 12,267 10,700
Multifamily residential property occupancy rate(6) 95% 97% 96% 96% 96%
Total properties (at end of period) 94 97 72 63 59
22
(1) Interest 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 in properties that the
Operating Partnership has consolidated for the entire two years ended as of
the end of the period set forth. The number of same property apartment
units in such properties may vary at each year end. Percentage changes in
averages per unit do not correspond to total same property revenues and
expense percent changes which are discussed in Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations.
(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
the Operating Partnership as of and for the years ended December 31, 2001, 2000
and 1999. This information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto.
The Operating Partnership holds, directly or indirectly, substantially all of
the Company's assets and conducts substantially all of the Company's operations.
The Company is the sole general partner of the Operating Partnership and, as of
December 31, 2001, 2000, and 1999 owned an approximate 89.0%, 89.6% and 89.7%
general partnership interest in the Operating Partnership, respectively.
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 Operating Partnership's expectations, hopes, intentions, beliefs
and strategies regarding the future. Forward looking statements include
statements regarding the Operating Partnership'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,
2002, future acquisitions and developments, the anticipated performance of the
Essex Apartment Value Fund, L.P., the anticipated performance of existing
properties, and statements regarding the Operating Partnership'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 acquisitions will fail to
meet expectations, 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 Operating Partnership's current
expectations, that the Essex Apartment Value Fund will fail to perform as
anticipated, 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 10-K for the year ended December 31, 2001, and those other
risk factors and special considerations set forth in the Operating Partnership's
other filings with the Securities and Exchange Commission (the "SEC") which may
cause the actual results, performance or achievements of the Operating
Partnership to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements.
Critical Accounting Policies and Estimates
In response to the SEC's Release Number 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," the Operating Partnership
identifies the following critical accounting areas that affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. The related accounting policies are included here and in
the notes to the consolidated financial statements.
The preparation of consolidated financial statements, in accordance with
accounting principles generally accepted in the United States of America,
requires the Operating Partnership to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses and related
disclosures of contingent assets and liabilities. On an on-going basis, the
Operating Partnership evaluates its estimates, including those related to
acquiring, developing and assessing the carrying values of its real estate
properties and its investments in and advances to joint ventures and affiliates.
The Operating Partnership bases its estimates on historical experience, current
market conditions, and on various other assumptions that are believed to be
reasonable under the circumstances.
Rental properties are recorded at cost less accumulated depreciation.
Depreciation on rental properties has been provided over estimated useful lives
ranging from 3 to 30 years using the straight-line method. Development costs
include acquisition, direct and indirect construction costs, interest and real
estate taxes incurred during the construction period, and certain operating
expenses prior to property
23
stabilization. Maintenance and repair expenses that do not add to the value or
prolong the useful life of the property are expensed as incurred. Asset
replacements and improvements are capitalized and depreciated over their
estimated useful lives.
The Operating Partnership assesses the carrying value of its real estate
investments by monitoring performance compared to budget for operating
properties and joint ventures, and by monitoring contract performance for
properties under development. Local market knowledge and data is used to assess
carrying values of properties and the market value of acquisition opportunities.
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
is 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 Operating Partnership will recognize an impairment loss
equal to the excess of the carrying amount over the fair value of the property.
Adverse changes in market conditions or poor operating results of real estate
investments could result in impairment charges. When the Operating Partnership
determines that a property is held for sale, it discontinues the periodic
depreciation of that property. Assets held for sale are reported at the lower of
the carrying amount or estimated fair value less costs to sell.
With respect to investments in and advances to joint ventures and affiliates,
the Operating Partnership looks to the underlying properties to assess
performance and the recoverability of carrying amounts for those investments in
a manner similar to direct investments in real estate properties. An impairment
charge or investment valuation charge is recorded if the carrying value of the
investment exceeds its fair value.
The Operating Partnership bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Actual results may vary from those estimates and those estimates
could be different under different assumptions or conditions.
General Background
The Operating Partnership's property revenues are generated primarily from
multifamily property operations, which accounted for greater than 95% of its
property revenues for the years ended December 31, 2001, 2000, and 1999. The
Operating Partnership'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 Operating Partnership's portfolio has exceeded 95% for the last five
years.
Essex Apartment Value Fund, L.P. (the "Fund"), is an investment fund managed by
the Operating Partnership and will be, subject to specific exceptions, the
Operating Partnership's exclusive investment vehicle for new investments until
the Fund's committed capital has been invested or committed for investments, or
if earlier, December 31, 2003. The Fund has total capital commitments of $250
million and is expected to utilize leverage of approximately 65% of the value of
the underlying real estate portfolio. The Operating Partnership is committed to
invest 21.4% of the aggregate capital committed to the Fund. In addition, Essex
will be compensated by the Fund for its asset management, property management,
development and redevelopment services and may receive incentive distributions
if the Fund exceeds certain financial return benchmarks.
Since the Operating Partnership began operations in 1994, the Operating
Partnership has acquired ownership interests in 76 multifamily residential
properties, its headquarters building and its Southern California office
building, of which 14 are located in Northern California, 42 are located in
Southern California, 15 are located in the Seattle Metropolitan Area and 5 are
located in the Portland Metropolitan Area. In total, these acquisitions consist
of 16,451 units with total capitalized acquisition costs of approximately
$1,254.3 million. Additionally, since it began operations in 1994, the Operating
Partnership has acquired ownership interests in 9 multifamily development
properties that have reached stabilized operations. These development properties
consist of 1,944 units with total capitalized development costs of $236.8
million. As part of its active portfolio management strategy, the Operating
Partnership has disposed of, since 1994, eight multifamily residential
properties (six in Northern California, one in Southern California and one in
the Pacific Northwest) consisting of a total of 1,021 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 $118.7 million resulting in a net realized gain of approximately
$25.8 million.
The Operating Partnership is developing five multifamily residential
communities, with an aggregate of 1,274 multifamily units. In connection with
these development projects, the Operating Partnership has directly, or in some
cases through its joint venture partners, entered into contractual construction
related commitments with unrelated third parties for approximately $221.2
million. As of December 31, 2001, the Operating Partnership's remaining
development commitment is approximately $113.4 million.
Results of Operations
Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000.
- ---------------------------------------------------------------------------
Average financial occupancy rates of the Operating Partnership's multifamily
"Same Store Properties" (properties consolidated by the Operating Partnership
for each of the years ended December 31, 2001 and 2000) increased to 95.1% for
the year ended December 31, 2001 from 96.8% for the year ended December 31,
2000. 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 contract rates and vacant
units at market rents.
24
The regional breakdown of financial occupancy for the Same Store Properties for
the years ended December 31, 2001 and 2000 are as follows:
December 31, December 31,
2001 2000
------------ ------------
Northern California 95.4% 98.0%
Southern California 95.1% 96.2%
Pacific Northwest 94.5% 95.9%
Total Revenues increased by $26,894,000 or 15.0% to $205,634,000 in 2001 from
$178,740,000 in 2000. The following table sets forth a breakdown of these
revenue amounts, including the revenues attributable to the Same Store
Properties.
Years Ended
December 31,
Number of ---------------------- Dollar Percentage
Properties 2001 2000 Change Change
---------- --------- --------- ------- ----------
(dollars in thousands)
Revenues
Property revenues
Same Store Properties
Northern California 14 $ 56,646 $ 52,814 $ 3,832 7.3%
Southern California 15 43,338 41,095 2,243 5.5
Pacific Northwest 19 35,743 35,122 621 1.8
-- -------- -------- ------- -----
Total property revenues
Same Store Properties 48 135,727 129,031 6,696 5.2
==
Property revenues properties
acquired/disposed of
subsequent to January 1, 2000 (1) 47,755 38,740 9,015 23.3
-------- -------- ------- -----
Total property revenues 183,482 167,771 15,711 9.4
-------- -------- ------- -----
Interest and other income 22,152 10,969 11,183 102.0
-------- -------- ------- -----
Total revenues $205,634 $178,740 $26,894 15.0%
======== ======== ======= =====
(1) Also includes two office buildings, redevelopment communities and
development communities.
As set forth in the above table, $9,015,000 of the $26,894,000 net increase in
total revenues is attributable to properties acquired or disposed of subsequent
to January 1, 2000, the two office buildings, redevelopment communities and
development communities. During this period, the Operating Partnership acquired
interests in 20 properties and achieved stabilized operations at six development
communities, (the "Acquisition Properties"), and disposed of three retail
shopping centers and one commercial property (the "Disposition Properties").
Of the increase in total revenues, $6,696,000 is attributable to increases in
property revenues from the Same Store Properties. Property revenues from the
Same Store Properties increased by approximately 5.2% to $135,727,000 in 2001
from $129,031,000 in 2000. A significant portion of this increase was
attributable to the 14 multifamily Same Store Properties located in Northern
California; the property revenues of these properties increased by $3,832,000 or
7.3% to $56,646,000 in 2001 from $52,814,000 in 2000. This $3,832,000 increase
is primarily attributable to rental rate increases, which were offset by a
decrease in average financial occupancy to 95.4% in 2001 from 98.0% in 2000. The
15 multifamily Same Store Properties located in Southern California accounted
for the next largest contribution to the Same Store Properties revenues
increased. The property revenues of these properties increased by $2,243,000 or
5.5 % to $43,338,000 in 2001 from $41,095,000 in 2000. This $2,243,000 increase
is primarily attributable to rental rate increases, which were offset by a
decrease in average financial occupancy to 95.1% in 2001 from 96.2% in 2000. The
19 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 $621,000 or
1.8% to $35,743,000 in 2001 from $35,122,000 in 2000. This $621,000 increase is
attributable to rental rate increases, which were offset by a decrease in
financial occupancy to 94.5% in 2001 from 95.9% in 2000.
The increase in total revenue also reflected an increase of $11,183,000
attributable to interest and other income, which primarily relates to income and
fees earned on the Operating Partnership's investments in joint ventures and
interest income earned on outstanding notes receivable and cash balances.
Total Expenses increased by $21,938,000 or approximately 19.2% to $136,478,000
in 2001 from $114,540,000 in 2000. The most significant factor contributing to
this increase was the growth in the Operating Partnership's multifamily
portfolio from 83 properties (18,673 units) at January 1, 2001 to 92 properties
(20,762 units) at December 31, 2001. Interest expense increased by $8,721,000 or
28.7% to $39,105,000 in 2001 from $30,384,000 in 2000. 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 Operating Partnership's
development and redevelopment communities of $1,011,000 or approximately 34.8%
to $3,917,000 from $2,906,000 in 2000. Property operating expenses, exclusive of
depreciation and amortization, increased by $6,233,000 or 13.3% to $52,923,000
in 2001 from $46,690,000 in 2000. Of such increase, $4,624,000 is attributable
to properties acquired or disposed of
25
subsequent to January 1, 2000, and the balance is attributable to an increase in
operating expenses for the Same Store Properties. Property operating expenses,
exclusive of depreciation and amortization, as a percentage of property revenues
were 28.8% for 2001 and 27.8% for 2000. Depreciation and amortization increased
by $5,530,000 or approximately 18.0% to $36,295,000 in 2001 from $30,765,000 in
2000, primarily due to the acquisition of assets. General and administrative
expenses represent the costs of the Operating Partnership's various acquisition
and administrative departments as well as corporate and partnership
administration and non-operating expenses. Such expenses increased by $1,436,000
in 2001 from the amount incurred in 2000. This increase is largely due to
additional staffing requirements resulting from the growth of the Operating
Partnership. General and administrative expenses as a percentage of total
revenues were 3.6 % for 2001 and 3.4% for 2000.
Net income increased by $5,017,000 to $72,748,000 in 2001 from $67,731,000 in
2000. Net income for 2001 included a gain on sales of real estate of $3,788,000
as compared with $4,022,000 in 2000. Net operating income of the Acquisition
Properties and the increase in net operating income from the Same Store
Properties represent the largest contributions to the increase in net income.
Comparison of Year Ended December 31, 2000 to Year Ended December 31, 1999.
- ---------------------------------------------------------------------------
Average financial occupancy rates of the Operating Partnership's multifamily
"2000/1999 Same Store Properties" (properties consolidated by the Operating
Partnership for each of the years ended December 31, 2000 and 1999) increased to
96.8% for the year ended December 31, 2000 from 96.0% for the year ended
December 31, 1999. 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 contract rates
and vacant units at market rents. The regional breakdown of financial occupancy
for the 2000/1999 Same Store Properties for the years ended December 31, 2000
and 1999 are as follows:
December 31, December 31,
2000 1999
------------ ------------
Northern California 98.2% 96.6%
Southern California 96.3% 96.8%
Pacific Northwest 95.9% 94.7%
Total Revenues increased by $32,695,000 or 22.4% to $178,740,000 in 2000 from
$146,045,000 in 1999. The following table sets forth a breakdown of these
revenue amounts, including the revenues attributable to the 2000/1999 Same Store
Properties.
Years Ended
December 31,
Number of ---------------------- Dollar Percentage
Properties 2000 1999 Change Change
---------- --------- ---------- ------- ----------
(dollars in thousands)
Revenues
Property revenues
Same Store Properties
Northern California 12 $ 45,408 $ 39,705 $ 5,703 14.3%
Southern California 13 38,306 35,821 2,485 6.9
Pacific Northwest 19 35,122 33,315 1,807 5.4
-- -------- -------- ------- ----
Total property revenues
Same Store Properties
44 118,836 108,841 9,995 9.2
==
Property revenues properties
acquired/disposed of
subsequent to January 1, 1999 //(1)// 48,935 31,586 17,349 54.9
-------- -------- ------- ----
Total property revenues 167,771 140,427 27,344 19.5
-------- -------- ------- ----
Interest and other income 10,969 5,618 5,351 95.3
-------- -------- ------- ----
Total revenues $178,740 $146,045 $32,695 22.4%
======== ======== ======= ====
//(1)// Also includes one commercial property, redevelopment communities and
development communities.
As set forth in the above table, $17,349,000 of the $32,695,000 net increase in
total revenues is attributable to properties acquired or disposed of subsequent
to January 1, 1999, the commercial property, redevelopment communities and
development communities. During this period, the Operating Partnership acquired
interests in 12 properties, (the "2000/1999 Acquisition Properties"), and
disposed of one multifamily property and six retail shopping centers, (the
"2000/1999 Disposition Properties").
Of the increase in total revenues, $9,995,000 is attributable to increases in
property revenues from the 2000/1999 Same Store Properties. Property revenues
from the 2000/1999 Same Store Properties increased by approximately 9.2% to
$118,836,000 in 2000 from $108,841,000 in 1999. The majority of this increase
was attributable to the 12 multifamily 2000/1999 Same Store Properties located
in Northern California, the property revenues of which increased by $5,703,000
or 14.3% to $45,408,000 in 2000 from $39,705,000 in 1999. This $5,703,000
increase is primarily attributable to rental rate increases, and an increase in
average financial occupancy to 98.2% in 2000 from 96.6% in 1999. The 13
multifamily 2000/1999 Same Store Properties located in Southern California
accounted for the next largest
26
contribution to this Same Store Property revenues increase. The property
revenues of these properties increased by $2,485,000 or 6.9% to $38,306,000 in
2000 from $35,821,000 in 1999. This $2,485,000 increase is primarily
attributable to rental rate increases, which were offset in part by a decrease
in average financial occupancy to 96.3% in 2000 from 96.8% in 1999. The 19
multifamily 2000/1999 Same Store Properties located in the Pacific Northwest
accounted for the next largest contribution to this 2000/1999 Same Store
Property revenues increase. The property revenues of these properties increased
by $1,807,000 or 5.4% to $35,122,000 in 2000 from $33,315,000 in 1999. This
$1,807,000 increase is attributable to rental rate increases, and an increase in
financial occupancy to 95.9% in 2000 from 94.7% in 1999.
The increase in total revenue also reflected an increase of $5,351,000
attributable to interest and other income, which primarily relates to income and
fees earned on the Operating Partnership's investments in joint ventures and
interest income earned on outstanding notes receivable and cash balances.
Total Expenses increased by $20,587,000 or 21.9% to $114,540,000 in 2000 from
$93,953,000 in 1999. The most significant factor contributing to this increase
was the growth in the Operating Partnership's multifamily portfolio from 68
properties (15,106 units) at January 1, 2000 to 83 properties (18,673 units) at
December 31, 2000. Interest expense increased by $9,116,000 or 42.9% to
$30,384,000 in 2000 from $21,268,000 in 1999. Such interest expense increase was
primarily due to the net addition of mortgage debt in connection with property
and investment acquisitions and a decrease in the capitalization of interest
charges on the Operating Partnership's development and redevelopment communities
of $2,266,000 or approximately 43.8% to $2,906,000 from $5,172,000 in 1999.
Property operating expenses, exclusive of depreciation and amortization,
increased by $4,984,000 or 12.0% to $46,690,000 in 2000 from $41,706,000 in
1999. Of such increase, $5,066,000 is attributable to properties acquired or
disposed of subsequent to January 1, 1999, which was offset by a decrease in
operating expenses for the 2000/1999 Same Store Properties. Property operating
expenses, exclusive of depreciation and amortization, as a percentage of
property revenues were 27.8% for 2000 and 29.7% for 1999. Depreciation and
amortization increased by $4,615,000 or approximately 17.6% to $30,765,000 in
2000 from $26,150,000 in 1999 primarily due to the acquisitions of assets.
General and administrative expenses represent the costs of the Operating
Partnership's various acquisition and administrative departments as well as
corporate and partnership administration and non-operating expenses. Such
expenses increased by $1,799,000 in 2000 from the 1999 amount. This increase is
largely due to additional staffing requirements resulting from the growth of the
Operating Partnership. General and administrative expenses as a percentage of
total revenues were 3.4% for 2000 and 2.9% for 1999.
Net income increased by $6,878,000 to $67,731,000 in 2000 from $60,853,000 in
1999. Net income for 2000 also included a gain on sales of real estate of
$4,022,000 as compared with $9,524,000 in 1999. The net effect of this item was
offset by the net operating income of the 2000/1999 Acquisition Properties and
an increase in net operating income from the 2000/1999 Same Store Properties.
Liquidity and Capital Resources Including Non-consolidated Investments
At December 31, 2001, the Operating Partnership had $6,440,000 of unrestricted
cash and cash equivalents. The Operating Partnership 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 Operating
Partnership believes that its current net cash flows will be adequate to meet
operating requirements and to provide for payment of dividends by the Operating
Partnership in accordance with REIT qualification requirements. The Operating
Partnership 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 Operating
Partnership 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 Operating Partnership's requirements or that the
Operating Partnership will be able to dispose of properties in a timely manner
and under terms and conditions that the Operating Partnership deems acceptable.
The Operating Partnership has two outstanding unsecured lines of credit for an
aggregate amount of $150,000,000. The first line, in the amount of $120,000,000,
matures in May 2002, with an option to extend it for one year thereafter.
Outstanding balances under this line of credit bear interest at a rate, which
uses a tiered rate structure tied to the Operating Partnership's corporate
ratings, if any, and leverage rating, which has been priced at LIBOR plus 1.15%
during 2001 and 2000. At December 31, 2001 the Operating Partnership had
$44,459,000 outstanding on this line of credit. A second line of credit in the
amount of $30,000,000 matures in August 2002, with an option to extend for one
year thereafter. Outstanding balances, if any, on this second line bear interest
based on a tiered rate structure currently at LIBOR plus 1.175%. At December 31,
2001 the Operating Partnership had $30,000,000 outstanding on this line of
credit. At December 31, 2001, these lines of credit bore interest rates of
approximately 3.0%.
In addition, the Fund, the investment fund managed by the Operating Partnership,
has an unsecured line of credit for an aggregate amount of $50 million. This
line matures in June 2002, but may be extended at the Fund's option to September
2002. The line bears interest at LIBOR plus 0.875%. As of December 31 2001, the
line had an outstanding balance of $46.2 million.
In addition to the Operating Partnership's unsecured lines of credit, the
Operating Partnership had $564,201,000 of secured indebtedness at December 31,
2001. Such indebtedness consisted of $505,381,000 in fixed rate debt with
interest rates varying from 6.6% to 8.8% and maturity dates ranging from 2002 to
2026. The indebtedness also includes $58,820,000 of tax-exempt variable rate
demand bonds with interest rates paid during 2001 ranging from approximately
4.0% to 5.5% 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 Operating Partnership's unrestricted cash balance decreased $160,000 from
$6,600,000 as of December 31, 2000 to $6,440,000 as of December 31, 2001. The
Operating Partnership generated $98,871,000 in cash from operating activities,
used $63,808,000 of cash in
27
investing activities and used $35,223,000 of cash from financing activities. Of
the $63,808,000 net cash used in investing activities, $22,168,000 was used to
purchase and upgrade rental properties, $52,969,000 was used to fund real estate
under development and $44,267,000 was issued as notes receivable from investees
and other related party notes and other receivables; these expenditures were
offset by $58,141,000 in repayment of notes from investees, other related
parties and other receivables and $5,018,000 of proceeds received from the
disposition of rental properties. The $35,223,000 net cash used in financing
activities was primarily a result of $252,153,000 of proceeds from mortgages and
other notes payable as offset by $215,172,000 of repayments of mortgages and
other notes payable and lines of credit, and $49,987,000 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, 2001, non-revenue generating capital expenditures totaled approximately $342
per weighted average occupancy unit. The Operating Partnership expects to incur
approximately $350 per weighted average occupancy unit in non-revenue generating
capital expenditures for the year ended December 31, 2002. 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 Operating
Partnership 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 2002 and/or the funding thereof will not be
significantly different than the Operating Partnership's current expectations.
The Operating Partnership is currently developing five multifamily residential
projects, with an aggregate of 1,274 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, 2001.
In connection with these development projects, the Operating Partnership has
directly, or in some cases through its joint venture partners entered into
contractual construction related commitments with unrelated third parties and
the total projected estimated cost for these projects is approximately
$221,200,000. As of December 31, 2001, the Operating Partnership's remaining
commitment to these development projects is approximately $113,400,000. The
Operating Partnership 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.
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 Operating
Partnership primarily in short-term investment grade securities or is used by
the Operating Partnership to reduce balances outstanding under its line of
credit.
Essex Apartment Value Fund, L.P. (the "Fund"), is an investment fund managed by
the Operating Partnership and will be, subject to specific exceptions, the
Operating Partnership's exclusive investment vehicle for new investments until
the Fund's committed capital has been invested or committed for investments, or
if earlier, December 31, 2003. The Fund has total capital commitments of $250
million and is expected to utilize leverage of approximately 65% of the value of
the underlying real estate portfolio. The Operating Partnership is committed to
invest 21.4% of the aggregate capital committed to the Fund. In addition, Essex
will be compensated by the Fund for its asset management, property management,
development and redevelopment services and may receive incentive distributions
if the Fund exceeds certain financial return benchmarks. The Fund will provide
funds related to certain new acquisitions and development transactions.
During the year, the Company's Board of Directors has authorized the Operating
Partnership to purchase from time to time shares of the Company's Common Stock,
in an amount up to $50 million, at a price not to exceed $48.00 per share in the
open market or through negotiated or block transactions. The timing of any
repurchase will depend on the market price and other market conditions and
factors. Essex will use working capital or proceeds from the sale of properties
to provide funds for this program. The purpose of the program is to acquire
stock related to real estate transactions involving the issuance of partnership
units in the Operating Partnership and similar interests. Such repurchased
shares may be reissued in connection with the conversion of such partnership
units, the exercise of stock options or other business transactions. This
Program supersedes its common stock repurchase plan as announced on March 25,
1999. In October 2001, the Operating Partnership acquired 100,700 shares of the
Company's outstanding Common Stock. The weighted average exercise price paid for
the shares was $47.88. The amount paid for the shares are reflected as a
reduction of the common stock and additional-paid-in-capital in the Company's
consolidated balance sheets for the year ended December 31, 2001.
The Operating Partnership invests in joint ventures, which generally involve
single multifamily property acquisitions. The Operating Partnership accounts for
these investments under the equity or consolidation methods of accounting based
on the control it exercises through its ownership interests in these affiliates.
Under the equity method of accounting, the investment is carried at cost of
acquisition, plus the Operating Partnership's share in undistributed earnings or
losses since acquisition. The individual assets, liabilities, revenues and
expenses of the joint venture are not recorded in the Operating Partnership's
consolidated financial statements.
At December 31, 2001 and 2000, the Company did not have any other relationship
with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. As such, the Company is not
materially exposed to any financing, liquidity, market or credit risk that could
arise if the Company had engaged in such relationships.
Included in the Operating Partnership's investments accounted for under the
equity method investments are limited partnership interests in 17 partnerships
(Down REIT entities), which collectively own ten multifamily properties,
comprised of 1,831 units. These investments
28
were made under arrangements whereby Essex Management Corporation (EMC) became
the general partner, the Operating Partnership became a special minority
interest limited partner, and the other limited partners were granted rights of
redemption for their interests. Such partners can request to be redeemed and the
Company can elect to redeem their rights for cash or by issuing shares of its
common stock on a one share per unit basis. Conversion values will be based on
the market value of the Company's common stock at the time of redemption
multiplied by the number of units stipulated under the above arrangements. The
other limited partners receive distributions based on the Company's current
dividend rate times the number of redemption shares. At December 31, 2001, the
maximum number of shares that could be required to meet redemption of these Down
REIT entities is 1,511,533. The net income reported by the Operating Partnership
under the equity method of accounting by these down REIT entities is the net
income of these down REIT entities as reduced by the distributions to the other
limited partners.
Total investments accounted for under the equity method of accounting are
summarized as follows:
Total Debt
Investments - December 31, 2001 Company's Total ------------------------------------------------
(In thousands) Carrying Book Estimated Interest Maturity
Value Value (1) Amount Type Rate Unit
- --------------------------------------------------------------------------------------------------------------------------------
Down REIT's
Highridge, Rancho Palos Verde, CA $ 12,075 Fixed 7.63% Jun-07
Anchor Village, Mukilteo, WA 10,750 Var.-bonds 5.50% Dec-27
Barkley Apartments, Anahiem, CA 5,406 Fixed 6.63% Feb-09
Brookside Oaks, Sunnyvale, CA 15,186 Fixed 7.90% Oct-10
Capri at Sunny Hills, Fullerton, CA 8,000 Var. Bank ref.+0.8% Oct-02
Hearthstone, Santa Ana, CA 10,168 Fixed 6.86%-7.25% Jun-08
Montejo, Garden Grove, CA 6,255 Fixed 6.98% Feb-11
Treehouse, Santa Ana,CA 8,422 Fixed 6.98% Feb-11
Valley Park, Fountain Valley, CA 10,669 Fixed 6.98% Feb-11
Villa Angelina, Placentia, CA 14,428 Fixed 6.98% Feb-11
--------
$16,610 $192,425 101,360
========
Joint Ventures
Essex Apartment Value Fund, L.P.
Andover Park, Beaverton, OR 12,505 Fixed 6.60% Oct-11
Marbrisas, Chula Vista, CA 39,889 Fixed 7.99% Jul-05
Vista Del Rey (El Encanto), Tustin, CA 8,048 Fixed 6.95% Feb-11
Rosebeach, La Mirada, CA 8,490 Fixed 7.09% Feb-11
Hunt Club, Lake Oswego, CA 11,770 Fixed 7.05% Feb-11
The Crest, Pomona, CA 36,056 Fixed 7.99% Jul-05
Foxborough (Woodland), Orange, CA 4,956 Fixed 7.84% Jul-09
Line of credit 46,200 Var. LIBOR+.875% Jun-02
--------
17,119 $207,127 167,914
========
AEW
Casa Mango, San Diego, CA 7,155 Fixed 7.35% Feb-09
Riverfront, San Diego, CA 19,434 Fixed 7.35% Feb-09
The Pointe at Cupertino, Cupertino, CA 0
Tierra Vista, Oxnard, CA 39,750 Var. LIBOR+1.795% Feb-03
--------
10,729 $125,266 66,339
========
Newport Beach
Coronado at Newport - North, CA 34,137 Var. LIBOR+225 Nov-02
Coronado at Newport - South, CA (4)
37,556 Var. LIBOR+225 Nov-02
--------
31,214 $139,682 71,693
========
Other Joint Ventures
Park Hill Apartments, Issaquah, WA 5,754 $ 34,888 22,500 Fixed 6.90% Aug-29
========
Other 14,034
-------- --------
$95,460 $699,388 $429,806
======= ======== ========
Investments - December 31, 2001 Down Value of Company's
(In thousands) REIT Down REIT Equity
Units Value Value
- -----------------------------------------------------------------------------------
Down REIT's
Highridge, Rancho Palos Verde, CA
Anchor Village, Mukilteo, WA
Barkley Apartments, Anahiem, CA
Brookside Oaks, Sunnyvale, CA
Capri at Sunny Hills, Fullerton, CA
Hearthstone, Santa Ana, CA
Montejo, Garden Grove, CA
Treehouse, Santa Ana,CA
Valley Park, Fountain Valley, CA (2) (3)
Villa Angelina, Placentia, CA 1,511 $74,659 $16,406
======= ======= =======
Value of Essex
Joint Ventures Equity Ownership
Essex Apartment Value Fund, L.P. -------- ---------
Andover Park, Beaverton, OR
Marbrisas, Chula Vista, CA
Vista Del Rey (El Encanto), Tustin, CA
Rosebeach, La Mirada, CA
Hunt Club, Lake Oswego, CA
The Crest, Pomona, CA
Foxborough (Woodland), Orange, CA
Line of credit
$39,213 31.8% 12,466
AEW
Casa Mango, San Diego, CA
Riverfront, San Diego, CA
The Pointe at Cupertino, Cupertino, CA
Tierra Vista, Oxnard, CA
58,927 20.0% 11,785
Newport Beach
Coronado at Newport - North, CA
Coronado at Newport - South, CA (4)
67,989 49.9% 33,927
Other Joint Ventures 12,388 45.0% 5,575
Park Hill Apartments, Issaquah, WA
14,034
Other
-------
$94,189
=======
(1) Value derived based on estimated 2002 net operating income at
capitalization rates ranging from 7.75% to 8.00% on stabilized multifamily
properties. Other properties, either in development, redevelopment or
acquired less than 12 months ago are valued at cost. The Company's carrying
value includes advances and other transaction costs which will be repaid or
recovered from financings, operations, or dispositions.
(2) Based on assumed conversion of Down REIT limited partner units into
Company's shares at share price $49.41 at December 31, 2001.
(3) Estimate value attributed to Company's interest after limited partners
interest and debt.
(4) Rehab not yet started.
29
Potential Factors Affecting Future Operating Results
Many factors affect the Operating Partnership's actual financial performance and
may cause the Operating Partnership's future results to be different from past
performance or trends. These factors include:
Economic Environment
Both the national economy and the economies of the western states in which the
Operating Partnership owns, manages and develops properties have been and
continue to be in a recession. This has resulted in reduced occupancy rates, and
flattening and reductions in market rental rates.
The Operating Partnership's property type and diverse geographic locations
provide some degree of risk moderation but are not immune to a prolonged down
cycle in the real estate markets in which the Operating Partnership operates.
Although the Operating Partnership believes it is well positioned to meet the
challenges ahead, it is possible that further reductions in occupancy and market
rental rates will result in reduction of rental revenues, operating income, cash
flows, and market value of the Company's shares. Prolonged recession could also
affect the Operating Partnership's ability to obtain financing at acceptable
rates of interest and to access funds from the disposition of properties at
acceptable disposition prices.
Interest Rate Fluctuations
The Operating Partnership monitors changes in interest rates and believes that
it is well positioned from both a liquidity and interest rate risk perspective.
However, current interest rates are at historic lows and potentially could
increase rapidly to levels more in line with recent historic levels. The
immediate effect of significant and rapid interest rate increases would result
in higher interest expense on the Operating Partnership's variable interest rate
debt (see Item 7A and Note 7 and 8 to consolidated financial statements). The
effect of prolonged interest rate increases could negatively impact the
Operating Partnership's ability to make acquisitions and develop properties at
economic returns on investment and the Operating Partnership's ability to
refinance existing borrowings at acceptable rates.
Inflations
Inflationary increases would likely have a negative effect on property operating
results and such increases may be at a greater rate of increases than property
rental rates in a period of recession. The Operating Partnership believes it
effectively manages its property and other expenses but understands that a
return to higher annual rates of inflation would result in increases to
operating expense.
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, gains/
losses on sales of real estate and extraordinary items. 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 Operating
Partnership's calculation of Funds from Operations for 2001, 2000 and 1999.
30
For the For the quarter ended
year --------------------------------------------------------
ended
12/31/01 12/31/01 9/30/01 6/30/01 3/31/01
------------ ----------- ----------- ----------- -----------
Income before gain on sale
of real estate,
minority interests and
extraordinary item $ 69,156,000 $17,148,000 $17,551,000 $17,537,000 $16,920,000
Adjustments:
Depreciation and
amortization 36,295,000 9,345,000 9,197,000 8,927,000 8,826,000
Adjustments for
unconsolidated
joint ventures 5,341,000 1,694,000 1,209,000 1,201,000 1,237,000
Minority interests (1) (18,515,000) (4,700,000) (4,608,000) (4,602,000) (4,605,000)
------------ ----------- ----------- ----------- -----------
Funds from Operations $ 92,277,000 $23,487,000 $23,349,000 $23,063,000 $22,378,000
============ =========== =========== =========== ===========
Weighted average number of
shares outstanding
diluted (1) 21,004,707 21,026,883 21,093,631 21,034,366 20,922,186
For the For the quarter ended
year --------------------------------------------------------
ended
12/31/00 12/31/00 9/30/00 6/30/00 3/31/00
------------ ----------- ----------- ----------- -----------
Income before gain on sale
of real estate,
minority interests and
extraordinary item $ 64,200,000 $17,114,000 $15,946,000 $16,218,000 $14,922,000
Adjustments:
Depreciation and
amortization 30,765,000 8,459,000 8,689,000 6,950,000 6,667,000
Adjustments for
unconsolidated
joint ventures 4,541,000 1,246,000 1,232,000 1,054,000 1,009,000
Minority interests (1) (18,731,000) (4,625,000) (4,602,000) (4,778,000) (4,726,000)
------------ ----------- ----------- ----------- -----------
Funds from operations $ 80,775,000 $22,194,000 $21,265,000 $19,444,000 $17,872,000
============ =========== =========== =========== ===========
Weighted average number of
shares outstanding
diluted (1) 20,732,148 20,951,690 20,891,729 20,708,639 20,578,898
For the For the quarter ended
year --------------------------------------------------------
ended
12/31/99 12/31/99 9/30/99 6/30/99 3/31/99
------------ ----------- ----------- ----------- -----------
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 of
shares outstanding
diluted (1) 20,513,398 20,554,096 20,573,866 20,476,092 20,496,718
(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.
31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Operating Partnership 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 Operating Partnership's real
estate investment portfolio and operations. The Operating Partnership'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 Operating Partnership 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 Operating Partnership does not enter into derivative
or interest rate transactions for speculative purposes.
The Operating Partnership'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 Operating Partnership believes
that the principal amounts of the Operating Partnership's mortgage notes payable
and line of credit approximate fair value as of December 31, 2001 as interest
rates are consistent with yields currently available to the Operating
Partnership for similar instruments.
For the Year Ended December 31
------------------------------
(In thousands) 2002 2003 2004 2005 2006 Thereafter Total
------- ------ ----- ------ ------ ---------- --------
Fixed rate debt $12,422 21,853 4,021 36,077 15,121 415,887 $505,381
Average interest rate 7.3% 6.9% 6.9% 7.1% 7.0% 7.0%
Variable rate LIBOR debt $74,459 -- -- -- -- 58,820/(1)/ $133,279
Average interest rate 3.5% -- -- -- -- 5.1%
/(1)/ Capped at interest rates ranging from 7.1% to 7.3%
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.
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 May 14, 2002.
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 May 14, 2002.
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 May 14, 2002.
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 May 14, 2002.
32
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(A) Financial Statements and Report of KPMG LLP, independent auditors Page
----
(1) Consolidated Financial Statements
Independent Auditors' Report F-1
Balance Sheets:
As of December 31, 2001 and December 31, 2000 F-2
Statements of Operations:
For the years ended December 31, 2001, 2000 and 1999 F-3
Statements of Partners' Capital:
For the years ended December 31, 2001, 2000 and 1999 F-4
Statements of Cash Flows:
For the years ended December 31, 2001, 2000 and 1999 F-5
Notes to Consolidated Financial Statements F-6
(2)Financial Statement Schedule: Real Estate and Accumulated Depreciation F-26
Essex Portfolio, L.P. for the year ended December 31, 2001
(B) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
2001.
(C) Exhibit
33
Independent Auditors' Report
The General Partners
Essex Portfolio, L.P.:
We have audited the accompanying consolidated balance sheets of Essex Portfolio,
L.P. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, partners' capital and cash flows for each
of the years in the three-year period ended December 31, 2001. 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, 2001. These consolidated financial statements
and the financial statement schedule are the responsibility of the management of
Essex Portfolio, L.P. 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 auditing standards generally accepted
in the United States of America. 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 Portfolio,
L.P. and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. 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 5, 2002, except as to the second paragraph of
Note (3)(b), for which the date is February 15, 2002
ESSEX PORTFOLIO, L.P.
Consolidated Balance Sheets
December 31, 2001 and 2000
(Dollars in thousands)
2001 2000
---------- ----------
Assets
Real estate:
Rental properties:
Land and land improvements $ 291,913 $ 289,796
Buildings and improvements 883,287 866,612
---------- ----------
1,175,200 1,156,408
Less accumulated depreciation (156,269) (119,499)
---------- ----------
1,018,931 1,036,909
Investments 95,460 65,703
Real estate under development 93,256 38,231
---------- ----------
1,207,647 1,140,843
Cash and cash equivalents - unrestricted 6,440 6,600
Cash and cash equivalents - restricted 17,163 18,965
Notes and other related party receivables 56,014 77,081
Notes and other receivables 29,771 24,062
Prepaid expenses and other assets 6,699 7,654
Deferred charges, net 5,724 6,644
---------- ----------
Total assets $1,329,458 $1,281,849
========== ==========
Liabilities and Partners' Capital
Mortgage notes payable $ 564,201 $ 502,066
Lines of credit 74,459 93,469
Accounts payable and accrued liabilities 29,577 30,430
Distributions payable 16,559 14,538
Other liabilities 6,583 6,539
Deferred gain -- 5,002
---------- ----------
Total liabilities 691,379 652,044
Minority interests 6,352 364
Partners' capital:
General partner:
Common equity 386,599 391,675
Preferred equity -- --
---------- ----------
386,599 391,675
---------- ----------
Limited partners:
Common equity 40,638 33,276
Preferred equity 204,490 204,490
---------- ----------
245,128 237,766
---------- ----------
Total partners' capital 631,727 629,441
---------- ----------
Commitments and contingencies
Total liabilities and partners' capital $1,329,458 $1,281,849
========== ==========
See accompanying notes to consolidated financial statements.
F-2
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Operations
Years ended December 31, 2001, 2000 and 1999
(Dollars in thousands, except per unit amounts)
2001 2000 1999
----------- ----------- -----------
Revenues:
Rental $ 177,954 $ 162,959 $ 137,262
Other property income 5,528 4,812 3,165
----------- ----------- -----------
Total property revenues 183,482 167,771 140,427
Interest and other income 22,152 10,969 5,618
----------- ----------- -----------
Total revenues 205,634 178,740 146,045
----------- ----------- -----------
Expenses:
Property operating expenses:
Maintenance and repairs 12,578 10,074 9,222
Real estate taxes 12,283 11,338 10,271
Utilities 8,787 8,387 8,532
Administrative 15,254 13,695 10,582
Advertising 2,870 2,211 2,187
Insurance 1,151 985 912
Depreciation and amortization 36,295 30,765 26,150
----------- ----------- -----------
Total property operating expenses 89,218 77,455 67,856
Interest 39,105 30,384 21,268
Amortization of deferred financing costs 657 639 566
General and administrative 7,498 6,062 4,263
----------- ----------- -----------
Total expenses 136,478 114,540 93,953
----------- ----------- -----------
Income before gain on sales of real estate,
minority interests and extraordinary item 69,156 64,200 52,092
Gain on sales of real estate 3,788 4,022 9,524
Minority interests (196) (372) (549)
----------- ----------- -----------
Income before extraordinary item 72,748 67,850 61,067
Extraordinary loss on early extinguishment of debt -- (119) (214)
----------- ----------- -----------
Net income 72,748 67,731 60,853
Dividends on preferred units - general partner -- (245) (1,333)
Dividends on preferred units - limited partner (18,319) (18,319) (12,238)
----------- ----------- -----------
Net income available to common units $ 54,429 $ 49,167 $ 47,282
=========== =========== ===========
Per Operating Partnership common unit data:
Basic:
Income before extraordinary item available to common units $ 2.63 $ 2.43 $ 2.43
Extraordinary item - debt extinguishment -- (0.01) (0.01)
----------- ----------- -----------
Net income $ 2.63 $ 2.42 $ 2.42
=========== =========== ===========
Weighted-average number of partnership units
outstanding during the period 20,688,246 20,308,264 19,543,341
=========== =========== ===========
Diluted:
Income before extraordinary item available to common units $ 2.59 $ 2.39 $ 2.38
Extraordinary item - debt extinguishment -- (0.01) (0.01)
----------- ----------- -----------
Net income $ 2.59 $ 2.38 $ 2.37
=========== =========== ===========
Weighted-average number of partnership units
outstanding during the period 21,004,707 20,731,148 20,513,398
=========== =========== ===========
Distributions per Operating Partnership common unit $ 2.80 $ 2.38 $ 2.15
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-3
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Partners' Capital
Years ended December 31, 2001, 2000 and 1999
(Dollars and units in thousands)
General partner Limited partner
------------------------------- -----------------------------
Preferred Preferred
Common equity equity Common equity equity
------------------ --------- ---------------- ---------
Units Amounts Amount Units Amounts Amount Total
------ -------- -------- ----- ------- -------- --------
Balances at December 31,
1998 16,641 $352,295 $ 37,505 1,873 $25,331 $102,150 $517,281
Contribution - net proceeds
from preferred units -- -- -- -- -- 102,340 102,340
Contribution - net proceeds
from options exercised 53 930 -- -- -- -- 930
Shares issued from conversion
of Convertible Preferred
stock 1,618 33,191 (33,191) -- -- -- --
Redemption of limited partner
common units -- -- -- (65) (2,101) -- (2,101)
Issuance of limited partner
common units -- -- -- 274 7,469 -- 7,469
Common units purchased
by Operating Partnership (262) (7,119) -- -- -- -- (7,119)
Net income -- 42,231 1,333 -- 5,051 12,238 60,853
Partners' distributions -- (38,149) (1,333) -- (4,330) (12,238) (56,050)
------ -------- -------- ----- ------- -------- --------
Balances at December 31,
1999 18,050 383,379 4,314 2,082 31,420 204,490 623,603
Contribution - net proceeds
from options exercised 156 3,344 -- -- -- -- 3,344
Common units issued from
conversion of Convertible
Preferred Stock 211 4,314 (4,314) -- -- -- --
Redemption of limited partner
common units -- -- -- (12) (555) -- (555)
Issuance of limited partner
common units -- -- -- 59 2,365 -- 2,365
Net income -- 44,105 245 -- 5,062 18,319 67,731
Partners' distributions -- (43,467) (245) -- (5,016) (18,319) (67,047)
------ -------- -------- ----- ------- -------- --------
Balances at December 31,
2000 18,417 391,675 -- 2,129 33,276 204,490 629,441
Contribution - net proceeds
from options exercised 112 2,906 -- -- -- -- 2,906
Common units purchased
by Operating Partnership (101) (4,822) (4,822)
Redemption of limited partner
common units -- -- -- (52) (2,652) -- (2,652)
Issuance of limited partner
common units -- -- -- 209 10,381 -- 10,381
Net income -- 48,545 -- -- 5,884 18,319 72,748
Partners' distributions -- (51,705) -- -- (6,251) (18,319) (76,275)
------ -------- -------- ----- ------- -------- --------
Balances at December 31,
2001 18,428 $386,599 $ -- 2,286 $40,638 $204,490 $631,727
====== ======== ======== ===== ======= ======== ========
See accompanying notes to consolidated financial statements.
F-4
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income $ 72,748 $ 67,731 $ 60,853
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interests 196 372 549
Gain on sales of real estate (3,788) (4,022) (9,524)
Equity in income of limited partnerships (3,854) (1,333) (1,389)
Loss on early extinguishment of debt -- 119 214
Depreciation and amortization 36,295 30,765 26,150
Amortization of deferred financing costs 657 639 566
Changes in operating assets and liabilities:
Other receivables -- (944) 621
Prepaid expenses and other assets 955 (4,159) (393)
Accounts payable and accrued liabilities (4,382) 2,051 5,626
Other liabilities 44 945 293
--------- --------- ---------
Net cash provided by operating activities 98,871 92,164 83,566
--------- --------- ---------
Cash flows from investing activities:
Additions to rental properties (22,168) (73,929) (88,305)
Dispositions of rental properties -- 31,302 63,421
Contribution of real estate to corporate investee 21,005 -- --
Increase in restricted cash 1,802 (1,749) (1,684)
Additions to related party notes and other receivables (42,766) (87,517) (6,084)
Repayments of related party notes and other receivables 56,640 3,514 16,504
Net contributions (to) from investments in corporations and limited partnerships (25,352) (9,609) (30,025)
Additions to real estate under development (52,969) (43,612) (74,608)
--------- --------- ---------
Net cash used in investing activities (63,808) (181,600) (120,781)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from mortgage and other notes payable and lines of credit 252,153 351,194 241,150
Repayment of mortgage and other notes payable and lines of credit (215,172) (203,004) (229,771)
Additions to deferred charges (43) (1,680) (1,253)
Net proceeds from preferred unit sales -- -- 102,340
Payment of offering related costs -- -- (93)
Contributions from stock options exercised and shares issued through
dividend reinvestment plan - general partner 2,906 3,344 930
General partner shares purchased by limited partner (4,822) -- (7,119)
Redemption of limited partner units (2,650) (555) (2,100)
Contribution from minority interest partners 6,660 -- --
Net payments made in connection with costs related to the
early extinguishment of debt -- -- --
Distributions to limited partners and minority interest (24,268) (23,187) (18,435)
Distributions to general partner (49,987) (42,424) (38,634)
--------- --------- ---------
Net cash used in financing activities (35,223) 83,688 47,015
--------- --------- ---------
Net increase in cash and cash equivalents (160) (5,748) 9,800
Cash and cash equivalents at beginning of period 6,600 12,348 2,548
--------- --------- ---------
Cash and cash equivalents at end of period $ 6,440 $ 6,600 $ 12,348
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of $3,917, $2,906 and $5,172 capitalized
in 2001, 2000 and 1999, respectively $ 34,895 $ 25,528 $ 15,860
========= ========= =========
Supplemental disclosure of noncash investing and financing activities:
Real estate under development transferred to rental propertis $ -- $ 120,183 $ 21,700
========= ========= =========
Mortgage notes payable assumed in connection with the purchase
of real estate $ 6,144 $ 63,209 $ 15,800
========= ========= =========
Issuance of Operating Partnership units in connection with the
purchase of real estate $ 10,381 $ 2,365 $ 7,469
========= ========= =========
Consolidation of previously unconsolidated investment $ 8,087 $ 2,771 $ 32,452
========= ========= =========
Exchange of real estate under development for notes receivable $ -- $ 5,613 $ --
========= ========= =========
Exchange of notes receivable for investment $ 8,347 $ 9,540 $ --
========= ========= =========
Exchange of investment for note receivable from investee $ 1,929 $ -- $ --
========= ========= =========
Contribution of real estate in exchange for notes receivable and investments $ 22,463 $ -- $ --
========= ========= =========
See accompanying notes to consolidated financial statements
F-5
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(Dollars in thousands, except for per share amounts)
(1) Organization and Basis of Presentation
Essex Portfolio, L.P. (the Operating Partnership) was formed in March 1994
and commenced operations on June 13, 1994, when Essex Property Trust, Inc.
(the Company), the general partner in the Operating Partnership (the
General Partner), completed its 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 by the General Partner
to acquire a 77.2% interest in the Operating Partnership. The Operating
Partnership holds the assets and liabilities and conducts the operating
activities of the Company. The Company has elected to be treated as a real
estate investment trust (REIT) under the Internal Revenue Code of 1986 (the
Code), as amended.
The limited partners own an aggregate 11.0% interest in the Operating
Partnership as of December 31, 2001. The limited partners may convert their
interests into shares of common stock of the Company or cash (based upon
the trading price of the common stock at the conversion date). The Company
has reserved 2,286,082 shares of common stock for such conversions. These
conversion rights may be exercised by the limited partners at any time
through 2024.
The consolidated financial statements include the financial statements of
Essex Portfolio, L.P. and the financial statements of certain limited
partnerships which own multifamily properties in which the Operating
Partnership has a controlling financial interest. Such limited partnerships
are managed by the Operating Partnership and are controlled by the
Operating Partnership as the majority limited partner pursuant to the terms
of the respective partnership agreement. All significant intercompany
balances and transactions have been eliminated in the consolidated
financial statements.
The Operating Partnership operates and has ownership interests in 92
multifamily properties (containing 20,762 units) and two office buildings
(with approximately 56,300 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) Critical Accounting Policies and Estimates
In response to the SEC's Release Number 33-8040, "Cautionary Advice
Regarding Disclosure About Critical Accounting Policies," the
Operating Partnership identifies the following critical accounting
areas that affect its more significant judgments and estimates used in
the preparation of its consolidated financial statements. The related
accounting policies are included in this and other notes to the
consolidated financial statements and, as appropriate, in Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
The preparation of consolidated financial statements, in accordance
with accounting principles generally accepted in the United States of
America, requires the Operating Partnership to make
F-6 (Continued)
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(Dollars in thousands, except for per share amounts)
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosures of
contingent assets and liabilities. On an on-going basis, the Operating
Partnership evaluates its estimates, including those related to
acquiring, developing and assessing the carrying values of its real
estate properties and its investments in and advances to joint
ventures and affiliates. The Operating Partnership bases its estimates
on historical experience, current market conditions, and on various
other assumptions that are believed to be reasonable under the
circumstances. Actual results may vary from those estimates and those
estimates could be different under different assumptions or
conditions.
(b) 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 30 years using the straight-line
method. Development costs include acquisition, direct and indirect
construction costs, interest and real estate taxes incurred during the
construction period, and certain operating expenses prior to property
stabilization.
Maintenance and repair expenses that do not add to the value or
prolong the useful life of the property are expensed 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.
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 Operating
Partnership will recognize an impairment loss equal to the excess of
the carrying amount over the fair value of the property.
When the Operating Partnership determines that a property is held for
sale, it discontinues the periodic depreciation of that property.
Assets held for sale are reported at the lower of the carrying amount
or estimated fair value less costs to sell.
(c) Investments and Joint Ventures
The Operating Partnership consolidates or accounts for its investments
in joint ventures and affiliates under the equity method of accounting
based on the percentage of ownership and control it exercises through
its ownership interests in those entities. Under the equity method of
accounting, the investment is carried at cost of acquisition, plus the
Operating Partnership's equity in undistributed earnings or losses
since acquisition.
(d) Revenues and Gains on Sale of Real Estate
Rental revenue is reported on the accrual basis of accounting.
F-7 (Continued)
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(Dollars in thousands, except for per share amounts)
Rental revenues of the Operating Partnership include revenues received
from its wholly and majority-owned apartment properties, which are
rented under short-term leases (generally, lease terms of 6 to 12
months).
The Operating Partnership recognizes gains on sales of real estate
when a contract is in place, a closing has taken place, the buyer's
investment is adequate to demonstrate a commitment to pay for the
property and the Operating Partnership does not have a substantial
continuing involvement in the property.
(e) Income Taxes
No provision for income taxes has been made as the Operating
Partnership's taxable income or loss is reportable on the tax returns
of the individual partners based on their proportionate interest in
the Operating Partnership.
(f) Interest Rate Protection, Swap, and Forward Contracts
The Operating Partnership has from time to time used interest rate
protection, swap and forward contracts to manage its interest rate
exposure on current or identified future debt transactions. Prior to
January 1, 2001, amounts paid in connection with such contracts were
capitalized and amortized over the term of the contract or related
debt. If the original contract was terminated, the gain or loss on
termination was deferred and amortized over the remaining term of the
contract. If the related debt was repaid, the unamortized portion of
the deferred amount was charged to income or the contract was marked
to market, as appropriate.
The Operating Partnership adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities" effective January 1, 2001. Under
the SFAS 133 derivative instruments are required to be included in the
balance sheet at fair value. The changes in the fair value of the
derivatives are accounted for depending on the use of the derivative
and whether it has been designated and qualifies as a part of a
hedging relationship. If the hedged exposure is a cash flow exposure,
changes in fair value of the effective portion of the gain or loss on
the derivative instrument are reported initially as a component of
other comprehensive income and subsequently reclassified into earnings
when the forecasted transaction affects earnings. Changes in the
ineffective portion of the gain or loss are reported in earnings
immediately.
(g) Deferred Charges
Deferred charges are principally comprised of loan fees and related
costs which are amortized over the terms of the related borrowing in a
manner which approximates the effective interest method.
(h) Interest
The Operating Partnership capitalized $3,917, $2,906 and $5,172 of
interest related to the development of real estate during 2001, 2000
and 1999, respectively.
F-8 (Continued)
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(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 Operating Partnership's
tax exempt variable rate bond financings and a guarantee the Operating
Partnership has made on a first mortgage loan held by one of its joint
venture partnerships.
(j) Accounting Pronouncements
In July 2001, the FASB issued Statement No. 141, "Business
Combinations," and Statement No. 142, "Goodwill and Other Intangible
Assets." Statement 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001
and also specifies the criteria that intangible assets acquired in a
business combination must meet in order to be recognized and reported
apart from goodwill. Statement 142 eliminates the requirement to
amortize goodwill and intangible assets with indefinite useful lives,
but instead requires testing of these assets for impairment at least
annually. Statement 142 also requires that intangible with definite
useful lives be amortized over their respective estimated useful lives
to their estimated residual values. The Operating Partnership does not
expect the adoption of Statements 141 and 142 to have a material
effect on the financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Disposal of Long-Lived Assets." SFAS No. 144 supercedes
SFAS No. 121 " Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." SFAS No. 144 develops one
accounting model for long-lived assets that are to be disposed of by
sale. The Operating Partnership will adopt SFAS No. 144 effective
January 1, 2002. The Operating Partnership believes that the adoption
of SFAS No. 144 will not have a material impact on the Operating
Partnership's financial statements.
(3) Real Estate
(a) Rental Properties
Rental properties consist of multifamily properties with a net book
value of $1,009,556 and office buildings with a net book value of
$9,375.
As of December 31, 2001, Moanalua Hillside Apartments, a property
purchased by the Operating Partnership's taxable REIT subsidiary,
Essex Fidelity I Corp (EFC) (an entity accounted for as an investment
on the equity method of accounting) is considered held for sale. The
property was purchased in June 2001 for a contract price of $42,200.
The property is located in Honolulu, Hawaii, which is not within the
Operating Partnership's geographic focus and the Operating Partnership
is actively involved in reselling this property to various unrelated
third parties. In the opinion of management, the amount realized will
be equal or greater than the carrying value. In accordance with the
FAS 121, no depreciation has been recorded on this property during the
year ended December 31, 2001.
F-9 (Continued)
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(Dollars in thousands, except for per share amounts)
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.
For the years ended December 31, 2001, 2000, and 1999, gain on the
sales of real estate was $3,788, $4,022, and $9,524, respectively. The
Operating Partnership utilized Internal Revenue Code section 1031 to
defer the majority of the taxable gains resulting from these sales.
For the years ended December 31, 2001, 2000, and 1999, depreciation
expense on real estate was $36,295, $30,765, and $26,150,
respectively.
(b) Investments
The Operating Partnership has investments in a number of affiliates,
which are accounted for under the equity method. The affiliates own
and operate multifamily rental properties.
Essex Apartment Value Fund, L.P. (the "Fund"), is an investment fund
managed by the Operating Partnership and will be, subject to specific
exceptions, the Operating Partnership's exclusive investment vehicle
for new investments until the Fund's committed capital has been
invested or committed for investments, or if earlier, December 31,
2003. As of the year end, the Fund has total capital commitments of
$157 million. On February 15, 2002, the Fund completed its equity
raising effort with a total of $250 million in capital commitments.
The Fund is expected to utilize leverage of approximately 65% of the
value of the underlying real estate portfolio. The Operating
Partnership is committed to invest 21.4% of the aggregate capital
committed to the Fund. In addition, Essex will be compensated by the
Fund for its asset management, property management, development and
redevelopment services and may receive incentive distributions if the
Fund exceeds certain financial return benchmarks.
The current portfolio of stabilized properties of the Fund is set
forth below:
Fixed Loan
Loan Amount Interest Maturity
Property Name Location Units ($ in millions) Rate Date
---------------------------------------------------------------------------------------------
Rosebeach Apartments LaMirada, CA 174 $ 8.5 7.09% Feb-11
Foxborough Homes Orange, CA 90 5.0 7.84% Jul-09
Vista del Rey Tustin, CA 116 8.0 6.95% Feb-11
The Crest at Phillips Ranch Pomona, CA 501 36.1 7.99% Jul-05
Andover Park Apartments Beaverton, OR 240 12.5 6.66% Oct-11
Hunt Club Lake Oswego, OR 256 11.8 7.05% Feb-11
Marbrisas Chula Vista, CA 500 39.9 7.99% Jul-05
----- ------
Total 1,877 $121.8
===== ======
In December 2001, the Fund obtained an unsecured line of credit for an
aggregate amount of $50 million. The line matures in June 2002 but may
be extended at the Fund's option to September 2002. The line bears
interest at LIBOR plus 0.875%. As of December 31, 2001, the line had
an outstanding balance of $46.2 million.
In addition to distributions with respect to its pro-rata share of the
Fund's Limited Partnership Interest invested capital, VFGP (1) will
receive special priority distributions from the Fund in the annual
amount of 1% of the Fund's unreformed third party capital, payable
quarterly for managing the Fund's operations, and (2) may receive over
the life of the Fund incentive distributions up to 20% of the
cumulative net profits on the Fund's investments, if the Fund exceeds
certain financial return benchmarks, including a minimum 10%
compounded annual return on the Limited Partner's total capital
contributions. VFGP will also be paid fees consistent with industry
standards for its property management, development and redevelopment
services with respect to the Fund's investments. VFGP will not receive
transaction fees, such as acquisition, disposition, and financing or
similar fees, in connection with the operation of the Fund.
Subject to specific exceptions, the Fund will generally be the
Operating Partnership's exclusive investment vehicle for new
investments until the earlier of (i) the date at least 90% of the
Fund's aggregate capital commitments have been invested or committed
or reserved for investments or (ii) December 31, 2003. The exceptions
are: (1) properties acquired to complete transactions intended to
qualify for non-recognition under Section 1031 of the Internal Revenue
Code, (2) transactions involving properties with 75 units or less, (3)
transactions which require equity securities of the Operating
Partnership, including convertible or exchangeable securities, with a
value of at least $750,000, (4) follow-on investments and re-building
of properties which have been destroyed or damaged, (5) land leases
with remaining terms of less than 35 years; and (6) other transactions
which are prohibited from being consummated on behalf of the Fund due
to express restrictions or diversification limitations. The Operating
Partnership is not prohibited from utilizing its development and
redevelopment capabilities to improve properties that it currently
owns or acquires pursuant to the preceding exceptions.
F-10 (Continued)
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(Dollars in thousands, except for per share amounts)
In October 1999, the Operating Partnership entered into two separate
joint venture arrangements and through two separate private REITs,
Newport Beach North, Inc. and Newport Beach South, Inc., received an
approximate 49.9% equity interest in each. Generally, profit and loss
are allocated to the partners in accordance with their ownership
interests. In addition to its equity earnings, the Operating
Partnership is entitled to management and redevelopment fees from the
joint ventures and incentive payments based on the financial success
of the joint ventures.
In December 1999, the Operating Partnership entered into a joint
venture arrangement (AEW joint venture) and received an approximate
20% equity interest in the joint venture. The Operating Partnership
contributed its investment in Riverfront Apartments, Casa Mango
Apartments, and Westwood Apartments into the joint venture. The
Operating Partnership also contributed land and development rights for
a development community, Tierra Vista, located in Oxnard, California.
Tierra Vista completed construction and reached stabilized operations
in 2001. Generally, profit and loss are allocated to the partners in
accordance with their ownership interests. In addition to its equity
earnings, the Operating Partnership is entitled to management,
redevelopment and development fees from the joint venture and
incentive payments based on the financial success of the joint
venture.
The Operating Partnership holds limited partnership interests in 17
partnerships which collectively own ten multifamily properties,
comprised of 1,831 units (Down REIT entities). These investments were
made under arrangements whereby Essex Management Corporation (EMC)
became the general partner, the Operating Partnership became a special
limited partner, and the other limited partners were granted rights of
redemption for their interests. Such partners can request to be
redeemed and the Company can elect to redeem their rights for cash or
by issuing shares of its common stock on a one unit per share basis.
Redemption values will be based on the market value of the Company's
common stock at the time of redemption multiplied by the number of
units stipulated under the above arrangements.
The Operating Partnership has investments in two taxable REIT
subsidiaries, EMC and EFC. The Operating Partnership has a 99%
economic interest in these entities through its ownership of nonvoting
preferred stock. Executives of the Operating Partnership have a 1%
economic interest through ownership of 100% of the common stock and
for the years ended December 31, 2001, 2000 and 1999 did not receive
any form of compensation from this ownership interest. These entities
were formed for the purpose of acquiring, developing and managing real
property and are accounted for on the equity method of accounting. As
of December 31, 2001, EFC owns one multifamily property, one property
under development and an investment in Internet Realty Partners. The
investments were made using proceeds from loans made by the Operating
Partnership. At December 31, 2001, EFC's total assets and equity were
$61,049 and $8,926, respectively.
F-11 (Continued)
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(Dollars in thousands, except for per share amounts)
2001 2000
------- ------
Investments in joint ventures:
Direct and indirect LLC member interests of approximately 49.9% in
Newport Beach North, LLC and Newport Beach South, LLC $31,214 31,201
Limited partnership interest of 30.8% and general partner interest
of 1% in Essex Apartment Value Fund, L.P. /(1)/ 17,119 --
Limited partnership interest of 20% in AEW joint ventures 10,729 10,585
Class A Member interest of 45% in Park Hill LLC 5,754 5,753
Limited partnership interests of 49% in Parker Ranch -- 6,000
Preferred limited partnership interests in Mountain Vista
Apartments 4,004 9,540
Limited partnership interest of 46% in Mt. Sutro Terrace
Associates, L.P. -- 2,048
Limited partnership interests of 1% to 30% in Down REIT entities 16,610 (1,926)
------- ------
85,430 63,201
Total equity method investments
Other investments 10,030 2,502
------- ------
Total investments $95,460 65,703
======= ======
/(1)/ Subsequent to the year end, the Fund completed its equity raising effort,
which will reduce its limited partnership interest to 20.4%.
F-12 (Continued)
ESSEX PORTFOLIO, L.P
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(Dollars in thousands, except for per share amounts)
The combined summarized financial information of investments, which are
accounted for under the equity method, are as follows:
December 31,
-------------------
2001 2000
-------- -------
Balance sheets:
Real estate and real estate under development $682,310 376,261
Other assets 51,182 37,373
-------- -------
Total assets
$733,492 413,634
======== =======
Mortgage notes payable
$421,556 179,994
Other liabilities 113,357 29,926
Partners' equity 198,579 203,714
-------- -------
Total liabilities and partners' equity
$733,492 413,634
======== =======
Operating Partnership's share of equity $ 95,460 65,703
======== =======
Years ended December 31,
------------------------
2001 2000
------- ------
Statements of operations:
Total revenue $70,414 39,097
Total expenses 60,289 34,502
------- ------
Total net income $10,125 4,595
======= ======
Operating Partnership's share of net income
$ 3,854 1,333
======= ======
(c) Real Estate Under Development
The Operating Partnership is developing five multifamily residential
communities, with an aggregate of 1,274 multifamily units. In connection
with these development projects, the Operating Partnership has directly, or
in some cases through its joint venture partners, entered into contractual
construction related commitments with unrelated third parties and the total
estimated cost for this projects are approximately $221.2 million. As of
December 31, 2001, the remaining development commitment including those
held in joint ventures is approximately $113.4 million.
F-13 (Continued)
ESSEX PORTFOLIO, L.P
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(Dollars in thousands, except for per share amounts)
(4) Notes Receivable from Investees and Other Related Parties
Notes receivable from joint venture investees and other related party
receivables consist of the following as of December 31, 2001 and 2000:
2001 2000
------- ------
Notes receivable from joint venture investees:
Note receivable EFC, secured by Moanalua Hillside Apartment
bearing interest at 7% due by December 2002 $34,000 --
Notes receivable from VFGP L.P.s, secured, bearing interest at 9%
- Prime + 3%, due 2001-2010 -- 47,840
Note receivable from Highridge Apartments, secured, bearing
interest at 9%, due March 2008 -- 1,047
Note receivable from Highridge Apartments, secured, bearing
interest at 10%, due on demand 2,950 2,950
Notes receivable from EFC, secured, bearing interest at LIBOR +
2.5%, due 2004 13,305 5,613
Notes receivable from EFC, unsecured, bearing interest at 7.5%,
due 2011 1,150 --
Receivable from Down REIT entities, noninterest bearing, due on
demand -- 8,281
Receivable from Newport Beach North LLC and Newport Beach South
LLC, due on demand 974 1,753
Receivable from City Heights LP, noninterest bearing, due on
demand -- 865
Other related party receivables:
Loans to officers, bearing interest at 8%, due April 2006 633 633
Other related party receivables, substantially all due on demand 3,002 8,099
------- ------
$56,014 77,081
======= ======
The Operating Partnership'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 from investees and other related
parties and loans to officers, advances and accrued management fees from
joint venture partnerships, and unreimbursed expenses due from EMC.
F-14 (Continued)
ESSEX PORTFOLIO, L.P
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(Dollars in thousands, except for per share amounts)
(5) Notes and Other Receivables
Notes and other receivables consist of the following as of December 31,
2001 and 2000:
2001 2000
------- ------
Note receivable from Derian Ave, LLC, secured, bearing interest at 9.3%,
due on demand $15,000 15,000
Note receivable from DOIT City Heights Los Angeles L.P., secured,
interest payable monthly at 9%, principal due December 2007 2,434 2,415
Note receivable from Derian Ave, LLC, secured, bearing interest at
15.0%, due on demand 1,372 208
Other receivables 10,965 6,439
------- ------
$29,771 24,062
======= ======
(6) Related Party Transactions
The Operating Partnership provides some of its fee-based asset management
and disposition services as well as third-party property management and
leasing services through EMC. The Operating Partnership owns 100% of EMC's
19,000 shares of nonvoting preferred stock. Executives of the Operating
Partnership own 100% of EMC's 1,000 shares of common stock. All general and
administrative expenses of the Operating Partnership and EMC are initially
borne by the Operating Partnership, 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, 2001, 2000, and 1999 totaled $2,635,
$1,247, and $545, respectively, and are reflected as a reduction in general
and administrative expenses in the accompanying consolidated statements of
operations.
The Company's Chairman, George Marcus, is also the Chairman of the Marcus &
Millichap Company (M&M), which is a real estate brokerage firm. During the
years ended December 31, 2001, 2000, and 1999, the Operating Partnership
paid brokerage commissions totaling $0, $289, and $105 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 Operating Partnership is a
party.
Interest and other income include interest income of $1,236, $1,863, and
$705 for the years ended December 31, 2001, 2000, and 1999, respectively,
which was earned principally on the notes receivable from related party
partnerships in which the Operating Partnership owns an ownership interest
(Joint Ventures). Interest and other income also include management fee
income and investment income earned by the Operating Partnership from its
Joint Ventures in which it has an ownership interest of $11,567, $1,955,
and $561 for the years ended December 31, 2001, 2000, and 1999,
respectively.
F-15 (Continued)
ESSEX PORTFOLIO, L.P
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(Dollars in thousands, except for per share amounts)
(7) Mortgage Notes Payable
Mortgage notes payable consist of the following as of December 31, 2001 and
2000:
2001 2000
-------- -------
Mortgage notes payable to a pension fund, secured by deeds of trust,
bearing interest at rates ranging from 6.62% to 8.18%, interest only
payments due monthly for periods ranging from October 2001 through
November 2004, principal and interest payments due monthly
thereafter, and maturity dates ranging from October 2008 through
October 2010. Under certain conditions a portion of these loans can
be
converted to an unsecured note payable $240,000 240,000
Mortgage notes payable, secured by deeds of trust, bearing interest at
rates ranging from 6.760% to 8.055%, principal and interest payments
due monthly, and maturity
dates ranging from February 2003 through July 2011 198,140 116,551
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 3.0% for December 2001 and 2000), 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 20% of the units are subject to tenant income
qualification criteria. Principal balances are due in full at various
maturity dates from July 2020 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 7.00% to 8.78%, principal and interest payments
due monthly, and maturity dates ranging from December 2002 through
April 2005. Under certain conditions these
loans can be converted to unsecured notes payable 42,723 43,436
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 20% 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 16,493 16,770
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 20% of the units are subject to tenant income
qualifications criteria 8,025 8,265
Construction note payable, secured by deed of trust, bearing interest at
a variable rate of LIBOR + 1.75% (approximately 8.5% for December
2000), interest payments due
monthly and maturing in May 2001 -- 18,224
-------- -------
$564,201 502,066
======== =======
F-16 (Continued)
ESSEX PORTFOLIO, L.P
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(Dollars in thousands, except for per share amounts)
The aggregate scheduled maturities of mortgage notes payable are as
follows:
2002 $ 12,422
2003 21,853
2004 4,021
2005 36,077
2006 15,121
Thereafter 474,707
--------
$564,201
========
In October 1997, the Operating Partnership entered into four forward
treasury contracts for an aggregate notional amount of $60,000, locking the
10-year treasury rate at between 6.15% and 6.26%. These contracts were
entered into 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 were settled by
June 2000. During 2000, the four contracts were sold, resulting in a net
realized gain of $1,384, which is being amortized over the related debt.
During the years ended December 31, 2001, 2000, and 1999, the Operating
Partnership refinanced various mortgages and incurred a loss on the early
extinguishment of debt of $0, $119, and $214 related to the write-off of
the unamortized mortgage loan fees and prepayment penalties.
During transactions through 1999, the Operating Partnership purchased
interest rate cap contracts in order to reduce the risks associated with
increases in interest rates on its tax exempt variable rate demand bonds.
The Operating Partnership has the right to receive cash if interest rates
increase above a specified level. The purpose of the caps is to hedge the
exposure to variability in expected future interest cash flows above a
fixed interest rate, and, accordingly, they are accounted for as cash flow
hedges under SFAS 133. The Operating Partnership determines the fair value
of the caps and assesses the ineffectiveness of the hedge based on changes
in the time value of the caps. As of January 1, 2001, there were no changes
in the intrinsic value of the caps since the date the caps were purchased,
and the changes in fair value of the caps is attributable entirely to
changes in time value. The amortized cost of the cap contracts exceeded
their fair value by approximately $450, which resulted in a transition
adjustment (charge to earnings) of that amount in the quarter ended March
31, 2001.
(8) Lines of Credit
The Operating Partnership has two outstanding unsecured lines of credit for
an aggregate amount $150,000. The first line, in the amount of $120,000,
matures in May 2002, with an option to extend it for one year thereafter.
Outstanding balances under this line of credit bear interest at a rate
which uses a tiered rate structure tied to the Operating Partnership
corporate ratings, if any, and leverage rating, which has been priced at
LIBOR + 1.15% during 2001 and 2000. As of December 31, 2001 and 2000, the
interest rate was approximately 3.0% and 7.9%, respectively. As of December
31, 2001 and 2000, the Operating Partnership had $44,459 and $86,469
outstanding on this line of credit, respectively. A second line of credit
in the amount of $30,000 matures in September 2002, with an option to
extend for one year
F-17 (Continued)
ESSEX PORTFOLIO, L.P
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(Dollars in thousands, except for per share amounts)
thereafter. Outstanding balances, if any, on this second line bear interest
based on a tiered-rate structure currently at LIBOR plus 1.175%. As of
December 31, 2001 and 2000, the Operating Partnership had $30,000 and
$7,000 outstanding on this line of credit, respectively. The Operating
Partnership had no outstanding letters of credit as of December 31, 2001.
As of December 31, 2001, the 30-day LIBOR rate was approximately 1.9%.
The credit agreements contain debt covenants related to limitations on
indebtedness and liabilities, maintenance of minimum levels of consolidated
earnings before depreciation, interest and amortization and maintenance of
minimum tangible net worth.
(9) Equity Transactions
As of December 31, 2001 the Operating Partnership has the following
cumulative redeemable preferred units outstanding.
Description Issue Date Units Liquidation Preference
-------------- -------------- --------- ----------------------
7.875%Series B February 1998 1,200,000 $60,000
7.875%Series B April 1998 400,000 $20,000
9.125%Series C November 1998 500,000 $25,000
9.3% Series D July 1999 2,000,000 $50,000
9.25% Series E September 1999 2,200,000 $55,000
Dividends on the units are payable quarterly. The holders of the units do
not have any voting rights. Holders of the units have the right to exchange
their units on or after the tenth anniversary of the Issue Date for shares
of the Operating Partnership's cumulative redeemable preferred stock at
identical economic terms. The Operating Partnership has the right to redeem
the units on the fifth anniversary after the issue date. These preferred
units are included in minority interests in the accompanying consolidated
balance sheet.
On June 28, 2001, the Operating Partnership issued 200,000 Series Z
Incentive Units of limited partner interest (the "Series Z Incentive
Units") to eleven senior executives of the Operating Partnership in
exchange for a capital commitment of $1.00 per Series Z Incentive Unit, for
an aggregate offering price of $200. Upon certain triggering events, the
Series Z Incentive Units will automatically convert into common Operating
Partnership units based on a conversion ratio that may increase over time
upon satisfaction of specific conditions. The conversion ratio, initially
set at zero, will increase by 10% (20% in 2002) on January 1 of each year
for each participating executive who remains employed by the Operating
Partnership if the Operating Partnership has met a specified "funds from
operations" per share target for the prior year, up to a maximum conversion
ratio of 1.0. In certain change of control situations, the participating
executives will also be given the option to convert their units at the
then-effective
F-18 (Continued)
ESSEX PORTFOLIO, L.P
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(Dollars in thousands, except for per share amounts)
conversion ratio. In addition, the Operating Partnership has the option to
redeem Series Z Incentive Units held by any executive whose employment has
been terminated for any reason and the obligation to redeem any such units
following the death of the holder. In such event, the Operating Partnership
will redeem the units for, at its option, either common Operating
Partnership units or shares of the Company's common stock based on the
then-effective conversion ratio.
During the year, the Operating Partnership's Board of Directors has
authorized the Operating Partnership to purchase from time to time shares
of the Company's Common Stock, in an amount up to $50 million, at a price
not to exceed $48.00 per share in the open market or through negotiated or
block transactions. The timing of the repurchase will depend on the market
price and other market conditions and factors. Essex will use working
capital or proceeds from the sale of properties to provide funds for this
program. The purpose of the program is to acquire stock related to real
estate transactions involving the issuance of partnership units in the
Operating Partnership and similar interests. Such repurchased shares may be
reissued in connection with the conversion of such partnership units, the
exercise of stock options or other business transactions. This Program
supersedes its common stock repurchase plan as announced on March 25, 1999.
In October 2001, the Operating Partnership acquired 100,700 shares of the
Company's outstanding Common Stock. The weighted average exercise price
paid for the shares was $47.88. The amount paid for the shares has been
reflected as a reduction of the common stock and additional-paid-in-capital
in the Company's consolidated balance sheets for the year ended December
31, 2001.
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.
F-19 (Continued)
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(Dollars and units in thousands, except for per share amounts)
(10) Per Unit Data
Basic income per unit before extraordinary item and diluted income per unit
before extraordinary item were calculated as follows for the years ended
December 31:
2001 2000 1999
----------------------------- ----------------------------- -----------------------------
Weighted- Per Weighted- Per Weighted- Per
average share average share average share
Income units amount Income units amount Income units amount
-------- --------- ------ -------- --------- ------ -------- --------- ------
Income before extraordinary item $ 72,748 $ 67,850 $ 61,067
Less dividends on preferred
units (18,319) (18,564) (13,571)
-------- -------- --------
Basic:
Income before extraordinary
item available to common
units 54,429 20,688 $2.63 49,286 20,308 $2.43 47,496 19,543 $2.43
===== ===== =====
Effect of Dilutive Securities:
Convertible preferred units -- -- 1246 108 1,333 786
Options/(2)/ -- 316 -- 315 -- 184
-------- ------ -------- ------ -------- ------
Diluted:
Income before extraordinary
item available to common
stockholders plus assumed
conversions $ 54,429 21,004 2.59 $ 49,532 20,731 $2.39 $ 20,513 20,513 $2.38
======== ====== ===== ======== ====== ===== ======== ====== =====
/(1)/ Securities not included because they were antidilutive.
/(2)/ The following 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 general partner common units for the year and,
therefore, the effect would be antidilutive:
2001 2000 1999
---------------- ---------------- ----------------
Number of options 145 12 295
Range of exercise prices $49.250 - 54.250 $45.063 - 54.250 $31.875 - 34.750
F-20 (Continued)
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(Dollars in thousands, except for per share amounts)
(11) Segment Information
In accordance with FASB No. 131, Disclosures about Segments of an
Enterprise and Related Information, the Operating Partnership 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.
Nonsegment revenues and net operating income included in the following
schedule consist of revenue generated from the two commercial properties.
Also excluded from segment revenues are interest and other corporate
income. Other nonsegment assets include investments, real estate under
development, cash, notes receivables, other assets and deferred charges.
The accounting policies of the segments are the same as those described in
note 2. The Operating Partnership evaluates performance based upon net
operating income from the combined properties in each segment.
F-21 (Continued)
ESSEX FORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(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, 2001, 2000 and 1999:
Year ended December 31,
----------------------------------
2001 2000 1999
---------- --------- ---------
Revenues:
Northern California $ 65,812 57,998 48,740
Southern California 72,561 68,246 58,371
Pacific Northwest 45,109 41,527 33,316
---------- --------- ---------
Total segment revenues 183,482 167,771 140,427
Interest and other income 22,152 10,969 5,618
---------- --------- ---------
Total revenues $ 205,634 178,740 146,045
========== ========= =========
Net operating income:
Northern California $ 49,956 44,960 35,962
Southern California 49,713 47,168 40,122
Pacific Northwest 30,890 28,953 22,284
---------- --------- ---------
Total segment net operating income 130,559 121,081 98,368
Nonsegment net operating income -- -- 353
Interest and other income 22,152 10,969 5,618
Depreciation and amortization (36,295) (30,765) (26,150)
Interest (39,105) (30,384) (21,268)
Amortization of deferred financing costs (657) (639) (566)
General and administrative (7,498) (6,062) (4,263)
---------- --------- ---------
Income before gain on the sales of real estate,
minority interests, and extraordinary item $ 69,156 64,200 52,092
========== ========= =========
Assets:
Northern California $ 302,408 289,839 222,086
Southern California 456,639 478,835 415,374
Pacific Northwest 259,884 268,235 195,011
---------- --------- ---------
Net real estate assets 1,018,931 1,036,909 832,471
Nonsegment assets 310,527 244,940 229,842
---------- --------- ---------
Total assets $1,329,458 1,281,849 1,062,313
========== ========= =========
F-22 (Continued)
ESSEX FORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(Dollars in thousands, except for per share amounts)
(12) Quarterly Results of Operations (Unaudited)
The following is a summary of quarterly results of operations for 2001 and
2000:
Quarter ended Quarter ended Quarter ended Quarter ended
December 31 September 30 June 30 March 31
------------- ------------- ------------- -------------
2001:
Total revenues before gain
on the sales of real
estate $52,716 51,763 51,045 50,110
======= ====== ====== ======
Gain on the sales of real
estate $ -- 3,788 -- --
======= ====== ====== ======
Extraordinary item $ -- -- -- --
======= ====== ====== ======
Net income $17,027 21,311 17,515 16,895
======= ====== ====== ======
Per unit data:
Net income:
Basic $ 0.60 0.81 0.62 0.60
======= ====== ====== ======
Diluted $ 0.59 0.79 0.62 0.59
======= ====== ====== ======
2000:
Total revenues before gain
on the sales of real
estate $49,434 47,358 42,412 39,536
======= ====== ====== ======
Gain on the sales of real
estate $ -- -- -- 4,022
======= ====== ====== ======
Extraordinary item $ (119) -- -- --
======= ====== ====== ======
Net income $16,825 15,924 16,038 18,944
======= ====== ====== ======
Per unit data:
Net income:
Basic $ 0.60 0.56 0.56 0.70
======= ====== ====== ======
Diluted $ 0.60 0.54 0.55 0.69
======= ====== ====== ======
(13) 401(k) Plan
The Operating Partnership has a 401(k) pension plan (the Plan) for all
full-time employees who have completed six months 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 Operating
Partnership matches the employee contributions for nonhighly compensated
personnel, up to 50% of their contribution to a maximum of $.5 (per
individual) per year. Operating Partnership contributions to the Plan were
approximately $116, $98, and $58 for the years ended December 31, 2001,
2000, and 1999.
F-23 (Continued)
ESSEX FORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(Dollars in thousands, except for per share amounts)
(14) 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, 2001 and 2000, because interest rates, yields and
other terms for these instruments are consistent with yields currently
available to the Operating Partnership for similar instruments. Management
believes that the carrying amounts of cash and cash equivalents, restricted
cash, accounts payable, other liabilities and dividends payable approximate
fair value as of December 31, 2001 and 2000 due to the short-term maturity
of these instruments.
(15) Commitments and Contingencies
The Operating Partnership had no outstanding letters of credit relating to
financing and development transactions as of December 31, 2001.
In conjunction with an acquisition of a property by the Operating
Partnership in 2000, the Operating Partnership has committed to provide a
loan of up to $4,400 subject to conditions. The commitment expires no later
than February 2003.
Investments in real property create a potential for environmental
liabilities on the part of the owner of such real property. The Operating
Partnership carries limited insurance coverage for this type of
environmental risk. The Operating Partnership 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 Operating
Partnership 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 Operating Partnership's financial
position, results of operations, or liquidity.
The Operating Partnership 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 Operating Partnership's financial position,
results of operations or liquidity.
F-24 (Continued)
ESSEX FORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(Dollars in thousands, except for per share amounts)
In September 1999, the Operating Partnership formed a program in which
directors and management of the Operating Partnership 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
Operating Partnership has guaranteed performance of the participants with
respect to any obligations relating to the swap agreement. If the program
was terminated effective December 31, 2001, there would have been no
collateral requirement and no obligation under the participant performance
guarantee. Through January 2002, the directors and management effected an
early termination of the agreement with respect to 120,718 shares of the
total 223,475 shares, realizing a gain of approximately $15 per share.
F-25
ESSEX PORTFOLIO, L.P.
Real Estate and Accumulated Depreciation
December 31, 2001
(Dollars in thousands)
Initial cost Costs
------------------------ capitalized
Buildings and subsequent to
Property Units Location Encumbrance Land improvements acquisition
- --------------------------------- ----- -------------------- ----------- -------- ------------- -------------
Encumbered multifamily properties
Summerhill Park 100 Sunnyvale, CA $ $ 2,654 $ 4,918 $ 642
Oak Pointe 390 Sunnyvale, CA 4,842 19,776 5,443
Summerhill Commons 184 Newark, CA 1,608 7,582 1,040
Pathways 296 Long Beach, CA 4,083 16,757 8,137
Stevenson Place(The Apple) 200 Fremont, CA 996 5,582 6,143
Foothill Commons 360 Bellevue, WA 2,435 9,821 3,032
Woodland Commons 236 Bellevue, WA 2,040 8,727 1,764
Palisades 192 Bellevue, WA 1,560 6,242 1,825
-------- -------- -------- -------
100,000 20,218 79,405 28,026
-------- -------- -------- -------
Wharfside Pointe 142 Seattle, WA 2,245 7,020 1,010
Emerald Ridge 180 Bellevue, WA 3,449 7,801 956
Sammamish View 153 Bellevue, WA 3,324 7,501 791
-------- -------- -------- -------
18,487 9,018 22,322 2,757
-------- -------- -------- -------
Brighton Ridge 264 Renton, WA 2,623 10,800 1,098
Landmark 285 Hillsboro, OR 3,655 14,200 1,061
Eastridge 188 San Ramon, CA 6,068 13,628 419
-------- -------- -------- -------
26,781 12,346 38,628 2,578
-------- -------- -------- -------
Fountain Court 320 Bellevue, WA 6,702 27,306 352
Hillcrest Park(Mirabella) 608 Newbury Park, CA 15,318 40,601 6,974
Hillsborough Park 235 La Habra, CA 6,291 15,455 85
-------- -------- -------- -------
80,000 28,311 83,362 7,411
-------- -------- -------- -------
The Shores 462 San Ramon, CA 12,105 18,252 15,036
Waterford 238 San Jose, CA 11,808 24,500 1,275
-------- -------- -------- -------
60,000 23,913 42,752 16,311
-------- -------- -------- -------
Bridle Trails 92 Kirkland, WA 4,098 1,500 5,930 235
Bunker Hill Towers 456 Los Angeles, CA 17,700 11,498 27,871 606
Camarillo Oaks 564 Camarillo, CA 27,445 10,953 25,254 3,919
Evergreen Heights 200 Kirkland, WA 8,506 3,566 13,395 672
Hampton Park(Columbus) 83 Glendale, CA 4,450 2,407 5,672 1,340
Hampton Place(Lorraine) 132 Glendale, CA 8,245 4,288 11,081 1,177
Huntington Breakers 342 Huntington Beach, CA 22,930 9,306 22,720 1,458
Inglenook Court 224 Bothell, WA 8,300 3,467 7,881 1,609
Jackson School Village 200 Hillsboro, OR 9,111 2,588 10,452 432
Maple Leaf 48 Seattle, WA 2,002 805 3,283 95
Mariners Palce 105 Oxnard, CA 4,241 1,555 6,103 282
Meadowood 320 Simi Valley, CA 16,493 7,852 18,592 1,220
Monterra del Rey(Glenbrook) 84 Pasadena, CA 4,375 2,312 4,923 2,071
Monterra del Sol(Euclid) 85 Pasadena, CA 2,817 2,202 4,794 1,900
Mt. Sutro 99 San Francisco, CA 6,119 2,334 8,507 484
Spring Lake 69 Seattle, WA 2,193 838 3,399 110
Stonehedge Village 196 Bothell, WA 8,859 3,167 12,603 690
The Bluffs 224 San Diego, CA 13,268 3,405 7,743 336
The Carlyle 132 San Jose, CA 16,541 3,954 15,277 8,526
Treetops 172 Fremont, CA 9,800 3,520 8,182 1,141
Wandering Creek 156 Kent, WA 5,300 1,285 4,980 1,143
Wilshire Promenade 128 Fullerton, CA 7,435 3,118 7,385 685
Wimbledon Woods 560 Hayward, CA 55,650 9,883 37,670 1,929
Windsor Ridge 216 Sunnyvale, CA 13,055 4,017 10,315 835
-------- -------- -------- --------
278,933 193,626 550,481 89,978
-------- -------- -------- --------
Gross amount
carried at close of period
---------------------------------------
Land and Buildings and Accumulated
Property Units Location improvements improvements Total(1) depreciation
- --------------------------------- ----- -------------------- ------------ ------------- -------- ------------
Encumbered multifamily properties
Summerhill Park 100 Sunnyvale, CA $ 2,655 $ 5,559 $ 8,214 $ 2,302
Oak Pointe 390 Sunnyvale, CA 4,845 25,216 30,061 13,089
Summerhill Commons 184 Newark, CA 1,523 8,707 10,230 3,643
Pathways 296 Long Beach, CA 6,236 22,741 28,977 7,235
Stevenson Place(The Apple) 200 Fremont, CA 1,000 11,721 12,721 5,281
Foothill Commons 360 Bellevue, WA 2,438 12,850 15,288 6,581
Woodland Commons 236 Bellevue, WA 2,042 10,489 12,531 5,075
Palisades 192 Bellevue, WA 1,562 8,065 9,627 4,422
-------- -------- -------- --------
22,301 105,348 127,649 47,628
-------- -------- -------- --------
Wharfside Pointe 142 Seattle, WA 2,253 8,022 10,275 2,509
Emerald Ridge 180 Bellevue, WA 3,447 8,759 12,206 2,677
Sammamish View 153 Bellevue, WA 3,329 8,287 11,616 2,382
-------- -------- -------- --------
9,029 25,068 34,097 7,568
-------- -------- -------- --------
Brighton Ridge 264 Renton, WA 2,654 11,867 14,521 1,876
Landmark 285 Hillsboro, OR 3,697 15,219 18,916 2,892
Eastridge 188 San Ramon, CA 6,089 14,026 20,115 2,585
-------- -------- -------- --------
12,440 41,112 53,552 7,353
-------- -------- -------- --------
Fountain Court 320 Bellevue, WA 6,977 27,383 34,360 1,631
Hillcrest Park(Mirabella) 608 Newbury Park, CA 15,750 47,143 62,893 5,913
Hillsborough Park 235 La Habra, CA 6,270 15,561 21,831 1,687
-------- -------- -------- --------
28,997 90,087 119,084 9,231
-------- -------- -------- --------
The Shores 462 San Ramon, CA 12,577 32,816 45,393 4,095
Waterford 238 San Jose, CA 12,309 25,274 37,583 1,225
-------- -------- -------- --------
24,886 58,090 82,976 5,320
-------- -------- -------- --------
Bridle Trails 92 Kirkland, WA 1,530 6,135 7,665 924
Bunker Hill Towers 456 Los Angeles, CA 11,635 28,340 39,975 3,813
Camarillo Oaks 564 Camarillo, CA 11,068 29,058 40,126 4,827
Evergreen Heights 200 Kirkland, WA 3,647 13,986 17,633 2,256
Hampton Park(Columbus) 83 Glendale, CA 2,420 6,999 9,419 600
Hampton Place(Lorraine) 132 Glendale, CA 4,302 12,244 16,546 1,060
Huntington Breakers 342 Huntington Beach, CA 9,312 24,172 33,484 3,579
Inglenook Court 224 Bothell, WA 3,474 9,483 12,957 3,758
Jackson School Village 200 Hillsboro, OR 2,697 10,775 13,472 453
Maple Leaf 48 Seattle, WA 827 3,356 4,183 496
Mariners Palce 105 Oxnard, CA 1,560 6,380 7,940 333
Meadowood 320 Simi Valley, CA 7,897 19,767 27,664 3,719
Monterra del Rey(Glenbrook) 84 Pasadena, CA 2,430 6,876 9,306 573
Monterra del Sol(Euclid) 85 Pasadena, CA 2,382 6,514 8,896 546
Mt. Sutro 99 San Francisco, CA 2,750 8,575 11,325 667
Spring Lake 69 Seattle, WA 859 3,488 4,347 506
Stonehedge Village 196 Bothell, WA 3,198 13,262 16,460 1,267
The Bluffs 224 San Diego, CA 3,439 8,045 11,484 1,264
The Carlyle 132 San Jose, CA 5,784 21,973 27,757 823
Treetops 172 Fremont, CA 3,578 9,265 12,843 2,066
Wandering Creek 156 Kent, WA 1,296 6,112 7,408 1,635
Wilshire Promenade 128 Fullerton, CA 3,140 8,048 11,188 1,500
Wimbledon Woods 560 Hayward, CA 10,348 39,134 49,482 5,122
Windsor Ridge 216 Sunnyvale, CA 4,019 11,148 15,167 4,061
-------- -------- -------- --------
201,245 632,840 834,085 122,948
-------- -------- -------- --------
Depreciable
Date of Date lives
Property Units Location construction acquired (years)
- --------------------------------- ----- -------------------- ------------- -------- -----------
Encumbered multifamily properties
Summerhill Park 100 Sunnyvale, CA 1988 9/88 3-40
Oak Pointe 390 Sunnyvale, CA 1973 12/88 3-30
Summerhill Commons 184 Newark, CA 1987 7/87 3-40
Pathways 296 Long Beach, CA 1975 2/91 3-30
Stevenson Place(The Apple) 200 Fremont, CA 1971 4/82 3-30
Foothill Commons 360 Bellevue, WA 1978 3/90 3-30
Woodland Commons 236 Bellevue, WA 1978 3/90 3-30
Palisades 192 Bellevue, WA 1969/1977 (2) 5/90 3-30
Wharfside Pointe 142 Seattle, WA 1990 6/94 3-30
Emerald Ridge 180 Bellevue, WA 1987 11/94 3-30
Sammamish View 153 Bellevue, WA 1986 11/94 3-30
Brighton Ridge 264 Renton, WA 1986 12/96 3-30
Landmark 285 Hillsboro, OR 1990 08/96 3-30
Eastridge 188 San Ramon, CA 1988 08/96 3-30
Fountain Court 320 Bellevue, WA 2000 3/00 3-30
Hillcrest Park(Mirabella) 608 Newbury Park, CA 1973 3/98 3-30
Hillsborough Park 235 La Habra, CA 1999 09/99 3-30
The Shores 462 San Ramon, CA 1988 01/97 3-30
Waterford 238 San Jose, CA 2000 6/00 3-30
Bridle Trails 92 Kirkland, WA 1986 10/97 3-30
Bunker Hill Towers 456 Los Angeles, CA 1968 3/98 3-30
Camarillo Oaks 564 Camarillo, CA 1985 07/96 3-30
Evergreen Heights 200 Kirkland, WA 1990 06/97 3-30
Hampton Park(Columbus) 83 Glendale, CA 1974 06/99 3-30
Hampton Place(Lorraine) 132 Glendale, CA 1970 06/99 3-30
Huntington Breakers 342 Huntington Beach, CA 1984 10/97 3-30
Inglenook Court 224 Bothell, WA 1985 10/94 3-30
Jackson School Village 200 Hillsboro, OR 1996 9/00 3-30
Maple Leaf 48 Seattle, WA 1986 10/97 3-30
Mariners Palce 105 Oxnard, CA 1987 5/00 3-30
Meadowood 320 Simi Valley, CA 1986 11/96 3-30
Monterra del Rey(Glenbrook) 84 Pasadena, CA 1972 04/99 3-30
Monterra del Sol(Euclid) 85 Pasadena, CA 1972 04/99 3-30
Mt. Sutro 99 San Francisco, CA 1973 06/01 3-30
Spring Lake 69 Seattle, WA 1986 10/97 3-30
Stonehedge Village 196 Bothell, WA 1986 10/97 3-30
The Bluffs 224 San Diego, CA 1974 06/97 3-30
The Carlyle 132 San Jose, CA 2000 4/00 3-30
Treetops 172 Fremont, CA 1978 01/96 3-30
Wandering Creek 156 Kent, WA 1986 11/95 3-30
Wilshire Promenade 128 Fullerton, CA 1992 01/97 3-30
Wimbledon Woods 560 Hayward, CA 1975 3/98 3-30
Windsor Ridge 216 Sunnyvale, CA 1989 03/89 3-40
F-26 (Continued)
ESSEX PORTFOLIO, L.P.
Real Estate and Accumulated Depreciation
December 31, 2001
(Dollars in thousands)
Initial cost Costs
------------------------ capitalized
Buildings and subsequent to
Property Units Location Encumbrance Land improvements acquisition
- ------------------------------------------- ------ ------------------ ----------- -------- ------------- -------------
Unencumbered multifamily properties
Avondale at Warner Center 446 Woodland Hills, CA 10,536 24,522 2,278
Bristol Commons 188 Sunnyvale, CA 5,278 11,853 1,117
Castle Creek 216 Newcastle, WA 4,149 16,028 875
City Heights (3) -- Los Angeles, CA 9,655 -- 111
Fairway (4) 74 Newport Beach, CA -- 7,850 741
Foothill/Twincreeks 176 San Ramon, CA 5,875 13,992 1,117
Kings Road 196 Los Angeles, CA 4,023 9,527 521
Linden Square 183 Seattle, WA 4,374 11,588 226
Marina Cove (5) 292 Santa Clara, CA 5,320 16,431 2,128
Meadows @ Cascade 198 Vancouver, WA 2,261 9,070 1,026
Mirabella 188 Marina Del Rey, CA 6,180 26,673 157
Park Place/
Windsor Court/Cochran 176 Los Angeles, CA 4,965 11,806 419
Plumtree 140 Santa Clara, CA 3,090 7,421 881
Salmon Run 132 Bothell, WA 3,717 11,483 187
Tara Village 168 Tarzana, CA 3,178 7,535 811
The Laurels 164 Mill Creek, WA 1,559 6,430 483
The Village 122 Oxnard, CA 2,349 5,579 2,715
Trabucco Villas 132 Lake Forest, CA 3,638 8,640 644
Villa Scandia 118 Ventura, CA 1,570 3,912 296
Village @ Cascade 192 Vancouver, WA 2,103 8,753 256
Monterra del Mar (Windsor Terrace) 123 Pasadena, CA 2,188 5,263 3,678
Vista Point (3) (6) -- Anaheim, CA -- -- 6
------ -------- -------- -------- --------
13,544 564,201 279,634 774,837 110,645
------ -------- -------- -------- --------
Commercial properties
925 East Meadow (7) Palo Alto, CA -- 1,401 3,172 932
22120 Clarendon (8) Woodland Hills, CA -- 903 3,600 76
-------- -------- -------- ---------
Total multifamily and commercial properties $564,201 $281,938 $781,609 $111,653
======== ======== ======== =========
Gross amount
carried at close of period
-----------------------------------------
Land and Buildings and Accumulated
Property Units Location improvements improvements Total(1) depreciation
- ------------------------------------------- ------ ------------------ ------------ ------------- ---------- ------------
Unencumbered multifamily properties
Avondale at Warner Center 446 Woodland Hills, CA 10,568 26,768 37,336 2,186
Bristol Commons 188 Sunnyvale, CA 5,284 12,964 18,248 2,157
Castle Creek 216 Newcastle, WA 4,830 16,222 21,052 1,816
City Heights (3) -- Los Angeles, CA 9,766 -- 9,766 --
Fairway (4) 74 Newport Beach, CA 9 8,582 8,591 775
Foothill/Twincreeks 176 San Ramon, CA 5,952 15,032 20,984 2,516
Kings Road 196 Los Angeles, CA 4,030 10,041 14,071 1,617
Linden Square 183 Seattle, WA 4,199 11,989 16,188 605
Marina Cove (5) 292 Santa Clara, CA 5,322 18,557 23,879 5,745
Meadows @ Cascade 198 Vancouver, WA 2,334 10,023 12,357 1,508
Mirabella 188 Marina Del Rey, CA 6,189 26,821 33,010 1,452
Park Place/
Windsor Court/Cochran 176 Los Angeles, CA 5,014 12,176 17,190 1,451
Plumtree 140 Santa Clara, CA 3,091 8,301 11,392 2,507
Salmon Run 132 Bothell, WA 3,784 11,603 15,387 448
Tara Village 168 Tarzana, CA 3,211 8,313 11,524 1,479
The Laurels 164 Mill Creek, WA 1,595 6,877 8,472 1,163
The Village 122 Oxnard, CA 2,413 8,230 10,643 1,001
Trabucco Villas 132 Lake Forest, CA 3,842 9,080 12,922 1,291
Villa Scandia 118 Ventura, CA 1,612 4,166 5,778 740
Village @ Cascade 192 Vancouver, WA 2,151 8,961 11,112 1,267
Monterra del Mar (Windsor Terrace) 123 Pasadena, CA 2,730 8,399 11,129 909
Vista Point (3) (6) -- Anaheim, CA 6 6 --
------ -------- -------- ---------- --------
13,544 289,171 875,945 1,165,116 155,581
------ -------- -------- ---------- --------
Commercial properties
925 East Meadow (7) Palo Alto, CA 1,771 3,734 5,505 588
22120 Clarendon (8) Woodland Hills, CA 971 3,608 4,579 100
-------- -------- ---------- --------
Total multifamily and commercial properties $291,913 $883,287 $1,175,200 $156,269
======== ======== ========== ========
Depreciable
Date of Date lives
Property Units Location construction acquired (years)
- ------------------------------------------- ------ ------------------ ------------ -------- -----------
Unencumbered multifamily properties
Avondale at Warner Center 446 Woodland Hills, CA 1989 01/97 3-30
Bristol Commons 188 Sunnyvale, CA 1989 01/97 3-30
Castle Creek 216 Newcastle, WA 1997 12/97 3-30
City Heights (3) -- Los Angeles, CA 1968 12/00 --
Fairway (4) 74 Newport Beach, CA 1972 06/99 3-30
Foothill/Twincreeks 176 San Ramon, CA 1985 02/97 3-30
Kings Road 196 Los Angeles, CA 1979 06/97 3-30
Linden Square 183 Seattle, WA 1994 6/00 3-30
Marina Cove (5) 292 Santa Clara, CA 1974 6/94 3-30
Meadows @ Cascade 198 Vancouver, WA 1988 11/97 3-30
Mirabella 188 Marina Del Rey, CA 2000 5/00 3-30
Park Place/
Windsor Court/Cochran 176 Los Angeles, CA 1988 08/97 3-30
Plumtree 140 Santa Clara, CA 1975 2/94 3-30
Salmon Run 132 Bothell, WA 2000 10/00 3-30
Tara Village 168 Tarzana, CA 1972 01/97 3-30
The Laurels 164 Mill Creek, WA 1981 12/96 3-30
The Village 122 Oxnard, CA 1974 07/97 3-30
Trabucco Villas 132 Lake Forest, CA 1985 10/97 3-30
Villa Scandia 118 Ventura, CA 1971 06/97 3-30
Village @ Cascade 192 Vancouver, WA 1995 12/97 3-30
Monterra del Mar (Windsor Terrace) 123 Pasadena, CA 1972 09/97 3-30
Vista Point (3) (6) -- Anaheim, CA 1968 07/85 --
------
13,544
------
Commercial properties
925 East Meadow (7) Palo Alto, CA 1984 11/97 3-30
22120 Clarendon (8) Woodland Hills, CA 1982 03/01 3-30
Total multifamily and commercial properties
(1) The aggregate cost for federal income tax purposes is $896,529,421.
(2) Phase I was built in 1969 and Phase II was built in 1977.
(3) The Company has a leasehold interest in this land and receives a land lease
payment over a 34-year-term.
(4) The land is leased pursuant to a ground lease expiring 2027.
(5) A portion of land is leased pursuant to a ground lease expiring in 2028.
(6) The Company's interest in the land is subordinate to a loan issued to the
purchaser of the buildings and improvements, and therefore the carrying
amount was written off in connection with the sale.
(7) Total rentable square footage of 17,404.
(8) Total rentable square footage of 38,940.
A summary of activity for real estate and accumulated depreciation is as
follows:
2001 2000 1999
---------- ---------- ---------
Real estate:
Balance at beginning of year $1,156,408 $ 929,076 $ 889,964
Improvements 25,839 18,348 5,554
Acquisition of real estate 15,904 238,938 193,634
Disposition of real estate (22,951) (29,954) (160,076)
---------- ---------- ---------
Balance at end of year $1,175,200 $1,156,408 $ 929,076
========== ========== =========
2001 2000 1999
-------- -------- -------
Accumulated depreciation:
Balance at beginning of year $119,499 $ 96,605 $77,789
Dispositions -- (7,871) (7,334)
Depreciation expense - Acquisitions 758 2,626 1,377
Depreciation expense 36,012 28,139 24,773
-------- -------- -------
Balance at end of year $156,269 $119,499 $96,605
======== ======== =======
F-27
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 Portfolio, L.P.
(Registrant)
By: Essex Property Trust, Inc.
Its: General Partner
Dated: April 1, 2002 By: /s/ Michael J. Schall
----------------------------------------
Michael J. Schall
Senior Executive Vice President and
Chief Financial Officer and Director
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.
Dated April 1, 2002 /s/ George M. Marcus
------------------------------------------
George M. Marcus
Chairman of the Board
Dated April 1, 2002 /s/ Keith R. Guericke
------------------------------------------
Keith R. Guericke
President and Chief Executive Officer and
Vice Chairman
(Principal Executive Officer)
Dated April 1, 2002 /s/ Michael J. Schall
------------------------------------------
Senior Executive Vice President and
Chief Financial Officer and Director
(Principal Financial Officer)
Dated April 1, 2002 /s/ Mark J. Mikl
------------------------------------------
Mark J. Mikl
Vice President and Controller
(Principal Accounting Officer)
Dated April 1, 2002 /s/ William A. Millichap
------------------------------------------
William A. Millichap
Director
Dated April 1, 2002 /s/ Gary P. Martin
------------------------------------------
Gary P. Martin
Director
Dated April 1, 2002 /s/ Robert E. Larson
------------------------------------------
Robert E. Larson
Director
Dated April 1, 2002 /s/ Thomas E. Randlett
------------------------------------------
Thomas E. Randlett
Director
S-1
Dated April 1, 2002 /s/ David W. Brady
------------------------------------------
David W. Brady
Director
Dated April 1, 2002 /s/ Issie N. Rabinovitch
------------------------------------------
Issie N. Rabinovitch
Director
Dated April 1, 2002 /s/ Willard H. Smith, Jr.
------------------------------------------
Willard H. Smith, Jr.
Director
S-2
EXHIBIT INDEX
Exhibit No. Document Page
- ----------- -------- ----
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 for the quarter ended 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 (1)
17, 1996.
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 (2)
of 9-1/8% Series C Cumulative Redeemable Preferred Stock, filed with the State of
Maryland on November 25, 1998.
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 for the
quarter ended 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 for the
quarter ended September 30, 1999 and incorporated herein by reference.
3.13 Certificate of Correction to Articles Supplementary reclassifying 2,000,000 shares of --
Common Stock as 2,000,000 shares of 9.30% Series D Cumulative Redeemable Preferred
Stock, attached as Exhibit 3.1 to the Company's Form 10-Q for the quarter ended March
31, 2000, and incorporated herein by reference.
Exhibit No. Document Page
- ----------- -------- ----
3.14 Certificate of Amendment of the Bylaws of Essex Property Trust, Inc. dated February 14, --
2000, attached as Exhibit 3.2 to the Company's Form 10-Q for the quarter ended March
31, 2000, and incorporated herein by reference.
4.1 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.
4.2 Amendment to Rights Agreement, dated as of December 13, 2000, attached as Exhibit 4.1 --
to the Company's Form 10-Q for the quarter ended March 31, 2001 and incorporated herein
by reference.
4.3 Amendment to Rights Agreement, dated as of February 28, 2002 --
10.1 Essex Property Trust, Inc. 1994 Stock Incentive Plan, (amended and restated), attached --
as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 2000 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.
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 (2)
Essex Portfolio, L.P. dated November 24, 1998.
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 for the quarter ended 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 for the quarter ended 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 Purchase Plan, attached as --
Exhibit 10.4 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 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.
10.11 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.
Exhibit No. Document Page
- ----------- -------- ----
10.12 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.
10.13 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.
10.14 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.
10.15 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.
10.16 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.
10.17 General Partnership Agreement of Essex Washington Interest Partners attached as Exhibit --
10.16 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.
10.18 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.
10.19 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.
10.20 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. (Same form was used for subsequent phantom stock
agreements.)*
10.21 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. (Same form was used for subsequent phantom stock agreements.)*
10.22 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.*
10.23 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. (Same form of Promissory Note and
Pledge Agreement used for subsequent loans.)*
10.24 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.*
Exhibit No. Document Page
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10.25 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. (Same form of Promissory Note and
Pledge Agreement used for subsequent loans.)*
10.26 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.
10.27 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.
10.28 $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.
10.29 Form of Revolving Loan Agreement among Essex Portfolio L.P., Bank of America and other --
banks as specified therein, attached as Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended September 30, 2000 and incorporated herein by reference.
10.30 Sixth Amendment to the First Amended and Restated Agreement of Limited Partnership of --
Essex Portfolio, L.P. dated as of June 28, 2001, attached as Exhibit 10.1 to the
Company's 10-Q for the quarter ended June 30, 2001 and incorporated herein by
reference.*
10.31 Executive Severance Plan* --
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. --
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* Management contract or compensatory plan or arrangement.
(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 Form 10-K for the year ended December 31, 1998.