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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