UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
______________________
FORM
10-Q
______________________
T QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended June 30, 2008
OR
£ TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from ________to _________
Commission file number
001-13106
ESSEX
PROPERTY TRUST, INC.
(Exact
name of Registrant as Specified in its Charter)
Maryland
|
77-0369576
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
(I.R.S.
Employer Identification Number)
|
925
East Meadow Drive
Palo Alto,
California 94303
(Address
of Principal Executive Offices including Zip Code)
(650)
494-3700
(Registrant's
Telephone Number, Including Area Code)
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 reports), and (2) has been subject to such filing requirements for the
past 90 days. YES T
NO £
Indicate
by check mark whether the registrant is a large accelerated filer an accelerated
file, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” ”accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer T
|
|
Accelerated
filer £
|
|
Non-accelerated
filer £
|
|
Smaller
reporting company £
|
|
|
|
|
(Do
not check if a smaller
reporting
company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act. Yes £
No T
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
25,565,636
shares of Common Stock as of August 4, 2008
ESSEX PROPERTY TRUST, INC.
FORM
10-Q
INDEX
|
|
Page No.
|
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
26
|
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
28
|
Part
I -- Financial Information
Item 1: Financial Statements (Unaudited)
"Essex"
or the "Company" means Essex Property Trust, Inc., a real estate investment
trust incorporated in the State of Maryland, or where the context otherwise
requires, Essex Portfolio, L.P., a limited partnership (the "Operating
Partnership") in which Essex Property Trust, Inc. is the sole general
partner.
The
information furnished in the accompanying unaudited condensed consolidated
balance sheets, statements of operations, stockholders' equity and comprehensive
income and cash flows of the Company reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the aforementioned
condensed consolidated financial statements for the interim periods and are
normal and recurring in nature, except as otherwise noted.
The
accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the notes to such unaudited condensed consolidated
financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations herein. Additionally, these
unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Company's annual report on Form 10-K for the year ended December 31,
2007.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
(Unaudited)
(Dollars
in thousands, except per share amounts)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
Rental
properties:
|
|
|
|
|
|
|
Land
and land improvements
|
|
$ |
670,494 |
|
|
$ |
670,494 |
|
Buildings
and improvements
|
|
|
2,487,962 |
|
|
|
2,447,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,158,456 |
|
|
|
3,117,759 |
|
Less
accumulated depreciation
|
|
|
(594,489 |
) |
|
|
(541,987 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
2,563,967 |
|
|
|
2,575,772 |
|
Real
estate under development
|
|
|
320,671 |
|
|
|
233,445 |
|
Co-investments
|
|
|
66,546 |
|
|
|
64,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2,951,184 |
|
|
|
2,873,408 |
|
Cash
and cash equivalents-unrestricted
|
|
|
20,995 |
|
|
|
9,956 |
|
Cash
and cash equivalents-restricted
|
|
|
12,082 |
|
|
|
12,527 |
|
Marketable
securities
|
|
|
2,503 |
|
|
|
2,017 |
|
Receivables
from related parties
|
|
|
1,547 |
|
|
|
904 |
|
Notes
and other receivables
|
|
|
43,064 |
|
|
|
49,632 |
|
Prepaid
expenses and other assets
|
|
|
21,104 |
|
|
|
20,286 |
|
Deferred
charges, net
|
|
|
11,430 |
|
|
|
11,593 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,063,909 |
|
|
$ |
2,980,323 |
|
|
|
|
|
|
|
|
|
|
Liabilities and
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Mortgage
notes payable
|
|
$ |
1,385,222 |
|
|
$ |
1,262,873 |
|
Exchangeable
bonds
|
|
|
225,000 |
|
|
|
225,000 |
|
Lines
of credit
|
|
|
155,000 |
|
|
|
169,818 |
|
Accounts
payable and accrued liabilities
|
|
|
50,382 |
|
|
|
52,783 |
|
Construction
payable
|
|
|
21,051 |
|
|
|
5,365 |
|
Dividends
payable
|
|
|
30,865 |
|
|
|
28,521 |
|
Other
liabilities
|
|
|
16,664 |
|
|
|
17,773 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,884,184 |
|
|
|
1,762,133 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
280,993 |
|
|
|
281,960 |
|
Cumulative
convertible preferred stock; $.0001 par value: 4.875% Series G - 5,980,000
issued and outstanding
|
|
|
145,912 |
|
|
|
145,912 |
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $.0001 par value, 649,702,178 shares authorized 24,787,569 and
24,876,737 shares issued and outstanding
|
|
|
2 |
|
|
|
2 |
|
Cumulative
redeemable preferred stock; $.0001 par value: 7.8125% Series F - 1,000,000
shares authorized, issued and outstanding, liquidation
value
|
|
|
25,000 |
|
|
|
25,000 |
|
Excess
stock, $.0001 par value, 330,000,000 shares authorized and no shares
issued and outstanding
|
|
|
- |
|
|
|
- |
|
Additional
paid-in capital
|
|
|
846,688 |
|
|
|
857,109 |
|
Distributions
in excess of accumulated earnings
|
|
|
(107,983 |
) |
|
|
(82,805 |
) |
Accumulated
other comprehensive (loss) income
|
|
|
(10,887 |
) |
|
|
(8,988 |
) |
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
752,820 |
|
|
|
790,318 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
3,063,909 |
|
|
$ |
2,980,323 |
|
See
accompanying notes to the unaudited condensed consolidated financial
statements.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARES
Condensed
Consolidated Statements of Operations
(Unaudited)
(Dollars
in thousands, except per share amounts)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other property
|
|
$ |
103,365 |
|
|
$ |
94,194 |
|
|
$ |
204,842 |
|
|
$ |
183,860 |
|
Management
and other fees from affiliates
|
|
|
1,428 |
|
|
|
1,354 |
|
|
|
2,655 |
|
|
|
2,394 |
|
|
|
|
104,793 |
|
|
|
95,548 |
|
|
|
207,497 |
|
|
|
186,254 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
operating, excluding real estate taxes
|
|
|
26,069 |
|
|
|
22,916 |
|
|
|
50,633 |
|
|
|
44,984 |
|
Real
estate taxes
|
|
|
8,481 |
|
|
|
7,955 |
|
|
|
16,898 |
|
|
|
15,481 |
|
Depreciation
and amortization
|
|
|
28,683 |
|
|
|
24,630 |
|
|
|
56,417 |
|
|
|
45,786 |
|
Interest
|
|
|
19,781 |
|
|
|
20,491 |
|
|
|
39,964 |
|
|
|
38,757 |
|
Amortization
of deferred financing costs
|
|
|
715 |
|
|
|
678 |
|
|
|
1,437 |
|
|
|
1,355 |
|
General
and administrative
|
|
|
6,512 |
|
|
|
6,008 |
|
|
|
13,137 |
|
|
|
12,104 |
|
|
|
|
90,241 |
|
|
|
82,678 |
|
|
|
178,486 |
|
|
|
158,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from operations
|
|
|
14,552 |
|
|
|
12,870 |
|
|
|
29,011 |
|
|
|
27,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
2,433 |
|
|
|
2,865 |
|
|
|
5,201 |
|
|
|
5,047 |
|
Equity
income in co-investments
|
|
|
360 |
|
|
|
463 |
|
|
|
6,990 |
|
|
|
2,445 |
|
Minority
interests
|
|
|
(5,346 |
) |
|
|
(5,069 |
) |
|
|
(11,189 |
) |
|
|
(10,376 |
) |
Income
before discontinued operations
|
|
|
11,999 |
|
|
|
11,129 |
|
|
|
30,013 |
|
|
|
24,903 |
|
Income
from discontinued operations (net of minority interests)
|
|
|
- |
|
|
|
1,058 |
|
|
|
- |
|
|
|
24,830 |
|
Net
income
|
|
|
11,999 |
|
|
|
12,187 |
|
|
|
30,013 |
|
|
|
49,733 |
|
Dividends
to preferred stockholders
|
|
|
(2,311 |
) |
|
|
(2,310 |
) |
|
|
(4,621 |
) |
|
|
(4,553 |
) |
Net
income available to common stockholders
|
|
$ |
9,688 |
|
|
$ |
9,877 |
|
|
$ |
25,392 |
|
|
$ |
45,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
common share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before discontinued operations available to common
stockholders
|
|
$ |
0.39 |
|
|
$ |
0.36 |
|
|
$ |
1.02 |
|
|
$ |
0.85 |
|
Income
from discontinued operations
|
|
|
- |
|
|
|
0.04 |
|
|
|
- |
|
|
|
1.04 |
|
Net
income available to common stockholders
|
|
$ |
0.39 |
|
|
$ |
0.40 |
|
|
$ |
1.02 |
|
|
$ |
1.89 |
|
Weighted
average number of common shares outstanding during the
period
|
|
|
24,768,626 |
|
|
|
24,493,816 |
|
|
|
24,758,276 |
|
|
|
23,966,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before discontinued operations available to common
stockholders
|
|
$ |
0.38 |
|
|
$ |
0.35 |
|
|
$ |
1.01 |
|
|
$ |
0.82 |
|
Income
from discontinued operations
|
|
|
- |
|
|
|
0.04 |
|
|
|
- |
|
|
|
1.01 |
|
Net
income available to common stockholders
|
|
$ |
0.38 |
|
|
$ |
0.39 |
|
|
$ |
1.01 |
|
|
$ |
1.83 |
|
Weighted
average number of common shares outstanding during the
period
|
|
|
25,153,826 |
|
|
|
25,104,021 |
|
|
|
25,032,076 |
|
|
|
24,688,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
per common share
|
|
$ |
1.02 |
|
|
$ |
0.93 |
|
|
$ |
2.04 |
|
|
$ |
1.86 |
|
See
accompanying notes to the unaudited condensed consolidated financial
statements.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Stockholders' Equity and
Comprehensive
Income for the six months ended June 30, 2008
(Unaudited)
(Dollars
and shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
Series
F
|
|
|
|
|
|
|
|
|
Additional
|
|
|
in excess of
|
|
|
Accumulated other
|
|
|
|
|
|
|
Preferred stock
|
|
|
Common stock
|
|
|
paid-in
|
|
|
accumulated
|
|
|
comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
earnings
|
|
|
income (loss)
|
|
|
Total
|
|
Balances
at December 31, 2007
|
|
|
1,000 |
|
|
$ |
25,000 |
|
|
|
24,877 |
|
|
$ |
2 |
|
|
$ |
857,109 |
|
|
$ |
(82,805 |
) |
|
$ |
(8,988 |
) |
|
$ |
790,318 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
30,013 |
|
|
|
- |
|
|
|
30,013 |
|
Change
in fair value of cash flow hedges and amortization of swap
settlements
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,899 |
) |
|
|
(1,899 |
) |
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,114 |
|
Issuance
of common stock under:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation plans
|
|
|
- |
|
|
|
- |
|
|
|
54 |
|
|
|
- |
|
|
|
3,302 |
|
|
|
- |
|
|
|
- |
|
|
|
3,302 |
|
Retirement
of common stock
|
|
|
- |
|
|
|
- |
|
|
|
(143 |
) |
|
|
- |
|
|
|
(13,723 |
) |
|
|
- |
|
|
|
- |
|
|
|
(13,723 |
) |
Dividends
declared
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(55,191 |
) |
|
|
- |
|
|
|
(55,191 |
) |
Balances
at June 30, 2008
|
|
|
1,000 |
|
|
$ |
25,000 |
|
|
|
24,788 |
|
|
$ |
2 |
|
|
$ |
846,688 |
|
|
$ |
(107,983 |
) |
|
$ |
(10,887 |
) |
|
$ |
752,820 |
|
See
accompanying notes to the unaudited condensed consolidated financial
statements.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars
in thousands)
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
Net
cash provided by operating activities
|
|
$ |
89,733 |
|
|
$ |
99,652 |
|
|
|
|
|
|
|
|
|
|
Cash
flows used in investing activities:
|
|
|
|
|
|
|
|
|
Additions
to real estate:
|
|
|
|
|
|
|
|
|
Acquisitions
and improvements to recent acquisitions
|
|
|
(4,865 |
) |
|
|
(219,237 |
) |
Capital
expenditures and redevelopment
|
|
|
(35,833 |
) |
|
|
(28,245 |
) |
Additions
to real estate under development
|
|
|
(63,152 |
) |
|
|
(75,502 |
) |
Dispositions
of real estate and investments
|
|
|
- |
|
|
|
123,029 |
|
Changes
in restricted cash and refundable deposits
|
|
|
453 |
|
|
|
2,270 |
|
Purchases
of marketable securities
|
|
|
(6,411 |
) |
|
|
(3,815 |
) |
Sales
and maturities of marketable securities
|
|
|
5,925 |
|
|
|
- |
|
Advances
under notes and other receivables
|
|
|
(1,898 |
) |
|
|
(9,104 |
) |
Collections
of notes and other receivables
|
|
|
5,116 |
|
|
|
477 |
|
Contributions
to co-investments
|
|
|
(4,047 |
) |
|
|
(21,215 |
) |
Distributions
from co-investments
|
|
|
8,847 |
|
|
|
15,131 |
|
Net
cash used in investing activities
|
|
|
(95,865 |
) |
|
|
(216,211 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings
under mortgage and other notes payable and lines of credit
|
|
|
302,636 |
|
|
|
445,595 |
|
Repayment
of mortgage and other notes payable and lines of credit
|
|
|
(195,128 |
) |
|
|
(416,038 |
) |
Additions
to deferred charges
|
|
|
(1,259 |
) |
|
|
(1,463 |
) |
Settlement
of forwad-starting swaps
|
|
|
(1,840 |
) |
|
|
1,311 |
|
Net
proceeds from stock options exercised
|
|
|
2,862 |
|
|
|
1,765 |
|
Net
sale of common stock
|
|
|
- |
|
|
|
213,672 |
|
Redemption
of common stock
|
|
|
(13,723 |
) |
|
|
- |
|
Distributions
to minority interest partners
|
|
|
(12,035 |
) |
|
|
(70,891 |
) |
Redemption
of minority interest limited partnership units
|
|
|
(11,282 |
) |
|
|
(8,288 |
) |
Common
and preferred stock dividends paid
|
|
|
(53,060 |
) |
|
|
(46,179 |
) |
Net
cash provided by financing activities
|
|
|
17,171 |
|
|
|
119,484 |
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
11,039 |
|
|
|
2,925 |
|
Cash
and cash equivalents at beginning of period
|
|
|
9,956 |
|
|
|
9,662 |
|
Cash
and cash equivalents at end of period
|
|
$ |
20,995 |
|
|
$ |
12,587 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest, net of $5,269 and $2,317 capitalized in 2008 and 2007,
respectively
|
|
$ |
34,538 |
|
|
$ |
36,162 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
notes assumed in connection with land contribution
|
|
|
- |
|
|
$ |
23,920 |
|
Land
contributed by a partner in a consolidated joint venture
|
|
$ |
10,500 |
|
|
$ |
22,200 |
|
Change
in value of cash flow hedges and amortization of swap
settlements
|
|
$ |
1,899 |
|
|
$ |
15,480 |
|
Change
in construction payable
|
|
$ |
15,686 |
|
|
$ |
2,263 |
|
See
accompanying notes to the unaudited condensed consolidated financial
statements.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
June
30, 2008 and 2007
(Unaudited)
(1) Organization
and Basis of Presentation
The
unaudited condensed consolidated financial statements of the Company are
prepared in accordance with U.S. generally accepted accounting principles for
interim financial information and in accordance with the instructions to Form
10-Q. In the opinion of management, all adjustments necessary for a
fair presentation of the financial position, results of operations and cash
flows for the periods presented have been included and are normal and recurring
in nature, except as otherwise noted. These unaudited condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements included in the Company's annual report on
Form 10-K for the year ended December 31, 2007.
All
significant intercompany balances and transactions have been eliminated in the
condensed consolidated financial statements.
The
unaudited condensed consolidated financial statements for the three and six
months ended June 30, 2008 and 2007 include the accounts of the Company and
Essex Portfolio, L.P. (the "Operating Partnership", which holds the operating
assets of the Company). See below for a description of entities
consolidated by the Operating Partnership. The Company is the sole
general partner in the Operating Partnership, with a 91.1% general partnership
interest as of June 30, 2008.
As of
June 30, 2008, the Company owned or had ownership interests in 133 apartment
communities, (aggregating 26,963 units), six office buildings, two recreational
vehicle parks (totaling 338 spaces), and one manufactured housing community
(containing 157 sites) (collectively, the “Properties”). The Properties are
located in Southern California (Los Angeles, Orange, Riverside, Santa Barbara,
San Diego, and Ventura counties), Northern California (the San Francisco Bay
Area), the Seattle metropolitan area, and other region (Houston,
Texas).
Fund
Activities
Essex
Apartment Value Fund II, L.P. (“Fund II”) is an investment fund formed by the
Company to add value through rental growth and asset appreciation, utilizing the
Company's development, redevelopment and asset management
capabilities.
Fund II
has eight institutional investors, and the Company, with combined partner equity
commitments of $265.9 million. The Company has committed $75.0 million to Fund
II, which represents a 28.2% interest as general partner and limited partner.
Fund II utilizes leverage equal to approximately 55% upon the initial
acquisition of the underlying real estate. Fund II invested in
apartment communities in the Company’s targeted West Coast markets and, as of
June 30, 2008, owned eleven apartment communities and three development
projects. Essex records revenue for its asset management, property
management, development and redevelopment services when earned, and promote
income when realized if Fund II exceeds certain financial return
benchmarks.
Marketable
Securities
Marketable
securities consist primarily of U.S. treasury or agency securities with original
maturities of more than three months when purchased. The Company has
classified these debt securities as held-to-maturity securities, and the Company
reports the securities at amortized cost. Realized gains and losses
and interest income are included in interest and other income on the condensed
consolidated statement of operations.
Variable
Interest Entities
In
accordance with Financial Accounting Standards Board (“FASB”) Interpretation No.
46 Revised (“FIN 46R”), “Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51”, the Company consolidates a
joint venture development project, 19 DownREIT limited partnerships (comprising
twelve properties), an office building that is subject to loans made by the
Company, and prior to the sale of the property during 2007, the buildings and
improvements that were owned by a third-party subject to a ground lease on land
that was owned by the Company. The Company consolidates these
entities because it is deemed the primary beneficiary under FIN
46R. The consolidated total assets and liabilities related to these
variable interest entities (“VIEs”), net of intercompany eliminations, were
approximately $244.8 million and $164.3 million, respectively, as of June 30,
2008 and $222.7 million and $163.9 million, respectively, as of December 31,
2007. Interest holders in VIEs consolidated by the Company are
allocated net income equal to the cash payments made to those interest holders
for services rendered or distributions from cash flow. The remaining
results of operations are generally allocated to the Company. As of
December 31, 2007, the Company had two VIE’s of which it was not deemed to be
the primary beneficiary. Total assets and liabilities of these
entities were $71.7 million and $58.3 million, as of December 31,
2007. As of June 30, 2008, the Company did not have any VIE’s of
which it was not deemed to be the primary beneficiary.
Stock-Based
Compensation
The
Company accounts for share based compensation using the fair value method of
accounting. The estimated fair value of stock options granted by the
Company is being amortized over the vesting period of the stock
options. The estimated grant date fair values of the long term
incentive plan units (discussed in Note 14, “Stock-Based Compensation Plans,” in
the Company’s Annual Report on Form 10-K for the year ended December 31, 2007)
are being amortized over the expected service periods.
Stock-based
compensation expense for options and restricted stock totaled $0.2 million and
$0.3 million for the three months ended June 30, 2008 and 2007, respectively,
and $0.4 million and $0.6 million for the six months ended June 30, 2008 and
2007, respectively. The intrinsic value of the stock options
exercised during the three months ended June 30, 2008 and 2007 totaled $2.1
million and $0.8 million, respectively, and $2.7 million for the six months
ended June 30, 2008 and 2007. As of June 30, 2008, the intrinsic
value of the stock options outstanding and fully vested totaled $11.9 million.
As of June 30, 2008, total unrecognized compensation cost related to unvested
share-based compensation granted under the stock option and restricted stock
plans totaled $5.1 million. The cost is expected to be recognized
over a weighted-average period of 3 to 5 years for the stock option plans and 7
years for the restricted stock awards.
The
Company has adopted an incentive program involving the issuance of Series Z and
Series Z-1 Incentive Units (collectively referred to as “Z Units”) of limited
partnership interest in the Operating Partnership. Stock-based
compensation expense for Z Units totaled $0.4 million for the three months ended
June 30, 2008 and 2007, and $0.8 million for the six months ended June 30, 2008
and 2007, respectively.
Stock-based
compensation capitalized for stock options, restricted stock awards, and the Z
Units totaled $0.2 million for the three months ended June 30, 2008 and
2007. As of June 30, 2008 the intrinsic value of the Z Units subject
to conversion totaled $18.6 million. As of June 30, 2008, total
unrecognized compensation cost related to Z Units subject to conversion in the
future granted under the Z Units totaled $6.6 million. The
unamortized cost is expected to be recognized over the next 3 to 11 years
subject to the achievement of the stated performance criteria.
Stock-based
compensation expense for the Outperformance Plan, (the “OPP”) adopted in
December 2007 totaled approximately $0.3 million and $0.6 million for three and
six months ended June 30, 2008, respectively. Total
unrecognized compensation cost less an estimate for forfeitures related to the
OPP totaled $4.7 million as of June 30, 2008. The unamortized cost is
expected to be recognized over the expected service period of five years for
senior officers and three years for non-employee directors.
The
Company’s stock-based compensation policies have not changed materially from
information reported in Note 2(l), “Stock-Based Compensation,” and Note 14,
“Stock-Based Compensation Plans,” in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2007.
Accounting
Estimates and Reclassifications
The
preparation of condensed consolidated financial statements, in accordance with
U.S. generally accepted accounting principles, requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosures of contingent assets and
liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to acquiring, developing and assessing the carrying
values of its real estate properties, its investments in and advances to joint
ventures and affiliates, its notes receivable and its qualification as a Real
Estate Investment Trust (“REIT”). The Company bases its estimates on historical
experience, current market conditions, and on various other assumptions that are
believed to be reasonable under the circumstances. Actual results may vary from
those estimates and those estimates could be different under different
assumptions or conditions. Certain reclassifications have been made
to prior year balances in order to conform to the current year
presentation. Such reclassifications have no impact on reported
earnings, cash flows, total assets, or total liabilities.
New
Accounting Pronouncements
In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”
(“FAS 157”). FAS 157 provides guidance for using fair value to
measure assets and liabilities. FAS 157 establishes a fair value
hierarchy, giving the highest priority to quoted prices in active markets and
the lowest priority to unobservable data. This statement is effective in fiscal
years beginning after November 15, 2007. The adoption of this
standard on January 1, 2008 did not have a material impact on the Company’s
consolidated financial position, results of operations or cash
flows.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“FAS No. 159”). FAS 159
expands opportunities to use fair value measurement in financial reporting and
permits entities to choose to measure many financial instruments and certain
other items at fair value. This Statement is effective for fiscal
years beginning after November 15, 2007. Through June 30, 2008, The
Company has not elected to measure any eligible financial assets and liabilities
at fair value.
In
December 2007, the FASB issued revised SFAS No. 141, “Business Combinations” (“FAS
141(R)”). FAS141(R)
establishes principles and requirements for how the acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures
the goodwill acquired in the business combination or a gain from a bargain
purchase; and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. FAS 141(R) is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008. Management is currently evaluating the impact FAS 141(R) will
have on the Company’s accounting for future business combinations.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“FAS 160”). FAS 160 establishes
accounting and reporting standards that require the ownership interests in
subsidiaries held by parties other than the parent be clearly identified,
labeled, and presented in the consolidated statement of financial position
within equity, but separate from the parent’s equity; the amount of consolidated
net income attributable to the parent and to the noncontrolling interest be
clearly identified and presented on the face of the consolidated statement of
income; changes in a parent’s ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted for consistently;
when a subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary be initially measured at fair value; and
entities provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. FAS 160 is effective for fiscal years beginning on or after
December 15, 2008. Management is currently evaluating the impact FAS 160 will
have on the Company’s condensed consolidated financial statements.
In May
2008, the FASB issued FASB staff position APB 14-1, “Accounting for Convertible Debt
Instruments That May be Settled in cash upon Conversion (Including Partial Cash
Settlement)” (“APB 14-1”). APB 14-1 requires the issuer of
certain convertible debt instruments that may be settled in cash (or other
assets) upon conversion separately account for the liability (debt) and equity
(conversion option) components of the instruments in a manner that reflects the
issuer’s nonconvertible debt borrowing rate. APB 14-1 requires the initial debt
proceeds from the sale of a company’s convertible debt instrument to be
allocated between the liability component and the equity
component. The resulting debt discount will be amortized over the
period during which the debt is expected to be outstanding (i.e., through the
first optional redemption dates) as additional non-cash interest expense. The
additional interest expense recorded will result in an increased level of
capitalized interest in accordance with SFAS 34, “Capitalization of Interest
Cost”. APB 14-1 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15,
2008. Earlier adoption is prohibited and retroactive application is
required for all periods presented. The interest expense from the
Company’s $225 million exchangeable senior notes with a coupon rate of 3.625%
due November 2025, which were issued in fourth quarter of 2005, will be impacted
by APB 14-1. Based on the Company's understanding of the application
of APB 14-1, this will result in an additional non-cash interest expense
(excluding the impact of capitalized interest) of additional interest of
approximately $4.0 million for 2008, and approximately $4.2 million for
2009. This amount (before the impact of capitalized interest) will
increase in subsequent reporting periods through the first optional redemption
dates as the debt accretes to its par value over the same period. The Company
will adopt APB 14-1 as of January 1, 2009, and the Company will present prior
period comparative results reflecting the impact of APB 14-1.
(2) Significant
Transactions
(a) Development
In May
2008, the Company started construction on Joule Broadway (formerly known as
“Broadway Heights”), an urban development featuring 295 apartment units and
29,100 square feet of retail space in Seattle’s Capital Hill
neighborhood. During the second quarter of 2008, the Company’s joint
venture partner contributed land in exchange for a 50% interest in the
partnership. The total estimated cost of the development is $104
million with an estimated completion of construction in September
2010.
(b)
Debt and Financing Activities
During
April 2008, the Company obtained a $31.5 million loan secured by Park Hill at
Issaquah, a community located in Issaquah, Washington, with a fixed interest
rate of 5.5%, which matures in April 2018. In conjunction with
this transaction, the Company settled a $30.0 million forward-starting swap for
a $1.7 million payment to the counterparty. The amortization of the
loss on settlement of the swap increases the effective interest rate on the
mortgage loan to 6.1%. Also in April 2008, Essex obtained a second
mortgage loan in the amount of $17.2 million secured by Kings Road, a community
located in Los Angeles, with a fixed interest rate at 5.6% due in January
2018.
During
May 2008, the Company’s consolidated joint venture obtained a construction loan
in the amount of $60.0 million secured by the Joule Broadway development project
in Seattle, Washington. The loan is variable based on LIBOR plus 155
basis points and matures in June 2011 with two one-year extension options, and
the initial funding on this loan was $0.5 million. The Company has a
performance guarantee with the commercial bank related to the Joule Broadway
project.
During
June 2008, Essex obtained a $22.5 million loan secured by Hampton Place, a
community located in Los Angeles, with a fixed interest rate of 6.1%, which
matures in June 2018. In conjunction with this transaction, the
Company settled a $20.0 million forward-starting swap for a $0.1 million payment
to the counterparty. The amortization of the loss on settlement of
the swap increases the effective interest rate on the mortgage loan to
6.2%.
The
Company has signed a letter of commitment to enter into a new five-year secured
line of credit facility to replace the existing secured line of credit facility
that matures in January 2009. The new secured facility will expand
the existing secured facility from $100 million to $150 million, and the new
facility is expandable to $250 million. The Company anticipates that
the closing date for this the new secured facility will occur during the fourth
quarter of 2008.
(3)
Co-investments
The
Company has joint venture investments in a number of co-investments, which are
accounted for under the equity method. The joint ventures own
development projects and operating apartment communities. The
following table details the Company's co-investments (dollars in
thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Investments
in joint ventures accounted for under the equity method of
accounting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited
partnership interest of 27.2% and general partner interest of 1% in Essex
Apartment Value Fund II, L.P ("Fund II")
|
|
$ |
61,283 |
|
|
$ |
58,419 |
|
Preferred
limited partnership interest in Mountain Vista Apartments, LLC
(A)
|
|
|
- |
|
|
|
1,182 |
|
Development
joint venture
|
|
|
4,763 |
|
|
|
4,090 |
|
|
|
|
66,046 |
|
|
|
63,691 |
|
Investments
accounted for under the cost method of accounting:
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock interest in Multifamily Technology Solutions,
Inc
|
|
|
500 |
|
|
|
500 |
|
Total
co-investments
|
|
$ |
66,546 |
|
|
$ |
64,191 |
|
|
(A)
|
The
investment was held in an entity that included an affiliate of The Marcus
& Millichap Company (“TMMC”), and is the general
partner. TMMC’s Chairman is also the Chairman of the
Company.
|
The
combined summarized balance sheet for co-investments, which are accounted for
under the equity method, is as follows (dollars in thousands).
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Balance
sheets:
|
|
|
|
|
|
|
Real
estate and real estate under development
|
|
$ |
510,878 |
|
|
$ |
614,266 |
|
Other
assets
|
|
|
6,785 |
|
|
|
16,184 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
517,663 |
|
|
$ |
630,450 |
|
|
|
|
|
|
|
|
|
|
Mortgage
notes payable
|
|
$ |
288,817 |
|
|
$ |
322,615 |
|
Other
liabilities
|
|
|
11,827 |
|
|
|
24,014 |
|
Partners'
equity
|
|
|
217,019 |
|
|
|
283,821 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and partners' equity
|
|
$ |
517,663 |
|
|
$ |
630,450 |
|
|
|
|
|
|
|
|
|
|
Company's
share of equity
|
|
$ |
66,046 |
|
|
$ |
63,691 |
|
The
combined summarized statement of operations for co-investments, which are
accounted for under the equity method, is as follows (dollars in
thousands).
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Statements
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
revenues
|
|
$ |
11,329 |
|
|
$ |
10,697 |
|
|
$ |
22,326 |
|
|
$ |
22,835 |
|
Operating
expenses
|
|
|
(4,428 |
) |
|
|
(4,503 |
) |
|
|
(8,615 |
) |
|
|
(9,470 |
) |
Interest
expense
|
|
|
(2,623 |
) |
|
|
(3,236 |
) |
|
|
(5,329 |
) |
|
|
(7,254 |
) |
Depreciation
and amortization
|
|
|
(3,646 |
) |
|
|
(3,473 |
) |
|
|
(6,671 |
) |
|
|
(6,945 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net income (loss)
|
|
$ |
632 |
|
|
$ |
(515 |
) |
|
$ |
1,711 |
|
|
$ |
(834 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company's
share of operating net income (loss)
|
|
|
360 |
|
|
|
159 |
|
|
|
672 |
|
|
|
94 |
|
Company's
preferred interest/gain - Mt. Vista
|
|
|
- |
|
|
|
304 |
|
|
|
6,318 |
|
|
|
2,351 |
|
Company's
share of net income
|
|
$ |
360 |
|
|
$ |
463 |
|
|
$ |
6,990 |
|
|
$ |
2,445 |
|
Through
June 30, 2008, the Company has made contributions to a joint venture totaling
$4.8 million related to a development project located in Southern California,
which was still in the predevelopment stage as of June 30, 2008.
In
January 2008, the Company received $7.5 million and recognized $6.3 million of
preferred income which is included in equity income in co-investments from the
repayment of its investment in Mountain Vista Apartments, LLC.
(4)
Notes and Other Receivables
Notes
receivables secured by real estate, and other receivables consist of the
following as of June 30, 2008 and December 31, 2007 (dollars in
thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Note
receivable, secured, bearing interest at 12%, due June
2008
|
|
$ |
- |
|
|
$ |
2,193 |
|
Note
receivable, secured, bearing interest at LIBOR + 4.65%, due July
2008
|
|
|
323 |
|
|
|
5,448 |
|
Note
receivable, secured, bearing interest at LIBOR + 3.38%, due February
2009
|
|
|
12,945 |
|
|
|
10,999 |
|
Note
receivable, secured, bearing interest at LIBOR + 2.95%, due April
2009
|
|
|
14,086 |
|
|
|
14,010 |
|
Note
receivable, secured, bearing interest at LIBOR + 3.69%, due June
2009
|
|
|
7,328 |
|
|
|
7,346 |
|
Note
receivable, secured, bearing interest at LIBOR + 4.75%, due March
2011
|
|
|
7,228 |
|
|
|
7,128 |
|
Other
receivables
|
|
|
1,154 |
|
|
|
2,508 |
|
|
|
$ |
43,064 |
|
|
$ |
49,632 |
|
During
August 2006, the Company originated a loan with the owners of a 26-unit
apartment community in Sherman Oaks, California. The proceeds from the loan
financed the conversion of the units to condominiums for
sale. Effective July 1, 2007, the Company had ceased accruing
interest on the note, due to the velocity of sales, pricing, and status of the
interest reserve. During the fourth quarter of 2007, the Company
recorded an allowance for loan loss in the amount of $0.5 million on this
impaired note receivable, which was approximately equal to accrued and unpaid
interest recorded from inception of the note through June 30,
2007. The Company believes that the June 30, 2008 loan balance of
$0.3 million is collectible through closing of sales of the two remaining
condominium units.
(5)
Related Party Transactions
Other
related party receivables consist primarily of accrued payroll costs and
management fees from Fund II totaling $1.5 million and $0.9 million as of June
30, 2008 and December 31, 2007, respectively.
Management
and other fees from affiliates includes property management, asset management,
development and redevelopment fees from related parties of $1.4 million for the
quarters ended June 30 , 2008 and 2007, and $2.7 million and $2.4 million for
the six months ended June 30, 2008 and 2007. The Company’s Chairman,
George Marcus, is also the Chairman of TMMC, which is a real estate brokerage
firm. The Company paid no brokerage commissions on the sale of real estate
during the three months ended June 30, 2008 and 2007, and $0 and $1.3 million
during the six months ended June 30, 2008 and 2007,
respectively.
In
January 2008, the Company received $7.5 million from an investment held in an
affiliate of TMMC and recognized $6.3 million of preferred income which is
included in equity income from co-investments from the repayment of its
investment.
(6) Segment
Information
The
Company defines its reportable operating segments as the three geographical
regions in which its properties are located: Southern California, Northern
California and Seattle Metro. Excluded from segment revenues are properties
outside of these regions, discontinued operations, management and other fees
from affiliates, and interest and other income. Non-segment revenues and net
operating income included in the following schedule also consist of revenue
generated from commercial properties, recreational vehicle parks, and
manufactured housing communities. Other non-segment assets include investments,
real estate under development, cash, notes receivable, other assets and deferred
charges.
The
revenues, net operating income, and assets for each of the reportable operating
segments are summarized as follows for the three months ended June 30, 2008 and
2007 (dollars in thousands):
|
|
Three
Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
Southern
California
|
|
$ |
55,424 |
|
|
$ |
53,590 |
|
Northern
California
|
|
|
29,637 |
|
|
|
23,725 |
|
Seattle
Metro
|
|
|
17,157 |
|
|
|
15,799 |
|
Other
real estate assets
|
|
|
1,147 |
|
|
|
1,080 |
|
Total
property revenues
|
|
$ |
103,365 |
|
|
$ |
94,194 |
|
|
|
|
|
|
|
|
|
|
Net
operating income:
|
|
|
|
|
|
|
|
|
Southern
California
|
|
$ |
38,032 |
|
|
$ |
36,969 |
|
Northern
California
|
|
|
19,027 |
|
|
|
15,522 |
|
Seattle
Metro
|
|
|
11,474 |
|
|
|
10,413 |
|
Other
real estate assets
|
|
|
282 |
|
|
|
419 |
|
Total
net operating income
|
|
|
68,815 |
|
|
|
63,323 |
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
(28,683 |
) |
|
|
(24,630 |
) |
Interest
expense
|
|
|
(19,781 |
) |
|
|
(20,491 |
) |
Amortization
of deferred financing costs
|
|
|
(715 |
) |
|
|
(678 |
) |
General
and administrative
|
|
|
(6,512 |
) |
|
|
(6,008 |
) |
Management
and other fees from affiliates
|
|
|
1,428 |
|
|
|
1,354 |
|
Interest
and other income
|
|
|
2,433 |
|
|
|
2,865 |
|
Equity
income in co-investments
|
|
|
360 |
|
|
|
463 |
|
Minority
interests
|
|
|
(5,346 |
) |
|
|
(5,069 |
) |
Income
before discontinued operations
|
|
$ |
11,999 |
|
|
$ |
11,129 |
|
The
revenues, net operating income, and assets for each of the reportable operating
segments are summarized as follows for the six months ended June 30, 2008 and
2007 (dollars in thousands):
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
Southern
California
|
|
$ |
110,170 |
|
|
$ |
105,336 |
|
Northern
California
|
|
|
58,266 |
|
|
|
45,514 |
|
Seattle
|
|
|
34,086 |
|
|
|
30,788 |
|
Other
real estate assets
|
|
|
2,320 |
|
|
|
2,222 |
|
Total
property revenues
|
|
$ |
204,842 |
|
|
$ |
183,860 |
|
|
|
|
|
|
|
|
|
|
Net
operating income:
|
|
|
|
|
|
|
|
|
Southern
California
|
|
$ |
75,530 |
|
|
$ |
72,857 |
|
Northern
California
|
|
|
38,125 |
|
|
|
30,161 |
|
Seattle
|
|
|
22,883 |
|
|
|
20,354 |
|
Other
real estate assets
|
|
|
773 |
|
|
|
23 |
|
Total
net operating income
|
|
|
137,311 |
|
|
|
123,395 |
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
(56,417 |
) |
|
|
(45,786 |
) |
Interest
expense
|
|
|
(39,964 |
) |
|
|
(38,757 |
) |
Amortization
of deferred financing costs
|
|
|
(1,437 |
) |
|
|
(1,355 |
) |
General
and administrative
|
|
|
(13,137 |
) |
|
|
(12,104 |
) |
Management
and other fees from affiliates
|
|
|
2,655 |
|
|
|
2,394 |
|
Interest
and other income
|
|
|
5,201 |
|
|
|
5,047 |
|
Equity
income in co-investments
|
|
|
6,990 |
|
|
|
2,445 |
|
Minority
interests
|
|
|
(11,189 |
) |
|
|
(10,376 |
) |
Income
before discontinued operations
|
|
$ |
30,013 |
|
|
$ |
24,903 |
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Assets:
|
|
|
|
|
|
|
Southern
California
|
|
$ |
1,312,329 |
|
|
$ |
1,354,818 |
|
Northern
California
|
|
|
832,172 |
|
|
|
829,879 |
|
Seattle
Metro
|
|
|
352,196 |
|
|
|
353,737 |
|
Other
real estate assets
|
|
|
67,270 |
|
|
|
37,338 |
|
Net
rental properties
|
|
|
2,563,967 |
|
|
|
2,575,772 |
|
|
|
|
|
|
|
|
|
|
Real
estate under development
|
|
|
320,671 |
|
|
|
233,445 |
|
Co-investments
|
|
|
66,546 |
|
|
|
64,191 |
|
Notes
and other receivables
|
|
|
44,611 |
|
|
|
50,536 |
|
Other
non-segment assets
|
|
|
68,114 |
|
|
|
56,379 |
|
Total
assets
|
|
$ |
3,063,909 |
|
|
$ |
2,980,323 |
|
(7) Net Income Per Common
Share
(Amounts
in thousands, except per share and unit data)
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
June 30,
2008
|
|
|
June 30,
2007
|
|
|
|
|
|
|
Weighted-
|
|
|
Per
|
|
|
|
|
|
Weighted-
|
|
|
Per
|
|
|
|
|
|
|
average
|
|
|
Common
|
|
|
|
|
|
average
|
|
|
Common
|
|
|
|
|
|
|
Common
|
|
|
Share
|
|
|
|
|
|
Common
|
|
|
Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations available to common
stockholders
|
|
$ |
9,688 |
|
|
|
24,769 |
|
|
$ |
0.39 |
|
|
$ |
8,819 |
|
|
|
24,494 |
|
|
$ |
0.36 |
|
Income
from discontinued operations
|
|
|
- |
|
|
|
24,769 |
|
|
|
- |
|
|
|
1,058 |
|
|
|
24,494 |
|
|
|
0.04 |
|
|
|
|
9,688 |
|
|
|
|
|
|
$ |
0.39 |
|
|
|
9,877 |
|
|
|
|
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities (1)
|
|
|
- |
|
|
|
385 |
|
|
|
|
|
|
|
- |
|
|
|
610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations available to common
stockholders
|
|
|
9,688 |
|
|
|
25,154 |
|
|
$ |
0.38 |
|
|
|
8,819 |
|
|
|
25,104 |
|
|
$ |
0.35 |
|
Income
from discontinued operations
|
|
|
- |
|
|
|
25,154 |
|
|
|
- |
|
|
|
1,058 |
|
|
|
25,104 |
|
|
|
0.04 |
|
|
|
$ |
9,688 |
|
|
|
|
|
|
$ |
0.38 |
|
|
$ |
9,877 |
|
|
|
|
|
|
$ |
0.39 |
|
|
|
Six
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
2008
|
|
|
June 30,
2007
|
|
|
|
|
|
|
Weighted
|
|
|
Per
|
|
|
|
|
|
Weighted
|
|
|
Per
|
|
|
|
|
|
|
Average
|
|
|
Common
|
|
|
|
|
|
Average
|
|
|
Common
|
|
|
|
|
|
|
Common
|
|
|
Share
|
|
|
|
|
|
Common
|
|
|
Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
Shares
|
|
|
Amount
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before discontinued operations available to common
stockholders
|
|
$ |
25,392 |
|
|
|
24,758 |
|
|
$ |
1.02 |
|
|
$ |
20,350 |
|
|
|
23,966 |
|
|
$ |
0.85 |
|
Income
from discontinued operations
|
|
|
- |
|
|
|
24,758 |
|
|
|
- |
|
|
|
24,830 |
|
|
|
23,966 |
|
|
|
1.04 |
|
|
|
|
25,392 |
|
|
|
|
|
|
$ |
1.02 |
|
|
|
45,180 |
|
|
|
|
|
|
$ |
1.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities (1)
|
|
|
- |
|
|
|
274 |
|
|
|
|
|
|
|
- |
|
|
|
722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before discontinued operations available to common
stockholders
|
|
|
25,392 |
|
|
|
25,032 |
|
|
$ |
1.01 |
|
|
|
20,350 |
|
|
|
24,688 |
|
|
$ |
0.82 |
|
Income
from discontinued operations
|
|
|
- |
|
|
|
25,032 |
|
|
|
- |
|
|
|
24,830 |
|
|
|
24,688 |
|
|
|
1.01 |
|
|
|
$ |
25,392 |
|
|
|
|
|
|
$ |
1.01 |
|
|
$ |
45,180 |
|
|
|
|
|
|
$ |
1.83 |
|
|
(1)
|
Weighted
convertible limited partnership units of 2,219,186 and 2,275,750 for the
three months ended June 30, 2008 and 2007, respectively, and 2,245,241 and
2,291,412 for the six months ended June 30, 2008 and 2007, respectively,
and Series Z incentive units of 250,927 and 213,205 for the three months
ended June 30, 2008 and 2007, respectively, and 250,305 and
213,045 for the six months ended June 30, 2008 and 2007, respectively,
were not included in the determination of diluted EPS because they were
anti-dilutive. The Company has the ability and intent to redeem
DownREIT Limited Partnership units for cash and does not consider them to
be common stock equivalents.
|
On or
after November 1, 2020, the holders of the $225 million exchangeable notes may
exchange, at the then applicable exchange rate, the notes for cash and, at
Essex’s option, a portion of the notes may be exchanged for Essex common stock;
the original exchange rate was $103.25 per share of Essex common
stock. The exchangeable notes will also be exchangeable prior to
November 1, 2020, but only upon the occurrence of certain specified
events. During the three and six months ended June 30, 2008 the
weighted average common stock price exceeded the current strike price and
therefore common stock issuable upon exchange of the exchangeable notes was
included in the diluted share count. The treasury method was used to
determine the shares to be added to the denominator for the calculation of
earnings per diluted share.
Stock
options of 53,579 and 4,000 for the three months ended June 30, 2008 and 2007,
respectively, and 76,737 and 2,500 for the six months ended June 30, 2008 and
2007, respectively, were not included in the diluted earnings per share
calculation because the exercise price of the options were greater than the
average market price of the common shares for the three and six months ended
and, therefore, were anti-dilutive.
The
5,980,000 shares of Series G cumulative convertible preferred stock have been
excluded from diluted earnings per share for the three and six months ended June
30, 2008 and 2007 as the effect was anti-dilutive.
(8) Derivative
Instruments and Hedging Activities
As
discussed in Note 1, the Company adopted FAS 157 as of January 1,
2008. The Company values forward-starting interest rate swaps at fair
value, and based on the fair value hierarchy of valuation techniques, the
Company has elected to use fair values determined by Level 2. Level 2
valuation methodology is determined based on inputs other than quoted prices in
active markets for identical assets or liabilities the Company has the ability
to access as included in Level 1 valuation methodology that are observable for
the asset or liability, either directly or indirectly. Level 2 inputs
include quoted prices for similar assets and liabilities in active markets and
inputs other than quoted prices observable for the asset or liability, such as
interest rates and yield curves observable at commonly quote
intervals. The Company’s assessment of the significance of a
particular input to the fair value measurement in its entirety requires
judgment, and considers factors specific to the asset or
liability. As of June 30, 2008, forward-starting interest rates swaps
are the only assets and liabilities that the Company measured at fair value
based on the FAS 157 fair valuation methodology.
As of
June 30, 2008 the Company had entered into eight forward-starting interest rate
swaps totaling a notional amount of $400 million with interest rates ranging
from 5.1% to 5.9% and settlements dates ranging from July 2008 to October
2011. These derivatives qualify for hedge accounting as they are
expected to economically hedge the cash flows associated with the refinancing of
debt that matures between July 2008 and October 2011. The fair value
of the derivatives decreased $1.9 million during the six months ended June 30,
2008 to a liability value of $10.2 million as of June 30, 2008, and the
derivative liability was recorded in other liabilities in the Company’s
condensed consolidated financial statements. The changes in the fair
values of the derivatives are reflected in accumulated other comprehensive
(loss) income in the Company’s condensed consolidated financial
statements. No hedge ineffectiveness on cash flow hedges was
recognized during the quarter ended June 30, 2008 and 2007.
During
April 2008, Essex obtained a $31.5 million loan secured by Park Hill at
Issaquah, a community located in Issaquah, Washington, with a fixed interest
rate of 5.5%, which matures in April 2018. In conjunction with
this transaction, the Company settled a $30.0 million forward-starting swap for
a $1.7 million payment to the counterparty. The amortization of the
loss on settlement of the swap increases the effective interest rate on the
mortgage loan to 6.1%.
During
June 2008, Essex obtained a $22.5 million loan secured by Hampton Place, a
community located in Los Angeles, with a fixed interest rate of 6.1%, which
matures in June 2018. In conjunction with this transaction, the
Company settled a $20.0 million forward-starting swap for a $0.1 million payment
to the counterparty. The amortization of the loss on settlement of
the swap increases the effective interest rate on the mortgage loan to
6.2%.
(9) Discontinued
Operations
In the
normal course of business, the Company will receive offers for sale of its
properties, either solicited or unsolicited. For those offers that are accepted,
the prospective buyer will usually require a due diligence period before
consummation of the transaction. It is not unusual for matters to
arise that result in the withdrawal or rejection of the offer during this
process. Essex classifies real estate as "held for sale" when all
criteria under SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (“SFAS 144”) have been met.
During
the first and second quarter of 2007, the Company sold 13 and 6 condominium
units at the Peregrine Point property and recorded a gain of approximately $0.6
million and $0.3 million net of taxes and expenses, respectively. The
Company has recorded the gain on sale of condominiums and operations for
Peregrine Point apartments as part of discontinued operations in the
accompanying condensed consolidated statements of operations.
As of
December 31, 2006, City Heights Apartments, a 687-unit community located in Los
Angeles was classified as held for sale, and during February 2007 the property
was sold to a third-party for $120 million. The Company’s share of
the proceeds from the sale totaled $33.9 million, resulting in a $13.7 million
gain on sale to the Company, and an additional $10.3 million for fees from the
City Heights joint venture partner are included in discontinued operations in
the accompanying condensed consolidated statements of operations.
In
December 2007, the Company sold four communities (875-units) in the Portland
metropolitan area and, as a result, has classified the results of operations for
these communities as discontinued operations for the three and six months ended
June 30, 2007.
The
components of discontinued operations are outlined below and include the results
of operations for the respective periods that the Company owned such assets, as
described above.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
revenues
|
|
$ |
- |
|
|
$ |
2,202 |
|
|
$ |
- |
|
|
$ |
5,699 |
|
Interest
and other income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
290 |
|
Revenues
|
|
|
- |
|
|
|
2,202 |
|
|
|
- |
|
|
|
5,989 |
|
Property
operating expenses
|
|
|
- |
|
|
|
(893 |
) |
|
|
- |
|
|
|
(2,318 |
) |
Interest
expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(417 |
) |
Depreciation
and amortization
|
|
|
- |
|
|
|
(536 |
) |
|
|
- |
|
|
|
(1,098 |
) |
Minority
interests
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(58 |
) |
Expenses
|
|
|
- |
|
|
|
(1,429 |
) |
|
|
- |
|
|
|
(3,891 |
) |
Gain
on sale of real estate
|
|
|
- |
|
|
|
303 |
|
|
|
- |
|
|
|
79,222 |
|
Equity
income co-investments
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Promote
interest and fees
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10,290 |
|
Minority
interests - OP units
|
|
|
- |
|
|
|
(18 |
) |
|
|
- |
|
|
|
(2,156 |
) |
Minority
interests - City Heights
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(64,624 |
) |
Net
gain on sale of real estate
|
|
|
- |
|
|
|
285 |
|
|
|
- |
|
|
|
22,732 |
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
Income
from discontinued operations
|
|
$ |
- |
|
|
$ |
1,058 |
|
|
$ |
- |
|
|
$ |
24,830 |
|
(10) Commitments
and Contingencies
The
Company is subject to various lawsuits in the normal course of its business
operations. Such lawsuits could have a material adverse effect on the
Company’s financial condition, results of operations or cash flows.
Item 2:
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion should be read in conjunction with our Condensed
Consolidated Financial Statements and accompanying Notes thereto included
elsewhere herein and with our 2007 Annual Report on Form 10-K for the year ended
December 31, 2007 and our Current Report on Form 10-Q for the quarter ended June
30, 2008.
The
Company is a fully integrated Real Estate Investment Trust (“REIT”), and its
property revenues are generated primarily from apartment community
operations. Our investment strategy has two
components: constant monitoring of existing markets, and evaluation
of new markets to identify areas with the characteristics that underlie rental
growth. Our strong financial condition supports our investment
strategy by enhancing our ability to quickly shift our acquisition, development,
and disposition activities to markets that will optimize the performance of the
portfolio.
As of
June 30, 2008, we had ownership interests in 133 apartment communities,
comprising 26,963 apartment units. Our apartment communities are
located in the following major West Coast regions:
Southern California (Ventura,
Los Angeles, Santa Barbara, Orange, Riverside and San Diego
counties)
Northern California (the San
Francisco Bay Area)
Seattle Metro (Seattle metropolitan
area)
Other Region (Houston,
Texas)
As of
June 30, 2008, the Company also had ownership interests in six office buildings,
two recreational vehicle parks (comprising 338 spaces) and one manufactured
housing community (containing 157 sites).
As of
June 30, 2008, the Company’s consolidated development pipeline, excluding
development projects owned by Fund II, was comprised of five development
projects, three predevelopment projects, and five land parcels held for future
development aggregating 2,715 units, with total incurred costs of $320.7
million, and estimated remaining project costs of approximately $509.3 million
for total estimated project costs of $830.0 million.
The
Company’s consolidated apartment communities are as follows:
|
|
As of June 30, 2008
|
|
|
|
|
|
As of June 30, 2007
|
|
|
|
|
|
|
Apartment Homes
|
|
|
%
|
|
|
Apartment Homes
|
|
|
%
|
|
Southern
California
|
|
|
12,725 |
|
|
|
52 |
% |
|
|
12,725 |
|
|
|
54 |
% |
Northern
California
|
|
|
6,361 |
|
|
|
26 |
% |
|
|
5,805 |
|
|
|
24 |
% |
Seattle
Metro
|
|
|
5,005 |
|
|
|
21 |
% |
|
|
5,005 |
|
|
|
21 |
% |
Other
Region
|
|
|
302 |
|
|
|
1 |
% |
|
|
302 |
|
|
|
1 |
% |
Total
|
|
|
24,393 |
|
|
|
100 |
% |
|
|
23,837 |
|
|
|
100 |
% |
Co-investments
including Fund II communities and communities sold in 2007 including City
Heights and the four Portland metropolitan communities are not included in the
table presented above for both periods presented.
Comparison
of the Three Months Ended June 30, 2008 to the Three Months Ended June 30,
2007
Our
average financial occupancies for the Company’s stabilized apartment communities
or “Quarterly Same-Properties” (stabilized properties consolidated by the
Company for the quarters ended June 30, 2008 and 2007) increased 60 basis points
to 96.4% as of June 30, 2008 from 95.8% as of June 30,
2007. Financial occupancy is defined as the percentage resulting from
dividing actual rental revenue by total possible rental revenue. Actual rental
revenue represents contractual rental revenue pursuant to leases without
considering delinquency and concessions. Total possible rental revenue
represents the value of all apartment units, with occupied units valued at
contractual rental rates pursuant to leases and vacant units valued at estimated
market rents. We believe that financial occupancy is a meaningful measure of
occupancy because it considers the value of each vacant unit at its estimated
market rate. Financial occupancy may not completely reflect short-term trends in
physical occupancy and financial occupancy rates as disclosed by other REITs may
not be comparable to our calculation of financial occupancy.
The
regional breakdown of the Company’s Quarterly Same-Property portfolio for
financial occupancy for the quarter ended June 30, 2008 and 2007 is as
follows:
|
|
Three
months ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
Southern
California
|
|
|
95.9 |
% |
|
|
95.3 |
% |
Northern
California
|
|
|
97.6 |
% |
|
|
96.5 |
% |
Seattle
Metro
|
|
|
96.6 |
% |
|
|
96.5 |
% |
Other
Region
|
|
|
85.8 |
% |
|
|
92.3 |
% |
The
following table illustrates a breakdown of revenue amounts, including revenues
attributable to the Quarterly Same-Properties.
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
June 30,
|
|
|
Dollar
|
|
|
Percentage
|
|
|
|
Properties
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Change
|
|
Property
Revenues (dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern
California
|
|
|
58 |
|
|
$ |
49,023 |
|
|
$ |
47,800 |
|
|
$ |
1,223 |
|
|
|
2.6
|
% |
Northern
California
|
|
|
18 |
|
|
|
19,696 |
|
|
|
17,908 |
|
|
|
1,788 |
|
|
|
10.0 |
|
Seattle
Metro
|
|
|
24 |
|
|
|
16,075 |
|
|
|
14,908 |
|
|
|
1,167 |
|
|
|
7.8 |
|
Other
Region
|
|
|
1 |
|
|
|
471 |
|
|
|
487 |
|
|
|
(16 |
) |
|
|
(3.3 |
) |
Total
Same-Property revenues
|
|
|
101 |
|
|
|
85,265 |
|
|
|
81,103 |
|
|
|
4,162 |
|
|
|
5.1 |
|
Non-Same
Property Revenues (1)
|
|
|
|
|
|
|
18,100 |
|
|
|
13,091 |
|
|
|
5,009 |
|
|
|
38.3 |
|
Total
property revenues
|
|
|
|
|
|
$ |
103,365 |
|
|
$ |
94,194 |
|
|
$ |
9,171 |
|
|
|
9.7
|
% |
(1) Includes properties acquired during
2007, eight redevelopment communities, three office buildings and one
development community.
Quarterly Same-Property
Revenues increased by $4.2 million or 5.1% to $85.3 million in the second
quarter of 2008 from $81.1 million in the second quarter of 2007. The
increase in the second quarter of 2008 was primarily attributable to the
increase in scheduled rents from the Quarterly Same-Properties which increased
$3.7 million or 4.6% compared to the second quarter of 2007. Average
rental rates for Quarterly Same-Property communities were $1,378 per unit in the
second quarter of 2008 compared to $1,318 per unit in the second quarter of
2007. Occupancy increased quarter over quarter by 60 basis points or
$0.3 million, and delinquency, rent concessions, and other income were
consistent between quarters.
Quarterly Non-Same Property
Revenues increased by $5.0 million or 38.3% to $18.1 million in the
second quarter of 2008 from $13.1 million in the second quarter of
2007. The increase was primarily due to nine operating properties
acquired since January 1, 2007 and eight properties that are in redevelopment
and classified in non-same property results.
Total Expenses increased $7.6
million or 9.1% to $90.2 million in the second quarter of 2008 from $82.7
million in the second quarter of 2007. Property operating expenses
including real estate taxes increased by $3.7 million or 11.9% for the quarter,
which is primarily due to the acquisition of nine new operating properties since
January 1, 2007 and annual increases in salaries and real estate
taxes. Depreciation expense increased by $4.1 million or 16.5% for
the second quarter 2008 compared to the second quarter of 2007, primarily due to
the acquisition of new properties totaling approximately $350.0 million and
capitalization of approximately $77.4 million of additions to rental properties
during 2007.
Income from discontinued
operations for the second quarter of 2007 includes operating results for
the four Portland metropolitan region communities, which were sold in the fourth
quarter of 2007, and the gain on sale of condominiums for $0.3
million. There was no income from discontinued operations during the
second quarter of 2008.
Comparison
of the Six Months Ended June 30, 2008 to the Six Months Ended June 30,
2007
Our
average financial occupancies for the Company’s stabilized apartment communities
or “2008/2007 Same-Properties” (stabilized properties consolidated by the
Company for the six months ended June 30, 2008 and 2007) increased 50 basis
points to 96.1% as of June 30, 2008 from 95.6% as of June 30, 2007.
The
regional breakdown of the Company’s 2008/2007 Same-Property portfolio for
financial occupancy for the six months ended June 30, 2008 and 2007 is as
follows:
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
Southern
California
|
|
|
95.5 |
% |
|
|
95.4 |
% |
Northern
California
|
|
|
97.3 |
% |
|
|
95.9 |
% |
Seattle
Metro
|
|
|
96.8 |
% |
|
|
96.1 |
% |
Other
Region
|
|
|
88.5 |
% |
|
|
91.3 |
% |
The
following table illustrates a breakdown of these revenue amounts, including
revenues attributable to 2008/2007 Same-Properties.
|
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
June 30,
|
|
|
Dollar
|
|
|
Percentage
|
|
|
|
Properties
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Change
|
|
Property
Revenues (dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern
California
|
|
|
57 |
|
|
$ |
94,922 |
|
|
$ |
92,666 |
|
|
$ |
2,256 |
|
|
|
2.4 |
% |
Northern
California
|
|
|
18 |
|
|
|
38,941 |
|
|
|
35,128 |
|
|
|
3,813 |
|
|
|
10.9 |
|
Seattle
Metro
|
|
|
23 |
|
|
|
30,569 |
|
|
|
28,139 |
|
|
|
2,430 |
|
|
|
8.6 |
|
Other
Region
|
|
|
1 |
|
|
|
964 |
|
|
|
979 |
|
|
|
(15 |
) |
|
|
(1.5 |
) |
Total
Same-Property revenues
|
|
|
99 |
|
|
|
165,396 |
|
|
|
156,912 |
|
|
|
8,484 |
|
|
|
5.4 |
|
Non-Same
Property Revenues (1)
|
|
|
|
|
|
|
39,446 |
|
|
|
26,948 |
|
|
|
12,498 |
|
|
|
46.4 |
|
Total
property revenues
|
|
|
|
|
|
$ |
204,842 |
|
|
$ |
183,860 |
|
|
$ |
20,982 |
|
|
|
11.4 |
% |
(1)
Includes properties acquired during 2007, ten redevelopment communities, three
office buildings, and one development community.
2008/2007 Same-Property Revenues
increased by $8.5 million or 5.4% to $165.4 million for the six months
ended June 30, 2008 compared to $156.9 million for the six months ended June 30,
2007. The increase for the six months ended June 30, 2008 was
primarily attributable to an increase in the scheduled rents from the 2008/2007
Same-Property portfolio which increased $7.9 million or 5.0%. Average
rental rates for 2008/2007 Same-Property communities were $1,378
per unit for the six months ended June 30, 2008 compared to $1,311 per unit for
the six months ended June 30, 2007. Occupancy increased for the six
months ended June 30, 2008 by 50 basis points or $0.5 million, and delinquency,
rent concessions, and other income were consistent between periods.
2008/2007 Non-Same Property
Revenues increased by $12.5 million or 46.4% to $39.4 million for the six
months ended June 30, 2008 from $26.9 million for the six months ended September
30, 2006. The increase was primarily due to nine operating
communities acquired since January 1, 2007.
Total Expenses increased
$20.0 million or 12.6% to $178.5 million for the six months ended June 30, 2008
compared to $158.5 million for the six months ended June 30,
2007. Property operating expenses including real estate taxes
increased by $7.1 million or 11.7% for the six months ended June 30, 2008, which
is primarily due to the acquisition of nine operating properties since January
1, 2007 and annual increases in salaries and real estate
taxes. Depreciation expense increased by $10.6 million or 23.2% for
six months ended June 30, 2008 compared to the six months ended June 30, 2007,
primarily due to the acquisition of new properties totaling approximately $350.0
million and capitalization of approximately $77.4 million of additions to rental
properties during 2007.
Equity income in co-investments
increased by $4.6 million due primarily to the repayment of the Company’s
remaining investment in the Mountain Vista, LLC joint venture for the six months
ended June 30, 2008. The Company recognized $6.3 million of preferred
income resulting from the final repayment of the investment for the six months
ended June 30, 2008, compared to $2.0 million recognized as income related to
the partial repayment of the investment for the six months ended June 30,
2007. The Company recorded equity income on its investment in Fund II
of $0.7 million for the six months ended June 30, 2008 compared to income of
$0.1 million for the six months ended June 30, 2007.
Income from discontinued
operations for the for the six months ended June 30, 2007 includes the
sale of the City Heights joint venture property for a gain of $13.7 million, net
of minority interest, and $10.3 million in fees from the City Heights joint
venture partner, and the gain on sale of condominiums for $0.9
million. Also included in the 2007 income from discontinued
operations are the operations from the sale of the four Portland metropolitan
region communities which occurred in the fourth quarter of
2007. There was no income from discontinued operations for the six
months ended June 30, 2008.
Liquidity
and Capital Resources
In June
2008, Standard and Poor's (“S&P”) reaffirmed its corporate credit rating of
BBB/Stable for Essex Property Trust, Inc. and Essex Portfolio L.P.
At June
30, 2008, the Company had $21.0 million of unrestricted cash and cash
equivalents. We believe that cash flows generated by our operations,
existing cash balances, availability under existing lines of credit, access to
capital markets and the ability to generate cash gains from the disposition of
real estate are sufficient to meet all of our reasonably anticipated cash needs
during 2008. The timing, source and amounts of cash flows provided by
financing activities and used in investing activities are sensitive to changes
in interest rates and other fluctuations in the capital markets environment,
which can affect our plans for acquisitions, dispositions, development and
redevelopment activities.
The
Company has a $200.0 million unsecured line of credit and, as of June 30, 2008,
there was $55.0 million outstanding balance on the line at an average interest
rate of 3.5%. This facility matures in March 2009, with an option for a one-year
extension. The underlying interest rate on this line is based on a tiered rate
structure tied to an S&P rating on the credit facility (currently BBB-) at
LIBOR plus 0.8%.
The
Company also has a $100 million credit facility from Freddie Mac, that is
secured by eight apartment communities and which matures in January
2009. As of June 30, 2008, we had $100 million outstanding under this
line of credit at an average interest rate of 3.1%. The underlying interest rate
on this line is between 55 and 59 basis points over the Freddie Mac Reference
Rate. The Company has signed a letter of commitment to enter into a
new five-year secured line of credit facility to replace the existing secured
line of credit facility that matures in January 2009. The new secured
facility will expand the existing secured facility from $100 million to $150
million, and the new facility is expandable to $250 million. The
Company anticipates that the closing date for the new secured facility will
occur during the fourth quarter of 2008. In March 2007, the Company
entered into an unsecured revolving line of credit for $10.0 million with a
commercial bank with a current extended maturity date of March
2009. Borrowing under this revolving line of credit are at the bank’s
Prime Rate less 2.0%. As of June 30, 2008 there was a no balance on
the revolving line of credit. The line is used to fund short-term
working capital needs. The Company’s line of credit agreements
contain debt covenants related to limitations on indebtedness and liabilities,
maintenance of minimum levels of consolidated earnings before depreciation,
interest and amortization and maintenance of minimum tangible net
worth. The Company was in compliance with the line of credit
covenants as of June 30, 2008 and December 31, 2007.
During
the first quarter of 2007, the Company filed a new shelf registration statement
with the SEC, allowing the Company to sell an undetermined number or amount of
certain equity and debt securities as defined in the prospectus.
The
Company may from time to time sell shares of common stock into the existing
trading market at current market prices through its Controlled Equity Offering
program with Cantor Fitzgerald & Co. During the first six months
ended June 30, 2008, no shares were sold under this program.
In August
2007, the Company’s Board of Directors authorized a stock repurchase plan to
allow the Company to acquire shares in an aggregate of up to $200
million. The program supersedes the common stock repurchase plan that
Essex announced on May 16, 2001. During January 2008, the Company
under its stock repurchase program repurchased and retired 143,400 shares of its
common stock for approximately $13.7 million, at an average stock price of
$95.64 per share. The Company has authorization to repurchase an
additional $154 million under the stock repurchase plan.
The
Company sold 5,980,000 shares of 4.875% Series G Cumulative Convertible
Preferred Stock for gross proceeds of $149.5 million during the third quarter of
2006. Holders may convert Series G Preferred Stock into shares of the
Company’s common stock subject to certain conditions. The conversion
rate was initially 0.1830 shares of common stock per the $25 share liquidation
preference, which is equivalent to an initial conversion price of approximately
$136.62 per share of common stock (the conversion rate will be subject to
adjustment upon the occurrence of specified events). The conversion
rate is currently 0.1842 shares of common stock per $25 per share liquidation
preference. On or after July 31, 2011, the Company may, under certain
circumstances, cause some or all of the Series G Preferred Stock to be converted
into shares of common stock at the then prevailing conversion rate.
The
Company, through its Operating Partnership, has $225 million of outstanding
exchangeable senior notes (the “Notes”) with a coupon of 3.625% due 2025. The
Notes are senior unsecured obligations of the Operating Partnership, and are
fully and unconditionally guaranteed by the Company. On or after
November 1, 2020, the Notes will be exchangeable at the option of the holder
into cash and, in certain circumstances at Essex’s option, shares of the
Company’s common stock at an initial exchange price of $103.25 per share subject
to certain adjustments. The Notes will also be exchangeable prior to
November 1, 2020, but only upon the occurrence of certain specified
events. On or after November 4, 2010, the Operating Partnership may
redeem all or a portion of the Notes at a redemption price equal to the
principal amount plus accrued and unpaid interest (including additional
interest, if any). Note holders may require the Operating Partnership
to repurchase all or a portion of the Notes at a purchase price equal to the
principal amount plus accrued and unpaid interest (including additional
interest, if any) on the Notes on November 1, 2010, November 1, 2015 and
November 1, 2020.
As
of June 30, 2008, our mortgage notes payable totaled $1.4 billion which
consisted of $1.1 billion in fixed rate debt with interest rates varying from
4.86% to 8.18% and maturity dates ranging from 2008 to 2018 and $243.1 million
of tax-exempt variable rate demand bonds with a weighted average interest rate
of 3.6%. The tax-exempt variable rate demand bonds have maturity dates ranging
from 2009 to 2039, and are subject to interest rate caps.
The
Company pays quarterly dividends from cash available for distribution. Until it
is distributed, cash available for distribution is invested by the Company
primarily in short-term investment grade securities or is used by the Company to
reduce balances outstanding under its line of credit.
The
Company’s current financing activities have not been severely impacted by the
tightening in the credit markets. Our strong balance sheet, the
established relationships with our unsecured line of credit bank group and
access to Fannie Mae and Freddie Mac secured debt financing have mitigated the
impact to us of the turmoil being experienced by many other real estate
companies. Recently, we have experienced some expansion in credit
spreads as Fannie Mae and Freddie Mac’s tier 4 financing are currently at
approximately 200 basis points over the relevant U.S. treasury
securities.
Derivative
Activity
As of
June 30, 2008 the Company had entered into eight forward-starting interest rate
swaps totaling a notional amount of $400 million with interest rates ranging
from 5.1% to 5.9% and settlements dates ranging from July 2010 to October
2011. These derivatives are expected to economically hedge the cash
flows associated with the refinancing of debt that matures between July 2008 and
October 2011 and they qualify for hedge accounting under FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The
fair value of the derivatives decreased $1.9 million during the six months ended
June 30, 2008 to a liability value of $10.2 million as of June 30, 2008, and the
derivative liability was recorded in other liabilities in the Company’s
condensed consolidated financial statements. The changes in the fair
values of the derivatives are reflected in accumulated other comprehensive
(loss) income in the Company’s condensed consolidated financial
statements. No hedge ineffectiveness on cash flow hedges was
recognized during the quarter ended June 30, 2008 and 2007.
During
April 2008, The Company obtained a $31.5 million loan secured by Park Hill at
Issaquah, a community located in Issaquah, Washington, with a fixed interest
rate of 5.5%, which matures in April 2018. In conjunction with
this transaction, the Company settled a $30.0 million forward-starting swap for
a $1.7 million payment to the counterparty. The amortization of the
loss on settlement of the swap increases the effective interest rate on the
mortgage loan to 6.1%.
During
June 2008, The Company obtained a $22.5 million loan secured by Hampton Place, a
community located in Los Angeles, with a fixed interest rate of 6.1%, which
matures in June 2018. In conjunction with this transaction, the
Company settled a $20.0 million forward-starting swap for a $0.1 million payment
to the counterparty. The amortization of the loss on settlement of
the swap increases the effective interest rate on the mortgage loan to
6.2%.
Development
and Predevelopment Pipeline
The
Company defines development activities as new properties that are being
constructed, or are newly constructed and, in the case of development
communities, are in a phase of lease-up and have not yet reached stabilized
operations. As of June 30, 2008, excluding development projects owned
by Fund II, the Company had five development projects comprised of 1,263 units
for an estimated cost of $486.5 million, of which $285.2 million remains to be
expended.
The
Company defines the predevelopment pipeline as new properties in negotiation or
in the entitlement process with a high likelihood of becoming development
activities. As of June 30, 2008, the Company had three development
communities totaling an estimated 1,018 units that were classified as
predevelopment projects. The estimated total cost of the
predevelopment pipeline at June 30, 2008 was $316.9 million, of which $224.1
million remains to be expended. The Company may also acquire
land for future development purposes. The Company owned five
land parcels held for future development aggregating an estimated 434 units as
of June 30, 2008. The Company had incurred $26.6 million in costs related to
these five land parcels as of June 30, 2008.
The
Company expects to fund the development pipeline by using a combination of some
or all of the following sources: its working capital, amounts available on its
lines of credit, net proceeds from public and private equity and debt issuances,
and proceeds from the disposition of properties, if any.
Redevelopment
The
Company defines redevelopment activities as existing properties owned or
recently acquired, which have been targeted for additional investment by the
Company with the expectation of increased financial returns through property
improvement. The Company’s redevelopment strategy strives to improve
the financial and physical aspects of the Company’s redevelopment apartment
communities and to target at least a 10 percent return on the incremental
renovation investment. Many of the Company’s properties are older and
in excellent neighborhoods, providing lower density with large floor plans that
represent attractive redevelopment opportunities. During
redevelopment, apartment units may not be available for rent and, as a result,
may have less than stabilized operations. As of June 30, 2008, the
Company had eleven redevelopment communities aggregating 3,344 apartment units
with estimated redevelopment costs of $123.7 million, of which approximately
$59.8 million remains to be expended. These amounts exclude two
redevelopment projects owned by Fund II.
Alternative
Capital Sources
Fund II
has eight institutional investors, and the Company, with combined partner equity
commitments of $265.9 million. Essex has committed $75.0 million to
Fund II, which represents a 28.2% interest as general partner and limited
partner. Fund II utilizes leverage equal to approximately 55%
upon the initial acquisition of the underlying real estate. Fund II
invested in apartment communities in the Company’s targeted West Coast markets
and, as of June 30, 2008, owned eleven apartment communities and three
development projects. Essex records revenue for its asset management,
property management, development and redevelopment services when earned, and
promote income when realized if Fund II exceeds certain financial return
benchmarks.
Contractual
Obligations and Commercial Commitments
The
following table summarizes the maturation or due dates of our contractual
obligations and other commitments at June 30, 2008, and the effect these
obligations could have on our liquidity and cash flow in future
periods:
|
|
|
|
|
2009
and
|
|
|
2011
and
|
|
|
|
|
|
|
|
(In
thousands)
|
|
2008
|
|
|
2010
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
Mortgage
notes payable
|
|
$ |
88,991 |
|
|
$ |
190,932 |
|
|
$ |
184,385 |
|
|
$ |
920,914 |
|
|
$ |
1,385,222 |
|
Exchangeable
bonds
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
225,000 |
|
|
|
225,000 |
|
Lines
of credit
|
|
|
- |
|
|
|
155,000 |
|
|
|
- |
|
|
|
- |
|
|
|
155,000 |
|
Interest
on indebtedness
|
|
|
37,591 |
|
|
|
94,638 |
|
|
|
56,350 |
|
|
|
180,340 |
|
|
|
368,919 |
|
Development
commitments
|
|
|
65,800 |
|
|
|
306,400 |
|
|
|
101,000 |
|
|
|
36,200 |
|
|
|
509,400 |
|
Redevelopment
commitments
|
|
|
19,800 |
|
|
|
40,000 |
|
|
|
- |
|
|
|
- |
|
|
|
59,800 |
|
Essex
Apartment Value Fund II, L.P. capital commitment
|
|
|
9,858 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,858 |
|
|
|
$ |
222,040 |
|
|
$ |
786,970 |
|
|
$ |
341,735 |
|
|
$ |
1,362,454 |
|
|
$ |
2,713,199 |
|
Critical
Accounting Policies and Estimates
The
preparation of condensed consolidated financial statements, in accordance with
U.S. generally accepted accounting principles requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosures of contingent assets and
liabilities. We define critical accounting policies as those accounting policies
that require our management to exercise their most difficult, subjective and
complex judgments. Our critical accounting policies relate principally to the
following key areas: (i) consolidation under applicable accounting standards for
entities that are not wholly owned; (ii) assessing the carrying values of our
real estate properties and investments in and advances to joint ventures and
affiliates; (iii) internal cost capitalization; and (iv) qualification as a
REIT. The Company bases its estimates on historical experience, current market
conditions, and on various other assumptions that are believed to be reasonable
under the circumstances. Actual results may differ from those estimates made by
management.
The
Company’s critical accounting policies and estimates have not changed materially
from information reported in "Critical Accounting Policies and Estimates"
included in Management's Discussion and Analysis of Financial Condition and
Results of Operations in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2007.
Forward
Looking Statements
Certain
statements in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and elsewhere in this quarterly report on Form 10-Q
which are not historical facts may be considered forward looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended, including
statements regarding the Company's expectations, hopes, intentions, beliefs and
strategies regarding the future. Forward looking statements include statements
regarding the Company’s expectations as to the timing of completion of current
development and redevelopment projects and the stabilization dates of such
projects, expectation as to the total projected costs of predevelopment,
development and redevelopment projects, beliefs as to our ability to meet our
cash needs during 2008 and to provide for dividend payments in accordance with
REIT requirements, the Company’s and Fund II’s development and redevelopment
pipeline, statements regarding the anticipated closing date of the Company’s new
line of credit facility, and statements regarding the Company's financing
activities.
Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors including, but not limited to, that the Company will fail to
achieve its business objectives, that the actual completion of development and
redevelopment projects will be subject to delays, that the stabilization dates
of such projects will be delayed, that the total projected costs of current
predevelopment, development and redevelopment projects will exceed expectations,
that such development and redevelopment projects will not be completed, that
development and redevelopment projects and acquisitions will fail to meet
expectations, that estimates of future income from an acquired property may
prove to be inaccurate, 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 there may be a downturn in
the markets in which the Company's properties are located, that the terms of any
refinancing may not be as favorable as the terms of existing indebtedness, as
well as those risks, special considerations, and other factors discussed under
the caption "Potential Factors Affecting Future Operating Results" below and
those discussed in Item 1A, “Risk Factors,” of the Company's Annual Report on
Form 10-K for the year ended December 31, 2007, and those risk factors and
special considerations set forth in the Company's other filings with the
Securities and Exchange Commission (the “SEC”) which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. All forward-looking statements are
made as of the date hereof, and the Company assumes no obligation to update this
information.
Funds
from Operations (“FFO”)
FFO is a
financial measure that is commonly used in the REIT industry. The
Company presents funds from operations as a supplemental performance
measure. FFO is not used by the Company as, nor should it be
considered to be, an alternative to net earnings computed under GAAP as an
indicator of the Company’s operating performance or as an alternative to cash
from operating activities computed under GAAP as an indicator of the Company’s
ability to fund its cash needs.
FFO is
not meant to represent a comprehensive system of financial reporting and does
not present, nor does the Company intend it to present, a complete picture of
its financial condition and operating performance. The Company
believes that net earnings computed under GAAP remain the primary measure of
performance and that FFO is only meaningful when it is used in conjunction with
net earnings. Further, the Company believes that its consolidated financial
statements, prepared in accordance with GAAP, provide the most meaningful
picture of its financial condition and its operating performance.
In
calculating FFO, the Company follows the definition for this measure published
by the National Association of REITs (“NAREIT”), which is a REIT trade
association. The Company believes that, under the NAREIT FFO
definition, the two most significant adjustments made to net income are (i) the
exclusion of historical cost depreciation and (ii) the exclusion of gains and
losses from the sale of previously depreciated properties. The
Company agrees that these two NAREIT adjustments are useful to investors for the
following reasons:
(a) historical cost
accounting for real estate assets in accordance with GAAP assumes, through
depreciation charges, that the value of real estate assets diminishes
predictably over time. NAREIT stated in its White Paper on Funds from Operations
“since real estate asset values have historically risen or fallen with market
conditions, many industry investors have considered presentations of operating
results for real estate companies that use historical cost accounting to be
insufficient by themselves.” Consequently, NAREIT’s definition of FFO reflects
the fact that real estate, as an asset class, generally appreciates over time
and depreciation charges required by GAAP do not reflect the underlying economic
realities.
(b) REITs were created as a
legal form of organization in order to encourage public ownership of real estate
as an asset class through investment in firms that were in the business of
long-term ownership and management of real estate. The exclusion, in
NAREIT’s definition of FFO, of gains and losses from the sales of previously
depreciated operating real estate assets allows investors and analysts to
readily identify the operating results of the long-term assets that form the
core of a REIT’s activity and assists in comparing those operating results
between periods.
Management
believes that is has consistently applied the NAREIT definition of FFO to all
periods presented. However, there is judgment involved and other
REITs’ calculation of FFO may vary from the NAREIT definition for this measure,
and thus their disclosure of FFO may not be comparable to the Company’s
calculation.
The
following table sets forth the Company’s calculation of FFO for the three and
six months ended June 30, 2008 and 2007 (in thousands except for per share
data):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$ |
9,688 |
|
|
$ |
9,877 |
|
|
$ |
25,392 |
|
|
$ |
45,180 |
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
28,683 |
|
|
|
25,166 |
|
|
|
56,417 |
|
|
|
46,884 |
|
Gains
not included in FFO
|
|
|
- |
|
|
|
(461 |
) |
|
|
- |
|
|
|
(14,501 |
) |
Minority
interests and co-investments (1)
|
|
|
1,892 |
|
|
|
1,915 |
|
|
|
4,319 |
|
|
|
4,321 |
|
Funds
from operations
|
|
$ |
40,263 |
|
|
$ |
36,497 |
|
|
$ |
86,128 |
|
|
$ |
81,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
from operations per share - diluted
|
|
$ |
1.46 |
|
|
$ |
1.32 |
|
|
$ |
3.13 |
|
|
$ |
3.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number shares outstanding diluted (2)
|
|
|
27,623,939 |
|
|
|
27,592,976 |
|
|
|
27,527,622 |
|
|
|
27,192,463 |
|
(1)
|
Amount
includes the following: (i) minority interest related to Operating
Partnership units, and (ii) depreciation add back for
co-investments.
|
(2)
|
Assumes conversion of all
dilutive outstanding operating partnership interests in the Operating
Partnership.
|
Item 3: Quantitative and Qualitative Disclosures About Market
Risks
Interest
Rate Hedging Activities
The
Company’s objective in using derivatives is to add stability to interest expense
and to manage its exposure to interest rate movements or other identified
risks. To accomplish this objective, the Company primarily uses
interest rate swaps as part of its cash flow hedging
strategy. Interest rate swaps designated as cash flow hedges involve
the receipt of variable-rate amounts in exchange for fixed-rate payments over
the life of the agreements without exchange of the underlying principal
amount. As of June 30, 2008, we had entered into eight
forward-starting swap contracts to mitigate the risk of changes in the
interest-related cash outflows on forecasted issuance of long-term
debt. The forward-starting swaps are cash flow hedges of the
variability in ten years of forecasted interest payments associated with the
refinancing of the Company’s long-term debt between 2008 and 2011. As of June
30, 2008, the Company also had $243.1 million of variable rate indebtedness, of
which $179.5 million is subject to interest rate cap
protection. All derivative instruments are designated as cash
flow hedges, and the Company does not have any fair value hedges as of June 30,
2008.
The
following table summarizes the notional amount, carrying value, and estimated
fair value of our derivative instruments used to hedge interest rates as of June
30, 2008. The notional amount represents the aggregate amount
of a particular security that is currently hedged at one time, but does not
represent exposure to credit, interest rates or market risks. The table also
includes a sensitivity analysis to demonstrate the impact on our derivative
instruments from an increase or decrease in 10-year Treasury bill interest rates
by 50 basis points, as of June 30, 2008.
|
|
|
|
|
|
|
|
Carrying
and
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Maturity
|
|
|
Estimate
Fair
|
|
|
+
50
|
|
|
-
50
|
|
(Dollars
in thousands)
|
|
Amount
|
|
|
Date Range
|
|
|
Value
|
|
|
Basis Points
|
|
|
Basis Points
|
|
Cash
flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate forward-starting swaps
|
|
$ |
400,000 |
|
|
|
2008-2011 |
|
|
$ |
(10,318 |
) |
|
$ |
3,174 |
|
|
$ |
(26,899 |
) |
Interest
rate caps
|
|
|
179,523 |
|
|
|
2008-2011 |
|
|
|
69 |
|
|
|
161 |
|
|
|
24 |
|
Total
cash flow hedges
|
|
$ |
579,523 |
|
|
|
2007-2011 |
|
|
$ |
(10,249 |
) |
|
$ |
3,335 |
|
|
$ |
(26,875 |
) |
Interest
Rate Sensitive Liabilities
The
Company is exposed to interest rate changes primarily as a result of its line of
credit and long-term debt used to maintain liquidity and fund capital
expenditures and expansion of the Company’s real estate investment portfolio and
operations. The Company’s interest rate risk management objective is to limit
the impact of interest rate changes on earnings and cash flows and to lower its
overall borrowing costs. To achieve its objectives the Company borrows primarily
at fixed rates and may enter into derivative financial instruments such as
interest rate swaps, caps and treasury locks in order to mitigate its interest
rate risk on a related financial instrument. The Company does not enter into
derivative or interest rate transactions for speculative
purposes.
The
Company’s interest rate risk is monitored using a variety of techniques. The
table below presents the principal amounts and weighted average interest rates
by year of expected maturity to evaluate the expected cash flows. Management
believes that the carrying amounts of its LIBOR debt approximates fair value as
of June 30, 2008 because interest rates, yields and other terms for these
instruments are consistent with yields and other terms currently available to
the Company for similar instruments. Management has estimated that the fair
value of the Company’s $1.37 billion of fixed rate mortgage notes payable and
exchangeable bonds at June 30, 2008 is approximately $1.42 billion based on the
terms of existing mortgage notes payable compared to those available in the
marketplace.
For
the Years Ended
|
|
2008(1)
|
|
|
2009
|
|
|
2010(2)
|
|
|
2011(3)
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
Fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate debt
|
|
$ |
88,991 |
|
|
|
23,456 |
|
|
|
153,591 |
|
|
|
152,004 |
|
|
|
31,872 |
|
|
|
917,210 |
|
|
$ |
1,367,124 |
|
|
$ |
1,415,151 |
|
Average
interest rate
|
|
|
6.7 |
% |
|
|
6.4 |
% |
|
|
8.1 |
% |
|
|
6.4 |
% |
|
|
5.4 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
Variable
rate debt
|
|
$ |
- |
|
|
|
168,885 |
|
|
|
- |
|
|
|
509 |
|
|
|
- |
|
|
|
228,704 |
(4) |
|
$ |
398,098 |
|
|
$ |
398,098 |
|
Average
interest
|
|
|
- |
|
|
|
3.4 |
% |
|
|
- |
|
|
|
4.0 |
% |
|
|
- |
|
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
(1) $25
million covered by a forward-starting swap at a fixed rate of 5.082%, with a
settlement date on or before January 1, 2009.
(2) $150
million covered by three forward-starting swaps with fixed rates ranging from
5.099% to 5.824%, with a settlement date on or before January 1,
2011.
(3) $125
million covered by forward-starting swaps with fixed rates ranging from 5.655%
to 5.8795%, with a settlement date on or before February 1, 2011. $50
million covered by a forward-starting swap with a fixed rate of 5.535%, with a
settlement date on or before July, 1 2011. $50 million covered by a
forward-starting swap with a fixed rate of 5.343%., with a settlement date on or
before October 1, 2011. The Company intends to encumber certain
unencumbered assets during 2011 in conjunction with the settlement of these
forward-starting swaps.
(4)
$179.5 million subject to interest rate caps.
The table
incorporates only those exposures that exist as of June 30, 2008; it does not
consider those exposures or positions that could arise after that date. As a
result, our ultimate realized gain or loss, with respect to interest rate
fluctuations, would depend on the exposures that arise during the period, our
hedging strategies at the time, and interest rates.
Item 4: Controls and Procedures
As of
June 30, 2008, we carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rules 13a-15 of the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting management
to material information relating to the Company that is required to be included
in our periodic filings with the Securities and Exchange
Commission. There were no changes in the Company’s internal control
over financial reporting, that occurred during the quarter ended June 30, 2008,
that have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.
Part
II -- Other Information
Item 1: Legal Proceedings
Recently
there has been an increasing number of lawsuits against owners and managers of
apartment communities 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. The
Company has been sued for mold related matters and has settled some, but not
all, of such matters. Insurance carriers have reacted to mold related
liability awards by excluding mold related claims from standard policies and
pricing mold endorsements at prohibitively high rates. The Company
has, however, purchased pollution liability insurance, which includes some
coverage for mold. The Company has adopted policies for promptly
addressing and resolving reports of mold when it is detected, and to minimize
any impact mold might have on residents of the property. The Company
believes its mold policies and proactive response to address any known
existence, reduces its risk of loss from these cases. There can be no
assurances that the Company has identified and responded to all mold
occurrences, but the Company promptly addresses all known reports of
mold. Liabilities resulting from such mold related matters are not
expected to have a material adverse effect on the Company’s financial condition,
results of operations or cash flows. As of June 30, 2008, no
potential liabilities for mold and other environmental liabilities are
quantifiable and an estimate of possible loss cannot be made.
The
Company carries comprehensive liability, fire, extended coverage and rental loss
insurance for each of the Properties. There are, however, certain types of
extraordinary losses, such as, for example, losses for terrorism or earthquake,
for which the Company does not have insurance coverage. Substantially all of the
Properties are located in areas that are subject to earthquake
activity.
The
Company is subject to various other lawsuits in the normal course of its
business operations. Such lawsuits could have a material adverse
effect on the Company’s financial condition, results of operations or cash
flows.
In
evaluating all forward-looking statements, you should specifically consider
various factors that may cause actual results to vary from those contained in
the forward-looking statements. Many factors affect the Company’s
actual financial performance and may cause the Company’s future results to be
different from past performance or trends. These factors include
those set forth under the caption “Risk Factors” in Item 1A of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2007 as filed with
the SEC and available at www.sec.gov, under
the caption “Potential Factors Affecting Future Operating Results,” and the
following:
Development
and Redevelopment Activities
The
Company pursues development and redevelopment projects of apartment communities
from time to time. These investments generally require various government and
other approvals, the receipt of which cannot be assured. The Company's
development and redevelopment 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;
|
|
·
|
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 project may be higher than
anticipated.
|
These
risks may reduce the funds available for distribution to the Company's
stockholders. Further, the development and redevelopment of properties is also
subject to the general risks associated with real estate
investments.
Interest
Rate Fluctuations
The
Company monitors changes in interest rates and believes that it is well
positioned from both a liquidity and interest rate risk
perspective. The immediate effect of significant and rapid interest
rate increases would result in higher interest expense on the Company's variable
interest rate debt. The effect of prolonged interest rate increases could
negatively impact the Company's ability to make acquisitions and develop
properties and the Company's ability to refinance existing borrowings at
acceptable rates and negatively impact the current dividend rate.
Item 4: Submissions of Matters to a Vote of Security
Holders
At the
Company’s annual meeting, held on May 6, 2008 in Menlo Park, California, the
following votes of security holders occurred:
|
(a)
|
The
following persons were duly elected by the stockholders of the Company as
Class II directors of the Company, each for a three (3) year term (until
2011) and until their successors are elected and
qualified:
|
|
(1)
|
David
W. Brady, 21,201,288 votes for and 405,413 votes
withheld;
|
|
(2)
|
Robert
E. Larson, 21,202,082 votes for and 404,619 votes withheld;
and
|
|
(3)
|
Michael
J. Schall, 21,155,371 votes for and 451,330 votes withheld;
and
|
|
(4)
|
Willard
H. Smith, Jr., 21,201,213 votes for and 405,488 votes withheld;
and
|
|
(b)
|
The
stockholders ratified the appointment of KPMG LLP as the Company’s
independent public auditors for the year ended December 31, 2008 by a vote
of 21,532,132 for, 62,053 votes against and 12,514 votes
abstaining.
|
|
|
Ratio
of Earnings to Fixed Charges
|
|
|
Certification
of Keith R. Guericke, Chief Executive Officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
|
Certification
of Michael T. Dance, Chief Financial Officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
|
Certification
of Keith R. Guericke, Chief Executive Officer, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
Certification
of Michael T. Dance, Chief Financial Officer, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
__________
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
ESSEX
PROPERTY TRUST, INC.
|
|
(Registrant)
|
|
|
|
|
|
|
|
Date:
August 6, 2008
|
|
|
|
|
|
|
|
|
By: /S/
MICHAEL T. DANCE
|
|
|
|
|
Michael
T. Dance
|
|
Executive
Vice President, Chief Financial Officer
|
|
(Authorized
Officer, Principal Financial Officer)
|
|
|
|
|
|
|
|
|
|
|
|
/S/ BRYAN
HUNT
|
|
|
|
|
Bryan
Hunt
|
|
Vice
President, Chief Accounting Officer
|
28