form10-q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended September 30, 2008
OR
o 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 x
NO o
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 x
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company o
|
|
|
(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 o No x
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:
26,795,274
shares of Common Stock as of October 30, 2008
ESSEX PROPERTY TRUST, INC.
FORM
10-Q
INDEX
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|
Page No.
|
PART
I. FINANCIAL INFORMATION
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3
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4
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5
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6
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7
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8
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17
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25
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26
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PART
II. OTHER INFORMATION
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26
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27
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28
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28
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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)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
Rental
properties:
|
|
|
|
|
|
|
Land
and land improvements
|
|
$ |
669,322 |
|
|
$ |
670,494 |
|
Buildings
and improvements
|
|
|
2,485,788 |
|
|
|
2,447,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,155,110 |
|
|
|
3,117,759 |
|
Less
accumulated depreciation
|
|
|
(612,249 |
) |
|
|
(541,987 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
2,542,861 |
|
|
|
2,575,772 |
|
Real
estate - held for sale, net
|
|
|
15,983 |
|
|
|
- |
|
Real
estate under development
|
|
|
347,979 |
|
|
|
233,445 |
|
Co-investments
|
|
|
66,363 |
|
|
|
64,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2,973,186 |
|
|
|
2,873,408 |
|
Cash
and cash equivalents-unrestricted
|
|
|
33,404 |
|
|
|
9,956 |
|
Cash
and cash equivalents-restricted
|
|
|
12,552 |
|
|
|
12,527 |
|
Marketable
securities
|
|
|
58,614 |
|
|
|
2,017 |
|
Receivables
from related parties
|
|
|
967 |
|
|
|
904 |
|
Notes
and other receivables
|
|
|
45,782 |
|
|
|
49,632 |
|
Prepaid
expenses and other assets
|
|
|
23,474 |
|
|
|
20,286 |
|
Deferred
charges, net
|
|
|
11,347 |
|
|
|
11,593 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,159,326 |
|
|
$ |
2,980,323 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Mortgage
notes payable
|
|
$ |
1,341,327 |
|
|
$ |
1,262,873 |
|
Mortgage
notes payable - held for sale
|
|
|
10,799 |
|
|
|
- |
|
Exchangeable
bonds
|
|
|
225,000 |
|
|
|
225,000 |
|
Lines
of credit
|
|
|
153,000 |
|
|
|
169,818 |
|
Accounts
payable and accrued liabilities
|
|
|
64,759 |
|
|
|
52,783 |
|
Construction
payable
|
|
|
20,089 |
|
|
|
5,365 |
|
Dividends
payable
|
|
|
32,037 |
|
|
|
28,521 |
|
Other
liabilities
|
|
|
16,672 |
|
|
|
17,773 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,863,683 |
|
|
|
1,762,133 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
279,930 |
|
|
|
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 24,943,675 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
|
|
|
982,754 |
|
|
|
857,109 |
|
Distributions
in excess of accumulated earnings
|
|
|
(122,044 |
) |
|
|
(82,805 |
) |
Accumulated
other comprehensive income (loss)
|
|
|
(15,911 |
) |
|
|
(8,988 |
) |
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
869,801 |
|
|
|
790,318 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
3,159,326 |
|
|
$ |
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
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other property
|
|
$ |
102,907 |
|
|
$ |
95,012 |
|
|
$ |
302,898 |
|
|
$ |
275,747 |
|
Management
and other fees from affiliates
|
|
|
1,311 |
|
|
|
1,268 |
|
|
|
3,965 |
|
|
|
3,662 |
|
|
|
|
104,218 |
|
|
|
96,280 |
|
|
|
306,863 |
|
|
|
279,409 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
operating, excluding real estate taxes
|
|
|
25,719 |
|
|
|
22,949 |
|
|
|
74,625 |
|
|
|
66,707 |
|
Real
estate taxes
|
|
|
8,630 |
|
|
|
8,185 |
|
|
|
24,904 |
|
|
|
23,298 |
|
Depreciation
and amortization
|
|
|
27,952 |
|
|
|
24,169 |
|
|
|
82,564 |
|
|
|
69,036 |
|
Interest
|
|
|
19,399 |
|
|
|
19,459 |
|
|
|
57,835 |
|
|
|
57,688 |
|
Amortization
of deferred financing costs
|
|
|
686 |
|
|
|
701 |
|
|
|
2,109 |
|
|
|
2,054 |
|
General
and administrative
|
|
|
6,524 |
|
|
|
6,415 |
|
|
|
19,600 |
|
|
|
18,519 |
|
|
|
|
88,910 |
|
|
|
81,878 |
|
|
|
261,637 |
|
|
|
237,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from operations
|
|
|
15,308 |
|
|
|
14,402 |
|
|
|
45,226 |
|
|
|
42,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of real estate
|
|
|
2,446 |
|
|
|
- |
|
|
|
2,446 |
|
|
|
- |
|
Interest
and other income
|
|
|
2,847 |
|
|
|
2,407 |
|
|
|
8,048 |
|
|
|
7,454 |
|
Equity
income in co-investments
|
|
|
335 |
|
|
|
322 |
|
|
|
7,325 |
|
|
|
2,767 |
|
Minority
interests
|
|
|
(5,666 |
) |
|
|
(5,088 |
) |
|
|
(16,929 |
) |
|
|
(15,459 |
) |
Income
before discontinued operations
|
|
|
15,270 |
|
|
|
12,043 |
|
|
|
46,116 |
|
|
|
36,869 |
|
Income
(loss) from discontinued operations (net of minority
interests)
|
|
|
(584 |
) |
|
|
265 |
|
|
|
(1,417 |
) |
|
|
25,172 |
|
Net
income
|
|
|
14,686 |
|
|
|
12,308 |
|
|
|
44,699 |
|
|
|
62,041 |
|
Dividends
to preferred stockholders
|
|
|
(2,310 |
) |
|
|
(2,311 |
) |
|
|
(6,931 |
) |
|
|
(6,864 |
) |
Net
income available to common stockholders
|
|
$ |
12,376 |
|
|
$ |
9,997 |
|
|
$ |
37,768 |
|
|
$ |
55,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
common share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before discontinued operations available to common
stockholders
|
|
$ |
0.52 |
|
|
$ |
0.39 |
|
|
$ |
1.58 |
|
|
$ |
1.23 |
|
Income
(loss) from discontinued operations
|
|
|
(0.02 |
) |
|
|
0.01 |
|
|
|
(0.06 |
) |
|
|
1.03 |
|
Net
income available to common stockholders
|
|
$ |
0.50 |
|
|
$ |
0.40 |
|
|
$ |
1.52 |
|
|
$ |
2.26 |
|
Weighted
average number of common shares outstanding during the
period
|
|
|
25,110,710 |
|
|
|
25,165,276 |
|
|
|
24,876,611 |
|
|
|
24,370,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before discontinued operations available to common
stockholders
|
|
$ |
0.51 |
|
|
$ |
0.38 |
|
|
$ |
1.56 |
|
|
$ |
1.20 |
|
Income
(loss) from discontinued operations
|
|
|
(0.02 |
) |
|
|
0.01 |
|
|
|
(0.06 |
) |
|
|
1.01 |
|
Net
income available to common stockholders
|
|
$ |
0.49 |
|
|
$ |
0.39 |
|
|
$ |
1.50 |
|
|
$ |
2.21 |
|
Weighted
average number of common shares outstanding during the
period
|
|
|
25,474,924 |
|
|
|
25,555,928 |
|
|
|
25,182,107 |
|
|
|
24,983,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
per common share
|
|
$ |
1.02 |
|
|
$ |
0.93 |
|
|
$ |
3.06 |
|
|
$ |
2.79 |
|
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 nine months ended September 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
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
44,699 |
|
|
|
- |
|
|
|
44,699 |
|
Change
in fair value of cash flow hedges and amortization of swap
settlements
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6,923 |
) |
|
|
(6,923 |
) |
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,776 |
|
Issuance
of common stock under:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation plans
|
|
|
- |
|
|
|
- |
|
|
|
79 |
|
|
|
- |
|
|
|
5,714 |
|
|
|
- |
|
|
|
- |
|
|
|
5,714 |
|
Issuance
of common stock
|
|
|
- |
|
|
|
- |
|
|
|
1,131 |
|
|
|
- |
|
|
|
133,654 |
|
|
|
- |
|
|
|
- |
|
|
|
133,654 |
|
Retirement
of common stock
|
|
|
- |
|
|
|
- |
|
|
|
(143 |
) |
|
|
- |
|
|
|
(13,723 |
) |
|
|
- |
|
|
|
- |
|
|
|
(13,723 |
) |
Dividends
declared
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(83,938 |
) |
|
|
- |
|
|
|
(83,938 |
) |
Balances
at September 30, 2008
|
|
|
1,000 |
|
|
$ |
25,000 |
|
|
|
25,944 |
|
|
$ |
2 |
|
|
$ |
982,754 |
|
|
$ |
(122,044 |
) |
|
$ |
(15,911 |
) |
|
$ |
869,801 |
|
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)
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
Net
cash provided by operating activities
|
|
$ |
143,048 |
|
|
$ |
158,148 |
|
|
|
|
|
|
|
|
|
|
Cash
flows used in investing activities:
|
|
|
|
|
|
|
|
|
Additions
to real estate:
|
|
|
|
|
|
|
|
|
Acquisitions
and improvements to recent acquisitions
|
|
|
(93,906 |
) |
|
|
(333,110 |
) |
Capital
expenditures and redevelopment
|
|
|
(52,420 |
) |
|
|
(52,124 |
) |
Additions
to real estate under development
|
|
|
(92,497 |
) |
|
|
(96,236 |
) |
Dispositions
of real estate and investments
|
|
|
44,980 |
|
|
|
124,103 |
|
Changes
in restricted cash and refundable deposits
|
|
|
(2,791 |
) |
|
|
1,979 |
|
Purchases
of marketable securities
|
|
|
(62,522 |
) |
|
|
(5,843 |
) |
Sales
and maturities of marketable securities
|
|
|
5,925 |
|
|
|
- |
|
Advances
under notes and other receivables
|
|
|
(1,958 |
) |
|
|
(19,192 |
) |
Collections
of notes and other receivables
|
|
|
5,980 |
|
|
|
1,472 |
|
Contributions
to co-investments
|
|
|
(4,183 |
) |
|
|
(22,164 |
) |
Distributions
from co-investments
|
|
|
9,423 |
|
|
|
15,330 |
|
Net
cash used in investing activities
|
|
|
(243,969 |
) |
|
|
(385,785 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings
under mortgage and other notes payable and lines of credit
|
|
|
565,096 |
|
|
|
665,709 |
|
Repayment
of mortgage and other notes payable and lines of credit
|
|
|
(450,485 |
) |
|
|
(494,331 |
) |
Additions
to deferred charges
|
|
|
(2,105 |
) |
|
|
(1,516 |
) |
Settlement
of forward-starting swaps
|
|
|
(1,840 |
) |
|
|
1,311 |
|
Net
proceeds from stock options exercised
|
|
|
4,841 |
|
|
|
3,786 |
|
Net
proceeds from sale of common stock
|
|
|
133,654 |
|
|
|
213,672 |
|
Repurchase
of common stock
|
|
|
(13,723 |
) |
|
|
(1,409 |
) |
Distributions
to minority interest partners
|
|
|
(18,128 |
) |
|
|
(77,145 |
) |
Redemption
of minority interest limited partnership units
|
|
|
(12,304 |
) |
|
|
(9,983 |
) |
Common
and preferred stock dividends paid
|
|
|
(80,637 |
) |
|
|
(71,880 |
) |
Net
cash provided by financing activities
|
|
|
124,369 |
|
|
|
228,214 |
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
23,448 |
|
|
|
577 |
|
Cash
and cash equivalents at beginning of period
|
|
|
9,956 |
|
|
|
9,662 |
|
Cash
and cash equivalents at end of period
|
|
$ |
33,404 |
|
|
$ |
10,239 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest, net of $8.2 million and $3.6 million capitalized in
2008 and 2007, respectively
|
|
$ |
46,929 |
|
|
$ |
52,443 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Mortgage
note assumed by buyer in connection with sale of property
|
|
$ |
42,200 |
|
|
$ |
- |
|
Mortgage
note assumed in connection with land contribution
|
|
$ |
- |
|
|
$ |
43,839 |
|
Mortgage
note issued to buyer in connection with sale of property
|
|
$ |
4,070 |
|
|
$ |
- |
|
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
|
|
$ |
6,923 |
|
|
$ |
6,602 |
|
Change
in construction payable
|
|
$ |
14,724 |
|
|
$ |
5,576 |
|
Issuance
of DownREIT units in connection with purchase of real
estate
|
|
$ |
- |
|
|
$ |
7,067 |
|
Property
received in satisfaction of note receivable
|
|
$ |
1,500 |
|
|
$ |
- |
|
See
accompanying notes to the unaudited condensed consolidated financial
statements.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
September
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 nine
months ended September 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 91.4% general partnership
interest as of September 30, 2008.
As of
September 30, 2008, the Company owned or had ownership interests in 133
apartment communities, (aggregating 26,790 units), six office buildings, 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), and the Seattle metropolitan
area.
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 utilized 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
September 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 and
tax-exempt variable rate demand notes with original maturities of more than
three months when purchased. The Company has classified U.S. treasury
and agency securities as held-to-maturity securities, and the Company reports
these securities at amortized cost. The Company has classified the
tax-exempt variable rate demand notes as available for sale and the Company
reports these securities at fair value and any unrealized gain or loss is
recorded as other comprehensive income (loss). 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 $247.7 million and $168.4 million, respectively, as of September
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 September 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 $0.4 million for
the three months ended September 30, 2008 and 2007, respectively, and $0.9
million and $1.0 million for the nine months ended September 30, 2008 and 2007,
respectively. The intrinsic value of the stock options exercised
during the three months ended September 30, 2008 and 2007 totaled $1.4 million
and $2.2 million, respectively, and $4.1 million and $4.9 for the nine months
ended September 30, 2008 and 2007. As of September 30, 2008, the
intrinsic value of the stock options outstanding and fully vested totaled $15.1
million. As of September 30, 2008, total unrecognized compensation cost related
to unvested share-based compensation granted under the stock option and
restricted stock plans totaled $4.7 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 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
September 30, 2008 and 2007, and $1.1 million for the nine months ended
September 30, 2008 and 2007, respectively.
Stock-based
compensation capitalized for stock options, restricted stock awards, and the Z
Units totaled $0.2 million and $0.6 million for the three and nine months ended
September 30, 2008 and 2007, respectively. As of September 30, 2008
the intrinsic value of the Z Units subject to conversion totaled $18.6
million. As of September 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 $0.9 million for three and
nine months ended September 30, 2008, respectively. Total
unrecognized compensation cost less an estimate for forfeitures related to the
OPP totaled $4.4 million as of September 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 assumptions 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.
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 September 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 FAS 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 FAS 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 balance sheet 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. 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 $225.0 million exchangeable senior notes (the “Notes”) with a coupon
rate of 3.625% due November 2025, which were issued in the 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 of additional interest of approximately $4.0 million
for 2008 and 2009, respectively. 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) Acquisitions
In July
2008, the Company acquired Chestnut Street Apartments, a 96-unit apartment
community located in Santa Cruz, California, for $22.1 million. The property was
built in 2002 and includes approximately 9,000 square feet of commercial and
retail space. Also, during July the Company received seven
condominium units with an estimated fair value of $1.5 million in full
satisfaction of its participating loan made in 2005 to the buyer of Eastridge
Apartments and, as a result, recognized $1.5 million of the previously deferred
$2.2 million gain on sale of Eastridge Apartments.
In August
2008, the Company acquired The Highlands at Wynhaven, a 333-unit apartment
community located in Issaquah, Washington for $66.3 million.
(b) Dispositions
During
the third quarter of 2008, the Company sold Cardiff by the Sea Apartments,
located in Cardiff, California for $71.0 million and St. Cloud Apartments,
located in Houston, Texas for $8.8 million resulting in a combined gain of
$46,000. The Company also sold the Circle recreational vehicle park
for $5.4 million resulting in a gain of $0.9 million, and the Company sold the
Vacationer recreational vehicle park for $4.6 million. The gain on
sale of $0.8 million resulting from the sale of Vacationer was deferred due to
the fact the Company loaned $4.1 million to the buyer at a fixed rate of 6.5%
due in August 2011.
The
Company is in contract to sell Coral Gardens, a 200-unit apartment community
located in El Cajon, California in the fourth quarter of 2008 for $19.8
million. This community is classified as held for sale as of
September 30, 2008.
(c)
Equity Transactions
During
the third quarter of 2008, the Company issued 1,130,750 shares of common stock
and during October 2008, the Company issued 78,300 shares at an average share
price of $120.17. Since July 2008, the Company issued 1,209,050
shares of common stock for $142.8 million, net of fees and
commissions. The Company will use the net proceeds to pay down debt,
to fund the development pipeline and for future investments.
(d)
Debt and Financing Activities
During
July 2008, the Company paid-off an $89.0 million cross-collateralized mortgage
loan at a fixed rate of 6.62%.
During
August 2008, the Company obtained a mortgage loan in the amount of $53.0 million
secured by Mill Creek, with a fixed rate of 5.77% which matures in August
2018. In conjunction with the sale of Cardiff by the Sea, the buyer
assumed the mortgage loan totaling $42.2 million at a fixed rate of
5.71%.
During
September 2008, the Company obtained mortgage loans in the amount of $23.0
million at a fixed rate of 5.79% and $22.5 million at a fixed rate of 5.81%,
secured by the Palisades and Bridgeport communities,
respectively. Both mortgage loans mature in September
2018.
During
October 2008, the Company repurchased and retired $29.7 million of the Company’s
$225 million exchangeable senior notes (“Notes”). The Company
repurchased these Notes at a discount to par value and expects to report a gain
of approximately $1.1 million from the extinguishment of debt in the fourth
quarter of 2008.
The
Company has signed a letter of commitment to enter into a new five-year secured
line of credit facility with Freddie Mac 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 will be expandable to $250 million. The
Company anticipates that the closing date for the new secured facility will
occur by the end of the fourth quarter of 2008.
(3)
Co-investments
The
Company has joint venture investments (“co-investments”), which are accounted
for under the equity method. The co-investments own development
projects and operating apartment communities. The following table
details the Company's co-investments (dollars in thousands):
|
|
September
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")
|
|
$ |
60,866 |
|
|
$ |
58,419 |
|
Preferred
limited partnership interest in Mountain Vista Apartments, LLC
(A)
|
|
|
- |
|
|
|
1,182 |
|
Development
joint venture
|
|
|
4,997 |
|
|
|
4,090 |
|
|
|
|
65,863 |
|
|
|
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
|
|
$ |
66,363 |
|
|
$ |
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).
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Balance
sheets:
|
|
|
|
|
|
|
Real
estate and real estate under development
|
|
$ |
519,921 |
|
|
$ |
614,266 |
|
Other
assets
|
|
|
7,672 |
|
|
|
16,184 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
527,593 |
|
|
$ |
630,450 |
|
|
|
|
|
|
|
|
|
|
Mortgage
notes payable
|
|
$ |
298,442 |
|
|
$ |
322,615 |
|
Other
liabilities
|
|
|
12,733 |
|
|
|
24,014 |
|
Partners'
equity
|
|
|
216,418 |
|
|
|
283,821 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and partners' equity
|
|
$ |
527,593 |
|
|
$ |
630,450 |
|
|
|
|
|
|
|
|
|
|
Company's
share of equity
|
|
$ |
65,863 |
|
|
$ |
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
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Statements
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
revenues
|
|
$ |
11,906 |
|
|
$ |
11,761 |
|
|
$ |
34,232 |
|
|
$ |
34,596 |
|
Operating
expenses
|
|
|
(4,565 |
) |
|
|
(4,335 |
) |
|
|
(13,180 |
) |
|
|
(13,805 |
) |
Interest
expense
|
|
|
(2,876 |
) |
|
|
(3,369 |
) |
|
|
(8,205 |
) |
|
|
(10,623 |
) |
Depreciation
and amortization
|
|
|
(3,308 |
) |
|
|
(3,485 |
) |
|
|
(9,979 |
) |
|
|
(10,431 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net income (loss)
|
|
$ |
1,157 |
|
|
$ |
572 |
|
|
$ |
2,868 |
|
|
$ |
(263 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company's
share of operating net income
|
|
|
335 |
|
|
|
322 |
|
|
|
1,007 |
|
|
|
421 |
|
Company's
preferred interest/gain - Mt. Vista
|
|
|
- |
|
|
|
- |
|
|
|
6,318 |
|
|
|
2,346 |
|
Company's
share of net income
|
|
$ |
335 |
|
|
$ |
322 |
|
|
$ |
7,325 |
|
|
$ |
2,767 |
|
Through
September 30, 2008, the Company has made contributions to a joint venture
totaling $5.0 million related to a development project located in Southern
California, which was still in the predevelopment stage as of September 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 September 30, 2008 and December 31, 2007 (dollars in
thousands):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Note
receivable, secured, bearing interest at LIBOR + 4.65%, due July
2008
|
|
$ |
- |
|
|
$ |
5,448 |
|
Note
receivable, secured, bearing interest at LIBOR + 3.38%, due February
2009
|
|
|
12,863 |
|
|
|
10,999 |
|
Note
receivable, secured, bearing interest at LIBOR + 2.95%, due April
2009
|
|
|
14,000 |
|
|
|
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
|
|
|
7,260 |
|
|
|
7,128 |
|
Other
receivables
|
|
|
4,331 |
|
|
|
4,701 |
|
|
|
$ |
45,782 |
|
|
$ |
49,632 |
|
In
September 2007, the Company originated a loan to the owners of an apartment
community under development in Vancouver, Washington, with a maturity date of
February 2009. The proceeds from the loan refinanced the property and
are providing funding for the completion of the 146-unit apartment
community. In July 2008, the Company ceased recording interest income
and issued a notice of monetary default to the borrower, and the borrower filed
for bankruptcy. The Company expects the note will be settled through
the foreclosure or sale of the property for full payment of the
note.
(5)
Related Party Transactions
Other
related party receivables consist primarily of accrued payroll costs and
management fees due from Fund II totaling $1.0 million and $0.9 million as of
September 30, 2008 and December 31, 2007, respectively. Management
and other fees from affiliates include property management, asset management,
development and redevelopment fees from related parties of $1.3 million for the
quarters ended September 30, 2008 and 2007, and $4.0 million and $3.7 million
for the nine months ended September 30, 2008 and 2007,
respectively. The Company’s Chairman, George Marcus, is also the
Chairman of TMMC, which is a real estate brokerage firm. The Company paid $0.2
million and $0 brokerage commissions on the sale of real estate during the three
months ended September 30, 2008 and 2007, respectively, and $0.2 million and
$1.3 million during the nine months ended September 30, 2008 and 2007,
respectively.
As
discussed in Note 3, 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.
(6) Segment
Information
The
Company defines its reportable operating segments as the three geographical
regions in which its apartment communities are located: Southern California,
Northern California and Seattle Metro. Excluded from segment revenues
are properties classified in 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
co-investments, real estate under development, cash and cash equivalents,
marketable securities, 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 September 30, 2008 and 2007 (dollars in thousands):
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
Southern
California
|
|
$ |
53,442 |
|
|
$ |
52,429 |
|
Northern
California
|
|
|
30,516 |
|
|
|
25,608 |
|
Seattle
Metro
|
|
|
18,269 |
|
|
|
16,355 |
|
Other
real estate assets
|
|
|
680 |
|
|
|
620 |
|
Total
property revenues
|
|
$ |
102,907 |
|
|
$ |
95,012 |
|
|
|
|
|
|
|
|
|
|
Net
operating income:
|
|
|
|
|
|
|
|
|
Southern
California
|
|
$ |
36,282 |
|
|
$ |
35,979 |
|
Northern
California
|
|
|
19,877 |
|
|
|
16,919 |
|
Seattle
Metro
|
|
|
12,037 |
|
|
|
10,680 |
|
Other
real estate assets
|
|
|
362 |
|
|
|
300 |
|
Total
net operating income
|
|
|
68,558 |
|
|
|
63,878 |
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
(27,952 |
) |
|
|
(24,169 |
) |
Interest
expense
|
|
|
(19,399 |
) |
|
|
(19,459 |
) |
Amortization
of deferred financing costs
|
|
|
(686 |
) |
|
|
(701 |
) |
General
and administrative
|
|
|
(6,524 |
) |
|
|
(6,415 |
) |
Management
and other fees from affiliates
|
|
|
1,311 |
|
|
|
1,268 |
|
Gain
on sale or real estate
|
|
|
2,446 |
|
|
|
- |
|
Interest
and other income
|
|
|
2,847 |
|
|
|
2,407 |
|
Equity
income in co-investments
|
|
|
335 |
|
|
|
322 |
|
Minority
interests
|
|
|
(5,666 |
) |
|
|
(5,088 |
) |
Income
before discontinued operations
|
|
$ |
15,270 |
|
|
$ |
12,043 |
|
The
revenues, net operating income, and assets for each of the reportable operating
segments are summarized as follows for the nine months ended September 30, 2008
and 2007 (dollars in thousands):
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
Southern
California
|
|
$ |
159,725 |
|
|
$ |
155,632 |
|
Northern
California
|
|
|
88,782 |
|
|
|
71,122 |
|
Seattle
Metro
|
|
|
52,355 |
|
|
|
47,144 |
|
Other
real estate assets
|
|
|
2,036 |
|
|
|
1,849 |
|
Total
property revenues
|
|
$ |
302,898 |
|
|
$ |
275,747 |
|
|
|
|
|
|
|
|
|
|
Net
operating income:
|
|
|
|
|
|
|
|
|
Southern
California
|
|
$ |
109,582 |
|
|
$ |
107,608 |
|
Northern
California
|
|
|
58,002 |
|
|
|
47,081 |
|
Seattle
Metro
|
|
|
34,925 |
|
|
|
31,035 |
|
Other
real estate assets
|
|
|
860 |
|
|
|
18 |
|
Total
net operating income
|
|
|
203,369 |
|
|
|
185,742 |
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
(82,564 |
) |
|
|
(69,036 |
) |
Interest
expense
|
|
|
(57,835 |
) |
|
|
(57,688 |
) |
Amortization
of deferred financing costs
|
|
|
(2,109 |
) |
|
|
(2,054 |
) |
General
and administrative
|
|
|
(19,600 |
) |
|
|
(18,519 |
) |
Management
and other fees from affiliates
|
|
|
3,965 |
|
|
|
3,662 |
|
Gain
on sale of real estate
|
|
|
2,446 |
|
|
|
- |
|
Interest
and other income
|
|
|
8,048 |
|
|
|
7,454 |
|
Equity
income in co-investments
|
|
|
7,325 |
|
|
|
2,767 |
|
Minority
interests
|
|
|
(16,929 |
) |
|
|
(15,459 |
) |
Income
before discontinued operations
|
|
$ |
46,116 |
|
|
$ |
36,869 |
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Assets:
|
|
|
|
|
|
|
Southern
California
|
|
$ |
1,218,392 |
|
|
$ |
1,354,818 |
|
Northern
California
|
|
|
852,061 |
|
|
|
829,879 |
|
Seattle
Metro
|
|
|
420,411 |
|
|
|
353,737 |
|
Other
real estate assets
|
|
|
51,997 |
|
|
|
37,338 |
|
Net
rental properties
|
|
|
2,542,861 |
|
|
|
2,575,772 |
|
|
|
|
|
|
|
|
|
|
Real
estate - held for sale, net
|
|
|
15,983 |
|
|
|
- |
|
Real
estate under development
|
|
|
347,979 |
|
|
|
233,445 |
|
Co-investments
|
|
|
66,363 |
|
|
|
64,191 |
|
Cash
and cash equivalents
|
|
|
45,956 |
|
|
|
22,483 |
|
Marketable
securities
|
|
|
58,614 |
|
|
|
2,017 |
|
Notes
and other receivables
|
|
|
46,749 |
|
|
|
50,536 |
|
Other
non-segment assets
|
|
|
34,821 |
|
|
|
31,879 |
|
Total
assets
|
|
$ |
3,159,326 |
|
|
$ |
2,980,323 |
|
(7)
|
Net Income Per Common
Share
|
|
(Amounts
in thousands, except per share and unit
data)
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
September
30, 2008
|
|
|
September
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
|
|
$ |
12,960 |
|
|
|
25,111 |
|
|
$ |
0.52 |
|
|
$ |
9,732 |
|
|
|
25,165 |
|
|
$ |
0.39 |
|
Income
(loss) from discontinued operations
|
|
|
(584 |
) |
|
|
25,111 |
|
|
|
(0.02 |
) |
|
|
265 |
|
|
|
25,165 |
|
|
|
0.01 |
|
|
|
|
12,376 |
|
|
|
|
|
|
$ |
0.50 |
|
|
|
9,997 |
|
|
|
|
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities (1)
|
|
|
- |
|
|
|
364 |
|
|
|
|
|
|
|
- |
|
|
|
391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations available to common
stockholders
|
|
|
12,960 |
|
|
|
25,475 |
|
|
$ |
0.51 |
|
|
|
9,732 |
|
|
|
25,556 |
|
|
$ |
0.38 |
|
Income
(loss) from discontinued operations
|
|
|
(584 |
) |
|
|
25,475 |
|
|
|
(0.02 |
) |
|
|
265 |
|
|
|
25,556 |
|
|
|
0.01 |
|
|
|
$ |
12,376 |
|
|
|
|
|
|
$ |
0.49 |
|
|
$ |
9,997 |
|
|
|
|
|
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2008
|
|
|
September
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
|
|
$ |
39,185 |
|
|
|
24,877 |
|
|
$ |
1.58 |
|
|
$ |
30,005 |
|
|
|
24,370 |
|
|
$ |
1.23 |
|
Income
(loss) from discontinued operations
|
|
|
(1,417 |
) |
|
|
24,877 |
|
|
|
(0.06 |
) |
|
|
25,172 |
|
|
|
24,370 |
|
|
|
1.03 |
|
|
|
|
37,768 |
|
|
|
|
|
|
$ |
1.52 |
|
|
|
55,177 |
|
|
|
|
|
|
$ |
2.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities (1)
|
|
|
- |
|
|
|
305 |
|
|
|
|
|
|
|
- |
|
|
|
614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before discontinued operations available to common
stockholders
|
|
|
39,185 |
|
|
|
25,182 |
|
|
$ |
1.56 |
|
|
|
30,005 |
|
|
|
24,984 |
|
|
$ |
1.20 |
|
Income
(loss) from discontinued operations
|
|
|
(1,417 |
) |
|
|
25,182 |
|
|
|
(0.06 |
) |
|
|
25,172 |
|
|
|
24,984 |
|
|
|
1.01 |
|
|
|
$ |
37,768 |
|
|
|
|
|
|
$ |
1.50 |
|
|
$ |
55,177 |
|
|
|
|
|
|
$ |
2.21 |
|
|
(1)
|
Weighted
convertible limited partnership units of 2,184,446 and 2,273,992 for the
three months ended September 30, 2008 and 2007, respectively, and
2,224,828 and 2,285,541 for the nine months ended September 30, 2008 and
2007, respectively, and Series Z incentive units of 250,927 and 213,205
for the three months ended September 30, 2008 and 2007, respectively,
and 250,514 and 213,045 for the nine months ended September 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 nine months ended September 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 28,250 and 45,004 for the three months ended September 30, 2008 and
2007, respectively, and 75,111 and 19,753 for the nine months ended September
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 nine 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 nine months ended
September 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 quoted
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 September 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
September 30, 2008 the Company had 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 December 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 December 2008 through October 2011. The fair value
of the derivatives decreased $5.1 million during the nine months ended September
30, 2008 to a liability value of $15.4 million as of September 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 September 30, 2008 and 2007.
During
the second quarter 2008, the Company settled one forward-starting interest
rate swaps for a total of $1.8 million in payments to
counterparties. The $1.8 million loss on settlement will be amortized
over the life of the 10-year secured mortgage loans.
(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 FAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (“FAS 144”) have been met.
During
February 2007, City Heights Apartments, a 687-unit community located in Los
Angeles 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 nine months ended
September 30, 2007.
In July
2007, the Company sold the final 2 condominium units at the Peregrine Point
property for a gain of $0.1 million net of taxes and expenses. For
the nine months ended September 30, 2007, the Company sold 21 condominium units
at the Peregrine Point property and recorded a gain of $1.0 million net of taxes
and expenses. The Company has recorded the gain on sale of
condominiums and operations for Peregrine Point apartments as part of
discontinued operations in the accompanying consolidated statements of
operations.
During
the third quarter of 2008, the Company sold Cardiff by the Sea, a 300-unit
community located in Cardiff, California for $71.0 million and St. Cloud
Apartments, a 302-unit community located in Houston, Texas for $8.8 million
resulting in a combined gain of $46,000. The Company has recorded the
gain on sale operations for these two apartment communities as part of
discontinued operations in the accompanying consolidated statements of
operations.
The
Company is in contract to sell Coral Gardens, a 200-unit apartment community
located in El Cajon, California in the fourth quarter of 2008 for $19.8
million. This community is classified as held for sale as of
September 30, 2008, and as a result, has classified the results of operations
for Coral Gardens as discontinued operations.
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
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
revenues
|
|
$ |
1,677 |
|
|
$ |
4,594 |
|
|
$ |
6,528 |
|
|
$ |
13,416 |
|
Interest
and other income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
290 |
|
Revenues
|
|
|
1,677 |
|
|
|
4,594 |
|
|
|
6,528 |
|
|
|
13,706 |
|
Property
operating expenses
|
|
|
(1,183 |
) |
|
|
(2,142 |
) |
|
|
(3,594 |
) |
|
|
(5,899 |
) |
Interest
expense
|
|
|
(545 |
) |
|
|
(783 |
) |
|
|
(2,087 |
) |
|
|
(1,729 |
) |
Depreciation
and amortization
|
|
|
(629 |
) |
|
|
(1,443 |
) |
|
|
(2,434 |
) |
|
|
(3,460 |
) |
Minority
interests
|
|
|
54 |
|
|
|
(20 |
) |
|
|
128 |
|
|
|
(226 |
) |
Expenses
|
|
|
(2,303 |
) |
|
|
(4,388 |
) |
|
|
(7,987 |
) |
|
|
(11,314 |
) |
Gain
on sale of real estate
|
|
|
46 |
|
|
|
64 |
|
|
|
46 |
|
|
|
79,275 |
|
Subordination
fees
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10,290 |
|
Minority
interests - OP units
|
|
|
(4 |
) |
|
|
(5 |
) |
|
|
(4 |
) |
|
|
(2,156 |
) |
Minority
interests - City Heights
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(64,629 |
) |
Net
gain on sale of real estate
|
|
|
42 |
|
|
|
59 |
|
|
|
42 |
|
|
|
22,780 |
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
Income
from discontinued operations
|
|
$ |
(584 |
) |
|
$ |
265 |
|
|
$ |
(1,417 |
) |
|
$ |
25,172 |
|
(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 September 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
September 30, 2008, we had ownership interests in 133 apartment communities,
comprising 26,790 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)
As of
September 30, 2008, the Company also had ownership interests in nine office
buildings and one manufactured housing community (containing 157
sites).
As of
September 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 $348.0
million, and estimated remaining project costs of approximately $483.6 million
for total estimated project costs of $831.6 million.
The
Company’s consolidated apartment communities are as follows:
|
|
As
of September 30, 2008
|
|
|
As
of September 30, 2007
|
|
|
|
Apartment
Homes
|
|
|
%
|
|
|
Apartment
Homes
|
|
|
%
|
|
Southern
California
|
|
|
12,225 |
|
|
|
51 |
% |
|
|
12,225 |
|
|
|
52 |
% |
Northern
California
|
|
|
6,457 |
|
|
|
27 |
% |
|
|
6,361 |
|
|
|
27 |
% |
Seattle
Metro
|
|
|
5,338 |
|
|
|
22 |
% |
|
|
5,005 |
|
|
|
21 |
% |
Total
|
|
|
24,020 |
|
|
|
100 |
% |
|
|
23,591 |
|
|
|
100 |
% |
Co-investments
including Fund II properties and properties included in discontinued
operations are not included in the table presented above for both periods
presented.
Comparison
of the Three Months Ended September 30, 2008 to the Three Months Ended September
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 September 30, 2008 and 2007) increased 40 basis
points to 96.3% as of September 30, 2008 from 95.9% as of September 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 September 30, 2008 and 2007 is as
follows:
|
|
Three
months ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
Southern
California
|
|
|
95.4 |
% |
|
|
95.5 |
% |
Northern
California
|
|
|
97.8 |
% |
|
|
96.8 |
% |
Seattle
Metro
|
|
|
96.8 |
% |
|
|
95.9 |
% |
The table
below illustrates a breakdown of revenues, including revenues attributable to
the Quarterly Same-Properties.
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
September
30,
|
|
|
Dollar
|
|
|
Percentage
|
|
|
|
Properties
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Change
|
|
Property
Revenues (dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern
California
|
|
|
57 |
|
|
$ |
48,237 |
|
|
$ |
47,701 |
|
|
$ |
536 |
|
|
|
1.1
|
% |
Northern
California
|
|
|
18 |
|
|
|
20,080 |
|
|
|
18,527 |
|
|
|
1,553 |
|
|
|
8.4 |
|
Seattle
Metro
|
|
|
24 |
|
|
|
16,493 |
|
|
|
15,349 |
|
|
|
1,144 |
|
|
|
7.5 |
|
Total
Same-Property revenues
|
|
|
99 |
|
|
|
84,810 |
|
|
|
81,577 |
|
|
|
3,233 |
|
|
|
4.0 |
|
Non-Same
Property Revenues (1)
|
|
|
|
|
|
|
18,097 |
|
|
|
13,435 |
|
|
|
4,662 |
|
|
|
34.7 |
|
Total
property revenues
|
|
|
|
|
|
$ |
102,907 |
|
|
$ |
95,012 |
|
|
$ |
7,895 |
|
|
|
8.3
|
% |
(1) Includes properties acquired
since January 1, 2007, eight redevelopment communities, three office buildings
and two development communities.
Quarterly Same-Property
Revenues increased by $3.2 million or 4.0% to $84.8 million in the third
quarter of 2008 from $81.6 million in the third quarter of 2007. The
increase in the third quarter of 2008 was primarily attributable to the increase
in scheduled rents from the Quarterly Same-Properties which increased $2.7
million or 3.4% compared to the third quarter of 2007. Average rental
rates for Quarterly Same-Property communities were $1,404 per unit in the third
quarter of 2008 compared to $1,359 per unit in the third quarter of
2007. Occupancy increased quarter over quarter by 40 basis points or
$0.2 million, and delinquency and rent concessions decreased slightly by a
combined $0.2 million, and other income was consistent between
quarters.
Quarterly Non-Same Property
Revenues increased by $4.7 million or 34.7% to $18.1 million in the third
quarter of 2008 from $13.4 million in the third quarter of 2007. The
increase was attributable to ten apartment communities acquired since January 1,
2007 totaling a $3.5 million increase in revenue compared to third quarter of
2007, eight communities that were in redevelopment totaling a $1.1 million
increase in revenue compared to the third quarter of 2007, and two development
properties totaling a $0.1 million increase in revenue compared to the third
quarter of 2007.
Total Expenses increased $7.0
million or 8.6% to $88.9 million in the third quarter of 2008 from $82.1 million
in the third quarter of 2007. Property operating expenses including
real estate taxes increased by $3.2 million or 10.3% for the quarter, which is
primarily due to the acquisition of ten operating properties, leasing at two
development properties since January 1, 2007, and annual increases in salaries
and real estate taxes. Depreciation expense increased by $3.8 million
or 15.7% for the third quarter 2008 compared to the third quarter of 2007,
primarily due to the acquisition of ten operating properties since January 1,
2007.
Gain on sale of real estate
for the third quarter of 2008 totaling $2.4 million relates to the sale of the
Circle RV park for $5.4 million resulting in a gain of $0.9 million, and $1.5
million of the gain that was previously deferred on the 2005 sale of Eastridge
Apartments. The $1.5 million gain recognized is equal to the
estimated fair value of seven condominium units received in satisfaction of the
note receivable issued in connection with the sale of Eastridge
Apartments. There were no gains or losses recorded from the sale of
other real estate in the third quarter of 2007.
Income from discontinued
operations for the third quarter of 2008 includes the operating results
of Coral Gardens which was classified as held for sale as of September 30, 2008,
and the operating results of Cardiff by the Sea and St. Cloud along with their
combined gain on sale $46,000. For the third quarter of 2007,
operating results includes the four Portland metropolitan region communities,
which were sold in the fourth quarter of 2007, and the gain on sale of
condominiums for $0.1 million.
Comparison
of the Nine Months Ended September 30, 2008 to the Nine Months Ended September
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 nine months ended September 30, 2008 and 2007) increased 50
basis points to 96.2% as of September 30, 2008 from 95.7% as of September 30,
2007.
The
regional breakdown of the Company’s 2008/2007 Same-Property portfolio for
financial occupancy for the nine months ended September 30, 2008 and 2007 is as
follows:
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
Southern
California
|
|
|
95.5 |
% |
|
|
95.5 |
% |
Northern
California
|
|
|
97.5 |
% |
|
|
96.2 |
% |
Seattle
Metro
|
|
|
96.8 |
% |
|
|
96.0 |
% |
The table
below illustrates a breakdown of revenues, including revenues attributable to
2008/2007 Same-Properties.
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
September
30,
|
|
|
Dollar
|
|
|
Percentage
|
|
|
|
Properties
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Change
|
|
Property
Revenues (dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern
California
|
|
|
56 |
|
|
$ |
140,566 |
|
|
$ |
137,921 |
|
|
$ |
2,645 |
|
|
|
1.9
|
% |
Northern
California
|
|
|
18 |
|
|
|
59,021 |
|
|
|
53,655 |
|
|
|
5,366 |
|
|
|
10.0 |
|
Seattle
Metro
|
|
|
23 |
|
|
|
46,344 |
|
|
|
42,830 |
|
|
|
3,514 |
|
|
|
8.2 |
|
Total
Same-Property revenues
|
|
|
97 |
|
|
|
245,931 |
|
|
|
234,406 |
|
|
|
11,525 |
|
|
|
4.9 |
|
Non-Same
Property Revenues (1)
|
|
|
|
|
|
|
56,967 |
|
|
|
41,341 |
|
|
|
15,626 |
|
|
|
37.8 |
|
Total
property revenues
|
|
|
|
|
|
$ |
302,898 |
|
|
$ |
275,747 |
|
|
$ |
27,151 |
|
|
|
9.8
|
% |
(1)
Includes properties acquired since January 1, 2007, ten redevelopment
communities, three office buildings, and two development
communities.
2008/2007 Same-Property Revenues
increased by $11.5 million or 4.9% to $245.9 million for the nine months
ended September 30, 2008 compared to $234.4 million for the nine months ended
September 30, 2007. The increase for the nine months ended September
30, 2008 was primarily attributable to an increase in the scheduled rents from
the 2008/2007 Same-Property portfolio which increased $10.5 million or
4.5%. Average rental rates for 2008/2007 Same-Property communities were $1,399
per unit for the nine months ended September 30, 2008 compared to $1,339 per
unit for the nine months ended September 30, 2007. Occupancy
increased for the nine months ended September 30, 2008 by 50 basis points or
$0.6 million, other income increased by $0.5 million and delinquency and rent
concessions, were consistent between periods.
2008/2007 Non-Same Property
Revenues increased by $15.6 million or 37.8% to $57.0 million for the
nine months ended September 30, 2008 from $41.3 million for the nine months
ended September 30, 2007. The increase was attributable to ten
apartment communities acquired since January 1, 2007 totaling a $12.4 million
increase in revenue compared to the nine months ended September 30, 2007, ten
communities that were in redevelopment totaling a $3.0 million increase in
revenue compared to the nine months ended September 30, 2007, and two
development properties totaling a $0.2 million increase in revenue compared to
the nine months ended September 30, 2007.
Total Expenses increased
$24.3 million or 10.3% to $261.6 million for the nine months ended September 30,
2008 compared to $237.3 million for the nine months ended September 30,
2007. Property operating expenses including real estate taxes
increased by $9.5 million or 10.6% for the nine months ended September 30, 2008,
which is primarily due to the acquisition of ten operating properties and the
lease-up of two development properties since January 1, 2007, and annual
increases in salaries and real estate taxes. Depreciation expense
increased by $13.5 million or 19.6% for nine months ended September 30, 2008
compared to the nine months ended September 30, 2007, primarily due to the
acquisition of ten operating properties since January 1, 2007.
Gain on sale of real
estate for the third quarter of 2008 totaling $2.4 million relates to the
sale of the Circle RV park for $5.4 million resulting in a gain of $0.9 million,
and $1.5 million of the gain that was previously deferred on the 2005 sale of
Eastridge Apartments. The $1.5 million gain recognized is equal to
the estimated fair value of seven condominium units received in satisfaction of
the note receivable issued in connection with the sale of Eastridge
Apartments. There were no gains or losses recorded from the sale of
other real estate in the third quarter of 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 nine
months ended September 30, 2008. The Company recognized $6.3 million
of income resulting from the final repayment of the investment for
the nine months ended September 30, 2008, compared to $2.0 million recognized as
income related to the partial repayment of the investment for the nine months
ended September 30, 2007.
Income from discontinued
operations for the nine months ended September 30, 2008 includes the
operating results of Coral Gardens which was classified as held for sale as of
September 30, 2008, and the operating results of Cardiff by the Sea and St.
Cloud and the combined gain of sale $46,000 for those two
communities. The nine months ended September 30, 2007 income
from discontinued operations 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 $1.0 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.
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
September 30, 2008, the Company had $33.4 million of unrestricted cash and cash
equivalents. We believe that cash flows generated by our operations,
existing cash balances, available for sale marketable securities, 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 through 2009. 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 bank facility with six
commercial banks and, as of September 30, 2008, there was $53.0 million
outstanding balance on the line at an average interest rate of
3.3%. 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 September 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 by the end of 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 is at the bank’s Prime Rate less 2.0%. As of September 30,
2008 there was a zero 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 September 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. Pursuant to the Controlled
Equity Offering Program, during the third quarter of 2008, the Company issued
1,130,750 shares of common stock and during October 2008, the Company issued
78,300 shares at an average share price of $120.17. Since July 2008,
the Company issued 1,209,050 shares of common stock for $142.8 million, net of
fees and commissions. The Company will use the net proceeds to pay down
debt, to fund the development pipeline and for future investments.
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, through its Operating Partnership, has $225.0 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 plus additional interest in shares of the Company’s common stock if
the current share price exceeds the 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.
During
October 2008, the Company repurchased and retired $29.7 million of the
Notes. The Company repurchased these bonds at a discount to par value
and expects to report approximately a $1.1 million gain from the extinguishment
of debt in the fourth quarter of 2008.
As of
September 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 2009 to 2018 and $246.4 million
of variable rate debt that consists of $228.6 million of tax exempt
variable rate demand bonds with a total 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 been impacted by the tightening in
the credit markets as spreads on secured financing have increased to over 220
basis points over the relevant U.S. treasury securities. 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.
Derivative
Activity
As of
September 30, 2008 the Company had 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 December 2008 to October
2011. These derivatives are expected to economically hedge the cash
flows associated with the refinancing of debt that matures between December 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 $5.1 million
during the nine months ended September 30, 2008 to a liability value of $15.4
million as of September 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 September 30, 2008
and 2007.
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 September 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 $487.7 million, of which $260.0 million remains
to be expended. The Company has approximately $59.5 million
undrawn on a construction loan to fund the Joule Broadway development project
with approximately $76.5 million in estimated costs to complete the
project.
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 September 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 September 30, 2008 was $316.9 million, of which
$223.6 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 September 30, 2008. The Company had incurred $27.0 million in costs
related to these five land parcels as of September 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, construction loans, 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 September 30, 2008,
the Company had eleven redevelopment communities aggregating 3,344 apartment
units with estimated redevelopment costs of $123.7 million, of which
approximately $54.9 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 utilized 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 September 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 September 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
|
|
$ |
- |
|
|
$ |
193,563 |
|
|
$ |
183,786 |
|
|
$ |
974,777 |
|
|
$ |
1,352,126 |
|
Exchangeable
bonds
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
225,000 |
|
|
|
225,000 |
|
Lines
of credit
|
|
|
- |
|
|
|
153,000 |
|
|
|
- |
|
|
|
- |
|
|
|
153,000 |
|
Interest
on indebtedness
|
|
|
21,630 |
|
|
|
115,826 |
|
|
|
70,479 |
|
|
|
208,924 |
|
|
|
416,859 |
|
Development
commitments
|
|
|
34,400 |
|
|
|
270,900 |
|
|
|
88,800 |
|
|
|
89,500 |
|
|
|
483,600 |
|
Redevelopment
commitments
|
|
|
11,000 |
|
|
|
43,900 |
|
|
|
- |
|
|
|
- |
|
|
|
54,900 |
|
Fund
II capital commitment
|
|
|
9,858 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,858 |
|
|
|
$ |
76,888 |
|
|
$ |
777,189 |
|
|
$ |
343,065 |
|
|
$ |
1,498,201 |
|
|
$ |
2,695,343 |
|
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 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, expectations as to the sources for
funding the Company’s development pipeline, statements regarding the anticipated
closing date of the Company’s new line of credit facility, and 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 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 nine months ended September 30, 2008 and 2007 (in
thousands except for per share data):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$ |
12,376 |
|
|
$ |
9,997 |
|
|
$ |
37,768 |
|
|
$ |
55,177 |
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
28,581 |
|
|
|
25,612 |
|
|
|
84,998 |
|
|
|
72,496 |
|
Gains
not included in FFO
|
|
|
(2,492 |
) |
|
|
(64 |
) |
|
|
(2,492 |
) |
|
|
(14,565 |
) |
Minority
interests and co-investments (1)
|
|
|
2,217 |
|
|
|
1,777 |
|
|
|
6,534 |
|
|
|
6,114 |
|
Funds
from operations
|
|
$ |
40,682 |
|
|
$ |
37,322 |
|
|
$ |
126,808 |
|
|
$ |
119,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
from operations per share - diluted
|
|
$ |
1.46 |
|
|
$ |
1.33 |
|
|
$ |
4.58 |
|
|
$ |
4.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number shares outstanding diluted (2)
|
|
|
27,910,297 |
|
|
|
28,043,125 |
|
|
|
27,657,449 |
|
|
|
27,482,406 |
|
(1)
|
Amount
includes the following: (i) minority interest related to Operating
Partnership units, and (ii) net depreciation add back from unconsolidated
co-investments net of depreciation attributable to third-party ownership
of consolidated 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 September
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
September 30, 2008, the Company also had $246.4 million of variable rate
indebtedness, of which $129.1 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 September
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
September 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 September 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 |
|
|
$ |
(15,809 |
) |
|
$ |
(1,859 |
) |
|
$ |
(32,778 |
) |
Interest
rate caps
|
|
|
129,149 |
|
|
|
2008-2011 |
|
|
|
370 |
|
|
|
586 |
|
|
|
217 |
|
Total
cash flow hedges
|
|
$ |
529,149 |
|
|
|
2007-2011 |
|
|
$ |
(15,439 |
) |
|
$ |
(1,273 |
) |
|
$ |
(32,561 |
) |
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 September 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 $1.33 billion of fixed rate mortgage notes payable and
exchangeable bonds at September 30, 2008 is approximately $1.38 billion based on
the terms of existing mortgage notes payable compared to those available in the
marketplace.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Years Ended
|
|
2008
|
|
|
2009(1)
|
|
|
2010(2)
|
|
|
2011(3)
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
Fair
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate debt
|
|
$ |
- |
|
|
|
23,256 |
|
|
|
153,007 |
|
|
|
151,400 |
|
|
|
31,870 |
|
|
|
971,162 |
|
|
$ |
1,330,695 |
|
|
$ |
1,381,140 |
|
Average
interest rate
|
|
|
|
|
|
|
6.3 |
% |
|
|
8.1 |
% |
|
|
6.4 |
% |
|
|
5.4 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
Variable
rate debt
|
|
$ |
- |
|
|
|
170,300 |
|
|
|
- |
|
|
|
516 |
|
|
|
- |
|
|
|
228,615 |
(4) |
|
$ |
399,431 |
|
|
$ |
399,431 |
|
Average
interest
|
|
|
|
|
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3.4 |
% |
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|
|
|
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4.0 |
% |
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|
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3.6 |
% |
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(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)
$129.1 million subject to interest rate caps.
The table
incorporates only those exposures that exist as of September 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
September 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 September 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 September 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. Insured risks for comprehensive
liability covers claims in excess of $25,000 per incident, and property
insurance covers losses in excess of a $5.0 million deductible per
incident. There are, however, certain types of extraordinary losses,
such as, for example, losses from terrorism and earthquake, for which the
Company does not have insurance. 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.
Credit Markets
The current instability and tightening in the credit markets has
led to an increase in spreads and pricing of secured and unsecured debt, and the effect of prolonged
tightening in the credit markets could negatively impact the Company's ability
to make acquisitions, develop properties and refinance existing borrowings at
acceptable rates.
|
3.1
|
Second
Amended and Restated Bylaws of Essex Property Trust, Inc., attached as
Exhibit 3.1 to the Company’s Form 8-K, filed September 22, 2008, and
incorporated herein by reference.
|
|
|
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)
|
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|
Date:
October 31, 2008
|
|
|
|
|
|
By: /S/ MICHAEL T.
DANCE
|
|
|
|
Michael
T. Dance
|
|
Executive
Vice President, Chief Financial Officer
|
|
(Authorized
Officer, Principal Financial Officer)
|
|
|
|
|
|
By: /S/ BRYAN
HUNT
|
|
|
|
Bryan
Hunt
|
|
Vice
President, Chief Accounting
Officer
|