form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
____________________________
FORM
10-Q
____________________________
T QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended March 31, 2009
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 T
NO o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). YES o 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 T
|
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 T
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 27,454,266 shares of Common Stock as
of May 5, 2009.
ESSEX PROPERTY TRUST, INC.
FORM
10-Q
INDEX
|
|
Page No.
|
PART
I. FINANCIAL INFORMATION
|
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Item
1.
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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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Item
2.
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16
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Item
3.
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23
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Item
4.
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24
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PART
II. OTHER INFORMATION
|
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Item
1.
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24
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Item1A.
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25
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Item
2.
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26
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Item
6
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26
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27
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Part
I -- Financial Information
Item 1: Condensed 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,
2008.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
(Unaudited)
(Dollars
in thousands, except per share amounts)
Assets
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
Real
estate:
|
|
|
|
|
|
|
Rental
properties:
|
|
|
|
|
|
|
Land
and land improvements
|
|
$ |
681,947 |
|
|
$ |
683,876 |
|
Buildings
and improvements
|
|
|
2,594,339 |
|
|
|
2,595,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,276,286 |
|
|
|
3,279,788 |
|
Less
accumulated depreciation
|
|
|
(666,552 |
) |
|
|
(640,026 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
2,609,734 |
|
|
|
2,639,762 |
|
Real
estate under development
|
|
|
292,607 |
|
|
|
272,273 |
|
Co-investments
|
|
|
70,603 |
|
|
|
76,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2,972,944 |
|
|
|
2,988,381 |
|
Cash
and cash equivalents-unrestricted
|
|
|
65,212 |
|
|
|
41,909 |
|
Cash
and cash equivalents-restricted
|
|
|
13,608 |
|
|
|
12,810 |
|
Marketable
securities
|
|
|
30,143 |
|
|
|
23,886 |
|
Funds
held by 1031 exchange facilitator
|
|
|
- |
|
|
|
21,424 |
|
Notes
and other receivables
|
|
|
46,141 |
|
|
|
47,637 |
|
Prepaid
expenses and other assets
|
|
|
18,416 |
|
|
|
17,430 |
|
Deferred
charges, net
|
|
|
15,451 |
|
|
|
11,346 |
|
Total
assets
|
|
$ |
3,161,915 |
|
|
$ |
3,164,823 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Equity
|
|
|
|
|
|
|
|
|
Mortgage
notes payable
|
|
$ |
1,529,571 |
|
|
$ |
1,468,931 |
|
Exchangeable
bonds
|
|
|
97,245 |
|
|
|
165,457 |
|
Lines
of credit
|
|
|
185,000 |
|
|
|
120,000 |
|
Accounts
payable and accrued liabilities
|
|
|
48,824 |
|
|
|
38,223 |
|
Construction
payable
|
|
|
15,072 |
|
|
|
18,605 |
|
Dividends
payable
|
|
|
31,618 |
|
|
|
32,124 |
|
Other
liabilities
|
|
|
16,429 |
|
|
|
16,444 |
|
Cash
flow hedge liabilities
|
|
|
54,825 |
|
|
|
73,129 |
|
Total
liabilities
|
|
|
1,978,584 |
|
|
|
1,932,913 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Cumulative
convertible preferred stock; $.0001 par value:
|
|
|
|
|
|
|
|
|
4.875%
Series G - 5,980,000 issued and 3,595,716 and 5,980,000
outstanding
|
|
|
87,735 |
|
|
|
145,912 |
|
Stockholders'
equity and noncontrolling interest:
|
|
|
|
|
|
|
|
|
Common
stock, $.0001 par value, 649,702,178 shares authorized 26,059,739 and
26,395,807 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 |
|
Additional
paid-in capital
|
|
|
1,045,603 |
|
|
|
1,043,985 |
|
Distributions
in excess of accumulated earnings
|
|
|
(151,615 |
) |
|
|
(141,336 |
) |
Accumulated
other comprehensive (loss) income
|
|
|
(58,942 |
) |
|
|
(75,424 |
) |
Total
stockholders' equity
|
|
|
860,048 |
|
|
|
852,227 |
|
Noncontrolling
interest
|
|
|
235,548 |
|
|
|
233,771 |
|
Total
stockholders' equity and noncontrolling interest
|
|
|
1,095,596 |
|
|
|
1,085,998 |
|
Total
liabilities and equity
|
|
$ |
3,161,915 |
|
|
$ |
3,164,823 |
|
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 March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
Rental
and other property
|
|
$ |
104,682 |
|
|
$ |
98,730 |
|
Management
and other fees from affiliates
|
|
|
1,197 |
|
|
|
1,227 |
|
|
|
|
105,879 |
|
|
|
99,957 |
|
Expenses:
|
|
|
|
|
|
|
|
|
Property
operating, excluding real estate taxes
|
|
|
24,265 |
|
|
|
23,654 |
|
Real
estate taxes
|
|
|
9,113 |
|
|
|
8,096 |
|
Depreciation
and amortization
|
|
|
29,175 |
|
|
|
26,766 |
|
Interest
|
|
|
20,203 |
|
|
|
21,139 |
|
General
and administrative
|
|
|
6,233 |
|
|
|
6,625 |
|
Write-off
of investment in development joint venture
|
|
|
5,752 |
|
|
|
- |
|
|
|
|
94,741 |
|
|
|
86,280 |
|
|
|
|
|
|
|
|
|
|
Earnings
from operations
|
|
|
11,138 |
|
|
|
13,677 |
|
|
|
|
|
|
|
|
|
|
Gain
on early retirement of debt
|
|
|
6,124 |
|
|
|
- |
|
Interest
and other income
|
|
|
3,287 |
|
|
|
2,768 |
|
Equity
income in co-investments
|
|
|
539 |
|
|
|
6,630 |
|
Income
before discontinued operations
|
|
|
21,088 |
|
|
|
23,075 |
|
Income
(loss) from discontinued operations
|
|
|
2,250 |
|
|
|
(226 |
) |
Net
income
|
|
|
23,338 |
|
|
|
22,849 |
|
Net
income attributable to noncontrolling interest
|
|
|
(4,942 |
) |
|
|
(5,759 |
) |
Net
income attributable to controlling interest
|
|
|
18,396 |
|
|
|
17,090 |
|
Dividends
to preferred stockholders
|
|
|
(1,826 |
) |
|
|
(2,310 |
) |
Excess
of the carrying amount of preferred stock redeemed over the cash paid to
redeem preferred stock
|
|
|
25,695 |
|
|
|
- |
|
Net
income available to common stockholders
|
|
$ |
42,265 |
|
|
$ |
14,780 |
|
|
|
|
|
|
|
|
|
|
Per
common share data:
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Income
before discontinued operations available to common
stockholders
|
|
$ |
1.53 |
|
|
$ |
0.61 |
|
Income
(loss) from discontinued operations
|
|
|
0.08 |
|
|
|
(0.01 |
) |
Net
income available to common stockholders
|
|
$ |
1.61 |
|
|
$ |
0.60 |
|
Weighted
average number of common shares outstanding during the
period
|
|
|
26,224,946 |
|
|
|
24,747,925 |
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Income
before discontinued operations available to common
stockholders
|
|
$ |
1.45 |
|
|
$ |
0.60 |
|
Income
(loss) from discontinued operations
|
|
|
0.08 |
|
|
|
(0.01 |
) |
Net
income available to common stockholders
|
|
$ |
1.53 |
|
|
$ |
0.59 |
|
Weighted
average number of common shares outstanding during the
period
|
|
|
28,692,959 |
|
|
|
24,877,626 |
|
|
|
|
|
|
|
|
|
|
Dividend
per common share
|
|
$ |
1.03 |
|
|
$ |
1.02 |
|
See
accompanying notes to the unaudited condensed consolidated financial
statements.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Stockholders' Equity, Noncontrolling Interest,
and
Comprehensive
Income for the three months ended March 31, 2009
(Unaudited)
(Dollars
and shares in thousands)
|
|
Series
F Preferred stock
|
|
|
Common
stock
|
|
|
Additional
paid-in
|
|
|
Distributions
in excess of accumulated
|
|
|
Accumulated
other comprehensive
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
earnings
|
|
|
income (loss)
|
|
|
Interest
|
|
|
Total
|
|
Balances
at December 31, 2008 (as reported)
|
|
$ |
25,000 |
|
|
|
26,396 |
|
|
$ |
2 |
|
|
|
1,026,037 |
|
|
$ |
(130,697 |
) |
|
|
(75,424 |
) |
|
|
- |
|
|
|
844,918 |
|
Adoption
of new accounting prouncements
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
17,948 |
|
|
|
(10,639 |
) |
|
|
- |
|
|
|
233,771 |
|
|
|
241,080 |
|
Balances
at December 31, 2008 (restated)
|
|
|
25,000 |
|
|
|
26,396 |
|
|
|
2 |
|
|
|
1,043,985 |
|
|
|
(141,336 |
) |
|
|
(75,424 |
) |
|
|
233,771 |
|
|
|
1,085,998 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
18,396 |
|
|
|
- |
|
|
|
4,942 |
|
|
|
23,338 |
|
Change
in fair value of cash flow hedges and amortization of settlements of
swaps
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
16,482 |
|
|
|
1,551 |
|
|
|
18,033 |
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,371 |
|
Issuance
of common stock under:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option plans
|
|
|
- |
|
|
|
14 |
|
|
|
- |
|
|
|
443 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
443 |
|
Equity
based compensation costs
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
212 |
|
|
|
- |
|
|
|
- |
|
|
|
704 |
|
|
|
916 |
|
Retirement
of Series G preferred stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25,695 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25,695 |
|
Retirement
of common stock
|
|
|
- |
|
|
|
(350 |
) |
|
|
- |
|
|
|
(20,271 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(20,271 |
) |
Retirement
of exchangeable bonds
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,461 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,461 |
) |
Distributions
to noncontrolling interest
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,420 |
) |
|
|
(5,420 |
) |
Dividends
declared
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(28,675 |
) |
|
|
- |
|
|
|
- |
|
|
|
(28,675 |
) |
Balances
at March 31, 2009
|
|
$ |
25,000 |
|
|
|
26,060 |
|
|
$ |
2 |
|
|
$ |
1,045,603 |
|
|
$ |
(151,615 |
) |
|
$ |
(58,942 |
) |
|
$ |
235,548 |
|
|
$ |
1,095,596 |
|
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)
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Net
cash provided by operating activities
|
|
$ |
55,063 |
|
|
$ |
47,235 |
|
|
|
|
|
|
|
|
|
|
Cash
flows used in investing activities:
|
|
|
|
|
|
|
|
|
Additions
to real estate:
|
|
|
|
|
|
|
|
|
Acquisitions
and improvements to recent acquisitions
|
|
|
(337 |
) |
|
|
(1,720 |
) |
Capital
expenditures and redevelopment
|
|
|
(12,654 |
) |
|
|
(19,333 |
) |
Additions
to real estate under development
|
|
|
(24,251 |
) |
|
|
(10,245 |
) |
Dispositions
of real estate
|
|
|
12,395 |
|
|
|
- |
|
Changes
in restricted cash and refundable deposits
|
|
|
21,189 |
|
|
|
245 |
|
Purchases
of marketable securities
|
|
|
(17,183 |
) |
|
|
(5,818 |
) |
Sales
and maturities of marketable securities
|
|
|
12,257 |
|
|
|
3,790 |
|
Proceeds
from tax credit investor
|
|
|
3,762 |
|
|
|
- |
|
Advances
under notes and other receivables
|
|
|
(725 |
) |
|
|
(784 |
) |
Collections
of notes and other receivables
|
|
|
2,220 |
|
|
|
634 |
|
Contributions
to co-investments
|
|
|
(270 |
) |
|
|
(285 |
) |
Distributions
from co-investments
|
|
|
- |
|
|
|
7,500 |
|
Net
cash used in investing activities
|
|
|
(3,597 |
) |
|
|
(26,016 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings
under mortgage and other notes payable and lines of credit
|
|
|
165,504 |
|
|
|
154,834 |
|
Repayment
of mortgage and other notes payable and lines of credit
|
|
|
(39,875 |
) |
|
|
(127,053 |
) |
Additions
to deferred charges
|
|
|
(343 |
) |
|
|
(446 |
) |
Retirement
of exchangeable bonds
|
|
|
(66,460 |
) |
|
|
- |
|
Retirement
of comon stock
|
|
|
(20,271 |
) |
|
|
(13,723 |
) |
Retirement
of preferred stock, Series G
|
|
|
(32,572 |
) |
|
|
- |
|
Net
proceeds from stock options exercised
|
|
|
443 |
|
|
|
651 |
|
Distributions
to noncontrolling interest
|
|
|
(5,420 |
) |
|
|
(5,882 |
) |
Redemption
of noncontrolling interest
|
|
|
- |
|
|
|
(3,728 |
) |
Common
and preferred stock dividends paid
|
|
|
(29,169 |
) |
|
|
(25,471 |
) |
Net
cash used in financing activities
|
|
|
(28,163 |
) |
|
|
(20,818 |
) |
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
23,303 |
|
|
|
401 |
|
Cash
and cash equivalents at beginning of period
|
|
|
41,909 |
|
|
|
9,956 |
|
Cash
and cash equivalents at end of period
|
|
$ |
65,212 |
|
|
$ |
10,357 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest, net of $3.2 million and $2.4 million capitalized in
2009 and 2008, respectively
|
|
$ |
14,853 |
|
|
$ |
15,879 |
|
Supplemental
disclosure of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual
of dividends
|
|
$ |
31,618 |
|
|
$ |
30,880 |
|
Change
in value of cash flow hedge liabilities
|
|
$ |
18,304 |
|
|
$ |
9,944 |
|
Change
in construction payable
|
|
$ |
3,533 |
|
|
$ |
14,943 |
|
See
accompanying notes to the unaudited condensed consolidated financial
statements.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
March
31, 2009 and 2008
(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, 2008.
All
significant intercompany balances and transactions have been eliminated in the
condensed consolidated financial statements.
The
unaudited condensed consolidated financial statements for the three months ended
March 31, 2009 and 2008 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 March 31,
2009. Total Operating Partnership units outstanding were 2,450,002
and 2,413,078 as of March 31, 2009 and December 31, 2008, respectively, and the
redemption value of the units based on the closing price of the
Company’s
common stock totaled $140.5 million and $185.2 million, as of March 31,
2009 and December 31, 2008, respectively.
As of
March 31, 2009, the Company owned or had ownership interests in 132 apartment
communities, (aggregating 26,862 units) (collectively, the “Communities”, and
individually, a “Community”), five office and commercial buildings and six
active development projects (collectively, the “Portfolio”). The
Communities 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 which were fully contributed as of
2008. The Company contributed $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 March 31, 2009, owned 12 apartment communities and two development
projects. The Company 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 REIT
unsecured bonds. 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
REIT bonds as available for sale and the Company reports these
securities at fair value, based on quoted market prices (Level 1 as defined by
FAS 157 as discussed in Note 8), 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. Amortization of unearned
discounts on both held to maturity and available for sale securities is included
in interest income.
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 19
DownREIT limited partnerships (comprising twelve communities), a development
project, an office building that is subject to loans made by the Company, and 55
low income housing units. Total DownREIT units outstanding were
1,148,510 as of March 31, 2009 and December 31, 2008, and the redemption
value of the units based on the closing price of the Company’s common
stock totaled $65.9 million and $88.1 million, as of March 31, 2009 and
December 31, 2008, respectively. 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 $275.9 million and $178.1 million, respectively, as of March 31,
2009 and $256.0 million and $169.1 million , respectively, as of December 31,
2008. 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
March 31, 2009 and December 31, 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 13, “Stock Based Compensation Plans,” in
the Company’s Form 10-K for the year ended December 31, 2008) are being
amortized over the expected service periods.
Stock-based
compensation expense for options and restricted stock totaled $0.2 million for
the three months ended March 31, 2009 and 2008, respectively. The
intrinsic value of the stock options exercised during the three months ended
March 31, 2009 and 2008 totaled $0.3 million and $0.6 million,
respectively. As of March 31, 2009, the intrinsic value of the stock
options outstanding and fully vested totaled $0.8 million. As of
March 31, 2009, total unrecognized compensation cost related to unvested
share-based compensation granted under the stock option and restricted stock
plans totaled $3.1 million. The cost is expected to be recognized
over a weighted-average period of 2 to 4 years for the stock option plans and is
expected to be recognized straight-line over 7 years for the restricted stock
awards.
The
Company has adopted an incentive program involving the issuance of Series Z and
Series Z-1 Incentive Units (collectively referred to as “Z Units”) of limited
partnership interest in the Operating Partnership. Stock-based
compensation expense for Z Units totaled $0.4 million for the three months ended
March 31, 2009 and 2008, respectively.
Stock-based
compensation capitalized for stock options, restricted stock awards, and the Z
Units totaled $0.2 million for the three months ended March 31, 2009 and
2008. As of March 31, 2009 the intrinsic value of the Z Units subject
to conversion totaled $16.2 million. As of March 31, 2009, total
unrecognized compensation cost related to Z Units subject to conversion in the
future granted under the Z Units totaled $6.2 million. The
unamortized cost is expected to be recognized over the next 2 to 10 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 for three months ended March
31, 2009 and 2008, respectively. Total unrecognized compensation cost less
an estimate for forfeitures related to the OPP totaled $3.8 million and $4.1
million as of March 31, 2009 and December 31, 2008, respectively. The
unamortized cost is recognized over the expected service period of five
years for senior officers and three years for non-employee
directors.
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 receivables 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.
Reclassifications
for discontinued operations and noncontrolling interest have been made to prior
year statements of operations balances in order to conform to current year
presentation. Such reclassifications have no impact on reported
earnings, cash flows, total assets or total liabilities.
New
Accounting Pronouncements and the Resulting Restatements of Previously Reported
Amounts
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“FAS 160”). FAS 160 establishes
accounting and reporting standards that require the ownership interests in
subsidiaries held by parties other than the parent be clearly identified,
labeled, and presented in the consolidated statement of financial position
within equity, but separate from the parent’s equity; the amount of consolidated
net income attributable to the parent and to the noncontrolling interest be
clearly identified and presented on the face of the consolidated statement of
income; changes in a parent’s ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted for consistently;
when a subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary be initially measured at fair value; and
entities provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. FAS 160 is effective for fiscal years beginning on or after
December 15, 2008. As summarized in the table below, the accompanying
condensed consolidated financial statements have been restated to record the
impact of adoption of FAS 160.
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. Accounting for the Company’s $225.0 million exchangeable bonds
(the “Bonds”) with a coupon rate of 3.625% due November 2025, which were issued
in the fourth quarter of 2005, was impacted by APB 14-1. During the
fourth quarter of 2008, the Company repurchased $53.3 million of the Bonds, and
during the first quarter of 2009 the Company repurchased an additional $71.3
million of the Bonds.
On
January 1, 2009, the Company retrospectively adopted APB 14-1 for the
Bonds. The Company estimated that the market interest rate for the
debt only portion of the Bonds as of the date of issuance was 5.75%, compared to
the coupon rate of 3.625%. The Company computed the estimated fair
value of the debt portion of the Bonds as the present value of the expected cash
flows discounted at 5.75%. The difference between the fair value of
the debt portion of the Bonds and the carrying value as previously reported was
added to additional paid in capital as of the date of issuance. The
discount on the debt is amortized over the period from issuance to the date of
the first call option by the holders of the Bonds which occurs in November 2010
resulting in non-cash interest expense in addition to the interest expense
calculated based on the coupon rate. This resulted in a non-cash
interest charge of $0.6 million and $1.0 million for the first quarter of 2009
and 2008, respectively. APB 14-1 requires that the fair value of the
debt portion of any bonds that are retired early be estimated to calculate the
gain on retirement. The difference between the estimated fair
value of the debt portion of the Bonds and the APB 14-1 carrying value of the
debt portion of the Bonds is recorded as gain on early retirement of debt
and additional paid in capital is reduced to reflect the remaining
portion of the total amount paid to retire the Bonds. This resulted
in increasing the gains previously reported for the year ended December 31, 2008
related to early retirements of Bonds by $0.5 million. This
adjustment along with the non-cash interest charges for the period from issuance
of the Bonds through December 31, 2008 resulted in a net reduction of equity,
including the portion allocated to noncontrolling interests, as summarized in
the table below.
The
following is a summary of the impact to the December 31, 2008 balance sheet and
first quarter of 2008 statement of operations from amounts previously reported
to amounts included in the accompanying condensed consolidated financial
statements as a result of the retrospective adoption of FAS 160 and APB
14-1:
|
|
As
Reported December 31,
|
|
|
Adoption
of
|
|
|
Adoption
of
|
|
|
Restated
December 31,
|
|
|
|
2008
|
|
|
FAS
160
|
|
|
APB
14-1
|
|
|
2008
|
|
Selected
balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchangeable
bonds
|
|
$ |
171,716 |
|
|
$ |
- |
|
|
$ |
(6,259 |
) |
|
$ |
165,457 |
|
Minority
interest
|
|
|
234,821 |
|
|
|
(233,771 |
) |
|
|
(1,050 |
) |
|
|
- |
|
Additional
paid-in capital
|
|
|
1,026,037 |
|
|
|
- |
|
|
|
17,948 |
|
|
|
1,043,985 |
|
Distributions
in excess of accumulated earnings
|
|
|
(130,697 |
) |
|
|
- |
|
|
|
(10,639 |
) |
|
|
(141,336 |
) |
Noncontrolling
interest
|
|
|
- |
|
|
|
233,771 |
|
|
|
- |
|
|
|
233,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
Reported (1)
|
|
|
Adoption
of
|
|
|
Adoption
of
|
|
|
Restated
|
|
Selected
income statement data:
|
|
Q1
2008
|
|
|
FAS
160
|
|
|
APB
14-1
|
|
|
Q1
2008
|
|
Interest
expense
|
|
$ |
20,130 |
|
|
$ |
- |
|
|
$ |
1,009 |
|
|
$ |
21,139 |
|
Noncontrolling
interest
|
|
|
5,843 |
|
|
|
- |
|
|
|
(84 |
) |
|
|
5,759 |
|
Earnings
per diluted share
|
|
|
0.63 |
|
|
|
- |
|
|
|
(0.04 |
) |
|
|
0.59 |
|
(1) As
reported balances are adjusted for discontinued operations.
In
December 2007, the FASB issued revised SFAS No. 141, “Business Combinations” (“FAS
141(R)”). FAS141(R)
establishes principles and requirements for how the acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree; recognizes
and measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. FAS 141(R) is effective for business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The
adoption of this standard on January 1, 2009 did not have any impact on the
Company’s consolidated financial position, results of operations or cash flows
as it relates only to business combinations for the Company that take place on
or after January 1, 2009.
(2) Significant
Transactions
(a) Dispositions
During
the first quarter, the Company sold Carlton Heights Villas, a 70-unit community
located in Santee, California for $6.9 million and recognized a gain of
approximately $1.6 million. Also in the first quarter, the Company
sold Grand Regency, a 60-unit property in Escondido, California for $5.0 million
and recognized a gain of approximately $0.9 million.
(b)
Debt and Financing Activities
During
the first quarter, the Company repurchased $71.3 million of 3.625% exchangeable
bonds at a discount to par value and recognized a gain of $6.1
million.
During
the first quarter, the Company obtained fixed rate mortgage loans totaling $81.9
million, including the following:
|
·
|
$48.9
million loan secured by Avondale, at a rate of 6.11%, which matures in
March 2019.
|
|
·
|
$23.0
million loan secured by Stevenson Place, at a rate of 6.35%, which matures
in March 2019.
|
|
·
|
$10.0
million 2nd
deed of trust loan secured by Esplanade, at a rate of 6.25%, which matures
in August 2015.
|
Additionally,
during the first quarter, the Company paid-off $17.0 million in maturing loans
including:
|
·
|
Two
mortgage loans secured by Monterra del Rey with fixed rates of 7.0% and
5.2%, respectively, maturing in May 2009 for an aggregate amount of $10.0
million.
|
|
·
|
One
mortgage loan secured by Mariner’s Place with a fixed rate of 7.3%
maturing in April 2009 for $3.8
million.
|
|
·
|
A
Belmont Station construction bridge loan maturing in June 2009 for $3.2
million.
|
(c)
Equity
In
February 2009, the Company, under its stock repurchase program, repurchased
350,000 shares of common stock for $20.3 million at an average price of
$57.89.
During
the first quarter, the Company repurchased $58.2 million of its Series G
Cumulative Convertible Preferred Stock at a 46.6% discount to its carrying
value, and the excess of the carrying value over the cash paid to redeem the
Series G Preferred Stock totaled $25.7 million.
(3)
Co-investments
The
Company has joint venture investments in a number of co-investments, which are
accounted for under the equity method. The joint ventures own and
operate apartment communities. The following table details the
Company's co-investments (dollars in thousands):
|
|
March 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
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")
|
|
$ |
70,103 |
|
|
$ |
70,469 |
|
Development
joint venture
|
|
|
- |
|
|
|
5,377 |
|
|
|
|
70,103 |
|
|
|
75,846 |
|
Investments
accounted for under the cost method of accounting:
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock interest in Multifamily Technology Solutions,
Inc
|
|
|
500 |
|
|
|
500 |
|
Total
co-investments
|
|
$ |
70,603 |
|
|
$ |
76,346 |
|
During
2006, the Company made a contribution to a development with a joint venture
partner totaling $3.4 million, and over the past three years the Company made
additional contributions and capitalized costs to this joint venture totaling
$2.4 million for a total investment of $5.8 million. This joint
venture was to obtain entitlements and make option payments towards the purchase
of land parcels in Marina del Rey, California for a proposed development
project. During the first quarter of 2009, the Company wrote-off its
investment in the joint venture development project for $5.8 million, and the
write-off of these costs is included in the accompanying consolidated condensed
statements of operations.
The
combined summarized balance sheet for co-investments, which are accounted for
under the equity method, is as follows (dollars in thousands).
|
|
March 31, 2009
|
|
|
December 31, 2008
|
|
Balance
sheets:
|
|
|
|
|
|
|
Rental
properties and real estate under development
|
|
$ |
502,775 |
|
|
$ |
526,906 |
|
Other
assets
|
|
|
44,547 |
|
|
|
40,877 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
547,322 |
|
|
$ |
567,783 |
|
|
|
|
|
|
|
|
|
|
Mortgage
notes and construction payable
|
|
$ |
315,530 |
|
|
$ |
308,853 |
|
Other
liabilities
|
|
|
11,249 |
|
|
|
8,481 |
|
Partners'
equity
|
|
|
220,543 |
|
|
|
250,449 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and partners' equity
|
|
$ |
547,322 |
|
|
$ |
567,783 |
|
|
|
|
|
|
|
|
|
|
Company's
share of equity
|
|
$ |
70,103 |
|
|
$ |
75,846 |
|
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 March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Statements
of operations:
|
|
|
|
|
|
|
Property
revenues
|
|
$ |
12,003 |
|
|
$ |
10,997 |
|
Property
operating expenses
|
|
|
(4,330 |
) |
|
|
(4,187 |
) |
Net
property operating income
|
|
|
7,673 |
|
|
|
6,810 |
|
Interest
expense
|
|
|
(2,192 |
) |
|
|
(2,706 |
) |
Depreciation
and amortization
|
|
|
(3,612 |
) |
|
|
(3,025 |
) |
|
|
|
|
|
|
|
|
|
Total
net income
|
|
$ |
1,869 |
|
|
$ |
1,079 |
|
|
|
|
|
|
|
|
|
|
Company's
share of operating net income
|
|
|
539 |
|
|
|
312 |
|
Company's
preferred interest/gain - Mt. Vista
|
|
|
- |
|
|
|
6,318 |
|
Company's
share of net income
|
|
$ |
539 |
|
|
$ |
6,630 |
|
In
January 2008, the Company received $7.5 million and recognized $6.3 million of
preferred interest in the joint venture 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 March 31, 2009 and December 31, 2008 (dollars in
thousands):
|
|
March 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
Note
receivable, secured, bearing interest at LIBOR + 3.69%, due June
2009
|
|
|
7,317 |
|
|
|
7,325 |
|
Note
receivable, secured, bearing interest at LIBOR + 2.95%, due December
2010
|
|
|
12,500 |
|
|
|
14,043 |
|
Note
receivable, secured, bearing interest at 8.0%, due November
2010
|
|
|
971 |
|
|
|
965 |
|
Note
receivable, secured, bearing interest at LIBOR + 4.75%, due March
2011
|
|
|
7,326 |
|
|
|
7,294 |
|
Note
receivable, secured, bearing interest at 6.5%, due August
2011
|
|
|
4,070 |
|
|
|
4,070 |
|
Non-performing
- note receivable, secured
|
|
|
12,748 |
|
|
|
12,748 |
|
Other
receivables
|
|
|
1,209 |
|
|
|
1,192 |
|
|
|
$ |
46,141 |
|
|
$ |
47,637 |
|
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. During the fourth quarter of 2008, the Company
recorded a loan loss reserve in the amount of $0.7 million on this
non-performing note receivable. The Company expects the note will be
settled through the foreclosure or sale of the property.
In the
first quarter of 2009, the borrower on the bridge loan secured by 301 Ocean
Avenue a 47-unit apartment community located in Santa Monica, California made a
principal payment of $1.6 million to pay down the loan to $12.5 million and the
Company extended the maturity of the loan until December 2010.
(5)
Related Party Transactions
Management
and other fees from affiliates includes management, promote, development and
redevelopment fees from related parties of $1.2 million for the quarters ended
March 31, 2009 and 2008. 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.
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 which are primarily office
buildings. 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 March 31, 2009 and 2008
(dollars in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
Southern
California
|
|
$ |
53,531 |
|
|
$ |
52,493 |
|
Northern
California
|
|
|
30,861 |
|
|
|
28,629 |
|
Seattle
Metro
|
|
|
19,118 |
|
|
|
16,929 |
|
Other
real estate assets
|
|
|
1,172 |
|
|
|
679 |
|
Total
property revenues
|
|
$ |
104,682 |
|
|
$ |
98,730 |
|
|
|
|
|
|
|
|
|
|
Net
operating income:
|
|
|
|
|
|
|
|
|
Southern
California
|
|
$ |
36,527 |
|
|
$ |
36,033 |
|
Northern
California
|
|
|
21,397 |
|
|
|
19,047 |
|
Seattle
Metro
|
|
|
12,686 |
|
|
|
11,374 |
|
Other
real estate assets
|
|
|
694 |
|
|
|
526 |
|
Total
net operating income
|
|
|
71,304 |
|
|
|
66,980 |
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
(29,175 |
) |
|
|
(26,766 |
) |
Interest
expense
|
|
|
(20,203 |
) |
|
|
(21,139 |
) |
General
and administrative
|
|
|
(6,233 |
) |
|
|
(6,625 |
) |
Write-off
of development joint venture
|
|
|
(5,752 |
) |
|
|
- |
|
Management
and other fees from affiliates
|
|
|
1,197 |
|
|
|
1,227 |
|
Gain
on early retirement of debt
|
|
|
6,124 |
|
|
|
- |
|
Interest
and other income
|
|
|
3,287 |
|
|
|
2,768 |
|
Equity
income from co-investments
|
|
|
539 |
|
|
|
6,630 |
|
Income
before discontinued operations
|
|
$ |
21,088 |
|
|
$ |
23,075 |
|
|
|
March 31, 2009
|
|
|
December 31, 2008
|
|
Assets:
|
|
|
|
|
|
|
Southern
California
|
|
$ |
1,267,671 |
|
|
$ |
1,291,850 |
|
Northern
California
|
|
|
847,196 |
|
|
|
850,170 |
|
Seattle
Metro
|
|
|
429,177 |
|
|
|
431,041 |
|
Other
real estate assets
|
|
|
65,690 |
|
|
|
66,701 |
|
Net
reportable operating segments - real estate assets
|
|
|
2,609,734 |
|
|
|
2,639,762 |
|
Real
estate under development
|
|
|
292,607 |
|
|
|
272,273 |
|
Cash
and cash equivalents
|
|
|
78,820 |
|
|
|
54,719 |
|
Marketable
securities
|
|
|
30,143 |
|
|
|
23,886 |
|
Funds
held by 1031 exchange facilitator
|
|
|
- |
|
|
|
21,424 |
|
Notes
and other receivables
|
|
|
46,141 |
|
|
|
47,637 |
|
Other
non-segment assets
|
|
|
104,470 |
|
|
|
105,122 |
|
Total
assets
|
|
$ |
3,161,915 |
|
|
$ |
3,164,823 |
|
(7) Net Income Per Common
Share
(Amounts
in thousands, except per share and unit data)
|
|
Three Months Ended March 31,
2009
|
|
|
Three Months Ended March 31,
2008
|
|
|
|
Income
|
|
|
Weighted-
average Common Shares
|
|
|
Per
Common Share Amount
|
|
|
Income
|
|
|
Weighted-
average Common Shares
|
|
|
Per
Common Share Amount
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations available to common
stockholders
|
|
$ |
40,184 |
|
|
|
26,225 |
|
|
$ |
1.53 |
|
|
$ |
14,956 |
|
|
|
24,748 |
|
|
$ |
0.61 |
|
Income
(loss) from discontinued operations available to common
stockholders
|
|
|
2,081 |
|
|
|
26,225 |
|
|
|
0.08 |
|
|
|
(176 |
) |
|
|
24,748 |
|
|
|
(0.01 |
) |
|
|
|
42,265 |
|
|
|
|
|
|
$ |
1.61 |
|
|
|
14,780 |
|
|
|
|
|
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities (1)
|
|
|
- |
|
|
|
2,468 |
|
|
|
|
|
|
|
- |
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations available to common stockholders
(1)
|
|
|
41,814 |
|
|
|
28,693 |
|
|
$ |
1.45 |
|
|
|
14,956 |
|
|
|
24,878 |
|
|
$ |
0.60 |
|
Income
(loss) from discontinued operations available to common
stockholders
|
|
|
2,250 |
|
|
|
28,693 |
|
|
|
0.08 |
|
|
|
(176 |
) |
|
|
24,878 |
|
|
|
(0.01 |
) |
|
|
$ |
44,064 |
|
|
|
|
|
|
$ |
1.53 |
|
|
$ |
14,780 |
|
|
|
|
|
|
$ |
0.59 |
|
|
(1)
|
Weighted
convertible limited partnership units of 2,161,964 and vested Series Z
incentive units of 282,783 for the three months ended March 31, 2009 were
included in the determination of diluted EPS, and convertible limited
partnership units of 2,271,295 and vested Series Z incentive units of
249,684 for the three months ended March 31, 2008, 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 exchangeable notes may exchange, at
the then applicable exchange rate, the notes for cash and, at the Company’s
option, a portion of the notes may be exchanged for Essex common stock; the
current exchange rate is $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
months ended March 31, 2009 and 2008 the weighted average common stock price did
not exceed the $103.25 strike price and therefore common stock issuable upon
exchange of the exchangeable notes was not included in the diluted share count
as the effect was anti-dilutive. 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 102,290 and 160,252 for the three months ended March 31, 2009 and
2008, 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 months ended and,
therefore, were anti-dilutive.
3,595,716
and 5,980,000 shares of cumulative convertible preferred stock Series G have
been excluded from diluted earnings per share for the three months ended March
31, 2009 and 2008, respectively, as the effect was anti-dilutive.
(8) Derivative
Instruments and Hedging Activities
The
Company adopted FAS 157, “Fair
Value Measurements” as of January 1, 2008, which provides guidance on
using fair value to measure assets and liabilities. The Company
values forward-starting interest rate swaps and interest rate caps at fair
value, and based on the fair value hierarchy of valuation techniques described
in FAS 157, 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
March 31, 2009 the Company had seven forward-starting interest rate swap
contracts totaling a notional amount of $375.0 million with interest rates
ranging from 5.1% to 5.9% and settlements dates ranging from November 2010 to
October 2011. These derivatives qualify for hedge accounting as they
are expected to economically hedge the cash flows associated with future
financing of debt between 2010 and 2011. The Company had twelve
interest rate cap contracts totaling a notional amount of $183.4 million that
qualify for hedge accounting as they effectively limit the Company’s exposure to
interest rate risk by providing a ceiling on the underlying variable interest
rate for the Company’s $233.1 million of tax exempt variable rate
debt. The aggregate carrying value of the forward-starting interest
rate swap contracts was a net liability of $55.0 million and the aggregate
carrying value of the interest rate cap contracts was an asset of $0.1
million. The overall fair value of the derivatives increased $18.3 million
during the three months ended March 31, 2009 to a net liability of $54.8 million
as of March 31, 2009, and the derivative liability was recorded in cash flow
hedge liabilities in the Company’s condensed consolidated financial
statements. The changes in the fair values of the derivatives are
reflected in comprehensive (loss) income in the Company’s condensed consolidated
financial statements. No hedge ineffectiveness on cash flow hedges
was recognized during the quarter ended March 31, 2009 and 2008.
(9) Discontinued
Operations
In the
normal course of business, the Company will receive offers for sale of its
communities, either solicited or unsolicited. For those offers that are
accepted, the prospective buyer will usually require a due diligence period
before consummation of the transaction. It is not unusual for matters
to arise that result in the withdrawal or rejection of the offer during this
process. Essex classifies real estate as "held for sale" when all
criteria under SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (“SFAS 144”) have been met.
In the
first quarter of 2009, the Company sold Carlton Heights Villas, a 70-unit
property located in Santee, California for $6.9 million resulting in a $1.6
million gain and Grand Regency, a 60-unit property in Escondido, California, for
$5.0 million resulting in a $0.9 million gain.
In the
fourth quarter of 2008, the Company sold Coral Gardens, a 200-unit property
located in El Cajon, California for $19.8 million, and in 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. The operations for these sold communities are
included in discontinued operations for the three months ended March 31,
2008.
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 (dollars in thousands).
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Rental
revenues
|
|
$ |
157 |
|
|
$ |
2,746 |
|
Property
operating expenses
|
|
|
(103 |
) |
|
|
(1,229 |
) |
Interest
expense
|
|
|
- |
|
|
|
(775 |
) |
Depreciation
and amortization
|
|
|
(29 |
) |
|
|
(968 |
) |
Income
(loss) from real estate sold
|
|
|
25 |
|
|
|
(226 |
) |
Gain
on sale
|
|
|
2,472 |
|
|
|
- |
|
Internal
disposition costs (1)
|
|
|
(247 |
) |
|
|
- |
|
Income
(loss) from discontinued operations
|
|
$ |
2,250 |
|
|
$ |
(226 |
) |
(1) Internal
disposition costs relate to a disposition incentive program established to pay
incremental bonuses for the sale of certain of the Company's communities that
are part of the program.
(10) Commitments
and Contingencies
The
Company is subject to various lawsuits in the normal course of its business
operations. Such lawsuits are not expected to have a material adverse
effect on the Company’s financial condition, results of operations or cash
flows.
The
following discussion should be read in conjunction with our Condensed
Consolidated Financial Statements and accompanying Notes thereto included
elsewhere herein and with our 2008 Annual Report on Form 10-K for the year ended
December 31, 2008 and our Current Report on Form 10-Q for the quarter ended
March 31, 2009.
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
March 31, 2009, we had ownership interests in 132 apartment communities,
comprising 26,862 apartment units. Our apartment communities are
located in the following major West Coast regions:
Southern California (Los
Angeles, Orange, Riverside, Santa Barbara, San Diego and Ventura
counties)
Northern California (the San
Francisco Bay Area)
Seattle Metro (Seattle metropolitan
area)
As of
March 31, 2009, we also had ownership interests in five office and commercial
buildings (with approximately 215,840 square feet).
As of
March 31, 2009, our consolidated development pipeline, excluding development
projects owned by Fund II, was comprised of four development projects,
three predevelopment projects and four land parcels held for future development
aggregating 2,200 units, with total incurred costs of $292.6
million. The estimated remaining project costs of active development
projects were $112.8 million for total estimated project costs of $279.6
million.
The
Company’s consolidated apartment communities are as follows:
|
|
As of March 31, 2009
|
|
|
As of March 31, 2008
|
|
|
|
Apartment
Units
|
|
|
%
|
|
|
Apartment
Units
|
|
|
%
|
|
Southern
California
|
|
|
12,370 |
|
|
|
51 |
% |
|
|
12,725 |
|
|
|
53 |
% |
Northern
California
|
|
|
6,457 |
|
|
|
27 |
% |
|
|
6,361 |
|
|
|
26 |
% |
Seattle
Metro
|
|
|
5,338 |
|
|
|
22 |
% |
|
|
5,005 |
|
|
|
21 |
% |
Total
|
|
|
24,165 |
|
|
|
100 |
% |
|
|
24,091 |
|
|
|
100 |
% |
Co-investments
including Fund II communities and communities included in discontinued
operations are not included in the table
above for both years presented above.
Comparison
of the Three Months Ended March 31, 2009 to the Three Months Ended March 31,
2008
Our
average financial occupancies for the Company’s stabilized apartment communities
or “Quarterly Same-Property” (stabilized properties consolidated by the Company
for the quarters ended March 31, 2009 and 2008) increased 110 basis points to
97.0% as of March 31, 2009 from 95.9% as of March 31, 2008. 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 March 31, 2009 and 2008 is as
follows:
|
|
Three
months ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Southern
California
|
|
|
96.5 |
% |
|
|
95.1 |
% |
Northern
California
|
|
|
97.6 |
% |
|
|
96.7 |
% |
Seattle
Metro
|
|
|
97.3 |
% |
|
|
96.8 |
% |
The
following table provides a breakdown of revenue amounts, including revenues
attributable to the Quarterly Same-Property portfolio:
|
|
Number
of
|
|
|
Three
Months Ended March 31,
|
|
|
Dollar
|
|
|
Percentage
|
|
|
|
Properties
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change
|
|
Property
Revenues (dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Property:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern
California
|
|
|
58 |
|
|
$ |
47,945 |
|
|
$ |
48,054 |
|
|
$ |
(109 |
) |
|
|
(0.2 |
)
% |
Northern
California
|
|
|
26 |
|
|
|
27,010 |
|
|
|
25,725 |
|
|
|
1,285 |
|
|
|
5.0 |
|
Seattle
Metro
|
|
|
24 |
|
|
|
15,654 |
|
|
|
15,053 |
|
|
|
601 |
|
|
|
4.0 |
|
Total
Same-Property revenues
|
|
|
108 |
|
|
|
90,609 |
|
|
|
88,832 |
|
|
|
1,777 |
|
|
|
2.0 |
|
Non-Same
Property Revenues (1)
|
|
|
|
|
|
|
14,073 |
|
|
|
9,898 |
|
|
|
4,175 |
|
|
|
42.2 |
|
Total
property revenues
|
|
|
|
|
|
$ |
104,682 |
|
|
$ |
98,730 |
|
|
$ |
5,952 |
|
|
|
6.0
|
% |
(1) Includes two communities acquired
after January 1, 2008, eight redevelopment communities, two development
communities, and three commercial buildings.
Quarterly Same-Property
Revenues increased by $1.8 million or 2.0% to $90.6 million in the first
quarter of 2009 from $88.8 million in the first quarter of 2008. The
increase in the first quarter of 2009 was primarily attributable to increased
occupancy of 110 basis points or $0.9 million, from 95.9% for the first quarter
of 2008 to 97.0% for the first quarter of 2009. Although scheduled
rents increased 2.8% in Northern California and 2.3% in the Seattle Metro area,
these increases in scheduled rent were offset by a 2.2% decrease in scheduled
rents for Southern California and the overall scheduled rents for the aggregate
Quarterly Same-Property portfolio were flat at an average rental rate of $1,402
per unit for the two quarters. Ratio utility billing system (“RUBS”)
income and other income increased $0.6 million, rent concessions decreased $0.2
million and bad debt expense was consistent between quarters. The
Company expects that total Same-Property revenues will decrease in the second
quarter of 2009 from the same period in 2008, due to an expected decrease in
scheduled rents compared to the same period in 2008.
Quarterly Non-Same Property
Revenues increased by $4.2 million or 42.2% to $14.1 million in the first
quarter of 2009 from $9.9 million in the first quarter of 2008. The
increase was primarily due to two new communities acquired since January 1,
2008, two development communities in lease-up and eight communities that are in
redevelopment and classified in non-same property results.
Real estate taxes increased
$1.0 million or 12.5% for the quarter over 2008, primarily due to the
acquisition of two new properties, the lease-up of two development properties
and an estimated 14% increase in real estate taxes in the Seattle Metro
area.
Depreciation expense
increased by $2.4 million or 9.0% for the first quarter of 2009 compared to the
first quarter of 2008, primarily due to the acquisition of two new communities,
the lease-up of two development properties, and the capitalization of
approximately $88.0 million of additions to rental properties, including $55.5
million spent on redevelopment and revenue generating capital expenditures
during 2008.
Write-off of investment in
development joint venture of $5.8 million for the first quarter of 2009
related to the write-off the full amount of the Company’s investment in a
predevelopment joint venture project in Southern California.
Gain on early retirement of debt
was $6.1 million for the first quarter of 2009 compared to $0 in the
first quarter of 2008, due to the repurchase of $71.3 million of 3.625%
exchangeable bonds at a discount to par value.
Equity income in co-investments
decreased by $6.1 million to $0.5 million from $6.6 million in 2008, due
to the fact that in the first quarter of 2008, the Company recognized
$6.3 million of preferred income from the retirement of the Company’s investment
in the Mountain Vista, LLC joint venture.
Income from discontinued
operations for the first quarter of 2009 includes operating results of
Carlton Heights and Grand Regency which were sold during the quarter for a
combined gain of $2.5 million. Discontinued operations for the first
quarter of 2008 includes the operating results for those two properties as well
as Cardiff by the Sea, St. Cloud and Coral Gardens, which were sold in the third
and fourth quarters of 2008.
Liquidity
and Capital Resources
In June
2008, Standard and Poor's (“S&P”) reaffirmed its corporate credit rating of
BBB/Stable for Essex Property Trust, Inc. and Essex Portfolio L.P.
At March
31, 2009, the Company had $65.2 million of unrestricted cash and cash
equivalents and $30.1 million in marketable securities. We believe
that cash flows generated by our operations, existing cash balances,
availability under existing lines of credit, access to capital markets and the
ability to generate cash gains from the disposition of real estate and
marketable securities held available for sale are sufficient to meet all of our
reasonably anticipated cash needs during 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 and, as of March 31, 2009,
there was $45.0 million outstanding balance on the line at an average interest
rate of 2.7%. This facility matures in March 2010. 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%. We also have
a $150.0 million credit facility from Freddie Mac, which is expandable to $250.0
million at any time during the first two years and which matures in December
2013. This line is secured by ten apartment
communities. As of March 31, 2009, we had $140.0 million outstanding
under this line of credit at an average interest rate of 2.0%. The underlying
interest rate on this line is between 99 and 150 basis points over the Freddie
Mac Reference Rate and the interest rate is subject to change by the lender in
November 2011. In March 2009, the Company did not renew upon maturity
a $10.0 million unsecured revolving line of credit. 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 March 31, 2009 and December 31,
2008.
The
Company may from time to time sell shares of common stock into the existing
trading market at current market prices as well as through negotiated
transactions under its Controlled Equity Offering (“CEO”) program with Cantor
Fitzgerald & Co. (“Cantor”). During the first quarters of 2009
and 2008, no shares were sold under CEO program. In May 2009, the
Company’s Board of Directors approved the sale of an additional 7.5 million
shares of common stock under the CEO program. Pursuant to this
approval, the Company entered in a sales agreement with Cantor on May 6, 2009,
for the sale of such 7.5 million shares pursuant to the CEO
program. A copy of the sales agreement has been filed as Exhibit 10.2
to this Form 10-Q.
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 $200.0
million. The program supersedes the common stock repurchase plan that
Essex announced on May 16, 2001. In February 2009 the Company
repurchased 350,000 shares of common stock for $20.3 million at an average price
of $57.89 per share. Since the inception of the stock repurchase
plan, the Company has repurchased and retired 816,659 shares for $66.6 million
at an average price of $81.56 per share, including commissions, as of March 31,
2009. After the Series G Preferred Stock repurchases described below,
the Company has authorization to repurchase an additional $101.0 million under
the stock repurchase plan.
In 2006,
the Company sold 5,980,000 shares of 4.875% Series G Cumulative Convertible
Preferred Stock (the "Series G Preferred Stock") for net proceeds of $145.9
million. Holders may convert Series G Preferred Stock into shares of
the Company’s common stock subject to certain conditions. The
conversion rate was initially 0.1830 shares of common stock per the $25 share
liquidation preference, which is equivalent to an initial conversion price of
approximately $136.62 per share of common stock (the conversion rate will be
subject to adjustment upon the occurrence of specified events). On or
after July 31, 2011, the Company may, under certain circumstances, cause some or
all of the Series G Preferred Stock to be converted into shares of common stock
at the then prevailing conversion rate.
During
the first quarter of 2009, the Company repurchased $58.2 million of its Series G
Preferred Stock at a discount to carrying value, and the excess of the carrying
value over the cash paid to redeem the Series G Preferred Stock totaling $25.7
million. As of March 31, 2009, the carrying value of the Series
G Preferred Stock outstanding totaled $87.7 million. The Company may
continue to repurchase Series G Preferred Stock.
In 2005
the Company, through its Operating Partnership, issued $225.0 million of
outstanding exchangeable senior notes (the “Bonds”) with a coupon of 3.625% due
2025. The Bonds are senior unsecured obligations of the Operating Partnership,
and are fully and unconditionally guaranteed by the Company. On or
after November 1, 2020, the Bonds will be exchangeable at the option of the
holder into cash and, in certain circumstances at Essex’s option, shares of the
Company’s common stock at an initial exchange price of $103.25 per share subject
to certain adjustments. The Bonds 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). Bond holders may require the Operating Partnership
to repurchase all or a portion of the Bonds at a purchase price equal to the
principal amount plus accrued and unpaid interest (including additional
interest, if any) on the Bonds on November 1, 2010, November 1, 2015 and
November 1, 2020.
During
the fourth quarter of 2008 the Company repurchased $53.3 million of these Bonds
at a discount to par value, and during the first quarter of 2009, the Company
repurchased an additional $71.3 million of these Bonds at a discount to par
value and recognized a gain of $6.1 million on cash paid of $66.5
million. As of March 31, 2009, the carrying value of the Bonds
outstanding totaled $97.2 million. The Company may continue to
repurchase Bonds.
As of
March 31, 2009, the Company’s mortgage notes payable totaled $1.5 billion which
consisted of $1.3 billion in fixed rate debt with interest rates varying from
4.86% to 8.18% and maturity dates ranging from 2010 to 2020 and $233.1
million of tax-exempt variable rate demand bonds with a weighted average
interest rate of 2.5%. The tax-exempt variable rate demand bonds have
maturity dates ranging from 2020 to 2039, and $183.4 million 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 instability and
tightening in the credit markets which has led to an increase in spreads and
pricing of secured and unsecured debt. Our strong balance sheet, the
established relationships with our unsecured line of credit bank group, the
secured line of credit with Freddie Mac and access to Fannie Mae and Freddie Mac
secured debt financing have provided some insulation to us from the turmoil
being experienced by many other real estate companies. The Company
has benefited from borrowing from Fannie Mae and Freddie Mac, and there are no
assurances that these entities will lend to the Company in the
future. The Company has experienced more restrictive loan to value
and debt service coverage ratio limits and an expansion in credit
spreads. Continued turmoil in the capital markets could
negatively impact the Company’s ability to make acquisitions, develop
communities, obtain new financing, and refinance existing borrowing at
competitive rates.
Derivative
Activity
As of
March 31, 2009 the Company had seven forward-starting interest rate swap
contracts totaling a notional amount of $375.0 million with interest rates
ranging from 5.1% to 5.9% and settlements dates ranging from November 2010 to
October 2011. These derivatives qualify for hedge accounting as they
are expected to economically hedge the cash flows associated with future
financing of debt between 2010 and 2011. The Company had twelve
interest rate cap contracts totaling a notional amount of $183.4 million that
qualify for hedge accounting as they effectively limit the Company’s exposure to
interest rate risk by providing a ceiling on the underlying variable interest
rate for the Company’s $233.1 million of tax exempt variable rate
debt. The aggregate carrying value of the forward-starting interest
rate swap contracts was a net liability of $55.0 million. The aggregate
carrying value of the interest rate cap contracts was an asset of $0.1 million
and the overall fair value of the derivatives increased $18.3 million during the
three months ended March 31, 2009 to a net liability of $54.8 million as of
March 31, 2009, and the derivative liability was recorded in cash flow hedge
liabilities in the Company’s condensed consolidated financial
statements. The changes in the fair values of the derivatives are
reflected in comprehensive (loss) income in the Company’s condensed consolidated
financial statements. No hedge ineffectiveness on cash flow hedges
was recognized during the quarter ended March 31, 2009 and 2008.
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 March 31, 2009, excluding development projects
owned by Fund II, the Company had four development projects comprised of 704
units for an estimated cost of $279.6 million, of which $112.8 million remains
to be expended. The Company has approximately $59.5 million
undrawn on a construction loan to fund the joint venture Joule Broadway
development project with approximately $63.6 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 March 31, 2009, the Company had three development
communities aggregating 1,104 units that were classified as predevelopment
projects. The estimated total cost of the predevelopment pipeline at
March 31, 2009 was $372.8 million, of which $271.1 million remains to be
expended. The Company may also acquire land for future
development purposes. The Company owned four land parcels held
for future development aggregating 392 units as of March 31,
2009. The Company had incurred $24.1 million in costs related to
these four land parcels as of March 31, 2009.
The
Company expects to fund the development pipeline by using a combination of some
or all of the following sources: its working capital, amounts available on its
lines of credit, net proceeds from public and private equity and debt issuances,
and proceeds from the disposition of properties, if any.
Redevelopment
The
Company defines redevelopment activities as existing properties owned or
recently acquired, which have been targeted for additional investment by the
Company with the expectation of increased financial returns through property
improvement. The Company’s redevelopment strategy strives to improve
the financial and physical aspects of the Company’s redevelopment apartment
communities and to target at least a 7 to 9 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 March 31, 2009, the
Company had nine redevelopment communities aggregating 2,631 apartment units
with estimated redevelopment costs of $128.0 million, of which approximately
$52.9 million remains to be expended.
Alternative
Capital Sources
Fund II
has eight institutional investors, and the Company, with combined partner equity
commitments of $265.9 million that were fully contributed as of
2008. The Company contributed $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 March 31, 2009, owned twelve apartment communities and two
development projects. The Company 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 March 31, 2009, and the effect these
obligations could have on our liquidity and cash flow in future
periods:
(In
thousands)
|
|
2009
|
|
|
2010
and 2011
|
|
|
2012
and 2013
|
|
|
Thereafter
|
|
|
Total
|
|
Mortgage
notes payable
|
|
$ |
14,548 |
|
|
$ |
302,412 |
|
|
$ |
223,459 |
|
|
$ |
989,152 |
|
|
$ |
1,529,571 |
|
Exchangeable
bonds
|
|
|
- |
|
|
|
97,245 |
|
|
|
- |
|
|
|
- |
|
|
|
97,245 |
|
Lines
of credit
|
|
|
- |
|
|
|
45,000 |
|
|
|
140,000 |
|
|
|
- |
|
|
|
185,000 |
|
Interest
on indebtedness
|
|
|
69,448 |
|
|
|
151,824 |
|
|
|
111,443 |
|
|
|
247,506 |
|
|
|
580,221 |
|
Development
commitments
|
|
|
60,100 |
|
|
|
52,700 |
|
|
|
- |
|
|
|
- |
|
|
|
112,800 |
|
Redevelopment
commitments
|
|
|
30,000 |
|
|
|
22,938 |
|
|
|
- |
|
|
|
- |
|
|
|
52,938 |
|
|
|
$ |
174,096 |
|
|
$ |
672,119 |
|
|
$ |
474,902 |
|
|
$ |
1,236,658 |
|
|
$ |
2,557,775 |
|
Critical
Accounting Policies and Estimates
The
preparation of 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 Note 2, “Summary of Critical and Significant
Accounting Policies,” in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008.
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 2009 and to provide for dividend payments
in accordance with REIT requirements, as to the Quarterly Same-Property revenues
in the second quarter of 2009, expectations as to the sources for funding the
Company’s development pipeline and statements regarding the Company's financing
activities.
Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors including, but not limited to, that the Company will fail to
achieve its business objectives, that the total projected costs of current
predevelopment, development and redevelopment projects 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 in Item
1A, “Risk Factors,” in Part II “Other Information” in this current report on
Form 10-Q for the quarter ended March 31, 2009 and those discussed in Item 1A,
“Risk Factors,” of the Company's Annual Report on Form 10-K for the year ended
December 31, 2008, 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 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 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 months
ended March 31, 2009 and 2008 (in thousands except for per share
data):
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$ |
42,265 |
|
|
$ |
14,780 |
|
Adjustments:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
29,204 |
|
|
|
27,734 |
|
Gains
not included in FFO, net of disposition costs (1)
|
|
|
(2,225 |
) |
|
|
- |
|
Noncontrolling
interest and co-investments (2)
|
|
|
2,563 |
|
|
|
2,312 |
|
Funds
from operations
|
|
$ |
71,807 |
|
|
$ |
44,826 |
|
Funds
from operations per share - diluted
|
|
$ |
2.50 |
|
|
$ |
1.64 |
|
|
|
|
|
|
|
|
|
|
Weighted
average number shares outstanding diluted (3)
|
|
|
28,692,959 |
|
|
|
27,398,605 |
|
(1)
|
Internal
disposition costs relate to a disposition incentive program established to
pay incremental bonuses totaling $247,000 as of March 31, 2009, for the
sale of certain of the Company's communities that are part of the
program.
|
(2)
|
Amount includes the following:
(i) noncontrolling interest related to Operating Partnership units, and
(ii) add back of depreciation expense from unconsolidated co-investments
and less depreciation attributable to third-party ownership of
consolidated co-investments.
|
(3)
|
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 March 31, 2009, we had entered into seven
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
future financings of debt between 2010 and 2011. The
Company had twelve interest rate cap contracts totaling a notional amount of
$183.4 million that qualify for hedge accounting as they effectively limit the
Company’s exposure to interest rate risk by providing a ceiling on the
underlying variable interest rate for the Company’s $233.1 million of tax exempt
variable rate debt. All derivative instruments are designated as cash
flow hedges, and the Company does not have any fair value hedges as of March 31,
2009.
The
following table summarizes the notional amount, carrying value, and estimated
fair value of our derivative instruments used to hedge interest rates as of
March 31, 2009. 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 March 31, 2009.
(Dollars
in thousands)
|
|
Notional
Amount
|
|
|
Maturity
Date Range
|
|
|
Carrying
and Estimate Fair Value
|
|
|
+
50 Basis Points
|
|
|
-
50 Basis Points
|
|
Cash
flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate forward-starting swaps
|
|
$ |
375,000 |
|
|
|
2010-2011 |
|
|
$ |
(54,959 |
) |
|
$ |
(37,384 |
) |
|
$ |
(73,681 |
) |
Interest
rate caps
|
|
|
183,359 |
|
|
|
2009-2013 |
|
|
|
134 |
|
|
|
293 |
|
|
|
42 |
|
Total
cash flow hedges
|
|
$ |
558,359 |
|
|
|
2009-2013 |
|
|
$ |
(54,825 |
) |
|
$ |
(37,091 |
) |
|
$ |
(73,639 |
) |
Interest
Rate Sensitive Liabilities
The
Company is exposed to interest rate changes primarily as a result of its lines
of credit and long-term tax exempt variable rate debt. 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 has estimated that the fair value of the Company’s
$1.38 billion of fixed debt at March 31, 2009 is approximately $1.36 billion and
the fair value of the Company’s $248.1 million of variable rate debt at March
31, 2009 is $272.7 million based on the terms of existing mortgage notes payable
and variable rate demand notes compared to those available in the
marketplace.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Years Ended
|
|
2009
|
|
|
2010(1)
|
|
|
2011(2)
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Total
|
|
|
Fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate debt
|
|
$ |
- |
|
|
|
249,049 |
|
|
|
150,084 |
|
|
|
31,642 |
|
|
|
191,817 |
|
|
|
756,044 |
|
|
$ |
1,378,636 |
|
|
$ |
1,364,987 |
|
Average
interest rate
|
|
|
- |
|
|
|
7.3 |
% |
|
|
6.4 |
% |
|
|
5.4 |
% |
|
|
5.8 |
% |
|
|
5.6 |
% |
|
|
|
|
|
|
|
|
Variable
rate debt
|
|
$ |
14,548 |
|
|
|
- |
|
|
|
524 |
|
|
|
- |
|
|
|
- |
|
|
|
233,108 |
(3) |
|
$ |
248,180 |
|
|
$ |
272,680 |
|
Average
interest
|
|
|
2.2 |
% |
|
|
- |
|
|
|
4.0 |
% |
|
|
- |
|
|
|
- |
|
|
|
2.5 |
% |
|
|
|
|
|
|
|
|
(1) $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.
(2) $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.
(3)
$183.4 million subject to interest rate caps.
The table
incorporates only those exposures that exist as of March 31, 2009; 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 and hedging strategies, would depend on the exposures that arise
during the period.
Item 4: Controls and Procedures
As of
March 31, 2009, 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 March 31, 2009,
that have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.
Part
II -- Other Information
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 March 31, 2009, 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 Company’s communities. 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 for terrorism and earthquake, for which the Company
does not have insurance. Substantially all of the Properties are located in
areas that are subject to earthquakes.
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 IA of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2008 as filed with
the SEC and available at www.sec.gov, and the
following, which supplements the risk factors listed under the caption “Risk
Factors” in the Company’s Annual Report on Form 10-K:
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.
Item 2: Unregistered Sales of Equity Securities and Use of
Proceeds
Purchases
of Equity Securities
Period
|
|
Total Number of Shares
Purchased
|
|
|
Average Price Paid per
Share
|
|
|
Total Number of Shares Purchased as Part of
Publicly Announced Plans or Programs
|
|
|
Total Amount that May Yet be Purchased Under the
Plans or Programs
|
|
2/11/09
to 2/17/09
|
|
|
350,000 |
(1) |
|
$ |
57.89 |
|
|
|
350,000 |
|
|
$ |
133,396,647 |
|
1/15/09
to 3/11/09
|
|
|
2,384,284 |
(2) |
|
$ |
13.62 |
|
|
|
2,384,284 |
|
|
$ |
100,979,242 |
|
(1) The
Company repurchased 350,000 shares of the Company's common stock.
(2) The
Company repurchased 2,384,284 shares of the Company's Series G Cumulative
Convertible Preferred Stock.
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
the Company announced on May 16, 2001. In February 2009 the Company
repurchased 350,000 shares of common stock for $20.3 million at an average price
of $57.89. During the first quarter of 2009, under the authorization
of the stock repurchase plan the Company repurchased $58.2 million in
liquidation value ($25 per share liquidation value) of 4.875% Series G
Cumulative Convertible Preferred Stock at a discount to par value for cash and
commissions paid of $32.6 million.
|
10.2
|
Sixteenth
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Essex Portfolio, L.P., filed as Exhibit 10.2 to Form 8-K,
filed on April 7, 2009, and incorporated herein by
reference.
|
|
|
Controlled
Equity Offering Sales Agreement by and between Essex Property Trust, Inc.
and Cantor Fitzgerald & Co., dated May 6,
2009.
|
|
|
Ratio
of Earnings to Fixed Charges
|
|
|
Certification
of Keith R. Guericke, Chief Executive Officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
|
Certification
of Michael T. Dance, Chief Financial Officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
|
Certification
of Keith R. Guericke, Chief Executive Officer, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
Certification
of Michael T. Dance, Chief Financial Officer, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
ESSEX
PROPERTY TRUST, INC.
|
|
(Registrant)
|
|
|
|
|
|
|
|
Date:
May 6, 2009
|
|
|
|
|
|
By: /S/ MICHAEL T.
DANCE
|
|
|
|
|
Michael
T. Dance
|
|
Executive
Vice President, Chief Financial Officer
|
|
(Authorized
Officer, Principal Financial Officer)
|
|
|
|
|
|
|
|
|
By: /S/ BRYAN G.
HUNT
|
|
|
|
|
Bryan
G. Hunt
|
|
Vice
President, Chief Accounting
Officer
|
27