Body
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the quarterly period ended March 31, 2006
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the transition period from ________to _________
Commission
file number 001-13106
ESSEX
PROPERTY TRUST, INC.
(Exact
name of Registrant as Specified in its Charter)
Maryland
|
|
77-0369576
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
|
(I.R.S.
Employer Identification Number)
|
925
East Meadow Drive
Palo
Alto, California 94303
(Address
of Principal Executive Offices including Zip Code)
(650)
494-3700
(Registrant's
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file reports), and (2) has been subject to such filing requirements for
the
past 90 days. YES x
NO
o
Indicate
by check mark whether the registrant is a large accelerated filer an accelerated
file, or a non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer x Accelerated
filer o Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act. Yes o
No
x
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
22,894,071
shares of Common Stock as of May 3, 2006
ESSEX
PROPERTY TRUST, INC.
FORM
10-Q
INDEX
|
|
Page
No.
|
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements (Unaudited):
|
3
|
|
|
|
|
Consolidated
Balance Sheets as of March 31, 2006 and December 31, 2005
|
4
|
|
|
|
|
Consolidated
Statements of Operations for the three months ended March 31, 2006
and
2005
|
5
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity and Comprehensive Income for the
three
months ended March 31, 2006
|
6
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the three months ended
March 31,
2006 and 2005
|
7
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
8
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
|
17
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
23
|
|
|
|
Item
4.
|
Controls
and Procedures
|
24
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
24
|
|
|
|
Item
1A.
|
Risk
Factors
|
25
|
|
|
|
Item
6.
|
Exhibits
|
25
|
|
|
|
Signatures
|
26
|
Part
I -- Financial Information
"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 consolidated unaudited 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 consolidated
financial statements for the interim periods.
The
accompanying unaudited consolidated financial statements should be read in
conjunction with the notes to such consolidated financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations herein. Additionally, these unaudited 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, 2005.
ESSEX
PROPERTY TRUST, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
(Unaudited)
(Dollars
in thousands, except per share amounts)
|
|
March
31,
|
|
December
31,
|
|
Assets
|
|
2006
|
|
2005
|
|
Real
estate:
|
|
|
|
|
|
Rental
properties:
|
|
|
|
|
|
Land
and land improvements
|
|
$
|
564,934
|
|
$
|
554,449
|
|
Buildings
and improvements
|
|
|
1,996,667
|
|
|
1,945,480
|
|
|
|
|
2,561,601
|
|
|
2,499,929
|
|
Less
accumulated depreciation
|
|
|
(418,858
|
)
|
|
(399,854
|
)
|
|
|
|
2,142,743
|
|
|
2,100,075
|
|
Investments
|
|
|
28,995
|
|
|
27,228
|
|
Real
estate under development
|
|
|
46,985
|
|
|
39,110
|
|
|
|
|
2,218,723
|
|
|
2,166,413
|
|
Cash
and cash equivalents-unrestricted
|
|
|
9,409
|
|
|
14,337
|
|
Cash
and cash equivalents-restricted
|
|
|
14,095
|
|
|
13,937
|
|
Notes
and other receivables from related parties
|
|
|
1,704
|
|
|
1,173
|
|
Notes
and other receivables
|
|
|
14,833
|
|
|
5,237
|
|
Prepaid
expenses and other assets
|
|
|
22,680
|
|
|
23,078
|
|
Deferred
charges, net
|
|
|
15,326
|
|
|
15,115
|
|
Total assets
|
|
$
|
2,296,770
|
|
$
|
2,239,290
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
Mortgage
notes payable
|
|
$
|
1,104,594
|
|
$
|
1,104,918
|
|
Exchangeable
bonds
|
|
|
225,000
|
|
|
225,000
|
|
Lines
of credit
|
|
|
78,000
|
|
|
25,000
|
|
Accounts
payable and accrued liabilities
|
|
|
42,295
|
|
|
32,982
|
|
Dividends
payable
|
|
|
23,275
|
|
|
22,496
|
|
Other
liabilities
|
|
|
13,113
|
|
|
12,520
|
|
Deferred
gain
|
|
|
2,193
|
|
|
2,193
|
|
Total
liabilities
|
|
|
1,488,470
|
|
|
1,425,109
|
|
Minority
interests
|
|
|
231,000
|
|
|
233,214
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Common
stock, $.0001 par value, 655,682,178
|
|
|
|
|
|
|
|
authorized,
22,889,971 and
|
|
|
|
|
|
|
|
22,851,953 issued
and outstanding
|
|
|
2
|
|
|
2
|
|
Cumulative
redeemable preferred stock; $.0001 par value:
|
|
|
|
|
|
|
|
No
shares issued and outstanding:
|
|
|
|
|
|
|
|
7.875%
Series B 2,000,000 shares authorized
|
|
|
-
|
|
|
-
|
|
7.875%
Series D 2,000,000 shares authorized
|
|
|
-
|
|
|
-
|
|
7.8125%
Series F 1,000,000 shares authorized,
|
|
|
|
|
|
|
|
1,000,000
and 1,000,000 shares issued and outstanding,
|
|
|
|
|
|
|
|
liquidation
value
|
|
|
25,000
|
|
|
25,000
|
|
Excess
stock, $.0001 par value, 330,000,000 shares
|
|
|
|
|
|
|
|
authorized
and no shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
Additional
paid-in capital
|
|
|
631,972
|
|
|
632,646
|
|
Distributions
in excess of accumulated earnings
|
|
|
(86,730
|
)
|
|
(77,341
|
)
|
Accumulated
other comprehensive income
|
|
|
7,056
|
|
|
660
|
|
Total
stockholders' equity
|
|
|
577,300
|
|
|
580,967
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
2,296,770
|
|
$
|
2,239,290
|
|
See
accompanying notes to the unaudited consolidated financial statements.
ESSEX
PROPERTY TRUST, INC. AND SUBSIDIARES
Consolidated
Statements of Operations
(Unaudited)
(Dollars
in thousands, except per share amounts)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
Rental
and other property
|
|
$
|
85,263
|
|
$
|
78,277
|
|
Management
and other fees from affiliates
|
|
|
824
|
|
|
6,576
|
|
|
|
|
86,087
|
|
|
84,853
|
|
Expenses:
|
|
|
|
|
|
|
|
Property
operating, excluding real estate taxes
|
|
|
22,615
|
|
|
20,228
|
|
Real
estate taxes
|
|
|
7,396
|
|
|
6,841
|
|
Depreciation
and amortization
|
|
|
20,091
|
|
|
19,579
|
|
Interest
|
|
|
18,990
|
|
|
18,147
|
|
Amortization
of deferred financing costs
|
|
|
696
|
|
|
476
|
|
General
and administrative
|
|
|
4,899
|
|
|
4,441
|
|
Other
expenses
|
|
|
970
|
|
|
-
|
|
|
|
|
75,657
|
|
|
69,712
|
|
|
|
|
|
|
|
|
|
Gain
on sale of real estate
|
|
|
-
|
|
|
1,115
|
|
Interest
and other income
|
|
|
2,394
|
|
|
523
|
|
Equity
income in co-investments
|
|
|
(323
|
)
|
|
14,711
|
|
Minority
interests
|
|
|
(4,927
|
)
|
|
(6,452
|
)
|
Income
from continuing operations before income
|
|
|
|
|
|
|
|
tax provision
|
|
|
7,574
|
|
|
25,038
|
|
Income
tax provision
|
|
|
(37
|
)
|
|
(101
|
)
|
Income
from continuing operations
|
|
|
7,537
|
|
|
24,937
|
|
Income
from discontinued operations (net of minority interests)
|
|
|
|
|
|
|
|
minority interests)
|
|
|
2,785
|
|
|
1,941
|
|
Net
income
|
|
|
10,322
|
|
|
26,878
|
|
Dividends
to preferred stockholders - Series F
|
|
|
(488
|
)
|
|
(489
|
)
|
Net
income available to common stockholders
|
|
$
|
9,834
|
|
$
|
26,389
|
|
|
|
|
|
|
|
|
|
Per
common share data:
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
Income
from continuing operations available to
|
|
|
|
|
|
|
|
common
stockholders
|
|
$
|
0.31
|
|
$
|
1.07
|
|
Income
from discontinued operations
|
|
|
0.12
|
|
|
0.08
|
|
Net
income available to common stockholders
|
|
$
|
0.43
|
|
$
|
1.15
|
|
Weighted
average number of common shares
|
|
|
|
|
|
|
|
outstanding
during the period
|
|
|
22,871,800
|
|
|
23,044,075
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
Income
from continuing operations available to
|
|
|
|
|
|
|
|
common
stockholders
|
|
$
|
0.31
|
|
$
|
1.05
|
|
Income
from discontinued operations
|
|
|
0.12
|
|
|
0.08
|
|
Net
income available to common stockholders
|
|
$
|
0.43
|
|
$
|
1.13
|
|
Weighted
average number of common shares
|
|
|
|
|
|
|
|
outstanding
during the period
|
|
|
23,095,493
|
|
|
23,330,358
|
|
Dividend
per common share
|
|
$
|
0.84
|
|
$
|
0.81
|
|
See
accompanying notes to the unaudited consolidated financial
statements.
ESSEX
PROPERTY TRUST, INC. AND SUBSIDIARIES
Consolidated
Statements of Stockholders' Equity and
Comprehensive
Income for the three months ended March 31, 2006
(Unaudited)
(Dollars
and shares in thousands)
|
|
Series
F
|
|
|
|
|
|
Additional
|
|
Accumulated
other
|
|
Distributions
in
excess of
|
|
|
|
|
|
Preferred
stock
|
|
Common
stock
|
|
paid-in
|
|
comprehensive
|
|
accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
capital
|
|
income
|
|
earnings
|
|
Total
|
|
Balances
at December 31, 2005
|
|
|
1,000
|
|
|
25,000
|
|
|
22,851
|
|
|
2
|
|
|
632,646
|
|
|
660
|
|
|
(77,341
|
)
|
|
580,967
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
10,322
|
|
|
10,322
|
|
Change in fair value of cash flow hedges
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6,396
|
|
|
-
|
|
|
6,396
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,718
|
|
Issuance
of common stock under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock-based
compensation plans
|
|
|
-
|
|
|
-
|
|
|
38
|
|
|
-
|
|
|
1,352
|
|
|
-
|
|
|
-
|
|
|
1,352
|
|
Reallocation
of minority interest
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,026
|
)
|
|
-
|
|
|
-
|
|
|
(2,026
|
)
|
Dividends
declared
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(19,711
|
)
|
|
(19,711
|
)
|
Balances
at March 31, 2006
|
|
|
1,000
|
|
$
|
25,000
|
|
|
22,889
|
|
$
|
2
|
|
$
|
631,972
|
|
$
|
7,056
|
|
$
|
(86,730
|
)
|
$
|
577,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the unaudited consolidated
financial statements.
ESSEX
PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars
in thousands)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
Net
cash provided by operating activities
|
|
$
|
43,322
|
|
$
|
38,482
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Additions
to real estate:
|
|
|
|
|
|
|
|
Acquisitions
and improvements to recent acquisitions
|
|
|
(57,275
|
)
|
|
(27,287
|
)
|
Capital
expenditures and redevelopment
|
|
|
(10,471
|
)
|
|
(6,087
|
)
|
Additions
to real estate under development
|
|
|
(7,877
|
)
|
|
(1,240
|
)
|
Dispositions
of real estate and investments
|
|
|
8,349
|
|
|
15,020
|
|
Changes
in restricted cash and refundable deposits
|
|
|
5,003
|
|
|
5,248
|
|
Additions
to notes receivable from related parties and other
receivables
|
|
|
(10,209
|
)
|
|
(13
|
)
|
Repayment
of notes receivable from related parties and other
receivables
|
|
|
(86
|
)
|
|
1,413
|
|
Net
(contributions to) distributions from limited partnerships
|
|
|
(618
|
)
|
|
2,294
|
|
Net
cash used in investing activities
|
|
|
(73,184
|
)
|
|
(10,652
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from mortgage notes payable and lines of credit
|
|
|
116,792
|
|
|
41,593
|
|
Repayment
of mortgage notes payable and lines of credit
|
|
|
(63,955
|
)
|
|
(40,361
|
)
|
Additions
to deferred charges
|
|
|
(907
|
)
|
|
(444
|
)
|
Net
proceeds from stock options exercised
|
|
|
1,209
|
|
|
654
|
|
Distributions
to minority interest partners
|
|
|
(5,731
|
)
|
|
(5,645
|
)
|
Redemption
of minority interest limited partnership units
|
|
|
(3,469
|
)
|
|
(3,284
|
)
|
Common
and preferred stock dividends paid
|
|
|
(19,005
|
)
|
|
(18,470
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
24,934
|
|
|
(25,957
|
)
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(4,928
|
)
|
|
1,873
|
|
Cash
and cash equivalents at beginning of period
|
|
|
14,337
|
|
|
10,644
|
|
Cash
and cash equivalents at end of period
|
|
$
|
9,409
|
|
$
|
12,517
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for interest, net of $549 and $57 capitalized
|
|
|
|
|
|
|
|
in
2006 and 2005, respectively
|
|
$
|
16,269
|
|
$
|
17,935
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the unaudited consolidated financial
statements.
ESSEX
PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2006 and 2005
(Unaudited)
(Dollars
in thousands, except for per share and unit amounts)
The
unaudited 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. These
unaudited 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, 2005.
All
significant intercompany balances and transactions have been eliminated in
the
consolidated financial statements. Certain prior year balances have been
reclassified to conform to the current year presentation.
The
unaudited consolidated financial statements for the three months ended March
31,
2006 and 2005 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
90.2% and 90.4% general partnership interest as of March 31, 2006 and December
31, 2005, respectively.
As
of
March 31, 2006, the Company has ownership interests in 126 multifamily
properties (containing 27,311 units), three office buildings (with approximately
166,340 square feet), two recreational vehicle parks (comprising 338 spaces)
and
one manufactured housing community (containing 157 sites), (collectively, the
"Properties"). The Properties are located in Southern California (Los Angeles,
Ventura, Orange, Riverside and San Diego counties), Northern California (the
San
Francisco Bay Area), the Pacific Northwest (the Seattle, Washington and
Portland, Oregon metropolitan areas) and other areas (Houston,
Texas).
Fund
Activities
Essex
Apartment Value Fund, L.P. ("Fund I" and “Fund II”), are investment funds formed
by the Company to add value through rental growth and asset appreciation,
utilizing the Company's development, redevelopment and asset management
capabilities. All of the assets in Fund I were sold during 2004 and 2005, and
Fund I is in the process of liquidation and will wind down affairs during 2006.
Fund
II
has eight institutional investors, including the Company, with combined partner
equity commitments of $265.9 million. Essex has committed $75.0 million to
Fund
II, which represents a 28.2% interest as general partner and limited partner.
Fund II expects to utilize leverage equal to approximately 65% of the estimated
value of the underlying real estate. Fund II invests in multifamily properties
in the Company’s targeted West Coast markets with an emphasis on investment
opportunities in Seattle and the San Francisco Bay Area. Subject to certain
exceptions, Fund II will be Essex’s exclusive investment vehicle until October
31, 2006, or when Fund II’s committed capital has been invested, whichever
occurs first. Consistent with Fund I, Essex will record revenue for its asset
management, property management, development and redevelopment services when
earned, and promote distributions should Fund II exceed certain financial return
benchmarks.
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 Essex Management Corporation (EMC), Essex Fidelity I
Corporation (EFC), 17 Down REIT limited partnerships (comprising ten
properties), an office building that is subject to loans made by the Company,
and the multifamily improvements owned by a third party in which the Company
owns the land underlying these improvements and from which the Company receives
fees, including land lease, subordination, property management, and incentive
fees. The Company consolidated these entities because it is deemed the primary
beneficiary under FIN 46R. The Company's total assets and liabilities related
to
these variable interest entities (VIEs), net of intercompany eliminations,
were
approximately $232.4 million and $146.8 million, respectively, at March 31,
2006
and $230.9 million and $146.7 million,
respectively, at December 31, 2005.
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, 2006 the Company is involved with three VIEs, of which it is not
deemed to be the primary beneficiary. Total assets and liabilities of these
entities were approximately $92.6 million and $72.7 million, respectively,
at
March 31, 2006 and $92.9 million and $72.5 million, respectively, at December
31, 2005. The Company does not have a significant exposure to loss resulting
from its involvement with these unconsolidated VIEs.
Stock-Based
Compensation
We
adopted the provisions of SFAS 123 revised effective January 1, 2006 using
the
modified prospective approach. Stock-based compensation expense for stock
options under the fair value method totaled $143 and $218 for the three months
ended March 31, 2006 and 2005, respectively. The intrinsic value of the stock
options exercised during the three months ended March 31, 2006 and 2005 totaled
$1.8 million and $0.5 million, respectively. As of March 31, 2006, the intrinsic
value of the stock options outstanding and fully vested totaled $24.6 million
and $16.8 million, respectively. As of March 31, 2006, total unrecognized
compensation cost related to unvested share-based compensation granted under
the
stock option plans totaled $1.7 million. The cost is expected to be recognized
over a weighted-average period of 3 to 5 years for the stock option
plans.
Stock-based
compensation expense for Z and Z-1 Units (collectively, "Z Units") under
the
fair value method totaled $231 and $84 for the three months ended March 31,
2006
and 2005, respectively. Stock-based compensation capitalized for these Plans
totaled $188 and $53 for the three months ended March 31, 2006 and 2005,
respectively. As of March 31, 2006 the intrinsic value of the Z Units subject
to
conversion totaled $16.6 million. As of March 31, 2006, total unrecognized
compensation cost related to Z Units subject to conversion in the future
totaled
$9.3 million. The cost is expected to be recognized over a weighted-average
period of 5 to 15 years for the Z Units.
The
Company’s stock-based compensation policies have not changed materially from
information reported in Note 2(k), "Stock-Based Compensation," and Note 14,
"Stock-Based Compensation Plans," in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2005.
Accounting
Estimates and Reclassifications
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.
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.
Certain
reclassifications have been made to prior year balances in order to conform
to
the current year presentation. Such reclassifications have no impact on reported
earnings, cash flows, total assets, or total liabilities.
New
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123 revised, “Share-Based
Payment”. This
statement is a revision of SFAS No. 123, “Accounting
for Stock-Based Compensation”, and
supersedes APB No. 25, “Accounting
for Stock Issued to Employees”. The
Statement requires companies to recognize in the income statement the grant-date
fair value of stock options and other equity based compensation issued to
employees. We adopted the provisions of SFAS 123 revised effective January
1,
2006 using the modified prospective approach. The adoption of this Statement
did
not have a material impact on our financial position, results of operations
or
cash flows.
In
June
2005, the FASB ratified the EITF’s consensus on Issue No. 04-5 “Determining
Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights.” This
consensus establishes the presumption that general partners in a limited
partnership control that limited partnership regardless of the extent of the
general partners’ ownership interest in the limited partnership. The consensus
further establishes that the rights of the limited partners can overcome the
presumption of control by the general partners, if the limited partners have
either (a) the substantive ability to dissolve (liquidate) the limited
partnership or otherwise remove the general partners without cause or (b)
substantive participating rights. Whether the presumption of control is overcome
is a matter of judgment based on the facts and circumstances, for which the
consensus provides additional guidance. This consensus applies to limited
partnerships or similar entities, such as limited liability companies that
have
governing provisions that are the functional equivalent of a limited
partnership. This consensus was applicable to the Company for new or modified
partnerships in 2005, and is otherwise applicable to existing partnerships
effective January 1, 2006. The adoption of this consensus did not have a
material impact on our consolidated financial position, results of operations
or
cash flows.
In
April
2006, the FASB issued FASB Staff Position (FSP) FIN 46R-6, “Determining
the Variability to Be Considered in Applying FASB Interpretation No. 46
(R).”
This
FSP addresses certain implementation issues related to FIN 46R. Specifically,
FSP FIN 46R-6 addresses how a reporting enterprise should determine the
variability to be considered in applying FIN 46R. The variability that is
considered in applying FIN 46R affects the determination of (a) whether an
entity is a variable interest entity (VIE), (b) which interests are “variable
interests” in the entity, and (c) which party, if any, is the primary
beneficiary of the VIE.
That
variability affects any calculation of expected losses and expected residual
returns, if such a calculation is necessary. The Company is required to apply
the guidance in this FSP prospectively to all entities (including newly created
entities) and to all entities previously required to be analyzed under FIN
46R
when a “reconsideration event” has occurred, effective July 1 ,2006. The Company
will evaluate the impact of this Staff Position at the time any such
“reconsideration event” occurs, and for any new entities.
(2)
Significant
Transactions for the Quarter Ended March 31, 2006
(a)
Acquisitions
In
January 2006, we acquired two apartment communities - Chimney Sweep and CBC,
aggregating 239 units, located in Isla Vista, California for a combined price
of
approximately $57.1 million.
(b)
Dispositions
As
part
of our strategic plan to own quality real estate in supply-constrained markets,
we continually evaluate our Properties and sell those which no longer meet
our
strategic criteria. We may use the capital generated from the dispositions
to
invest in higher-return Properties or repay debts. We believe that the sale
of
these Properties will not have a material impact on our future results of
operations or cash flows nor will their sale materially affect our ongoing
operations. Generally, any impact of earnings dilution resulting from these
dispositions will be offset by the positive impact of our acquisitions,
development and redevelopment activities.
In
January 2006, the Company sold Vista Capri East and Casa Tierra apartment
communities for approximately $7.0 million and in March 2006, the Company sold
Diamond Valley Recreational Vehicle Park for approximately $1.3 million, for
a
total combined gain net of minority interest of $2.8 million. These assets
were
part of the John M. Sachs merger in 2002.
(c)
Debt
On
March
24, 2006, the Company renegotiated its revolving line of credit to increase
the
maximum principal amount to $200 million from $185 million. Additionally, the
maturity date was extended from April 2007 to March 2009, with an option for
a
one-year extension, and the underlying rate, based on a tiered rate structure
tied to our corporate ratings, was reduced to LIBOR plus 0.8% from LIBOR plus
1.0%.
On
January 3, 2006, the Company originated a mortgage loan secured by the Fairwood
Pond apartment community in the amount of $14.9 million, with a fixed interest
rate of 5.31%, which matures on February 1, 2015. On March 1, 2006, the Company
paid-off a loan secured by the Windsor Ridge apartment community in the amount
of $11.6 million, with a fixed interest rate of 7.09%.
(d)
Equity
On
February 23, 2006, the Company announced the Board of Directors approved a
quarterly distribution of $0.48828 per share, which represents an annual
distribution of $1.9531 per share on its 7.8125% Series F Cumulative Redeemable
Preferred Shares. Distributions are payable on June 1, 2006 to shareholders
of
record as of May 17, 2006.
On
February 23, 2006, the Company announced the Board of Directors approved a
$0.12
per share annual increase to the quarterly cash dividend. Accordingly, the
first
quarter dividend distribution, paid on April 17, 2006 to stockholders of record
as of March 31, 2006, was $0.84 per share.
(e)
Interest and Other Income
In
March
2006, the Company sold shares it owned in Town & County Trust and recognized
$1.7 million in investment income related to the sale of those shares. The
investment income was offset by $970 in pursuit costs that are recorded as
other
expenses in the accompanying consolidated statements of operations. The proceeds
from the sale, which aggregated $9.5 million, were received on April 3, 2006,
and were accrued for in notes and other receivables in the accompanying
consolidated balance sheets as of March 31, 2006.
(f)
The Essex Apartment Value Fund II (“Fund II”)
In
April
2006, Fund II acquired the Lake Union development project in Seattle, Washington
for approximately $5.5 million. This development project is a planned 127-unit
apartment community plus approximately 9,300 square feet of commercial space
with an estimated total cost of $29.5 million.
In
April
2006, Fund II acquired the Studio City development project in Los Angeles,
California for approximately $20.5 million. This development is a planned
149-unit apartment community with an estimated total cost of $53.3
million.
In
April
2006, Fund II acquired Davey Glen, a 69-unit apartment community located in
Belmont, California for approximately $13.5 million.
The
Company has investments in a number of
affiliates, which are accounted for under the equity method. The affiliates
own
and operate multifamily rental properties. The following table details the
Company's investments (dollars in thousands):
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Investments
in joint ventures accounted for under the equity
|
|
|
|
|
|
method of accounting:
|
|
|
|
|
|
|
|
|
|
|
|
Limited partnership interest of 20.4% and general partner
|
|
|
|
|
|
interest of 1% in Essex Apartment Value Fund, L.P (Fund I)
|
|
$
|
582
|
|
$
|
582
|
|
Limited partnership interest of 27.2% and general partner
|
|
|
|
|
|
|
|
interest of 1% in Essex Apartment Value Fund II, L.P (Fund
II)
|
|
|
21,107
|
|
|
19,340
|
|
Preferred limited partnership interests in Mountain Vista
|
|
|
|
|
|
|
|
Apartments (A)
|
|
|
6,806
|
|
|
6,806
|
|
|
|
|
28,495
|
|
|
26,728
|
|
Investments
accounted for under the cost method of accounting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock interest in Multifamily Technology
|
|
|
|
|
|
|
|
Solutions, Inc.
|
|
|
500
|
|
|
500
|
|
|
|
|
|
|
|
|
|
Total
investments
|
|
$
|
28,995
|
|
$
|
27,228
|
|
(A) |
The
investment is held in an entity that includes an affiliate of The
Marcus
& Millichap Company (“TMMC”). TMMC’s Chairman is also the Chairman of
the Company.
|
The
combined summarized financial information of investments, which are accounted
for under the equity method, is as follows (dollars in thousands).
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Real
estate and real estate under development
|
|
$
|
437,212
|
|
$
|
431,655
|
|
Other
assets
|
|
|
18,871
|
|
|
18,655
|
|
Total
assets
|
|
$
|
456,083
|
|
$
|
450,310
|
|
|
|
|
|
|
|
|
|
Mortgage
notes payable
|
|
$
|
267,333
|
|
$
|
268,325
|
|
Other
liabilities
|
|
|
83,271
|
|
|
83,979
|
|
Partners'
equity
|
|
|
105,479
|
|
|
98,007
|
|
Total
liabilities and partners' equity
|
|
$
|
456,083
|
|
$
|
450,311
|
|
Company's
share of equity
|
|
$
|
28,495
|
|
$
|
26,728
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
March
31,
|
Statements
of operations:
|
|
|
2006
|
|
|
2005
|
|
Total
property revenues
|
|
$
|
9,290
|
|
$
|
7,500
|
|
Total
gain on the sales of real estate
|
|
|
-
|
|
|
33,036
|
|
Total
expenses
|
|
|
(10,968
|
)
|
|
(7,052
|
)
|
|
|
|
|
|
|
|
|
Total
net (loss) income
|
|
$
|
(1,678
|
)
|
$
|
33,484
|
|
Company's
share of net (loss) income
|
|
$
|
(323
|
)
|
$
|
14,711
|
|
(4)
Notes Receivable and Other Receivables from Related
Parties
Notes
receivable and other receivables from related parties consist of the following
as of March 31, 2006 and December 31, 2005 (dollars in thousands):
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2006
|
|
|
2005
|
Related
party receivables, unsecured:
|
|
|
|
|
|
|
Loans
to officers made prior to July 31, 2002, secured,
|
|
|
|
|
|
|
bearing
interest at 8%, due beginning April 2007
|
|
$
|
375
|
|
$
|
375
|
Other related party receivables, substantially due on
demand
|
|
|
1,329
|
|
|
798
|
Total
notes and other receivable from related parties
|
|
$
|
1,704
|
|
$
|
1,173
|
|
|
|
|
|
|
|
Other
related party receivables consist primarily of accrued interest income on
related party notes receivable from loans to officers, advances, and accrued
management fees from Fund II.
(5)
Notes and Other Receivables
Notes
and
other receivables consist of the following as of March 31, 2006 and December
31,
2005 (dollars in thousands):
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2006
|
|
|
2005
|
Note
receivable from Pacifica Companies, LLC, secured,
|
|
|
|
|
|
|
bearing interest at 12%, due June 2008
|
|
|
2,193
|
|
|
2,193
|
Other
receivables
|
|
|
12,640
|
|
|
3,044
|
Total
notes and other receivables
|
|
$
|
14,833
|
|
$
|
5,237
|
|
|
|
|
|
|
|
Other
receivables consist primarily of a receivable due from the sale of Town &
Country stock as of March 31, 2006 for $9.5 million, subordination and land
lease fees from the Vista Pointe joint venture.
(6)
Related Party Transactions
Management
and other fees from affiliates includes property management, asset management,
development and redevelopment fees from the Company’s investees of $824 and
$1,703 for the three months ended March 31, 2006 and 2005, respectively, and
promote income from Fund I of $4,873 for the three months ended March 31, 2005.
There was no promote income for the three months ended March 31, 2006.
(7)
Segment Information
The
Company defines its reportable operating segments as the three geographical
regions in which its properties are located: Southern California, Northern
California and the Pacific Northwest. Excluded from segment revenues are
properties outside of these regions, management and other fees from affiliates,
and interest and other income. Non-segment revenues and net operating income
included in the following schedule also consist of revenue generated from
commercial properties, recreational vehicle parks, and manufactured housing
communities. Other non-segment assets include investments, real estate under
development, cash, notes receivable, other assets and deferred charges.
The
revenues, net operating income, and assets for each of the reportable operating
segments are summarized as follows for the periods presented (dollars in
thousands):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
Southern
California
|
|
$
|
51,123
|
|
$
|
46,323
|
|
Northern
California
|
|
|
17,484
|
|
|
16,534
|
|
Pacific
Northwest
|
|
|
15,532
|
|
|
14,558
|
|
Other
non-segment areas
|
|
|
1,124
|
|
|
862
|
|
Total
property revenues
|
|
$
|
85,263
|
|
$
|
78,277
|
|
|
|
|
|
|
|
|
|
Net
operating income:
|
|
|
|
|
|
|
|
Southern
California
|
|
$
|
33,962
|
|
$
|
30,995
|
|
Northern
California
|
|
|
11,340
|
|
|
11,017
|
|
Pacific
Northwest
|
|
|
9,447
|
|
|
8,997
|
|
Other
non-segment areas
|
|
|
503
|
|
|
199
|
|
Total
net operating income
|
|
|
55,252
|
|
|
51,208
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
Southern
California
|
|
|
(11,063
|
)
|
|
(10,136
|
)
|
Northern
California
|
|
|
(4,075
|
)
|
|
(3,918
|
)
|
Pacific
Northwest
|
|
|
(3,774
|
)
|
|
(3,629
|
)
|
Other
non-segment areas
|
|
|
(1,179
|
)
|
|
(1,896
|
)
|
|
|
|
(20,091
|
)
|
|
(19,579
|
)
|
Interest
expense:
|
|
|
|
|
|
|
|
Southern
California
|
|
|
(7,144
|
)
|
|
(7,469
|
)
|
Northern
California
|
|
|
(4,443
|
)
|
|
(3,791
|
)
|
Pacific
Northwest
|
|
|
(1,690
|
)
|
|
(1,450
|
)
|
Other
non-segment areas
|
|
|
(5,713
|
)
|
|
(5,437
|
)
|
|
|
|
(18,990
|
)
|
|
(18,147
|
)
|
|
|
|
|
|
|
|
|
Amortization
of deferred financing costs
|
|
|
(696
|
)
|
|
(476
|
)
|
General
and administrative
|
|
|
(4,899
|
)
|
|
(4,441
|
)
|
Other
expenses
|
|
|
(970
|
)
|
|
-
|
|
Management
and other fees from affiliates
|
|
|
824
|
|
|
6,576
|
|
Gain
on sale of real estate
|
|
|
-
|
|
|
1,115
|
|
Interest
and other income
|
|
|
2,394
|
|
|
523
|
|
Equity
income in co-investments
|
|
|
(323
|
)
|
|
14,711
|
|
Minority
interests
|
|
|
(4,927
|
)
|
|
(6,452
|
)
|
Income
tax provision
|
|
|
(37
|
)
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
7,537
|
|
$
|
24,937
|
|
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Net
real estate assets:
|
|
|
|
|
|
Southern
California
|
|
$
|
1,275,758
|
|
$
|
1,211,372
|
|
Northern
California
|
|
|
454,110
|
|
|
456,093
|
|
Pacific
Northwest
|
|
|
374,065
|
|
|
374,958
|
|
Other
non-segment areas
|
|
|
38,810
|
|
|
57,652
|
|
Total
net real estate assets
|
|
|
2,142,743
|
|
|
2,100,075
|
|
Other
non-segment assets
|
|
|
154,027
|
|
|
139,215
|
|
Total
assets
|
|
$
|
2,296,770
|
|
$
|
2,239,290
|
|
(8)
Net Income Per Common Share
(Amounts
in thousands, except per share data)
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
March
31, 2006
|
|
|
March
31, 2005
|
|
|
|
|
|
Weighted
|
|
|
Per
|
|
|
|
|
|
Weighted
|
|
|
Per
|
|
|
|
|
|
Average
|
|
|
Common
|
|
|
|
|
|
Average
|
|
|
Common
|
|
|
|
|
|
Common
|
|
|
Share
|
|
|
|
|
|
Common
|
|
|
Share
|
|
|
|
Income
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
Income from continuing operations available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common stockholders
|
|
$
|
7,049
|
|
22,872
|
|
$
|
0.31
|
|
$
|
24,448
|
|
|
23,044
|
|
$
|
1.07
|
Income from discontinued operations
|
|
|
2,785
|
|
22,872
|
|
|
0.12
|
|
|
1,941
|
|
|
23,044
|
|
|
0.08
|
|
|
|
9,834
|
|
|
|
$
|
0.43
|
|
|
26,389
|
|
|
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities (1)
|
|
|
-
|
|
223
|
|
|
|
|
|
-
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common stockholders
|
|
|
7,049
|
|
23,095
|
|
$
|
0.31
|
|
|
24,448
|
|
|
23,330
|
|
$
|
1.05
|
Income from discontinued operations
|
|
|
2,785
|
|
23,095
|
|
|
0.12
|
|
|
1,941
|
|
|
23,330
|
|
|
0.08
|
|
|
$
|
9,834
|
|
|
|
$
|
0.43
|
|
$
|
26,389
|
|
|
|
|
$
|
1.13
|
The
Company has the ability and intent to redeem Down REIT Limited Partnership
units
for cash and does not consider them to be common stock equivalents.
(1) |
Weighted
convertible limited partnership units of 2,293,978 and
2,325,213 for the
three months ended March 31, 2006 and 2005, respectively,
and Series Z
incentive units of 183 for the three months ended March
31, 2006, were not
included in the determination of diluted EPS because they
were
anti-dilutive. The Company has the ability and intent to
redeem Down REIT
Limited Partnership units for cash and does not consider
them to be common
stock equivalents.
|
|
At
the maturity date of the $225 million exchangeable bonds,
bond holders
will be issued common stock, if the stock price exceeds
$103.25 per share,
subject to certain adjustments. During the quarter, the
weighted average
common stock price did not exceed the $103.25 strike price
and therefore
are not included in the diluted share count for the three
months ended
March 31, 2006. In future quarters, if the weighted average
stock price
exceeds the strike price, the treasury method will be used
to determine
the shares to be added to the denominator to calculate
earnings per
diluted share.
|
|
|
Stock
options of 667 and 32,872 for the three months ended
March 31, 2006 and
2005, respectively, are 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
quarter and,
therefore, the stock options were
anti-dilutive.
|
(9)
Derivative Instruments and Hedging Activities
To
hedge
the cash flows associated with the refinancing of debt that matures in 2007,
2008, and 2010 the Company entered into the following derivative
transactions:
· |
On
February 16, 2005, the Company entered into a $50.0 million notional
forward-starting swap with a commercial bank at a fixed rate of 4.927%,
with a settlement date on or before October 1, 2007.
|
· |
On
August 18, 2005, the Company entered into a $50.0 million notional
forward-starting swap with a commercial bank at a fixed rate of 4.869%
and
a settlement date on or before October 1, 2008.
|
· |
On
February 22, 2006, the Company entered into three forward-starting
swaps.
The first is for a notional amount of $25.0 million with a commercial
bank
at a fixed rate of 5.082% and a settlement date on or before January
1,
2009. The second and third swaps are for a notional amount totaling
$100.0
million with two commercial banks at a fixed rate of $5.099% and
a
settlement date on or before January 1, 2011.
|
These
derivatives will be used to economically hedge the cash flows associated with
the refinancing of debt that matures in 2007, 2008 and 2010, respectively.
As of
March 31, 2006, the Company had five forward-starting swaps totaling $225
million, that hedge over 50% of the fixed debt maturities through 2010. The
Company believes that these transactions will be effective in offsetting changes
in future cash flows for forecasted transactions and qualify for hedge
accounting. The increase in the fair value of these derivatives during the
three
months ended March 31, 2006 was approximately $6,396 and is reflected in
accumulated other comprehensive income in the Company’s consolidated financial
statements. No hedge ineffectiveness on cash flow hedges was recognized during
the three months ended March 31, 2006.
(10) |
Discontinued
Operations
|
In
the
normal course of business, the Company will receive offers for sale of its
properties, either solicited or unsolicited. For those offers that are accepted,
the prospective buyer will usually require a due diligence period before
consummation of the transaction. It is not unusual for matters to arise that
result in the withdrawal or rejection of the offer during this process. Essex
classifies real estate as "held for sale" when all criteria under SFAS No.
144,
"Accounting
for the Impairment or Disposal of Long-Lived Assets"
(SFAS
144) have been met.
In
January 2005, the Company sold four non-core assets that were acquired in
conjunction with the John M. Sachs’ merger in 2002 for $14.9 million. The four
non-core assets were: The Riviera Recreational Vehicle Park and a Manufactured
Home Park, located in Las Vegas, Nevada, for which the Company had previously
entered into master lease and option agreements with an unrelated entity; and
two small office buildings, located in San Diego California, aggregating 7,200
square feet. The Company recorded a gain of $668 on the sale of these assets,
net of minority interests.
On
June
21, 2005, the Company sold Eastridge Apartments, a 188-unit apartment community
located in San Ramon, California for approximately $47.5 million. The Company
acquired Eastridge in 1996 for $19.2 million. In conjunction with the sale,
the
Company deferred $2.2 million of the gain on the sale of Eastridge because
Essex, through its wholly owned taxable subsidiary, originated a participating
loan to the buyer in the amount of approximately $2.2 million, which allows
the
Company to financially participate in the buyer’s condominium conversion plan.
The Company has recorded the operations for Eastridge Apartments as part of
discontinued operations in the accompanying consolidated statements of
operations.
In
January 2006 the Company sold Vista Capri East and Casa Tierra apartment
communities for approximately $7.0 million and in March 2006, the Company sold
Diamond Valley, a Recreational Vehicle Park, for approximately $1.3 million.
The
total combined gain was $3.1 million offset by $277 in minority interest for
a
net gain of $2.8 million. The Company has recorded the gain on sale for the
three properties as part of discontinued operations in the accompanying
consolidated statements of operations. The Company did not reclass the following
combined revenues, expenses, and net income for the these three properties
for
$82, $32, and $50 for the three months ended March 31, 2006, and $183, $102,
and
$81 for the three months ended March 31, 2005, to discontinued operations due
to
the fact the amounts are immaterial to the consolidated financial statements.
The
components of discontinued operations are outlined below and include the results
of operations for the respective periods that the Company owned such assets,
as
described above.
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2006
|
|
|
2005
|
Rental
revenues
|
|
$
|
-
|
|
$
|
654
|
Interest
and other
|
|
|
-
|
|
|
1,134
|
Revenues
|
|
|
-
|
|
|
1,788
|
|
|
|
|
|
|
|
Property
operating expenses
|
|
|
-
|
|
|
(388)
|
Impairment
charge
|
|
|
-
|
|
|
-
|
Minority
interests
|
|
|
-
|
|
|
(127)
|
Operating
income from real estate sold
|
|
|
-
|
|
|
1,273
|
|
|
|
|
|
|
|
Gain
on sale of real estate
|
|
|
3,062
|
|
|
736
|
Minority
interests
|
|
|
(277)
|
|
|
(68)
|
Net
gain on sale of real estate
|
|
|
2,785
|
|
|
668
|
Income
from discontinued operations
|
|
$
|
2,785
|
|
$
|
1,941
|
(11)
Commitments and Contingencies
In
April
2004, an employee lawsuit was filed against the Company in the California
Superior Court in the County of Alameda. In this lawsuit, two former Company
maintenance employees seek unpaid wages, associated penalties and attorneys’
fees on behalf of a putative class of the
Company’s
current and former maintenance employees who were required to wear a pager
while
they were on call during evening and weekend hours. In June 2005, the Company
recorded $1.5 million for legal settlement costs. There has been no change
to
the settlement amount since the second quarter of 2005. However, litigation
is
subject to inherent uncertainties, and such amount represents management’s best
estimate of the total cost of the litigation at this time.
Recently
there has been an increasing number of lawsuits against owners and managers
of
multifamily properties 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 coverage for mold. The Company
has
adopted programs designed to manage the existence of mold in its properties
as
well as guidelines for promptly addressing and resolving reports of mold to
minimize any impact mold might have on residents or the property. Liabilities
resulting from such mold related matters and the costs of carrying insurance
to
address potential mold related claims may also be substantial.
The
Company is subject to various other lawsuits in the normal course of its
business operations. Accordingly, such lawsuits, as well as the class action
lawsuit described above, could result in substantial costs and diversion of
resources and could 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 Consolidated
Condensed Financial Statements and accompanying Notes thereto included elsewhere
herein and with our 2005 Annual Report on Form 10-K for the year ended
December 31, 2005 and our Current Report on Form 10-Q for the three months
ended March 31, 2006. (Unless otherwise noted, all dollar amounts are in
thousands.)
Essex
is
a fully integrated Real Estate Investment Trust (REIT), and its property
revenues are generated primarily from multifamily property operations, which
are
located in three major West Coast regions:
Southern
California
(Los
Angeles, Ventura, Orange, Riverside and San Diego counties)
Northern
California
(the San
Francisco Bay Area)
Pacific
Northwest
(Seattle, Washington and Portland, Oregon metropolitan areas)
The
Company’s consolidated multifamily properties are as follows:
|
As
of March 31, 2006
|
|
As
of March 31, 2005
|
|
|
Number
of Apartment Homes
|
%
|
Number
of Apartment Homes
|
%
|
Southern
California
|
12,957
|
55%
|
12,442
|
54%
|
Northern
California
|
4,621
|
19%
|
4,559
|
20%
|
Pacific
Northwest
|
5,831
|
25%
|
5,831
|
25%
|
Other
|
302
|
1%
|
302
|
1%
|
Total
|
23,711
|
100%
|
23,134
|
100%
|
|
|
|
|
|
Occupancy
Rates
With
respect to stabilized multifamily properties with sufficient operating history,
occupancy rates are based on financial occupancy, which 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.
Comparison
of the Three Months Ended March 31, 2006 to the Three Months Ended March 31,
2005
Our
average financial occupancies for the Company’s multifamily stabilized
properties or “Same Properties” (properties consolidated by the Company for each
of the three months ended March 31, 2006 and 2005) decreased 0.1% to 96.3%
as of
March 31, 2006 from 96.4% as of March 31, 2005 for the multifamily
Same-Properties. The regional breakdown of the Company’s Same-Property portfolio
for financial occupancy for the three months ended March 31, 2006 and 2005
is as
follows:
|
|
|
Three
months ended
|
|
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
Southern
California
|
|
|
96.1%
|
|
96.2%
|
Northern
California
|
|
|
96.4%
|
|
96.9%
|
Pacific
Northwest
|
|
|
96.7%
|
|
96.7%
|
Total
Property Revenues
increased 8.9% to $85.3 million in the first quarter of 2006 from $78.3 million
in the first quarter of 2005. The following table illustrates a breakdown of
these revenue amounts, including revenues attributable to the
Same-Properties.
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
Number
of
|
|
|
March
31,
|
|
|
Dollar
|
|
Percentage
|
|
|
Properties
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
Change
|
|
Revenues:
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
Property revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern
California
|
54
|
|
$
|
42,583
|
|
$
|
40,370
|
|
$
|
2,213
|
|
5.5
|
%
|
Northern
California
|
19
|
|
|
15,705
|
|
|
14,928
|
|
|
777
|
|
5.2
|
|
Pacific
Northwest
|
27
|
|
|
14,331
|
|
|
13,576
|
|
|
755
|
|
5.6
|
|
Total
property revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Properties
|
100
|
|
|
72,619
|
|
|
68,874
|
|
|
3,745
|
|
5.4
|
|
Property
revenues - properties acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subsequent to December 31, 2004 (1)
|
|
|
|
12,644
|
|
|
9,403
|
|
|
3,241
|
|
34.5
|
|
Total
property revenues
|
|
|
$
|
85,263
|
|
$
|
78,277
|
|
$
|
6,986
|
|
8.9
|
%
|
(1)
Also
includes three office buildings, one multifamily property located in Houston,
Texas, two recreational vehicle parks, one manufactured housing community,
and
redevelopment communities and development communities.
Same-Property
Revenues
increased by $3.7 million or 5.4% to $72.6 million in the first quarter of
2006
from $68.9 million in the first quarter of 2005. Same-Properties include those
stabilized properties owned by the Company during each of the three months
ended
March 31, 2006 and 2005. The increase in first quarter of 2006 was primarily
attributable to an increase in rental rates of $3.2 million or 4.7% and a
decrease in rent concessions of $429 compared to the first quarter of 2005.
Occupancy and delinquency rates were consistent for the two quarters.
Non-Same
Property Revenues
increased by $3.2 million or 34.5% to $12.6 million in the first quarter of
2006
from $9.4 million in the first quarter of 2005. Non-Same Properties include
properties acquired subsequent to January 1, 2005, three office buildings,
one
multifamily property located in Houston, Texas, one manufactured housing
community, two recreational vehicle parks, and development and redevelopment
communities. The increase was primarily due to seven properties acquired since
March 31, 2005.
Management
and other fees from affiliates decreased
by approximately $5.8 million or 87% in the first quarter of 2006 due primarily
to $4.9 million in promote distributions received in the three months ended
March 31, 2005 related to the sale of Fund I assets. Additionally, for the
three
months ended March 31, 2005 the Company recorded $1.3 million in management
fee
income which included fee income deferred from 2004. For the three months ended
March 31, 2006, the Company recorded $824 in management fee income and received
no promote distributions.
Total
Expenses
increased $5.9 million or 8.5% to $75.6 million in the first quarter of 2006
from $69.7 million in the first quarter of 2005. The increase was primarily
due
to utilities, salaries, interest and other expenses.
Utilities
increased due mainly to higher natural gas and electric rates. Beginning in
the
first quarter of 2006, the Company has reclassified reimbursements of the ratio
utility billing system (“RUBS”) to revenue from net of utility expense for both
periods presented. Property salaries increased $773 or 11% due to an increase
in
payroll salaries over the prior year period as well as higher property
administration needs due to the acquisition of properties in 2005.
Interest
expense increased
by $843 or 5% in the first quarter of 2006 to $19.0 million, net of $549 in
capitalized interest, compared to $18.1 million, net of $57 in capitalized
interest for the first quarter of 2005. The increase was mainly due to an
increase in total outstanding debt of $90 million between the two
quarters.
Other
expenses increased
$970 for the first quarter of 2006 as a result of pursuit costs related to
the
Company’s attempt to acquire the Town & Country REIT.
Gain
on sale of real estate was
$0
for the first quarter of 2006 compared to a gain of $1.1 million recorded in
first quarter of 2005 related to the sale of The Essex at Lake Merritt property
in 2004.
Interest
and other income increased
$1.9 million in the first quarter of 2006 to $2.4 million compared to $523
in
the first quarter of 2005. The increase is due primarily to the gain on the
sale
of Town & Country stock for $1.7 million.
Equity
income in co-investments
decreased $15.0 million in the first quarter of 2006 due to the fact the Company
recorded $14.4 million in equity income and $216 in operating income related
to
Fund I properties sold during the first quarter of 2005. For the first quarter
of 2006 the Company recorded a net loss on investment in Fund II.
Discontinued
operations
increased by $844 due to $2.8 million recorded during the first quarter of
2006
related to the sale of the Vista Capri East, Casa Tierra and Diamond Valley
properties. During the first quarter of 2005, the Company recorded $1.9 million
in discontinued operations related to the sale of the Eastridge Apartments
and
Riviera properties in 2005.
Liquidity
and Capital Resources
Standard
and Poor's and Fitch ratings have existing issuer credit ratings of BBB/Stable
for Essex Property Trust, Inc. and Essex Portfolio L.P.
We
believe that cash flows generated by our operations, existing cash balances,
availability under existing lines of credit, access to capital markets and
the
ability to generate cash gains from the disposition of real estate are
sufficient to meet all of our reasonably anticipated cash needs during 2006.
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.
Essex
had
a $200 million unsecured line of credit and, as of March 31, 2006, $18.5 million
was outstanding on the line. This facility matures in March 2009, with an option
for a one-year extension. The underlying interest rate on this line is based
on
a tiered rate structure tied to our corporate ratings and is currently LIBOR
plus 0.8% which yields an average interest rate of 5.4%. We also have a $100
million credit facility from Freddie Mac, which is secured by six of Essex's
multifamily communities. As of March 31, 2006, we had $59.5 million outstanding
under this line of credit, which bears an average interest rate of 5.2% and
matures in January 2009. The underlying interest rate on this line is between
55
and 59 basis points over the Freddie Mac Reference Rate. Fund II has a credit
facility aggregating $115 million. This line bears interest at LIBOR plus
0.875%, and matures on June 30, 2007. At
the
end of the first quarter, the Company had the capacity to issue up to $219.4
million in equity securities, and the Operating Partnership had the capacity
to
issue up to $250 million of debt securities under our existing shelf
registration statements.
Essex,
through its operating partnership, Essex Portfolio, L.P. (the “Operating
Partnership”), has $225 million of outstanding exchangeable
senior notes (the “Notes”) with a coupon of 3.625% due 2025. The Notes are
senior unsecured obligations of the Operating Partnership, and are fully and
unconditionally guaranteed by the Company. On or after November 1, 2020, the
Notes will be exchangeable at the option of the holder into cash and, in certain
circumstances at Essex’s option, shares of Company’s common stock at an initial
exchange price of $103.25 per share subject to certain adjustments. The Notes
will also be exchangeable prior to November 1, 2020, but only upon the
occurrence of certain specified events. On or after November 4, 2010, the
Operating Partnership may redeem all or a portion of the Notes at a redemption
price equal to the principal amount plus accrued and unpaid interest (including
additional interest, if any). Note holders may require the Operating Partnership
to repurchase all or a portion of the Notes at a purchase price equal to the
principal amount plus accrued and unpaid interest (including additional
interest, if any) on the Notes on November 1, 2010, November 1, 2015 and
November 1, 2020.
As
of
March 31, 2006, our mortgage notes payable totaled $1.1 billion which consisted
of $918.0 million in fixed rate debt with interest rates varying from 4.27%
to
8.29% and maturity dates ranging from 2007 to 2015 and $186.6 million of
tax-exempt variable rate demand bonds with a weighted average interest rate
of
4.5%. The tax-exempt variable rate demand bonds have maturity dates ranging
from
2006 to 2034, and are subject to interest rate caps.
The
Company pays quarterly dividends from cash available for distribution. Until
it
is distributed, cash available for distribution is invested by the Company
primarily in short-term investment grade securities or is used by the Company
to
reduce balances outstanding under its line of credit.
Derivative
Activity
To
hedge
the cash flows associated with the refinancing of debt that matures in 2007,
2008, and 2010 the Company entered into the following derivative
transactions:
· |
On
February 16, 2005, the Company entered into a $50.0 million notional
forward-starting swap with a commercial bank at a fixed rate of 4.927%,
with a settlement date on or before October 1, 2007.
|
· |
On
August 18, 2005, the Company entered into a $50.0 million notional
forward-starting swap with a commercial bank at a fixed rate of 4.869%
and
a settlement date on or before October 1, 2008.
|
· |
On
February 22, 2006, the Company entered into three forward-starting
swaps.
The first was for a notional amount of $25.0 million with a commercial
bank at a fixed rate of 5.082% and a settlement date on or before
January
1, 2009. The second and third swaps are for a notional amount totaling
$100.0 million with two commercial banks at a fixed rate of $5.099%
and a
settlement date on or before January 1, 2011.
|
There
can
be no assurance that Essex will have access to the debt and equity markets
in a
timely fashion to meet such future funding requirements. Future working capital
and borrowings under the lines of credit may not be available, or if available,
may not be sufficient to meet the Company's requirements, and we may not be
able
to sell properties in a timely manner and under terms and conditions that we
deem acceptable.
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; or, in the case of for-sale development projects, have not yet
been
sold. As of March 31, 2006, the Company had one development project comprised
of
275 units for an estimated cost of $71.1 million of which $53.1 million remains
to be expended, (excluding development
projects owned by the Essex Apartment Value Fund II, L.P.).
The
Company has also incurred $3.2 million in costs related to a joint ventures
development with a third party of which the Company is committed to contribute
an additional $1 million.
The
Company defines the predevelopment pipeline as new properties in negotiation
with a high likelihood of becoming development activities. As of March 31,
2006,
the Company had negotiations in process on six development communities
aggregating 1,972 units. The estimated total cost of the predevelopment pipeline
at March 31, 2006 is $522.5 million, of which $508.4 million remains to be
expended.
The
Company had two for-sale development projects that are under development
aggregating 84 units, and three for-sale development projects that are in
predevelopment status aggregating 136 units. The estimated total cost of the
for-sale projects at March 31, 2006 is $53.8 million, of which $42.5 million
remains to be expended.
Redevelopment
The
Company defines redevelopment activities as upgrades to existing properties
owned or recently acquired, which have been targeted for 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 a 10 to 12 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. Redevelopment communities
typically have some apartment units that are not available for rent and, as
a
result, may have less than stabilized operations. As of March 31, 2006, the
Company had six communities, aggregating 1,450 units in various stages of
redevelopment. Total redevelopment cost of these projects as of March 31, 2006
is approximately $36.9 million, of which $19.4 million remains to be
expended.
Alternative
Capital Sources
Fund
II,
a value added discretionary fund, is utilized as Essex’s investment vehicle
(subject to certain exceptions) until October 31, 2006, or when Fund II’s
committed capital has been invested, whichever occurs first. Fund II invests
in
multifamily properties in the Company’s targeted West Coast markets with a focus
on investment opportunities in the Seattle Metropolitan Area and the San
Francisco Bay Area. Fund II announced its final closing on partner equity
commitments on September 27, 2004. There are eight institutional investors
including Essex with combined partner equity commitments of $265.9 million.
Essex has committed $75.0 million, which represents a 28.2% interest as general
partner and limited partner. Fund II expects to utilize leverage equal to
approximately 65% of the estimated value of the underlying real estate.
Consistent with Fund I, Essex will record revenue for its asset management,
property management, development and redevelopment services when earned, and
promote distributions should Fund II exceed 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, 2006, and the effect these
obligations could have on our liquidity and cash flow in future
periods:
|
|
|
|
2007
and
|
|
2009
and
|
|
|
|
|
|
(In
thousands)
|
|
2006
|
|
2008
|
|
2010
|
|
Thereafter
|
|
Total
|
|
Mortgage
notes payable
|
|
$
|
-
|
|
$
|
218,657
|
|
$
|
183,491
|
|
$
|
702,446
|
|
$
|
1,104,594
|
|
Exchangeable
bonds
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
225,000
|
|
|
225,000
|
|
Lines
of credit
|
|
|
-
|
|
|
-
|
|
|
78,000
|
|
|
-
|
|
|
78,000
|
|
Interest
on indebtedness
|
|
|
58,229
|
|
|
121,425
|
|
|
88,387
|
|
|
201,807
|
|
|
469,848
|
|
Development
commitments
|
|
|
33,700
|
|
|
34,100
|
|
|
-
|
|
|
-
|
|
|
67,800
|
|
Redevelopment
commitments
|
|
|
17,072
|
|
|
2,341
|
|
|
-
|
|
|
-
|
|
|
19,413
|
|
Essex
Apartment Value Fund II, L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
capital commitment
|
|
|
53,027
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
53,027
|
|
|
|
$
|
162,028
|
|
$
|
376,523
|
|
$
|
349,878
|
|
$
|
1,129,253
|
|
$
|
2,017,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 of various
entities; (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, 2005.
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 expectation as to the total projected costs of acquisition,
redevelopment, and development projects, beliefs as to the adequacy of future
cash flows to meet operating requirements and to provide for dividend payments
in accordance with REIT requirements, future acquisitions, developments, and
redevelopment, the anticipated performance of the second Fund II, and the
anticipated performance of existing properties.
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
development projects will exceed expectations, that development projects and
acquisitions will fail to meet expectations, that future cash flows will be
inadequate to meet operating requirements and/or will be insufficient to provide
for dividend payments in accordance with REIT requirements, that the Company's
partners in Fund II fail to fund capital commitments as contractually required,
that there may be a downturn in the markets in which the Company's properties
are located, that the terms of any refinancing may not be as favorable as the
terms of existing indebtedness, as well as those risks, special considerations,
and other factors discussed under the caption "Potential Factors Affecting
Future Operating Results" below and those discussed in Item 1A, “Risk Factors,”
of the Company's Annual Report on Form 10-K for the year ended December 31,
2005, and those other 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 and reasons why results may differ included in this Form 10-Q are
made as of the date hereof, and we assume no obligation to update any such
forward-looking statement or reason why actual results may differ.
Potential
Factors Affecting Future Operating Results
Many
factors affect the Company’s actual financial performance and may cause the
Company’s future results to be different from past performance or trends. These
factors include those set forth under the caption “Risk Factors” in Item 1A of
the Company’s Annual Report on Form 10-K for the year ended December 31, 2005
and the following:
Development
and Redevelopment Activities
The
Company pursues multifamily residential properties and development and
redevelopment projects from time to time. These projects 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 at economic
returns on investment and the Company's ability to refinance existing borrowings
at acceptable rates.
Funds
from Operations (FFO)
FFO
is a
financial measure that is commonly used in the REIT industry. Essex presents
funds from operations as a supplemental performance measure. FFO is not used
by
Essex as, nor should it be considered to be, an alternative to net earnings
computed under GAAP as an indicator of Essex’s operating performance or as an
alternative to cash from operating activities computed under GAAP as an
indicator of Essex’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 Essex intend it to present, a complete picture of its
financial condition and operating performance. Essex 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,
Essex
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, Essex follows the definition for this measure published by
the
National Association of REITs (“NAREIT”), which is a REIT trade association.
Essex 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. Essex 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
has consistently applied the NAREIT definition of FFO to all periods presented.
However, other REITs in calculating FFO may vary from the NAREIT definition
for
this measure, and thus their disclosure of FFO may not be comparable to Essex’s
calculation.
The
following table sets forth the Company’s calculation of FFO for the three months
ended March 31, 2006 and 2005:
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
10,322
|
|
$
|
26,878
|
|
Adjustments:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
20,091
|
|
|
19,579
|
|
Co-investments (1)
|
|
|
876
|
|
|
149
|
|
Gain on sale of real estate
|
|
|
-
|
|
|
(1,115
|
)
|
Gain on sale of co-investment activities, net
|
|
|
-
|
|
|
(14,381
|
)
|
Gain on sale of real estate - discontinued operations
|
|
|
(3,062
|
)
|
|
(735
|
)
|
Minority interests
|
|
|
1,178
|
|
|
2,798
|
|
Depreciation - discontinued operations
|
|
|
-
|
|
|
148
|
|
Dividends to preferred stockholders - Series F
|
|
|
(488
|
)
|
|
(489
|
)
|
Funds
from operations
|
|
$
|
28,917
|
|
$
|
32,832
|
|
|
|
|
|
|
|
|
|
Funds
from operations per share - diluted
|
|
$
|
1.13
|
|
$
|
1.28
|
|
|
|
|
|
|
|
|
|
Weighted
average number
|
|
|
|
|
|
|
|
shares
outstanding diluted (2)
|
|
|
25,572,575
|
|
|
25,655,571
|
|
|
|
|
|
|
|
|
|
(1)
Amount
includes the following: (i) depreciation addback from Fund II assets and
minority interest, (ii) joint venture NOI, and (iii) City Heights land lease
income not recognized for GAAP.
(2)
Assumes
conversion of all outstanding operating partnership interests in the Operating
Partnership.
Item
3: Quantitative and Qualitative Disclosures About Market Risk
The
Company is exposed to interest rate changes primarily as a result of its line
of
credit and long-term debt used to maintain liquidity and to fund capital
expenditures and expansion of the Company’s real estate investment portfolio and
operations. The Company’s interest rate risk management objectives are to limit
the impact of interest rate changes on earnings and cash flows and to lower
its
overall borrowing costs.
To
achieve its objectives the Company borrows primarily at fixed rates and may
enter into derivative financial instruments such as interest rate swaps, caps
and treasury locks in order to mitigate its interest rate risk on a related
financial instrument. The Company does not enter into derivative or interest
rate transactions for speculative purposes.
The
Company’s interest rate risk is monitored using a variety of techniques. The
table below presents the principal amounts and weighted average interest rates
by year of expected maturity to evaluate the expected cash flows. Management
believes that the carrying amounts of its variable LIBOR debt approximates
fair
value as of March 31, 2006 because interest rates, yields and other terms for
these instruments are consistent with yields and other terms currently available
to the Company for similar instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Years Ended
|
|
|
2006
|
|
|
2007(1)
|
|
|
2008(2)
|
|
|
2009
|
|
|
2010(3)
|
|
|
Thereafter
|
|
Total
|
|
|
Fair
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate debt
|
|
$
|
-
|
|
$
|
70,376
|
|
$
|
148,281
|
|
$
|
25,107
|
|
$
|
158,384
|
|
$
|
740,817
|
|
$
|
1,142,965
|
|
$
|
1,192,189
|
Average
interest rate
|
|
|
-
|
|
|
6.0%
|
|
|
6.8%
|
|
|
6.9%
|
|
|
8.1%
|
|
|
5.7%
|
|
|
|
|
|
|
Variable
rate LIBOR debt
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
78,000
|
|
$
|
-
|
|
$
|
186,629
|
(4)
|
$
|
264,629
|
|
$
|
264,629
|
Average
interest
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5.2%
|
|
|
-
|
|
|
4.5%
|
|
|
|
|
|
|
(1)
$50,000 covered by a forward-starting swap at a fixed rate of 4.927%, with
a
settlement date on or before October 1, 2007.
(2)
$50,000 covered by a forward-starting swap at a fixed rate of 4.869%, with
a
settlement date on or before October 1, 2008. Also, $25,000 covered by a
forward-starting swap at a fixed rate of 5.082%, with a settlement date on
or
before January 1, 2009.
(3)
$100,000 covered by two forward-starting swaps at a fixed rate of 5.099%, with
a
settlement date on or before January 1, 2011.
(4)
$152,749 subject to interest rate caps.
The
table
incorporates only those exposures that exist as of March 31, 2006; it does
not
consider exposures or positions that could arise after that date. As a result,
our ultimate realized gain or loss, with respect to interest rate fluctuations,
would depend on the exposures that arise during the period, our hedging
strategies at the time, and interest rates.
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.
Item
4: Controls and Procedures
As
of
March 31, 2006, 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, 2006, that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
Part
II -- Other Information
Item
1: Legal Proceedings
In
April
2004, an employee lawsuit was filed against the Company in the California
Superior Court in the County of Alameda. In this lawsuit, two former Company
maintenance employees seek unpaid wages, associated penalties and attorneys’
fees on behalf of a putative class of the Company’s current and former
maintenance employees who were required to wear a pager while they were on
call
during evening and weekend hours. In June 2005, the Company recorded $1.5
million for legal settlement costs. There has been no change to the settlement
amount since the second quarter of 2005. However, litigation is subject to
inherent uncertainties, and such amount represents management’s best estimate of
the total cost of the litigation at this time.
Recently
there has been an increasing number of lawsuits against owners and managers
of
multifamily properties 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 programs designed to manage the existence of mold in its
properties as well as guidelines for promptly addressing and resolving reports
of mold to minimize any impact mold might have on residents or the property.
Liabilities resulting from such mold related matters and the costs of carrying
insurance to address potential mold related claims may also be
substantial.
The
Company is subject to various other lawsuits in the normal course of its
business operations. Accordingly, such lawsuits, as well as the class action
lawsuit described above, could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company’s financial
condition, results of operations or cash flows.
Item
IA: Risk Factors
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. The Company’s risk factors are included in Item
IA of Part I of our Annual Report on Form 10-K for the year ended December
31,
2005, as filed with the SEC and available at www.sec.gov.
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10.1
|
Fourth
Amended and Restated Revolving Credit Agreement dated as of March
24,
2006, by and among Essex Portfolio, L.P., and Bank of America, N.A.
as
Administrative Agent, Bank of America Securities LLC as Sole Lead
Arranger
and Sole Book Manager, PNC Bank, National Association as Documentation
Agent, Union Bank of California, N.A. as Syndication Agent, Comerica
Bank
as Managing Agent, KeyBank National Association as Managing Agent,
and
JPMorgan Chase Bank, N.A., as Managing Agent, attached as Exhibit
10.1 to
the Company’s current report on Form 8-K, filed March 31, 2006, and
incorporated herein by reference.
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12.1
|
Ratio
of Earnings to Fixed Charges
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31.1
|
Certification
of Keith R. Guericke, Chief Executive Officer, pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002.
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31.2
|
Certification
of Michael T. Dance, Chief Financial Officer, pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002.
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32.1
|
Certification
of Keith R. Guericke, Chief Executive Officer, pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
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32.2
|
Certification
of Michael T. Dance, Chief Financial Officer, pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
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__________
SIGNATURE
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.
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ESSEX
PROPERTY TRUST, INC.
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(Registrant)
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Date:
May 8, 2006
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|
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By:
/S/ MICHAEL T. DANCE
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Michael
T. Dance
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Executive
Vice President, Chief Financial Officer
(Authorized
Officer, Principal Financial Officer)
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By: /S/ BRYAN HUNT
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Bryan
Hunt
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Vice
President, Chief Accounting
Officer
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