Form 10-Q
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 June 30, 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:
23,140,006
shares of Common Stock as of August 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 June 30, 2006 and December 31, 2005
|
|
|
|
|
|
Consolidated
Statements of Operations for the three and six months ended June
30, 2006
and 2005
|
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity and Comprehensive Income for the
six
months ended June 30, 2006
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the six months ended June
30,
2006 and 2005
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
27
|
|
|
|
Item
4.
|
Controls
and Procedures
|
28
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
28
|
|
|
|
Item
1A.
|
Risk
Factors
|
28
|
|
|
|
Item
4.
|
Submissions
of Matters to a Vote of Security Holders
|
29
|
|
|
|
Item
6.
|
Exhibits
|
29
|
|
|
|
Signatures
|
|
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)
|
|
June
30,
|
|
December
31,
|
|
Assets
|
|
2006
|
|
2005
|
|
Real
estate:
|
|
|
|
|
|
Rental
properties:
|
|
|
|
|
|
Land
and land improvements
|
|
$
|
561,560
|
|
$
|
551,132
|
|
Buildings
and improvements
|
|
|
1,994,741
|
|
|
1,932,113
|
|
|
|
|
2,556,301
|
|
|
2,483,245
|
|
Less
accumulated depreciation
|
|
|
(437,154
|
)
|
|
(398,476
|
)
|
|
|
|
2,119,147
|
|
|
2,084,769
|
|
Real
estate under development
|
|
|
75,429
|
|
|
54,416
|
|
Investments
|
|
|
36,498
|
|
|
27,228
|
|
|
|
|
2,231,074
|
|
|
2,166,413
|
|
Cash
and cash equivalents-unrestricted
|
|
|
9,022
|
|
|
14,337
|
|
Cash
and cash equivalents-restricted
|
|
|
14,035
|
|
|
13,937
|
|
Notes
and other receivables from related parties
|
|
|
2,258
|
|
|
1,173
|
|
Notes
and other receivables
|
|
|
29,845
|
|
|
5,237
|
|
Prepaid
expenses and other assets
|
|
|
27,632
|
|
|
23,078
|
|
Deferred
charges, net
|
|
|
14,378
|
|
|
15,115
|
|
Total
assets
|
|
$
|
2,328,244
|
|
$
|
2,239,290
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
Mortgage
notes payable
|
|
$
|
1,100,965
|
|
$
|
1,104,918
|
|
Exchangeable
bonds
|
|
|
225,000
|
|
|
225,000
|
|
Lines
of credit
|
|
|
95,030
|
|
|
25,000
|
|
Accounts
payable and accrued liabilities
|
|
|
37,567
|
|
|
32,982
|
|
Dividends
payable
|
|
|
23,317
|
|
|
22,496
|
|
Other
liabilities
|
|
|
13,696
|
|
|
12,520
|
|
Deferred
gain
|
|
|
2,193
|
|
|
2,193
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,497,768
|
|
|
1,425,109
|
|
Minority
interests
|
|
|
229,694
|
|
|
233,214
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Common
stock, $.0001 par value, 655,682,178
|
|
|
|
|
|
|
|
authorized,
23,047,162 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
|
|
|
648,142
|
|
|
632,646
|
|
Distributions
in excess of accumulated earnings
|
|
|
(84,066
|
)
|
|
(77,341
|
)
|
Accumulated
other comprehensive income
|
|
|
11,704
|
|
|
660
|
|
Total
stockholders' equity
|
|
|
600,782
|
|
|
580,967
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
2,328,244
|
|
$
|
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
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
Revenues:
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Rental
and other property
|
|
$
|
86,656
|
|
$
|
79,662
|
|
$
|
171,919
|
|
$
|
157,938
|
|
Management
and other fees from affiliates
|
|
|
830
|
|
|
931
|
|
|
1,654
|
|
|
7,507
|
|
|
|
|
87,486
|
|
|
80,593
|
|
|
173,573
|
|
|
165,445
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
operating, excluding real estate taxes
|
|
|
22,095
|
|
|
20,685
|
|
|
44,710
|
|
|
40,913
|
|
Real
estate taxes
|
|
|
7,374
|
|
|
6,610
|
|
|
14,770
|
|
|
13,451
|
|
Depreciation
and amortization
|
|
|
20,675
|
|
|
20,043
|
|
|
40,766
|
|
|
39,622
|
|
Interest
|
|
|
19,497
|
|
|
18,153
|
|
|
38,487
|
|
|
36,300
|
|
Amortization
of deferred financing costs
|
|
|
497
|
|
|
563
|
|
|
1,193
|
|
|
1,039
|
|
General
and administrative
|
|
|
5,002
|
|
|
4,573
|
|
|
9,901
|
|
|
9,014
|
|
Other
expenses
|
|
|
800
|
|
|
1,500
|
|
|
1,770
|
|
|
1,500
|
|
|
|
|
75,940
|
|
|
72,127
|
|
|
151,597
|
|
|
141,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of real estate
|
|
|
-
|
|
|
5,276
|
|
|
-
|
|
|
6,391
|
|
Interest
and other income
|
|
|
654
|
|
|
2,431
|
|
|
3,048
|
|
|
2,954
|
|
Equity
income in co-investments
|
|
|
(374
|
)
|
|
2,724
|
|
|
(816
|
)
|
|
17,316
|
|
Minority
interests
|
|
|
(4,760
|
)
|
|
(5,360
|
)
|
|
(9,687
|
)
|
|
(11,801
|
)
|
Income
from continuing operations before income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax
provision
|
|
|
7,066
|
|
|
13,537
|
|
|
14,521
|
|
|
38,466
|
|
Income
tax provision
|
|
|
(138
|
)
|
|
(1,100
|
)
|
|
(175
|
)
|
|
(1,201
|
)
|
Income
from continuing operations
|
|
|
6,928
|
|
|
12,437
|
|
|
14,346
|
|
|
37,265
|
|
Income
from discontinued operations (net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
minority
interests)
|
|
|
15,584
|
|
|
26,441
|
|
|
18,488
|
|
|
28,491
|
|
Net
income
|
|
|
22,512
|
|
|
38,878
|
|
|
32,834
|
|
|
65,756
|
|
Dividends
to preferred stockholders
|
|
|
(489
|
)
|
|
(488
|
)
|
|
(977
|
)
|
|
(977
|
)
|
Net
income available to common stockholders
|
|
$
|
22,023
|
|
$
|
38,390
|
|
$
|
31,857
|
|
$
|
64,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
common share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations available to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders
|
|
$
|
0.28
|
|
$
|
0.52
|
|
$
|
0.58
|
|
$
|
1.57
|
|
Income
from discontinued operations
|
|
|
0.68
|
|
|
1.14
|
|
|
0.81
|
|
|
1.24
|
|
Net
income available to common stockholders
|
|
$
|
0.96
|
|
$
|
1.66
|
|
$
|
1.39
|
|
$
|
2.81
|
|
Weighted
average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
during the period
|
|
|
22,950,172
|
|
|
23,069,620
|
|
|
22,911,202
|
|
|
23,056,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations available to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders
|
|
$
|
0.28
|
|
$
|
0.51
|
|
$
|
0.58
|
|
$
|
1.55
|
|
Income
from discontinued operations
|
|
|
0.67
|
|
|
1.13
|
|
|
0.80
|
|
|
1.22
|
|
Net
income available to common stockholders
|
|
$
|
0.95
|
|
$
|
1.64
|
|
$
|
1.38
|
|
$
|
2.77
|
|
Weighted
average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
during the period
|
|
|
23,226,466
|
|
|
23,372,873
|
|
|
23,154,818
|
|
|
23,363,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
per common share
|
|
$
|
0.84
|
|
$
|
0.81
|
|
$
|
1.68
|
|
$
|
1.62
|
|
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 six months ended June 30, 2006
(Unaudited)
(Dollars
and shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
32,834
|
|
|
32,834
|
|
Change in fair value of cash flow hedges
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
11,044
|
|
|
-
|
|
|
11,044
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,878
|
|
Issuance
of common stock under:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation plans
|
|
|
-
|
|
|
-
|
|
|
56
|
|
|
-
|
|
|
2,709
|
|
|
-
|
|
|
-
|
|
|
2,709
|
|
Sale
of common stock
|
|
|
-
|
|
|
-
|
|
|
140
|
|
|
-
|
|
|
14,813
|
|
|
-
|
|
|
-
|
|
|
14,813
|
|
Redemptions
of minority interests, net
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,026
|
)
|
|
-
|
|
|
-
|
|
|
(2,026
|
)
|
Dividends
declared
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(39,559
|
)
|
|
(39,559
|
)
|
Balances
at June 30, 2006
|
|
|
1,000
|
|
$
|
25,000
|
|
|
23,047
|
|
$
|
2
|
|
$
|
648,142
|
|
$
|
11,704
|
|
$
|
(84,066
|
)
|
$
|
600,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
Net
cash provided by operating activities
|
|
$
|
69,253
|
|
$
|
66,629
|
|
|
|
|
|
|
|
|
|
Cash
flows (used in) provided by investing activities:
|
|
|
|
|
|
|
|
Additions
to real estate:
|
|
|
|
|
|
|
|
Acquisitions
and improvements to recent acquisitions
|
|
|
(60,115
|
)
|
|
(16,090
|
)
|
Redevelopment
|
|
|
(11,455
|
)
|
|
(7,711
|
)
|
Revenue
generating capital expenditures
|
|
|
(1,092
|
)
|
|
(115
|
)
|
Other
capital expenditures
|
|
|
(7,485
|
)
|
|
(6,116
|
)
|
Additions
to real estate under development
|
|
|
(20,346
|
)
|
|
(15,031
|
)
|
Dispositions
of real estate and investments
|
|
|
8,349
|
|
|
6,585
|
|
Changes
in restricted cash and refundable deposits
|
|
|
6,271
|
|
|
7,646
|
|
Additions
to notes receivable from related parties and other
receivables
|
|
|
(8,284
|
)
|
|
(3,643
|
)
|
Repayments
of notes receivable from related parties and other
receivables
|
|
|
456
|
|
|
5,005
|
|
Net
(contributions to) distributions from limited partnerships
|
|
|
(8,261
|
)
|
|
41,336
|
|
Net
cash (used in) provided by investing activities
|
|
|
(101,962
|
)
|
|
11,866
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from mortgage notes payable and lines of credit
|
|
|
159,429
|
|
|
96,629
|
|
Repayment
of mortgage notes payable and lines of credit
|
|
|
(93,030
|
)
|
|
(99,840
|
)
|
Additions
to deferred charges
|
|
|
(456
|
)
|
|
(885
|
)
|
Net
proceeds from stock options exercised
|
|
|
2,113
|
|
|
1,881
|
|
Net
sale of common stock
|
|
|
14,813
|
|
|
-
|
|
Distributions
to minority interest partners
|
|
|
(11,679
|
)
|
|
(11,545
|
)
|
Redemption
of minority interest limited partnership units
|
|
|
(5,073
|
)
|
|
(4,466
|
)
|
Common
and preferred stock dividends paid
|
|
|
(38,723
|
)
|
|
(37,837
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
27,394
|
|
|
(56,063
|
)
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(5,315
|
)
|
|
22,432
|
|
Cash
and cash equivalents at beginning of period
|
|
|
14,337
|
|
|
10,644
|
|
Cash
and cash equivalents at end of period
|
|
$
|
9,022
|
|
$
|
33,076
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for interest, net of $1,260 and $511 capitalized
|
|
|
|
|
|
|
|
in
2006 and 2005, respectively
|
|
$
|
36,858
|
|
$
|
35,600
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the unaudited consolidated financial
statements.
ESSEX
PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
June
30, 2006 and 2005
(Unaudited)
(Dollars
in thousands, except for per share and unit amounts)
(1)
Organization and Basis of Presentation
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 six months ended June 30,
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
90.3% and 90.4% general partnership interest as of June 30, 2006 and December
31, 2005, respectively.
As
of June
30, 2006, the Company has ownership interests in 126 multifamily properties
(containing 27,110 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 $236.9 million and $146.7 million, respectively, at June 30,
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 June
30, 2006 the Company was involved with two VIEs, of which it is not deemed
to be
the primary beneficiary. Total assets and liabilities of these entities were
approximately $79.3 million and $58.2 million, respectively, at June 30, 2006.
As of December 31, 2005, the Company was involved with three VIEs, of which
it
was not deemed to be the primary beneficiary, total assets and liabilities
of
these entities were approximately $92.9 million and $72.5 million, respectively.
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 $481 and $115 for the three months ended June
30,
2006 and 2005, respectively, and $624 and $249 for the six months ended June
30,
2006 and 2005, respectively. The intrinsic value of the stock options exercised
during the three months ended June 30, 2006 and 2005 totaled $0.9 million and
$0.8 million, respectively, and $2.7 million and $1.4 million for the six months
ended June 30, 2006 and 2005, respectively. As of June 30, 2006, the intrinsic
value of the stock options outstanding and fully vested totaled $26.1 million
and $17.8 million, respectively. As of June 30, 2006, total unrecognized
compensation cost related to unvested share-based compensation granted under
the
stock option plans totaled $2.5 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 $38 for the three months ended June 30,
2006
and 2005, respectively. Stock-based compensation capitalized for these Plans
totaled $188 and $53 for the three months ended June 30, 2006 and 2005,
respectively. As of June 30, 2006 the intrinsic value of the Z Units subject
to
conversion totaled $16.6 million. As of June 30, 2006, total unrecognized
compensation cost related to Z Units subject to conversion in the future granted
under the Z Units 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.
In
July
2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting
for Uncertainty in Income Taxes-an Interpretation of FASB Statement
109.”
FIN
48
increases the relevancy and comparability of financial reporting by clarifying
the way companies account for uncertainty in measuring income taxes. FIN 48
prescribes a comprehensive model for how a company should recognize, measure,
present, and disclose in its financial statements uncertain tax positions that
the company has taken or expects to take on a tax return. This Interpretation
only allows a favorable tax position to be included in the calculation of tax
liabilities and expenses if a company concludes that it is more likely than
not
that its adopted tax position will prevail if challenged by tax authorities.
FIN
48 is effective for fiscal years beginning after December 15, 2006. We are
in
the process of evaluating the impact of this Interpretation on our future
consolidated financial position, results of operations and cash
flows.
(2)
Significant
Transactions for the Quarter Ended June 30, 2006
(a)
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
June
2006, the unconsolidated joint venture property, Vista Pointe, a 286-unit
apartment community located in Anaheim, California, was sold for approximately
$46 million. The Company’s share of the proceeds from the transaction totaled
$19.3 million, resulting in an $8.8 million gain on the sale, and an additional
$8.2 million for fees and a promote distribution.
(b)
Equity
During
July 2006, the Company sold 5.98 million shares of 4.875% Series G Cumulative
Convertible Preferred Stock at $25 per share for estimated gross proceeds of
$149.5 million. Holders may convert Series G Preferred Stock into shares of
the
Company’s common stock subject to certain conditions. The conversion rate will
initially be .1830 shares of common stock per the $25 per 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 conditions, cause some or all of the Series
G
Preferred Stock to be converted into that number of shares of common stock
at
the then prevailing conversion rate. The Company intends to use the net proceeds
from the offering to pay down outstanding borrowings under the Company’s lines
of credit, to fund the development pipeline and for general corporate
purposes.
During
the
second quarter 2006, the Company issued and sold approximately 140,500 shares
for $14.8 million, net of fees and commissions, under its Controlled Equity
Offering program. Under this program, the Company may from time to time sell
shares of common stock into the existing trading market at current market
prices, and the Company anticipates using the net proceeds from such sales
to
fund the development and redevelopment pipelines.
(c)
The Essex Apartment Value Fund II (“Fund II”)
In
April
2006, Fund II acquired two land parcels including a 1.26 acre parcel of land,
fully entitled for 149 units, located in Studio City, California for a total
estimated cost of approximately $53.3 million, and a 0.9 acre parcel of fully
entitled land for 127 units, located in Seattle, Washington, for a total
estimated cost of approximately $29.5 million.
In
April
2006, Fund II acquired Davey Glen, a 69-unit apartment community located in
Belmont, California for approximately $13.5 million.
(d)
Real Estate Rental Properties
During
the
second quarter of 2006, the Company recorded an impairment loss of $0.8 million
resulting from the write-down of a property in Houston, Texas, to reduce the
property’s carrying value to its estimated fair value as of June 30, 2006. The
amount is recorded in other expenses in the accompanying consolidated statements
of operations.
(3)
Investments
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):
|
|
June
30,
|
|
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)
|
|
|
28,610
|
|
|
19,340
|
|
Preferred limited partnership interests in Mountain Vista
|
|
|
|
|
|
|
|
Apartments
(A)
|
|
|
6,806
|
|
|
6,806
|
|
|
|
|
35,998
|
|
|
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
|
|
$
|
36,498
|
|
$
|
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).
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
December
31,
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
Balance
sheets:
|
|
|
|
|
|
|
|
|
|
Real
estate and real estate under development
|
|
$
|
474,100
|
|
$
|
431,655
|
|
|
|
|
|
|
|
Other
assets
|
|
|
20,509
|
|
|
18,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
494,609
|
|
$
|
450,310
|
|
|
|
|
|
|
|
Mortgage
notes payable
|
|
$
|
266,380
|
|
$
|
268,325
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
95,538
|
|
|
83,979
|
|
|
|
|
|
|
|
Partners'
equity
|
|
|
132,691
|
|
|
98,007
|
|
|
|
|
|
|
|
Total
liabilities and partners' equity
|
|
$
|
494,609
|
|
$
|
450,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company's
share of equity
|
|
$
|
35,998
|
|
$
|
26,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
Six
Months Ended
|
|
|
June
30,
|
June
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Statements
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
property revenues
|
|
$
|
10,231
|
|
$
|
6,354
|
|
$
|
19,741
|
|
$
|
13,854
|
|
Total
gain on the sales of real estate
|
|
|
-
|
|
|
4,422
|
|
|
-
|
|
|
33,008
|
|
Depreciation
and amortization
|
|
|
(2,937
|
)
|
|
(1,536
|
)
|
|
(5,822
|
)
|
|
(3,240
|
)
|
Interest
expense
|
|
|
(4,407
|
)
|
|
(2,712
|
)
|
|
(8,562
|
)
|
|
(5,048
|
)
|
Other
operating expenses
|
|
|
(4,353
|
)
|
|
(3,088
|
)
|
|
(8,508
|
)
|
|
(6,100
|
)
|
Total
net (loss) income
|
|
$
|
(1,466
|
)
|
$
|
3,440
|
|
$
|
(3,151
|
)
|
$
|
32,474
|
|
Company's
share of net (loss) income
|
|
$
|
(374
|
)
|
$
|
2,724
|
|
$
|
(816
|
)
|
$
|
17,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
Notes Receivable and Other Receivables from Related
Parties
Notes
receivable and other receivables from related parties consist of the following
as of June 30, 2006 and December 31, 2005 (dollars in thousands):
|
|
June
30,
|
|
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
|
|
|
1,883
|
|
|
798
|
|
Total
notes and other receivable from related parties
|
|
$
|
2,258
|
|
$
|
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 June 30, 2006 and December
31,
2005 (dollars in thousands):
|
|
|
|
|
|
|
|
June
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Note
receivable from Pacifica Companies, LLC, secured,
|
|
|
|
|
|
bearing interest at 12%, due June 2008
|
|
|
2,193
|
|
|
2,193
|
|
Note
receivable from Marketplace Mortgage, LLC, secured
|
|
|
|
|
|
|
|
bearing interest at LIBOR + 3.69%, due June 2009
|
|
|
7,293
|
|
|
-
|
|
Other
receivables
|
|
|
20,359
|
|
|
3,044
|
|
Total
notes and other receivables
|
|
$
|
29,845
|
|
$
|
5,237
|
|
|
|
|
|
|
|
|
|
Other
receivables consist primarily of proceeds from the sale of Vista Pointe for
$19,297 held in escrow as of June 30, 2006, and a receivable due from the
Vista
Pointe joint venture for $2,176 as of December 31, 2005. A cash distribution
for
the entire amount was received from escrow on July 7, 2006.
(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 $830 and $931
for the three months ended June 30, 2006 and 2005, respectively, and $1,654
and
$7,507 for the six months ended June 30, 2006 and 2005, respectively, and
promote income from Fund I of $241 for the three months ended June 30, 2005
and
$5,114 for the six months ended June 30, 2005. There was no promote income
from
related parties for the six months ended June 30, 2006.
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 three months ended June 30, 2006
and
2005 (dollars in thousands):
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
Southern
California
|
|
$
|
51,567
|
|
$
|
46,968
|
|
Northern
California
|
|
|
18,057
|
|
|
16,796
|
|
Pacific
Northwest
|
|
|
15,911
|
|
|
14,849
|
|
Other
non-segment areas
|
|
|
1,121
|
|
|
1,049
|
|
Total
property revenues
|
|
$
|
86,656
|
|
$
|
79,662
|
|
|
|
|
|
|
|
|
|
Net
operating income:
|
|
|
|
|
|
|
|
Southern
California
|
|
$
|
34,975
|
|
$
|
31,458
|
|
Northern
California
|
|
|
12,235
|
|
|
11,457
|
|
Pacific
Northwest
|
|
|
10,030
|
|
|
9,379
|
|
Other
non-segment areas
|
|
|
(53
|
)
|
|
73
|
|
Total
net operating income
|
|
|
57,187
|
|
|
52,367
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
Southern
California
|
|
|
(11,506
|
)
|
|
(10,360
|
)
|
Northern
California
|
|
|
(4,161
|
)
|
|
(3,998
|
)
|
Pacific
Northwest
|
|
|
(3,915
|
)
|
|
(3,706
|
)
|
Other
non-segment areas
|
|
|
(1,093
|
)
|
|
(1,979
|
)
|
|
|
|
(20,675
|
)
|
|
(20,043
|
)
|
Interest
expense:
|
|
|
|
|
|
|
|
Southern
California
|
|
|
(7,550
|
)
|
|
(7,692
|
)
|
Northern
California
|
|
|
(4,338
|
)
|
|
(3,777
|
)
|
Pacific
Northwest
|
|
|
(1,731
|
)
|
|
(1,888
|
)
|
Other
non-segment areas
|
|
|
(5,878
|
)
|
|
(4,796
|
)
|
|
|
|
(19,497
|
)
|
|
(18,153
|
)
|
|
|
|
|
|
|
|
|
Amortization
of deferred financing costs
|
|
|
(497
|
)
|
|
(563
|
)
|
General
and administrative
|
|
|
(5,002
|
)
|
|
(4,573
|
)
|
Other
expenses
|
|
|
(800
|
)
|
|
(1,500
|
)
|
Management
and other fees from affiliates
|
|
|
830
|
|
|
931
|
|
Gain
on sale of real estate
|
|
|
-
|
|
|
5,276
|
|
Interest
and other income
|
|
|
654
|
|
|
2,431
|
|
Equity
income in co-investments
|
|
|
(374
|
)
|
|
2,724
|
|
Minority
interests
|
|
|
(4,760
|
)
|
|
(5,360
|
)
|
Income
tax provision
|
|
|
(138
|
)
|
|
(1,100
|
)
|
Income
from continuing operations
|
|
$
|
6,928
|
|
$
|
12,437
|
|
|
|
|
|
|
|
|
|
The
revenues, net operating income, and assets for each of the reportable operating
segments are summarized as follows for the six months ended June 30, 2006
and
2005 (dollars in thousands):
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
Southern
California
|
|
$
|
102,686
|
|
$
|
93,260
|
|
Northern
California
|
|
|
35,501
|
|
|
33,293
|
|
Pacific
Northwest
|
|
|
31,443
|
|
|
29,407
|
|
Other
non-segment areas
|
|
|
2,289
|
|
|
1,978
|
|
Total
property revenues
|
|
$
|
171,919
|
|
$
|
157,938
|
|
|
|
|
|
|
|
|
|
Net
operating income:
|
|
|
|
|
|
|
|
Southern
California
|
|
$
|
69,475
|
|
$
|
62,642
|
|
Northern
California
|
|
|
23,761
|
|
|
22,541
|
|
Pacific
Northwest
|
|
|
19,652
|
|
|
18,429
|
|
Other
non-segment areas
|
|
|
(449
|
)
|
|
(38
|
)
|
Total
net operating income
|
|
|
112,439
|
|
|
103,574
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
Southern
California
|
|
|
(22,568
|
)
|
|
(20,496
|
)
|
Northern
California
|
|
|
(8,236
|
)
|
|
(7,915
|
)
|
Pacific
Northwest
|
|
|
(7,690
|
)
|
|
(7,334
|
)
|
Other
non-segment areas
|
|
|
(2,272
|
)
|
|
(3,877
|
)
|
|
|
|
(40,766
|
)
|
|
(39,622
|
)
|
Interest
expense:
|
|
|
|
|
|
|
|
Southern
California
|
|
|
(14,694
|
)
|
|
(15,161
|
)
|
Northern
California
|
|
|
(8,781
|
)
|
|
(7,568
|
)
|
Pacific
Northwest
|
|
|
(3,421
|
)
|
|
(3,338
|
)
|
Other
non-segment areas
|
|
|
(11,591
|
)
|
|
(10,233
|
)
|
|
|
|
(38,487
|
)
|
|
(36,300
|
)
|
|
|
|
|
|
|
|
|
Amortization
of deferred financing costs
|
|
|
(1,193
|
)
|
|
(1,039
|
)
|
General
and administrative
|
|
|
(9,901
|
)
|
|
(9,014
|
)
|
Other
expenses
|
|
|
(1,770
|
)
|
|
(1,500
|
)
|
Management
and other fees from affiliates
|
|
|
1,654
|
|
|
7,507
|
|
Gain
on sale of real estate
|
|
|
-
|
|
|
6,391
|
|
Interest
and other income
|
|
|
3,048
|
|
|
2,954
|
|
Equity
income in co-investments
|
|
|
(816
|
)
|
|
17,316
|
|
Minority
interests
|
|
|
(9,687
|
)
|
|
(11,801
|
)
|
Income
tax provision
|
|
|
(175
|
)
|
|
(1,201
|
)
|
Income
from continuing operations
|
|
$
|
14,346
|
|
$
|
37,265
|
|
|
|
June
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Assets:
|
|
|
|
|
|
Net
real estate assets:
|
|
|
|
|
|
Southern California
|
|
$
|
1,270,774
|
|
$
|
1,211,373
|
|
Northern California
|
|
|
451,850
|
|
|
456,093
|
|
Pacific Northwest
|
|
|
358,892
|
|
|
359,432
|
|
Other
non-segment areas
|
|
|
37,631
|
|
|
57,871
|
|
Total
net real estate assets
|
|
|
2,119,147
|
|
|
2,084,769
|
|
Other
non-segment assets
|
|
|
209,097
|
|
|
154,521
|
|
Total
assets
|
|
$
|
2,328,244
|
|
$
|
2,239,290
|
|
(8)
Net Income Per Common Share
(Amounts
in thousands, except per share data)
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
|
|
|
|
Weighted
|
|
Per
|
|
|
|
Weighted
|
|
Per
|
|
|
|
|
|
Average
|
|
Common
|
|
|
|
Average
|
|
Common
|
|
|
|
|
|
Common
|
|
Share
|
|
|
|
Common
|
|
Share
|
|
|
|
Income
|
|
Shares
|
|
Amount
|
|
Income
|
|
Shares
|
|
Amount
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common stockholders
|
|
$
|
6,439
|
|
|
22,950
|
|
$
|
0.28
|
|
$
|
11,949
|
|
|
23,070
|
|
$
|
0.52
|
|
Income
from discontinued operations
|
|
|
15,584
|
|
|
22,950
|
|
|
0.68
|
|
|
26,441
|
|
|
23,070
|
|
|
1.14
|
|
|
|
|
22,023
|
|
|
|
|
$
|
0.96
|
|
|
38,390
|
|
|
|
|
$
|
1.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities (1)
|
|
|
-
|
|
|
276
|
|
|
|
|
|
-
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common stockholders
|
|
|
6,439
|
|
|
23,226
|
|
$
|
0.28
|
|
|
11,949
|
|
|
23,373
|
|
$
|
0.51
|
|
Income
from discontinued operations
|
|
|
15,584
|
|
|
23,226
|
|
|
0.67
|
|
|
26,441
|
|
|
23,373
|
|
|
1.13
|
|
|
|
$
|
22,023
|
|
|
|
|
$
|
0.95
|
|
$
|
38,390
|
|
|
|
|
$
|
1.64
|
|
|
|
|
Six
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30, 2006
|
|
|
June
30, 2005
|
|
|
|
|
|
Weighted
|
|
|
Per
|
|
|
|
|
|
Weighted
|
|
|
Per
|
|
|
|
|
|
Average
|
|
|
Common
|
|
|
|
|
|
Average
|
|
|
Common
|
|
|
|
|
|
Common
|
|
|
Share
|
|
|
|
|
|
Common
|
|
|
Share
|
|
|
|
Income
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
Shares
|
|
|
Amount
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common stockholders
|
|
$
|
13,369
|
|
22,911
|
|
$
|
0.58
|
|
$
|
36,288
|
|
|
23,057
|
|
$
|
1.57
|
Income
from discontinued operations
|
|
|
18,488
|
|
22,911
|
|
|
0.81
|
|
|
28,491
|
|
|
23,057
|
|
|
1.24
|
|
|
|
31,857
|
|
|
|
$
|
1.39
|
|
|
64,779
|
|
|
|
|
$
|
2.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities (1)
|
|
|
-
|
|
244
|
|
|
|
|
|
-
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common stockholders
|
|
|
13,369
|
|
23,155
|
|
$
|
0.58
|
|
|
36,288
|
|
|
23,364
|
|
$
|
1.55
|
Income
from discontinued operations
|
|
|
18,488
|
|
23,155
|
|
|
0.80
|
|
|
28,491
|
|
|
23,364
|
|
|
1.22
|
|
|
$
|
31,857
|
|
|
|
$
|
1.38
|
|
$
|
64,779
|
|
|
|
|
$
|
2.77
|
(1) |
Weighted
convertible limited partnership units of 2,286,291 and 2,299,361
for the
three months ended June 30, 2006 and 2005, respectively, and 2,290,113
and
2,312,216 for the six months ended June 30, 2006 and 2005, respectively,
and Series Z incentive units of 184,000 for the three and six months
ended
June 30, 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.
|
On
or
after November 1, 2020, the holders of the $225 million exchangeable notes
may
exchange, at the then applicable exchange rate, the notes for cash and, at
Essex’s option, a portion of the notes may be exchanged for Essex common stock;
the 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 and six months
ended June 30, 2006, the weighted average common stock price exceeded the
$103.25 strike price and therefore common stock issuable upon exchange of the
exchangeable notes was included in the diluted share count. The treasury method
was used to determine the shares to be added to the denominator for the
calculation of earnings per diluted share.
Stock
options of 19,148 and 39,274 for the three months ended June 30, 2006 and 2005,
respectively, and 10,704 and 33,356 for the six months ended June 30, 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
|
During
the
second quarter of 2006 the Company entered into two, ten-year forward-starting
interest rate swaps for $50 million and $75 million with settlement dates of
January 1, 2011 and February 1, 2011, respectively. As of June 30, 2006, the
Company has entered into seven forward-starting interest rate swaps totaling
a
notional amount of $350 million with interest rates ranging from 4.9% to 5.9%
and settlements dates ranging from October 1, 2007 to February 1, 2011. These
derivatives qualify for hedge accounting and will economically hedge the cash
flows associated with the refinancing of debt that matures between 2007 and
early 2011. The increase in the fair value of these derivatives during the
six
months ended June 30, 2006 was approximately $11.7 million 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 six months ended June 30, 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.
In
June
2005, the Company sold Eastridge Apartments, a 188-unit apartment community
located in San Ramon, California for approximately $47.5 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 gain on the sale of the Eastridge property net of the
deferral of the $2.2 participating loan was $28.5 million. 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 $142, $29, and
$113
for the six months ended June 30, 2006, and $367, $147, and $220 for the six
months ended June 30, 2005, to discontinued operations due to the fact the
amounts are immaterial to the consolidated financial statements.
In
June
2006, the unconsolidated joint venture property, Vista Pointe, a 286-unit
apartment community located in Anaheim, California, was sold for approximately
$46 million. The Company’s share of the proceeds from the transaction totaled
$19.3 million, resulting in an $8.8 million gain on the sale, and an additional
$8.2 million for fees and a promote distribution. The Company has recorded
the
ground lease income and all related gains and fees from the Vista Pointe joint
venture as part of discontinued operations in the accompanying consolidated
statements of operations.
The
components of discontinued operations are outlined below and include the results
of operations for the respective periods that the Company owned such assets,
as
described above.
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Rental
revenues
|
|
$
|
-
|
|
$
|
574
|
|
$
|
-
|
|
$
|
1,233
|
|
Interest
and other
|
|
|
119
|
|
|
119
|
|
|
238
|
|
|
1,373
|
|
Revenues
|
|
|
119
|
|
|
693
|
|
|
238
|
|
|
2,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
operating expenses
|
|
|
-
|
|
|
(114
|
)
|
|
-
|
|
|
(506
|
)
|
Minority
interests
|
|
|
(11
|
)
|
|
(52
|
)
|
|
(22
|
)
|
|
(190
|
)
|
Operating
income from real estate sold
|
|
|
108
|
|
|
527
|
|
|
216
|
|
|
1,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of real estate
|
|
|
8,800
|
|
|
28,484
|
|
|
11,862
|
|
|
29,219
|
|
Promote
interest and fees
|
|
|
8,221
|
|
|
-
|
|
|
8,221
|
|
|
-
|
|
Minority
interests
|
|
|
(1,545
|
)
|
|
(2,570
|
)
|
|
(1,811
|
)
|
|
(2,638
|
)
|
Net gain on sale of real estate
|
|
|
15,476
|
|
|
25,914
|
|
|
18,272
|
|
|
26,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
$
|
15,584
|
|
$
|
26,441
|
|
$
|
18,488
|
|
$
|
28,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
Item
2: Management's Discussion and Analysis of Financial Condition and Results
of
Operations
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 and six
months ended June 30, 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 June 30, 2006
|
|
As
of June 30, 2005
|
|
|
Number
of Apartment Homes
|
%
|
Number
of Apartment Homes
|
%
|
Southern
California
|
12,957
|
55%
|
12,724
|
54%
|
Northern
California
|
4,621
|
19%
|
4,621
|
20%
|
Pacific
Northwest
|
5,847
|
25%
|
5,831
|
25%
|
Other
|
302
|
1%
|
302
|
1%
|
Total
|
23,727
|
100%
|
23,478
|
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 June 30, 2006 to the Three Months Ended June 30,
2005
Our
average financial occupancies for the Company’s multifamily stabilized
properties or “Quarterly Same Properties” (properties consolidated by the
Company for each of the three months ended June 30, 2006 and 2005) decreased
0.1% to 96.6% as of June 30, 2006 from 96.7% as of June 30, 2005 for the
multifamily Quarterly Same-Properties. The regional breakdown of the Company’s
Quarterly Same-Property portfolio for financial occupancy for the three months
ended June 30, 2006 and 2005 is as follows:
|
|
|
Three
months ended
|
|
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
Southern
California
|
|
|
95.9%
|
|
96.5%
|
Northern
California
|
|
|
97.8%
|
|
97.2%
|
Pacific
Northwest
|
|
|
97.5%
|
|
96.8%
|
Total
Property Revenues
increased
8.8% to $86.7 million in the second quarter of 2006 from $79.7 million in the
second quarter of 2005. The following table illustrates a breakdown of these
revenue amounts, including revenues attributable to the Quarterly
Same-Properties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
Number
of
|
|
June
30,
|
|
Dollar
|
|
Percentage
|
|
|
|
Properties
|
|
2006
|
|
2005
|
|
Change
|
|
Change
|
|
Revenues:
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
Property
revenues
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
Same-Properties:
|
|
|
|
|
|
|
|
|
|
|
|
Southern
California
|
|
|
56
|
|
$
|
46,314
|
|
$
|
43,954
|
|
$
|
2,360
|
|
|
5.4
|
%
|
Northern
California
|
|
|
20
|
|
|
18,057
|
|
|
16,796
|
|
|
1,261
|
|
|
7.5
|
|
Pacific
Northwest
|
|
|
25
|
|
|
13,926
|
|
|
12,879
|
|
|
1,047
|
|
|
8.1
|
|
Total
property revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
Same-Properties
|
|
|
101
|
|
|
78,297
|
|
|
73,629
|
|
|
4,668
|
|
|
6.3
|
|
Property
revenues - properties acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subsequent to March 31, 2005 (1)
|
|
|
|
|
|
8,359
|
|
|
6,033
|
|
|
2,326
|
|
|
38.6
|
|
Total
property revenues
|
|
|
|
|
$
|
86,656
|
|
$
|
79,662
|
|
$
|
6,994
|
|
|
8.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Also
includes three office buildings, one multifamily property located in Houston,
Texas, two recreational vehicle parks, one manufactured housing community,
and
redevelopment communities.
Quarterly
Same-Property Revenues
increased
by $4.7 million or 6.3% to $78.3 million in the second quarter of 2006 from
$73.6 million in the second quarter of 2005. The increase in second quarter
of
2006 was primarily attributable to an increase in rental rates of $4.3 million
or 5.9% and a decrease in rent concessions of $173 compared to the second
quarter of 2005. Occupancy and delinquency rates were consistent for the two
quarters.
Quarterly
Non-Same Property Revenues
increased
by $2.3 million or 38.6% to $8.4 million in the second quarter of 2006 from
$6.0
million in the second quarter of 2005. Quarterly Non-Same Properties include
properties acquired subsequent to March 31, 2005, three office buildings, one
multifamily property located in Houston, Texas, one manufactured housing
community, two recreational vehicle parks, and redevelopment communities. The
increase was primarily due to four properties acquired since March 31,
2005.
Total
Expenses
increased
$3.8 million or 5% to $75.9 million in the second quarter of 2006 from $72.1
million in the second quarter of 2005. The increase was primarily due to an
increased in real estate taxes, salaries, and interest offset by a decrease
in
other expenses of $700. Real estate taxes increased $764 over the prior quarter
due mainly to increases in assessment of properties in the Pacific Northwest.
Salaries increased mainly due to an increase in equity based compensation
expense of $366, and an increase in payroll salaries over the prior year period
as well as higher operating expenses due to the acquisition of properties in
the
past year.
Interest
expense increased
by $1.3 million or 7% in the second quarter of 2006 to $19.5 million, net of
$711 in capitalized interest, compared to $18.2 million, net of $511 in
capitalized interest for the second quarter of 2005. The increase was mainly
due
to an increase in total outstanding debt of $108 million between the two
quarters, and an increase in short-term borrowing rates.
Other
expenses included
an impairment charge of $800 related to the write-down of the value of a
property located in Houston, Texas during the second quarter of 2006, and during
the second quarter of 2005 the Company recorded a $1.5 million charge for a
legal settlement.
Gain
on sale of real estate was
$0 for
the second quarter of 2006 compared to a gain of $3.8 million recorded in the
second quarter of 2005 related to the deferred gain on sale of The Essex at
Lake
Merritt property, and a gain of $1.4 million from the Company’s taxable REIT
subsidiaries.
Interest
and other income decreased
$1.8 million in the second quarter of 2006 due to the recognition of $1.8
million in interest income from the Essex at Lake Merritt participating loan
during the second quarter of 2005.
Equity
income in co-investments
decreased
$3.1 million in the second quarter of 2006 due mainly to the fact the Company
recorded $2.7 million in equity income related to Fund I properties sold during
the second quarter of 2005. For the second quarter of 2006 the Company recorded
a net loss on its investment in Fund II for $374.
Discontinued
operations
for the
second quarter of 2006 relates to the gain on sale of the Vista Pointe joint
venture property for $8.8 million plus fees and a promote distribution from
the
sale for a total of $8.2 million. Discontinued operations for the second
quarter
of 2005, relates to the sale of the Eastridge Apartments, for a gain on sale
of
$28.5 million, and $575 in rental revenues related to Eastridge.
Comparison
of the Six Months Ended June 30, 2006 to the Six Months Ended June 30,
2005
Our
average financial occupancies for the Company’s multifamily stabilized
properties or “Same Properties” (properties consolidated by the Company for each
of the six months ended June 30, 2006 and 2005) decreased 0.1% to 96.5% as
of
June 30, 2006 from 96.6% as of June 30, 2005. The regional breakdown of the
Company’s Same-Property portfolio for financial occupancy for the six months
ended June 30, 2006 and 2005 is as follows:
|
|
|
Six
Months Ended
|
|
|
|
|
June
30,
|
|
|
|
|
2006
|
|
|
2005
|
|
Southern
California
|
|
|
96.1%
|
|
|
96.3%
|
|
Northern
California
|
|
|
97.1%
|
|
|
97.0%
|
|
Pacific
Northwest
|
|
|
97.1%
|
|
|
96.7%
|
|
Total
Property Revenues
increased
8.9% to $171.9 million in the six months ended June 30, 2006 from $157.9
million
in the six months ended June 30, 2005. The following table illustrates a
breakdown of these revenue amounts, including revenues attributable to the
Same-Properties.
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
Number
of
|
|
June
30,
|
|
Dollar
|
|
Percentage
|
|
|
|
Properties
|
|
2006
|
|
2005
|
|
Change
|
|
Change
|
|
Revenues:
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
Property
revenues
|
|
|
|
|
|
|
|
|
|
|
|
Same-Properties:
|
|
|
|
|
|
|
|
|
|
|
|
Southern
California
|
|
|
55
|
|
$
|
90,648
|
|
$
|
85,934
|
|
$
|
4,714
|
|
|
5.5
|
%
|
Northern
California
|
|
|
20
|
|
|
35,501
|
|
|
33,292
|
|
|
2,209
|
|
|
6.6
|
|
Pacific
Northwest
|
|
|
24
|
|
|
26,368
|
|
|
24,699
|
|
|
1,669
|
|
|
6.8
|
|
Total
property revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Properties
|
|
|
99
|
|
|
152,517
|
|
|
143,925
|
|
|
8,592
|
|
|
6.0
|
|
Property
revenues - properties acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subsequent to December 31, 2004 (1)
|
|
|
|
|
|
19,402
|
|
|
14,013
|
|
|
5,389
|
|
|
38.5
|
|
Total
property revenues
|
|
|
|
|
$
|
171,919
|
|
$
|
157,938
|
|
$
|
13,981
|
|
|
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.
Same-Property
Revenues
increased
by $8.6 million or 6.0% to $152.5 million for the six months ended June 30,
2006
compared to $143.9 million for the six months ended June 30, 2005. The increase
was primarily attributable to an increase in rental rates of $7.5 million or
5.3%, and increase of $303 in revenue from the ratio utility billing system
(“RUBS”), and a decrease in rent concessions of $683 compared to the six months
ended June 30, 2005. Occupancy and delinquency rates were consistent for the
six
months ended June 30, 2006 and 2005.
Non-Same
Property Revenues
increased
by $5.4 million or 38.5% to $19.4 million for the six months ended June 30,
2006
from $14.0 million for the six months ended June 30, 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 redevelopment
communities. The increase was primarily due to five properties acquired since
June 30, 2005.
Management
and other fees from affiliates decreased
by approximately $5.9 million or 78% for the six months ended June 30, 2006
due
primarily to $4.9 million in promote distributions received in the six months
ended June 30, 2005 related to the sale of Fund I assets. Additionally, for
the
six months ended June 30, 2005 the Company recorded $1.3 million in management
fee income which included fee income deferred from 2004. For the six months
ended June 30, 2006, the Company recorded $830 in management fee income and
received no promote distributions for Fund I. Essex did receive a promote
distribution from the sale of Vista Pointe which is included in discontinued
operations.
Total
Expenses
increased
$9.8 million or 7% to $151.6 million for the six months ended June 30, 2006
from
$141.8 million for the six months ended June 30, 2005. The increase was
primarily due to real estate taxes, salaries, and interest. Real estate taxes
increased $1.3 million over the prior year due mainly to increases in assessment
of properties in the Pacific Northwest. Salaries increased mainly due to an
increase in equity based compensation expense of $375, and an increase in
payroll salaries over the prior year period as well as higher operating expenses
due to the acquisition of properties in the past year.
Interest
expense increased
by $2.2 million or 6% for the six months ended June 30, 2006 to $38.5 million,
net of $1.3 million in capitalized interest, compared to $36.3 million, net
of
$511 in capitalized interest for the six months ended June 30, 2005. The
increase was mainly due to an increase in total outstanding debt of $108 million
between June 30, 2006 and 2005, and higher short-term borrowing
rates.
Other
expenses increased
$270 for the six months ended June 30, 2006 as a result of pursuit costs related
to the Company’s attempt to acquire the Town & Country REIT for a net of
pursuit costs of $970 in the first quarter of 2006 and an $800 impairment charge
recorded on a property in Houston, Texas during the second quarter of 2006,
compared to a $1.5 million charge related to a legal settlement recorded during
the second quarter of 2005.
Gain
on sale of real estate was
$0 for
the six months ended June 30, 2006 compared to a gain of $6.4 million recorded
for the six months ended June 30, 2005 resulting from the recognition of a
$5
million deferred gain due to the sale of The Essex at Lake Merritt and $1.4
million from our taxable REIT subsidiaries.
Interest
and other income was
comprised of $1.7 million for a gain on the sale of the Town & Country stock
recorded during the first quarter for 2006 as compared to $1.8 million in
interest income from the Essex at Lake Merritt participating loan recorded
in
the second quarter of 2005 and lease income from the RV parks was consistent
for
both periods.
Equity
income in co-investments
decreased
$18.1 million for the six months ended June 30, 2006 due to the fact the Company
recorded $17.1 million in equity income related to Fund I properties sold during
the six months ended June 30, 2005. For the six months ended June 30, 2006
the
Company recorded a net loss on its investment in Fund II of $816.
Discontinued
operations
for the
six months ended June 30, 2006 relates to the gain on sale of the Vista Pointe
joint venture property for $8.8 million plus fees and a promote distribution
from the sale for a total of $8.2 million recorded in the second quarter
of
2006. During the first quarter of 2006, the Company sold Vista Capri East,
Casa
Tierra, and Diamond Valley properties for a gain of $3.1 million. Discontinued
operations for the six months ended June 30, 2005 relates to the sale of
the
Eastridge Apartments in the second quarter of 2005, for a gain on sale of
$28.5
million and the sale of four non-core assets in the first quarter of 2005
for a
total gain on sale of $668, and $1.2 million in rental revenues related to
Eastridge.
Liquidity
and Capital Resources
Standard
and Poor's rating has issued a corporate credit rating 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 June 30, 2006, $26.0 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 6.6%. We also have a $100
million credit facility from Freddie Mac, which is secured by six of Essex's
multifamily communities.
As
of June 30, 2006, we had $69.0 million outstanding under this line of credit,
which bears an average interest rate of 5.4% 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 second quarter, the Company had the capacity to issue up to $204.3
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 it 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 June
30, 2006, our mortgage notes payable totaled $1.1 billion which consisted of
$914.4 million in fixed rate debt with interest rates varying from 4.27% to
8.29% and maturity dates ranging from 2007 to 2015 and $186.5 million of
tax-exempt variable rate demand bonds with a weighted average interest rate
of
4.7%. The tax-exempt variable rate demand bonds have maturity dates ranging
from
2006 to 2034, and are subject to interest rate caps.
During
July 2006, the Company sold 5.98 million shares of 4.875% Series G Cumulative
Convertible Preferred Stock at $25 per share for estimated gross proceeds of
$149.5 million. Holders may convert Series G Preferred Stock into shares of
the
Company’s common stock subject to certain conditions. The conversion rate will
initially be .1830 shares of common stock per the $25 per 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 conditions, cause some or all of the Series
G
Preferred Stock to be converted into that number of shares of common stock
at
the then prevailing conversion rate. The Company intends to use the net proceeds
from the offering to pay down outstanding borrowings under the Company’s lines
of credit, to fund the development pipeline and for general corporate
purposes.
During
the
second quarter of 2006, the Company issued and sold approximately 140,500 shares
of common stock for $14.8 million, net of fees and commissions, under its
Controlled Equity Offering program. Under this program, the Company may from
time to time sell shares of common stock into the existing trading market at
current market prices, and the Company anticipates using the net proceeds from
such sales to fund the development and redevelopment pipelines.
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
In
an
effort to hedge the cash flows associated with the forecasted issuance of debt
expected to occur at the end of 2010 and early 2011, during the second quarter
of 2006 the Company entered into two, ten-year forward-starting interest rate
swaps for $50 million and $75 million with settlement dates of January 1, 2011
and February 1, 2011, respectively. As of June 30, 2006, the Company has entered
into seven forward-starting interest rate swaps totaling a notional amount
of
$350 million with interest rates ranging from 4.9% to 5.9% and settlements
dates
ranging from October 1, 2007 to February 1, 2011. These derivatives qualify
for
hedge accounting and will economically hedge the cash flows associated with
the
refinancing of debt that matures between 2007 and early 2011. The increase
in
the fair value of these derivatives during the six months ended June 30, 2006
was approximately $11 million 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 six months
ended June 30, 2006.
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 June
30, 2006, the Company had one development project comprised of 275 units for
an
estimated cost of $71.1 million, of which $51.2 million remains to be expended,
(excluding development projects owned by the Essex Apartment Value Fund II,
L.P.). The Company has also incurred $7.4 million in costs related to joint
venture developments with third parties. The Company is committed to contribute
an additional $1 million to these ventures.
The
Company defines the predevelopment pipeline as new properties in negotiation
with a high likelihood of becoming development activities. As of June 30, 2006,
the Company had six development communities aggregating 1,972 units that were
classified as predevelopment projects. The estimated total cost of the
predevelopment pipeline at June 30, 2006 is $522.5 million, of which $504.8
million remains to be expended.
The
Company had two for-sale development projects that are under development
aggregating 97 units, and three for-sale development projects that are in
predevelopment status aggregating 123 units. The estimated total cost of the
for-sale projects at June 30, 2006 is $69.7 million, of which $39.3 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 June 30, 2006, the
Company had six communities, aggregating 1,850 units in various stages of
redevelopment. Total redevelopment cost of these projects as of June 30, 2006
is
approximately $34.0 million, of which $15.5 million remains to be
expended.
Alternative
Capital Sources
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.
Contractual
Obligations and Commercial Commitments
The
following table summarizes the maturation or due dates of our contractual
obligations and other commitments at June 30, 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
|
|
$
|
-
|
|
$
|
217,705
|
|
$
|
182,828
|
|
$
|
700,432
|
|
$
|
1,100,965
|
|
Exchangeable
bonds
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
225,000
|
|
|
225,000
|
|
Lines
of credit
|
|
|
-
|
|
|
-
|
|
|
95,030
|
|
|
-
|
|
|
95,030
|
|
Interest
on indebtedness
|
|
|
36,705
|
|
|
110,918
|
|
|
66,134
|
|
|
262,774
|
|
|
476,531
|
|
Development
commitments
|
|
|
98,100
|
|
|
34,100
|
|
|
-
|
|
|
-
|
|
|
132,200
|
|
Redevelopment
commitments
|
|
|
13,120
|
|
|
2,341
|
|
|
-
|
|
|
-
|
|
|
15,461
|
|
Essex
Apartment Value Fund II, L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
capital commitment
|
|
|
45,412
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
45,412
|
|
|
|
$
|
193,337
|
|
$
|
365,064
|
|
$
|
343,992
|
|
$
|
1,188,206
|
|
$
|
2,090,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 anticipated total projected costs and investment returns of
acquisition, redevelopment, and development projects, the anticipated timing
of
the completion and stabilization of development and redevelopment 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, the anticipated performance of the Fund II, the anticipated
performance of existing properties, and future issuance of debt.
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 and redevelopment projects will exceed expectations, that
development and redevelopment 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 June 30, 2006 and 2005:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
income available to common stockholders
|
|
$
|
22,023
|
|
$
|
38,390
|
|
$
|
31,857
|
|
$
|
64,779
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
20,675
|
|
|
20,043
|
|
|
40,766
|
|
|
39,770
|
|
Co-investments (1)
|
|
|
876
|
|
|
207
|
|
|
1,751
|
|
|
356
|
|
Gains not included in FFO
|
|
|
(8,800
|
)
|
|
(35,072
|
)
|
|
(11,862
|
)
|
|
(51,303
|
)
|
Minority interests
|
|
|
2,378
|
|
|
3,972
|
|
|
3,555
|
|
|
6,770
|
|
Funds
from operations
|
|
$
|
37,152
|
|
$
|
27,540
|
|
$
|
66,067
|
|
$
|
60,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
from operations per share - diluted
|
|
$
|
1.45
|
|
$
|
1.07
|
|
$
|
2.58
|
|
$
|
2.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding diluted (2)
|
|
|
25,697,237
|
|
|
25,672,234
|
|
|
25,628,728
|
|
|
25,675,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amount
includes the following: (i) depreciation add back 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 June 30, 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
|
|
$
|
-
|
|
|
69,960
|
|
|
147,745
|
|
|
24,937
|
|
|
157,891
|
|
|
738,900
|
|
|
(4
|
)
|
$
|
1,139,433
|
|
$
|
1,176,570
|
|
Average
interest rate
|
|
|
-
|
|
|
6.0
|
%
|
|
6.8
|
%
|
|
6.9
|
%
|
|
8.0
|
%
|
|
5.7
|
%
|
|
|
|
|
|
|
|
|
|
Variable
rate LIBOR debt
|
|
$
|
-
|
|
|
-
|
|
|
-
|
|
|
95,030
|
|
|
-
|
|
|
186,532
|
|
|
(5
|
)
|
$
|
281,562
|
|
$
|
281,562
|
|
Average
interest
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5.8
|
%
|
|
-
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) $50
million 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
million 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 million covered by
a
forward-starting swap at a fixed rate of 5.082%, with a settlement date on
or
before January 1, 2009.
(3) $150
million covered by three forward-starting swaps with fixed rates ranging from
5.099% and 5.824%, with a settlement date on or before January 1,
2011.
(4) $75
million covered by a forward-starting swap at a fixed rate of 5.880% and a
settlement date on or before February 1, 2011.
(5) $152.7
million subject to interest rate caps.
The
table
incorporates only those exposures that exist as of June 30, 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 June
30, 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 June 30, 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,
and
under the caption “Potential Factors Affecting Future Operating Results,” in
Item 2, Management’s Discussion and Analysis of Financial Condition and Results
of Operations, in Part I of this Form 10-Q.
Item
4: Submissions of Matters to a Vote of Security Holders
At
the
Company’s annual meeting, held on May 9, 2006 in Menlo Park, California, the
following votes of security holders occurred:
(a) |
The
following persons were duly elected by the stockholders of the Company
as
Class III directors of the Company, each for a three (3) year term
(until
2009) and until their successors are elected and
qualified:
|
(1) |
George
M. Marcus, 20,822,252 votes for and 967,854 votes
withheld;
|
(2) |
Gary
P. Martin, 21,635,890 votes for and 154,216 votes withheld;
and
|
(3) |
William
A. Millichap, 21,473,164 votes for and 835,708 votes withheld;
and
|
(b) |
The
stockholders ratified the appointment of KPMG LLP as the Company’s
independent public auditors for the year ended December 31, 2006
by a vote
of 21,473,164 for, 313,273 votes against and 3,670 votes
abstaining.
|
Item
6: Exhibits
|
3.1
|
Articles
Supplementary designating the 4.875% Series G Cumulative Convertible
Preferred Stock, filed as Exhibit 3.1 to the Company’s Form 8-K, filed on
August 1, 2006, and incorporated herein by
reference.
|
|
4.1
|
Form
of 4.875% Series G Cumulative Convertible Preferred Stock Certificate,
filed as Exhibit 4.1 to the Company’s 8-K, filed on July 27, 2006, and
incorporated herein by reference.
|
|
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.
|
|
10.2
|
Twelfth
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Essex Portfolio, L.P., dated as of July 26, 2006,
filed as
Exhibit 10.1 to the Company’s Form 8-K, filed on July 27, 2006, and
incorporated herein by reference.
|
|
12.1
|
Ratio
of Earnings to Fixed Charges
|
|
31.1
|
Certification
of Keith R. Guericke, Chief Executive Officer, pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
of Michael T. Dance, Chief Financial Officer, pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certification
of Keith R. Guericke, Chief Executive Officer, pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
|
32.2
|
Certification
of Michael T. Dance, Chief Financial Officer, pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
__________
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.
|
ESSEX
PROPERTY TRUST, INC.
|
|
(Registrant)
|
|
|
|
|
|
Date: August 4, 2006
|
|
|
|
|
By:
/S/ MICHAEL T. DANCE
|
|
Michael
T. Dance
|
|
Executive
Vice President, Chief Financial Officer
Authorized
Officer, Principal Financial Officer)
|
|
|
|
|
|
By: /S/ BRYAN HUNT
|
|
Bryan
Hunt
|
|
Vice
President, Chief Accounting
Officer
|