Form 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the quarterly period ended September 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:
23,352,112
shares of Common Stock as of November 1, 2006
ESSEX
PROPERTY TRUST, INC.
FORM
10-Q
INDEX
|
|
Page No.
|
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements (Unaudited):
|
|
|
|
|
|
Consolidated
Balance Sheets as of September 30, 2006 and December 31, 2005
|
|
|
|
|
|
Consolidated
Statements of Operations for the three and nine months ended September
30,
2006 and 2005
|
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity and Comprehensive Income for the
nine
months ended September 30, 2006
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended September
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
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
|
|
|
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 unaudited consolidated balance sheets,
statements of operations, stockholders' equity and comprehensive income and
cash
flows of the Company reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of the aforementioned 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)
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
Assets
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
Rental
properties:
|
|
|
|
|
|
|
|
Land
and land improvements
|
|
$
|
561,582
|
|
$
|
551,132
|
|
Buildings
and improvements
|
|
|
2,103,595
|
|
|
1,932,113
|
|
|
|
|
2,665,177
|
|
|
2,483,245
|
|
Less
accumulated depreciation
|
|
|
(457,220)
|
|
|
(398,476)
|
|
|
|
|
2,207,957
|
|
|
2,084,769
|
|
Real
estate under development
|
|
|
101,562
|
|
|
54,416
|
|
Investments
|
|
|
53,806
|
|
|
27,228
|
|
|
|
|
2,363,325
|
|
|
2,166,413
|
|
Cash
and cash equivalents-unrestricted
|
|
|
30,142
|
|
|
14,337
|
|
Cash
and cash equivalents-restricted
|
|
|
14,999
|
|
|
13,937
|
|
Notes
and other receivables from related parties
|
|
|
1,841
|
|
|
1,173
|
|
Notes
and other receivables
|
|
|
17,043
|
|
|
5,237
|
|
Prepaid
expenses and other assets
|
|
|
18,523
|
|
|
23,078
|
|
Deferred
charges, net
|
|
|
13,617
|
|
|
15,115
|
|
Total
assets
|
|
$
|
2,459,490
|
|
$
|
2,239,290
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
Mortgage
notes payable
|
|
$
|
1,097,330
|
|
$
|
1,104,918
|
|
Exchangeable
bonds
|
|
|
225,000
|
|
|
225,000
|
|
Lines
of credit
|
|
|
80,000
|
|
|
25,000
|
|
Accounts
payable and accrued liabilities
|
|
|
49,414
|
|
|
32,982
|
|
Dividends
payable
|
|
|
24,735
|
|
|
22,496
|
|
Other
liabilities
|
|
|
14,459
|
|
|
12,520
|
|
Deferred
gain
|
|
|
2,193
|
|
|
2,193
|
|
Total
liabilities
|
|
|
1,493,131
|
|
|
1,425,109
|
|
Minority
interests
|
|
|
227,761
|
|
|
233,214
|
|
Cumulative
convertible preferred stock; $.0001 par value: |
|
|
|
|
|
|
|
4.875%
Series G - 5,980,000 and 0 shares authorized, |
|
|
|
|
|
|
|
issued
and outstanding, respectively |
|
|
145,912
|
|
|
-
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Common
stock, $.0001 par value, 655,682,178
|
|
|
|
|
|
|
|
authorized,
23,177,330 and
|
|
|
|
|
|
|
|
22,851,953
issued and outstanding, respectively
|
|
|
2
|
|
|
2
|
|
Cumulative
redeemable preferred stock; $.0001 par value:
|
|
|
|
|
|
|
|
7.8125%
Series F - 1,000,000 shares authorized,
|
|
|
|
|
|
|
|
issued
and outstanding, liquidation
value
|
|
|
|
|
|
|
|
Excess
stock, $.0001 par value, 330,000,000 shares
|
|
|
|
|
|
|
|
authorized
and no shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
Additional
paid-in capital
|
|
|
662,043
|
|
|
632,646
|
|
Distributions
in excess of accumulated earnings
|
|
|
(92,849)
|
|
|
(77,341)
|
|
Accumulated
other comprehensive income (loss)
|
|
|
(1,510)
|
|
|
660
|
|
Total
stockholders' equity
|
|
|
592,686
|
|
|
580,967
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
2,459,490
|
|
$
|
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
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental and other property
|
|
$
|
89,670
|
|
$
|
81,881
|
|
$
|
261,589
|
|
$
|
239,819
|
|
Management and other fees from affiliates
|
|
|
1,872
|
|
|
1,601
|
|
|
3,526
|
|
|
9,108
|
|
|
|
|
91,542
|
|
|
83,482
|
|
|
265,115
|
|
|
248,927
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating, excluding real estate taxes
|
|
|
23,307
|
|
|
21,254
|
|
|
68,017
|
|
|
62,167
|
|
Real estate taxes
|
|
|
7,535
|
|
|
7,066
|
|
|
22,305
|
|
|
20,517
|
|
Depreciation and amortization
|
|
|
20,666
|
|
|
20,323
|
|
|
61,432
|
|
|
59,945
|
|
Interest
|
|
|
18,525
|
|
|
18,566
|
|
|
57,012
|
|
|
54,866
|
|
Amortization of deferred financing costs
|
|
|
778
|
|
|
451
|
|
|
1,971
|
|
|
1,490
|
|
General and administrative
|
|
|
5,289
|
|
|
4,560
|
|
|
15,190
|
|
|
13,574
|
|
Other expenses
|
|
|
-
|
|
|
1,400
|
|
|
1,770
|
|
|
2,900
|
|
|
|
|
76,100
|
|
|
73,620
|
|
|
227,697
|
|
|
215,459
|
|
Earnings from operations
|
|
|
15,442
|
|
|
9,862
|
|
|
37,418
|
|
|
33,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of real estate
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6,391
|
|
Interest
and other income
|
|
|
1,701
|
|
|
4,978
|
|
|
4,749
|
|
|
7,932
|
|
Equity income (loss) in co-investments
|
|
|
(368)
|
|
|
(98)
|
|
|
(1,184)
|
|
|
17,217
|
|
Minority interests
|
|
|
(5,212)
|
|
|
(4,918)
|
|
|
(14,899)
|
|
|
(16,719)
|
|
Income before discontinued operations and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax provision
|
|
|
11,563
|
|
|
9,824
|
|
|
26,084
|
|
|
48,289
|
|
Income tax provision
|
|
|
(150)
|
|
|
(1,185)
|
|
|
(325)
|
|
|
(2,386)
|
|
Income before discontinued operations
|
|
|
11,413
|
|
|
8,639
|
|
|
25,759
|
|
|
45,903
|
|
Income from discontinued operations (net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
minority interests)
|
|
|
1,064
|
|
|
108
|
|
|
19,552
|
|
|
28,600
|
|
Net income
|
|
|
12,477
|
|
|
8,747
|
|
|
45,311
|
|
|
74,503
|
|
Dividends to preferred stockholders
|
|
|
(1,791)
|
|
|
(488)
|
|
|
(2,768)
|
|
|
(1,465)
|
|
Net income available to common stockholders
|
|
$
|
10,686
|
|
$
|
8,259
|
|
$
|
42,543
|
|
$
|
73,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
common share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before discontinued operations available to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common stockholders
|
|
$
|
0.41
|
|
$
|
0.36
|
|
$
|
1.00
|
|
$
|
1.93
|
|
Income from discontinued operations
|
|
|
0.05
|
|
|
-
|
|
|
0.85
|
|
|
1.24
|
|
Net income available to common stockholders
|
|
$
|
0.46
|
|
$
|
0.36
|
|
$
|
1.85
|
|
$
|
3.17
|
|
Weighted average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
during the period
|
|
|
23,142,385
|
|
|
23,106,569
|
|
|
22,988,083
|
|
|
23,073,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before discontinued operations available to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common stockholders
|
|
$
|
0.40
|
|
$
|
0.35
|
|
$
|
0.98
|
|
$
|
1.91
|
|
Income from discontinued operations
|
|
|
0.05
|
|
|
-
|
|
|
0.84
|
|
|
1.22
|
|
Net income available to common stockholders
|
|
$
|
0.45
|
|
$
|
0.35
|
|
$
|
1.82
|
|
$
|
3.13
|
|
Weighted average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding during the period
|
|
|
23,677,569
|
|
|
23,411,959
|
|
|
23,353,791
|
|
|
23,364,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend per common share
|
|
$
|
0.84
|
|
$
|
0.81
|
|
$
|
2.52
|
|
$
|
2.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine months ended September 30, 2006
(Unaudited)
(Dollars
and shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Accumulated
other
|
|
in
excess of
|
|
|
|
|
|
Preferred
stock
|
|
Common
stock
|
|
paid-in
|
|
comprehensive
|
|
accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
capital
|
|
income
(loss)
|
|
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
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
45,311
|
|
|
45,311
|
|
Change in fair value of cash flow hedges
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,170
|
)
|
|
-
|
|
|
(2,170
|
)
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,141
|
|
Issuance of common stock under:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation plans
|
|
|
-
|
|
|
-
|
|
|
72
|
|
|
-
|
|
|
4,198
|
|
|
-
|
|
|
-
|
|
|
4,198
|
|
Sale
of common stock
|
|
|
-
|
|
|
-
|
|
|
254
|
|
|
-
|
|
|
27,225
|
|
|
-
|
|
|
-
|
|
|
27,225
|
|
Redemptions of minority interests, net
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,026
|
)
|
|
-
|
|
|
-
|
|
|
(2,026
|
)
|
Dividends declared
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(60,819
|
)
|
|
(60,819
|
)
|
Balances at September 30, 2006
|
|
|
1,000
|
|
$
|
25,000
|
|
|
23,177
|
|
$
|
2
|
|
$
|
662,043
|
|
$
|
(1,510
|
)
|
$
|
(92,849
|
)
|
$
|
592,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
Net
cash provided by operating activities
|
|
$
|
137,501
|
|
$
|
106,652
|
|
|
|
|
|
|
|
Cash
flows used in investing activities:
|
|
|
|
|
|
|
Additions
to real estate:
|
|
|
|
|
|
|
Acquisitions
and improvements to recent acquisitions
|
|
|
(161,998)
|
|
|
(30,968)
|
Redevelopment
|
|
|
(17,753)
|
|
|
(15,384)
|
Revenue
generating capital expenditures
|
|
|
(1,746)
|
|
|
(146)
|
Non-revenue
generating capital expenditures
|
|
|
(10,648)
|
|
|
(7,980)
|
Additions
to real estate under development
|
|
|
(52,957)
|
|
|
(22,540)
|
Dispositions
of real estate and investments
|
|
|
15,883
|
|
|
6,585
|
Changes
in restricted cash and refundable deposits
|
|
|
5,162
|
|
|
6,228
|
Additions
to notes receivable from related parties and other
receivables
|
|
|
(15,279)
|
|
|
(3,278)
|
Repayments
of notes receivable from related parties and other
receivables
|
|
|
2,295
|
|
|
4,925
|
Net
(contributions to) distributions from limited partnerships
|
|
|
(25,938)
|
|
|
43,341
|
Net
cash used in investing activities
|
|
|
(262,979)
|
|
|
(19,217)
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Proceeds
from mortgage notes payable and lines of credit
|
|
|
281,325
|
|
|
152,971
|
Repayment
of mortgage notes payable and lines of credit
|
|
|
(233,442)
|
|
|
(154,813)
|
Additions
to deferred charges
|
|
|
(472)
|
|
|
(1,167)
|
Issuance
of preferred stock - Series G
|
|
|
145,912
|
|
|
-
|
Net
proceeds from stock options exercised
|
|
|
3,136
|
|
|
4,143
|
Net
sale of common stock
|
|
|
27,225
|
|
|
-
|
Distributions
to minority interest partners
|
|
|
(17,482)
|
|
|
(17,353)
|
Redemption
of minority interest limited partnership units
|
|
|
(6,360)
|
|
|
(5,463)
|
Common
and preferred stock dividends paid
|
|
|
(58,559)
|
|
|
(57,032)
|
Net
cash provided by (used in) financing activities
|
|
|
141,283
|
|
|
(78,714)
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
15,805
|
|
|
8,721
|
Cash
and cash equivalents at beginning of period
|
|
|
14,337
|
|
|
10,644
|
Cash
and cash equivalents at end of period
|
|
$
|
30,142
|
|
$
|
19,365
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
Cash
paid for interest, net of $2,413 and $647 capitalized
|
|
|
|
|
|
|
in
2006 and 2005, respectively
|
|
$
|
52,386
|
|
$
|
54,245
|
|
|
|
|
|
|
|
See
accompanying notes to the unaudited consolidated financial
statements.
ESSEX
PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2006 and 2005
(Unaudited)
(Dollars
in thousands, except for per share and unit amounts)
The
unaudited consolidated financial statements of the Company are prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q.
In
the opinion of management, all adjustments necessary for a fair presentation
of
the financial position, results of operations and cash flows for the periods
presented have been included and are normal and recurring in nature. These
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements included in the Company's annual
report on Form 10-K for the year ended December 31, 2005.
All
significant intercompany balances and transactions have been eliminated in
the
consolidated financial statements. Certain prior year balances have been
reclassified to conform to the current year presentation.
The
unaudited consolidated financial statements for the nine months ended September
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 90.4% general partnership interest as of September 30,
2006
and December 31, 2005.
As
of
September 30, 2006, the Company has ownership interests in 129 multifamily
properties (containing 27,491 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), Seattle, Washington and other regions (Portland, Oregon
metropolitan area and 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.
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 apartment communities
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 has been Essex’s exclusive investment vehicle during 2005
and 2006. As of October 2006, management has fully committed the available
capital and Fund II will not make any additional acquisitions. Consistent with
Fund I, Essex records revenue for its asset management, property management,
development and redevelopment services when earned, and promote income 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 consolidates 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 $237.8 million and $146.7 million, respectively, at September
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
September 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 $79.1 million and $58.5 million, respectively,
at
September 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, and 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 $439 and $270 for the three months ended September
30, 2006 and 2005, respectively, and $1.1 million and $519 for the nine months
ended September 30, 2006 and 2005, respectively. The intrinsic value of the
stock options exercised during the three months ended September 30, 2006 and
2005 totaled $1.0 million and $2.6 million, respectively, and $3.7 million
and
$3.9 million for the nine months ended September 30, 2006 and 2005,
respectively. As of September 30, 2006, the intrinsic value of the stock options
outstanding and fully vested totaled $41.9 million and $14.3 million,
respectively. As of September 30, 2006, total unrecognized compensation cost
related to unvested share-based compensation granted under the stock option
plans totaled $3.4 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 September
30,
2006 and 2005, respectively. Stock-based compensation capitalized for stock
options and the Z Units totaled $188 and $53 for the three months ended
September 30, 2006 and 2005, respectively. As of September 30, 2006 the
intrinsic value of the Z Units subject to conversion totaled $16.6 million.
As
of September 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.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements.” SAB No. 108 was issued to address diversity in practice in
quantifying financial statement misstatements. Current practice allows for
the
evaluation of materiality on the basis of either (1) the error quantified as
the
amount by which the current year income statement was misstated (“rollover
method”) or (2) the cumulative error quantified as the cumulative amount by
which the current year balance sheet was misstated (“iron curtain method”). The
guidance provided in SAB 108 requires both methods to be used in evaluating
materiality (“dual approach”). SAB No. 108 permits companies to initially apply
its provisions either by (1) restating prior financial statements as if the
dual
approach had always been used or (2) recording the cumulative effect of
initially applying the “dual approach” as adjustments to the carrying values of
assets and liabilities as of January 1, 2006 with an offsetting adjustment
recorded to the opening balance of retained earnings. 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
(a)
Acquisitions
On
September 13, 2006, the Company acquired Hillsdale Garden Apartments, a 697-unit
community located in San Mateo, California for approximately $97.3 million.
The
property is subject to a ground lease with annual payments of $46 that will
expire in 2047.
During
October 2006, the Company acquired Belmont Terrace, a 71-unit community located
in Belmont, California for approximately $14.7 million in transaction structured
as an UpREIT. The community was built in 1974 and consists of one four-story
building located in the Belmont hills.
(b)
Dispositions
Currently,
the Company is in the process of a condo conversion of Peregrine Point, a
taxable REIT subsidiary (TRS), in Issaquah, Washington. In April of 2006 the
property was reclassified from a rental property to real estate under
development
held for sale. During the third quarter of 2006, the Company sold 28 of the
66
available condominiums, for a gain of $1.1 million, net of minority interest,
taxes, and expenses.
(c)
Equity
During
the
third quarter of 2006, the Company sold 5.98 million shares of 4.875% Series
G
Cumulative Convertible Preferred Stock for 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 circumstances, 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.
During
the
third quarter 2006, the Company issued and sold approximately 114,100 shares
of
common stock for $12.4 million, net of fees and commissions. The Company used
the net proceeds from the Series G offering and stock sales to pay down
outstanding borrowings under the Company’s lines of credit, to fund the
development pipeline and for general corporate purposes.
(d)
The Essex Apartment Value Fund II (“Fund II”)
Fund
II
acquired two communities in September of 2006. Renaissance Apartments, a
168-unit apartment community located in Los Angeles, California was acquired
for
approximately $46.3 million and Alderwood Park Apartments, a 96-unit apartment
community located in Newark, California was acquired for approximately $13.4
million.
During
the
fourth quarter of 2006, management anticipates closing on a land parcel,
entitled for 119-units, located in Chatsworth, California for a total estimated
cost of approximately $39.4 million.
As
of
October 31, 2006, management has determined that Fund II is fully committed
and
closed for any future acquisitions or development.
(3)
Investments
The
Company has investments in a number of affiliates, which are accounted for
under
the equity method. The affiliates own and operate apartment communities. The
following table details the Company's investments (dollars in
thousands):
|
|
|
September
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)
|
|
|
45,918
|
|
|
19,340
|
Preferred limited partnership interests in Mountain Vista
|
|
|
|
|
|
|
Apartments
(A)
|
|
|
6,806
|
|
|
6,806
|
|
|
|
53,306
|
|
|
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
|
|
$
|
53,806
|
|
$
|
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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Balance
sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate and real estate under development
|
|
$
|
545,602
|
|
$
|
431,655
|
|
|
|
|
|
|
Other assets
|
|
|
20,699
|
|
|
18,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
566,301
|
|
$
|
450,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
notes payable
|
|
$
|
302,739
|
|
$
|
268,325
|
|
|
|
|
|
|
Other
liabilities
|
|
|
62,437
|
|
|
83,979
|
|
|
|
|
|
|
Partners'
equity
|
|
|
201,125
|
|
|
98,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and partners' equity
|
|
$
|
566,301
|
|
$
|
450,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company's
share of equity
|
|
$
|
53,306
|
|
$
|
26,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
Statements
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
property revenues
|
|
$
|
10,887
|
|
$
|
6,705
|
|
$
|
30,631
|
|
$
|
20,812
|
Total
gain on the sales of real estate
|
|
|
-
|
|
|
5,889
|
|
|
-
|
|
|
38,897
|
Depreciation
and amortization
|
|
|
(3,122)
|
|
|
(1,815)
|
|
|
(8,945)
|
|
|
(5,056)
|
Interest
expense
|
|
|
(4,169)
|
|
|
(2,814)
|
|
|
(12,731)
|
|
|
(7,862)
|
Other
operating expenses
|
|
|
(5,074)
|
|
|
(2,562)
|
|
|
(13,600)
|
|
|
(8,925)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net (loss) income
|
|
$
|
(1,478)
|
|
$
|
5,403
|
|
$
|
(4,645)
|
|
$
|
37,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company's
share of net (loss) income
|
|
$
|
(368)
|
|
$
|
(98)
|
|
$
|
(1,184)
|
|
$
|
17,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
Notes Receivable and Other Receivables from Related
Parties
Notes
receivable and other receivables from related parties consist of the following
as of September 30, 2006 and December 31, 2005 (dollars in thousands):
|
|
|
September
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
|
|
|
1,466
|
|
|
798
|
Total
notes and other receivable from related parties
|
|
$
|
1,841
|
|
$
|
1,173
|
|
|
|
|
|
|
|
Other
related party receivables consist primarily of accrued interest income on
related party notes receivable from loans to officers and advances, and $1
million in accrued promote income from Fund I as of September 30,
2006.
(5)
Notes and Other Receivables
Notes
receivables, secured by real estate, and other receivables consist of the
following as of September 30, 2006 and December 31, 2005 (dollars in
thousands):
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
Note
receivable, secured, bearing interest at 12%, due June
2008
|
|
$
|
2,193
|
|
$
|
2,193
|
Note
receivable, secured, bearing interest at LIBOR + 3.69%, due June
2009
|
|
|
7,311
|
|
|
-
|
Note
receivable, secured, bearing interest at LIBOR + 4.65%, due November
2008
|
|
|
6,656
|
|
|
-
|
Other
receivables
|
|
|
883
|
|
|
3,044
|
Total
notes and other receivables
|
|
$
|
17,043
|
|
$
|
5,237
|
|
|
|
|
|
|
|
Included
in other receivable as of December 31, 2005, was an amount due from the Vista
Pointe joint venture for $2,176. A cash distribution for the entire amount
was
received from escrow in July 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 $872 and $705
for the three months ended September 30, 2006 and 2005, respectively, and $2,526
and $3,098 for the nine months ended September 30, 2006 and 2005, respectively,
and promote income from Fund I of $1,000 and $896 for the three months ended
September 30, 2006 and 2005, respectively, and $1,000 and $6,010 for the nine
months ended September 30, 2006 and 2005, respectively.
(7)
Segment Information
The
Company defines its reportable operating segments as the three geographical
regions in which its properties are located: Southern California, Northern
California and Seattle. Excluded from segment revenues are properties outside
of
these regions including properties in Portland, Oregon and Houston, Texas,
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 2005 operations and assets for the
properties held in Portland, Oregon have been reclassified from the
Seattle/Pacific Northwest region to the other non-segment areas for comparison
to the current segment presentation. The revenues, net operating income, and
assets for each of the reportable operating segments are summarized as follows
for the three months ended September 30, 2006 and 2005 (dollars in
thousands):
|
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
Revenues:
|
|
|
|
|
|
|
Southern
California
|
|
$
|
53,110
|
|
$
|
48,996
|
Northern
California
|
|
|
18,985
|
|
|
16,763
|
Seattle
|
|
|
14,381
|
|
|
13,138
|
Other
non-segment areas
|
|
|
3,194
|
|
|
2,984
|
Total
property revenues
|
|
$
|
89,670
|
|
$
|
81,881
|
|
|
|
|
|
|
|
Net
operating income:
|
|
|
|
|
|
|
Southern
California
|
|
$
|
36,127
|
|
$
|
33,176
|
Northern
California
|
|
|
12,609
|
|
|
11,037
|
Seattle
|
|
|
8,853
|
|
|
8,118
|
Other
non-segment areas
|
|
|
1,239
|
|
|
1,230
|
Total
net operating income
|
|
|
58,828
|
|
|
53,561
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
Southern
California
|
|
|
(11,457)
|
|
|
(10,619)
|
Northern
California
|
|
|
(4,218)
|
|
|
(4,023)
|
Seattle
|
|
|
(3,470)
|
|
|
(3,208)
|
Other
non-segment areas
|
|
|
(1,521)
|
|
|
(2,473)
|
|
|
|
(20,666)
|
|
|
(20,323)
|
Interest
expense:
|
|
|
|
|
|
|
Southern
California
|
|
|
(7,285)
|
|
|
(7,543)
|
Northern
California
|
|
|
(4,559)
|
|
|
(4,451)
|
Seattle
|
|
|
(1,749)
|
|
|
(1,964)
|
Other
non-segment areas
|
|
|
(4,932)
|
|
|
(4,608)
|
|
|
|
(18,525)
|
|
|
(18,566)
|
|
|
|
|
|
|
|
Amortization
of deferred financing costs
|
|
(778)
|
|
|
(451)
|
General
and administrative
|
|
|
(5,289)
|
|
|
(4,560)
|
Other
expenses
|
|
|
-
|
|
|
(1,400)
|
Management
and other fees from affiliates
|
|
1,872
|
|
|
1,601
|
Interest
and other income
|
|
|
1,701
|
|
|
4,978
|
Equity
income (loss) in co-investments
|
|
|
(368)
|
|
|
(98)
|
Minority
interests
|
|
|
(5,212)
|
|
|
(4,918)
|
Income
tax provision
|
|
|
(150)
|
|
|
(1,185)
|
|
|
|
|
|
|
|
Income
before discontinued operations
|
|
$
|
11,413
|
|
$
|
8,639
|
|
|
|
|
|
|
|
The
revenues, net operating income, and assets for each of the reportable operating
segments are summarized as follows for the nine months ended September 30,
2006
and 2005 (dollars in thousands):
|
|
Nine Months Ended
|
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
Revenues:
|
|
|
|
|
|
|
Southern
California
|
|
$
|
155,797
|
|
$
|
142,257
|
Northern
California
|
|
|
54,485
|
|
|
50,056
|
Seattle
|
|
|
41,786
|
|
|
38,738
|
Other
non-segment areas
|
|
|
9,521
|
|
|
8,768
|
Total
property revenues
|
|
$
|
261,589
|
|
$
|
239,819
|
|
|
|
|
|
|
|
Net
operating income:
|
|
|
|
|
|
|
Southern
California
|
|
$
|
105,603
|
|
$
|
95,818
|
Northern
California
|
|
|
36,369
|
|
|
33,578
|
Seattle
|
|
|
26,084
|
|
|
24,263
|
Other
non-segment areas
|
|
|
3,211
|
|
|
3,476
|
Total
net operating income
|
|
|
171,267
|
|
|
157,135
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
Southern
California
|
|
|
(34,025)
|
|
|
(31,115)
|
Northern
California
|
|
|
(12,454)
|
|
|
(11,938)
|
Seattle
|
|
|
(10,139)
|
|
|
(9,545)
|
Other
non-segment areas
|
|
|
(4,814)
|
|
|
(7,347)
|
|
|
|
(61,432)
|
|
|
(59,945)
|
Interest
expense:
|
|
|
|
|
|
|
Southern
California
|
|
|
(21,565)
|
|
|
(22,295)
|
Northern
California
|
|
|
(13,754)
|
|
|
(12,428)
|
Seattle
|
|
|
(5,170)
|
|
|
(5,302)
|
Other
non-segment areas
|
|
|
(16,523)
|
|
|
(14,841)
|
|
|
|
(57,012)
|
|
|
(54,866)
|
|
|
|
|
|
|
|
Amortization
of deferred financing costs
|
|
(1,971)
|
|
|
(1,490)
|
General
and administrative
|
|
|
(15,190)
|
|
|
(13,574)
|
Other
expenses
|
|
|
(1,770)
|
|
|
(2,900)
|
Management
and other fees from affiliates
|
|
3,526
|
|
|
9,108
|
Gain
on sale of real estate
|
|
|
-
|
|
|
6,391
|
Interest
and other income
|
|
|
4,749
|
|
|
7,932
|
Equity
income (loss) in co-investments
|
|
|
(1,184)
|
|
|
17,217
|
Minority
interests
|
|
|
(14,899)
|
|
|
(16,719)
|
Income
tax provision
|
|
|
(325)
|
|
|
(2,386)
|
Income
before discontinued operations
|
|
$
|
25,759
|
|
$
|
45,903
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2006
|
|
|
2005
|
Assets:
|
|
|
|
|
|
|
Net
real estate assets:
|
|
|
|
|
|
|
Southern
California
|
|
$
|
1,235,107
|
|
$
|
1,211,373
|
Northern
California
|
|
|
548,373
|
|
|
456,093
|
Seattle
|
|
|
315,763
|
|
|
315,108
|
Other
non-segment areas
|
|
|
108,714
|
|
|
102,195
|
Total
net real estate assets
|
|
|
2,207,957
|
|
|
2,084,769
|
Other
non-segment assets
|
|
|
251,533
|
|
|
154,521
|
Total
assets
|
|
$
|
2,459,490
|
|
$
|
2,239,290
|
|
|
|
|
|
|
|
(8)
Net Income Per Common Share
(Amounts
in thousands, except per share and unit data)
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
September
30, 2006
|
|
|
September
30, 2005
|
|
|
|
|
|
Weighted
|
|
|
Per
|
|
|
|
|
|
Weighted
|
|
|
Per
|
|
|
|
|
|
Average
|
|
|
Common
|
|
|
|
|
|
Average
|
|
|
Common
|
|
|
|
|
|
Common
|
|
|
Share
|
|
|
|
|
|
Common
|
|
|
Share
|
|
|
|
Income
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before discontinued operations available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common stockholders
|
|
$
|
9,622
|
|
23,142
|
|
$
|
0.41
|
|
$
|
8,151
|
|
|
23,107
|
|
$
|
0.36
|
Income from discontinued operations
|
|
|
1,064
|
|
23,142
|
|
|
0.05
|
|
|
108
|
|
|
23,107
|
|
|
-
|
|
|
|
10,686
|
|
|
|
$
|
0.46
|
|
|
8,259
|
|
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities (1)
|
|
|
-
|
|
536
|
|
|
|
|
|
-
|
|
|
305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before discontinued operations available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common stockholders
|
|
|
9,622
|
|
23,678
|
|
$
|
0.40
|
|
|
8,151
|
|
|
23,412
|
|
$
|
0.35
|
Income from discontinued operations
|
|
|
1,064
|
|
23,678
|
|
|
0.05
|
|
|
108
|
|
|
23,412
|
|
|
-
|
|
|
$
|
10,686
|
|
|
|
$
|
0.45
|
|
$
|
8,259
|
|
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2006
|
|
|
September
30, 2005
|
|
|
|
|
|
Weighted
|
|
|
Per
|
|
|
|
|
|
Weighted
|
|
|
Per
|
|
|
|
|
|
Average
|
|
|
Common
|
|
|
|
|
|
Average
|
|
|
Common
|
|
|
|
|
|
Common
|
|
|
Share
|
|
|
|
|
|
Common
|
|
|
Share
|
|
|
|
Income
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
Shares
|
|
|
Amount
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before discontinued operations available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common stockholders
|
|
$
|
22,991
|
|
22,988
|
|
$
|
1.00
|
|
$
|
44,438
|
|
|
23,074
|
|
$
|
1.93
|
Income from discontinued operations
|
|
|
19,552
|
|
22,988
|
|
|
0.85
|
|
|
28,600
|
|
|
23,074
|
|
|
1.24
|
|
|
|
42,543
|
|
|
|
$
|
1.85
|
|
|
73,038
|
|
|
|
|
$
|
3.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities (1)
|
|
|
-
|
|
366
|
|
|
|
|
|
-
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before discontinued operations available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common stockholders
|
|
|
22,991
|
|
23,354
|
|
$
|
0.98
|
|
|
44,438
|
|
|
23,364
|
|
$
|
1.91
|
Income from discontinued operations
|
|
|
19,552
|
|
23,354
|
|
|
0.84
|
|
|
28,600
|
|
|
23,364
|
|
|
1.22
|
|
|
$
|
42,543
|
|
|
|
$
|
1.82
|
|
$
|
73,038
|
|
|
|
|
$
|
3.13
|
|
|
|
|
|
|
|
|
|
|
|
.
|
|
|
|
|
|
|
(1) |
Weighted
convertible limited partnership units of 2,281,874 and 2,299,361
for the
three months ended September 30, 2006 and 2005, respectively, and
2,287,377 and 2,307,884 for the nine months ended September 30, 2006
and
2005, respectively, and Series Z incentive units of 184,000 for the
three
and nine months ended September 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 nine
months ended September 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 0 and 4,788 for the three months ended September 30, 2006 and 2005,
respectively, and 0 and 26,930 for the nine months ended September 30, 2006,
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 three and nine months ended and, therefore,
were anti-dilutive.
5,980,000
shares of cumulative convertible preferred stock Series G has been excluded
from
diluted earnings per share for the three and nine months ended September 30,
2006 as the effect was anti-dilutive.
(9) |
Derivative
Instruments and Hedging
Activities
|
During
the
third quarter of 2006 the Company entered into a ten-year forward-starting
interest rate swap for a notional amount of $50 million with a settlement date
of February 1, 2011. As of September 30, 2006, the Company has entered into
forward-starting interest rate swaps totaling a notional amount of $400 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 decrease
in
the fair value of these derivatives during the nine months ended September
30,
2006 was approximately $2.2 million and is reflected in accumulated other
comprehensive income (loss) in the Company’s consolidated financial statements.
No hedge ineffectiveness on cash flow hedges was recognized during the nine
months ended September 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 a 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 reclassify the following combined revenues,
expenses, and net income for the these three properties of $144, $33, and $111
for the nine months ended September 30, 2006, and $552, $339, and $213 for
the
nine months ended September 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.
As
of
September 30, 2006, the Company has sold 28 of 66 available condominiums at
the
Peregrine Point property. The Company recorded a gain of approximately $1.1
million, net of minority interest, taxes, and expenses during the three and
nine
months ended September 30, 2006. The Company did not reclassify the following
combined revenues, expenses, and net income for this property during the condo
conversion process totaling $584, $580, and $4 for the nine months ended
September 30, 2006 and $842, $631, and $211 for the nine months ended September
30, 2005, to discontinued operations due to the fact the amounts are immaterial
to the consolidated financial statements.
The
components of discontinued operations are outlined below and include the
results
of operations for the respective periods that the Company owned such assets,
as
described above.
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
revenues
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,233
|
|
Interest
and other
|
|
|
-
|
|
|
119
|
|
|
238
|
|
|
1,492
|
|
Revenues
|
|
|
-
|
|
|
119
|
|
|
238
|
|
|
2,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
operating expenses
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(506)
|
|
Minority
interests
|
|
|
-
|
|
|
(11)
|
|
|
(22)
|
|
|
(200)
|
|
Operating income from real estate sold
|
|
|
-
|
|
|
108
|
|
|
216
|
|
|
2,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of real estate
|
|
|
1,170
|
|
|
-
|
|
|
13,032
|
|
|
29,219
|
|
Promote
interest and fees
|
|
|
-
|
|
|
-
|
|
|
8,221
|
|
|
-
|
|
Minority
interests
|
|
|
(106)
|
|
|
-
|
|
|
(1,917)
|
|
|
(2,638)
|
|
Net gain on sale of real estate
|
|
|
1,064
|
|
|
-
|
|
|
19,336
|
|
|
26,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
$
|
1,064
|
|
$
|
108
|
|
$
|
19,552
|
|
$
|
28,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 sought 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 to resolve this lawsuit and these costs
were
paid during the third quarter of 2006.
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 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
nine months ended September 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 apartment community operations, which are located in following major West
Coast regions:
Southern
California
(Los
Angeles, Ventura, Orange, Riverside and San Diego counties)
Northern
California
(the San
Francisco Bay Area)
Seattle
(Seattle
metropolitan area)
Other
Regions
(Portland
metropolitan area, and Houston, Texas)
The
Company’s consolidated multifamily properties are as follows:
|
As
of September 30, 2006
|
|
As
of September 30, 2005
|
|
|
Number
of Apartment
Homes
|
%
|
Number
of Apartment
Homes
|
%
|
Southern
California
|
12,957
|
53%
|
12,784
|
54%
|
Northern
California
|
5,318
|
22%
|
4,621
|
20%
|
Seattle
|
4,943
|
20%
|
4,956
|
21%
|
Other
Regions
|
1,177
|
5%
|
1,177
|
5%
|
Total
|
24,395
|
100%
|
23,538
|
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 September 30, 2006 to the Three Months Ended September
30, 2005
Our
average financial occupancies for the Company’s stabilized apartment communities
or “Quarterly Same-Properties” (properties consolidated by the Company for each
of the three months ended September 30, 2006 and 2005) decreased 0.1% to 96.7%
as of September 30, 2006 from 96.8% as of September 30, 2005 for the Quarterly
Same-Properties. The regional breakdown of the Company’s Quarterly Same-Property
portfolio for financial occupancy for the three months ended September 30,
2006
and 2005 is as follows:
|
|
|
Three
months ended
|
|
|
|
|
September
30,
|
|
|
|
|
2006
|
|
2005
|
|
Southern
California
|
|
|
96.6%
|
|
96.8%
|
|
Northern
California
|
|
|
97.0%
|
|
96.9%
|
|
Seattle
|
|
|
97.1%
|
|
97.1%
|
|
Other
Regions
|
|
|
94.9%
|
|
95.6%
|
|
Total
Property Revenues
increased
9.5% to $89.7 million in the third quarter of 2006 from $81.9 million in the
third 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
|
|
|
September
30,
|
|
|
Dollar
|
|
Percentage
|
|
|
Properties
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
Change
|
|
Revenues:
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
Property
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
Same-Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern
California
|
56
|
|
$
|
47,383
|
|
$
|
44,750
|
|
$
|
2,633
|
|
5.9
|
%
|
Northern
California
|
19
|
|
|
17,122
|
|
|
15,521
|
|
|
1,601
|
|
10.3
|
|
Seattle
|
22
|
|
|
13,035
|
|
|
11,718
|
|
|
1,317
|
|
11.2
|
|
Other
Regions
|
5
|
|
|
2,603
|
|
|
2,401
|
|
|
202
|
|
8.4
|
|
Total
property revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
Same-Properties
|
102
|
|
|
80,143
|
|
|
74,390
|
|
|
5,753
|
|
7.7
|
|
Property
revenues - properties acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subsequent
to June 30, 2005 (1)
|
|
|
|
9,527
|
|
|
7,491
|
|
|
2,036
|
|
27.2
|
|
Total
property revenues
|
|
|
$
|
89,670
|
|
$
|
81,881
|
|
$
|
7,789
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Also
includes seven redevelopment communities, three office buildings, two
recreational vehicle parks, and one manufactured housing community.
Quarterly
Same-Property Revenues
increased
by $5.8 million or 7.7% to $80.1 million in the third quarter of 2006 from
$74.4
million in the third quarter of 2005. The increase in third quarter of 2006
was
primarily attributable to an increase in average rental rates of $1,206 per
unit
in 2006 compared to $1,122 in 2005 a 7.5% increase. Occupancy and delinquency
rates were consistent for the two quarters.
Quarterly
Non-Same Property Revenues
increased
by $2.0 million or 27.2% to $9.5 million in the third quarter of 2006 from
$7.5
million in the third quarter of 2005. Quarterly Non-Same Properties include
properties acquired subsequent to September 30, 2005, seven redevelopment
communities, three office buildings, two recreational vehicle parks, and one
manufactured housing community. The increase was primarily due to four
properties acquired since July 1, 2005.
Total
Expenses
increased
$2.5 million or 3% to $76.1 million in the third quarter of 2006 from $73.6
million in the third quarter of 2005. The increase was primarily due to an
increase in insurance expense, real estate taxes, and general and
administrative, offset by a decrease in other expenses of $1.4 million.
Insurance expense increased $303 over the third quarter in 2005 due to increases
in earthquake and property liability premiums. Real estate taxes increased
$469
over the prior quarter due mainly to increases in assessment of properties
in
the Pacific Northwest. General and administrative costs increased mainly due
to
an increase in equity based compensation expense of $169, an increase of $179
in
abandoned projects, and an increase in salaries over the prior year period
as
well as higher operating expenses due to the acquisition of properties in the
past year.
Other
expenses for
the
third quarter of 2005 relate to a $1.4 million incentive compensation reward
recorded for key members of the management team that contributed to the success
of the $6.1 million interest income realized on the $5.0 million participating
loan for The Essex on Lake Merritt.
Interest
and other income decreased
$3.3 million in the third quarter of 2006 due to the recognition of $4.3 million
in interest income from the Essex on Lake Merritt participating loan during
the
third quarter of 2005. During the third quarter of 2006, the Company recorded
$227 of interest income earned on notes receivables, $200 in forfeited deposits
from a potential disposition and an increase over prior quarter of $620 in
interest income related to higher savings rates and cash balances than the
third
quarter of 2005.
Discontinued
operations
for the
third quarter of 2006 relates to the gain on sale of condominiums at Peregrine
Point for $1.1 million. Discontinued operations for the third quarter of 2005
relate to lease income of $119 for the Vista Pointe property that was sold
during the second quarter of 2006.
Comparison
of the Nine Months Ended September 30, 2006 to the Nine Months Ended September
30, 2005
Our
average financial occupancies for the Company’s stabilized apartment communities
or “Same-Properties” (properties consolidated by the Company for each of the
nine months ended September 30, 2006 and 2005) increased 0.1% to 96.6%
as
of
September 30, 2006 from 96.5% as of September 30, 2005. The regional breakdown
of the Company’s Same-Property portfolio for financial occupancy for the nine
months ended September 30, 2006 and 2005 is as follows:
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
|
|
2006
|
|
|
2005
|
|
Southern
California
|
|
|
96.3%
|
|
|
96.3%
|
|
Northern
California
|
|
|
97.0%
|
|
|
96.9%
|
|
Seattle
|
|
|
97.2%
|
|
|
96.9%
|
|
Other
Regions
|
|
|
95.7%
|
|
|
94.9%
|
|
Total
Property Revenues
increased
9.1% to $261.6 million in the nine months ended September 30, 2006 from $239.9
million in the nine months ended September 30, 2005. The following table
illustrates a breakdown of these revenue amounts, including revenues
attributable to the Same-Properties.
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
Number
of
|
|
September
30,
|
|
|
Dollar
|
|
Percentage
|
|
|
Properties
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
Change
|
|
Revenues:
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
Property revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern
California
|
54
|
|
$
|
133,610
|
|
$
|
126,448
|
|
$
|
7,162
|
|
5.7
|
%
|
Northern
California
|
19
|
|
|
49,950
|
|
|
46,360
|
|
|
3,590
|
|
7.7
|
|
Seattle
|
21
|
|
|
35,999
|
|
|
33,215
|
|
|
2,784
|
|
8.4
|
|
Other
Regions
|
5
|
|
|
7,625
|
|
|
7,139
|
|
|
486
|
|
6.8
|
|
Total
property revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Properties
|
99
|
|
|
227,184
|
|
|
213,162
|
|
|
14,022
|
|
6.6
|
|
Property
revenues - properties acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
subsequent to December 31, 2004 (1)
|
|
|
34,405
|
|
|
26,657
|
|
|
7,748
|
|
29.1
|
|
Total
property revenues
|
|
|
$
|
261,589
|
|
$
|
239,819
|
|
$
|
21,770
|
|
9.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Also
includes eight redevelopment communities, three office buildings, two
recreational vehicle parks, and one manufactured housing community.
Same-Property
Revenues
increased
by $14.0 million or 6.6% to $227.2 million for the nine months ended September
30, 2006 compared to $213.2 million for the nine months ended September 30,
2005. The increase was primarily attributable to an increase in rental rates
of
$12.4 million or 5.9%, and an increase of $546 in revenue from the ratio utility
billing system (“RUBS”), and a decrease in rent concessions of $907 compared to
the nine months ended September 30, 2005. Occupancy and delinquency rates were
consistent for the nine months ended September 30, 2006 and 2005.
Non-Same
Property Revenues
increased
by $7.7 million or 29.1% to $34.4 million for the nine months ended September
30, 2006 from $26.7 million for the nine months ended September 30, 2005.
Non-Same Properties include properties acquired subsequent to January 1, 2005,
eight redevelopment communities, three office buildings, two recreational
vehicle parks, and one manufactured housing community. The increase was
primarily due to six properties acquired since January 1, 2005.
Management
and other fees from affiliates decreased
by approximately $5.6 million or 61% for the nine months ended September 30,
2006 due primarily to $6 million in promote income recorded during the nine
months ended September 30, 2005 related to the sale of Fund I assets.
Additionally, for the nine months ended September 30, 2005 the Company recorded
$1.3 million in management fee income which included fee income deferred from
2004. Essex has recorded $2.5 million in management fees for the nine months
ended September 30, 2006, and during the third quarter of 2006, Essex recorded
$1 million in promote income from Fund I. Essex also recorded promote fees
from
the sale of Vista Pointe in the second quarter of 2006 which are included in
discontinued operations.
Total
Expenses
increased
$12.2 million or 6% to $227.7 million for the nine months ended September 30,
2006 from $215.5 million for the nine months ended September 30, 2005. The
increase was primarily due to increases in insurance expense, real estate taxes,
salaries, and interest, offset by a decrease in other expenses by $1.1 million.
Insurance expense increased $626 over prior year due to increases in earthquake
and property liability premiums. Real estate taxes increased $1.8 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 $543, 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 $2.1 million or 4% for the nine months ended September 30, 2006 to $57
million, net of $2.4 million in capitalized interest, compared to $54.9 million,
net of $647 in capitalized interest for the nine months ended September 30,
2005. The increase was mainly due to an increase in total outstanding debt
of
$88 million between September 30, 2006 and 2005, and higher short-term borrowing
rates.
Other
expenses decreased
$1.1 for the nine months ended September 30, 2006 as a result of net pursuit
costs of $970 related to the Company’s attempt to acquire the Town & Country
REIT in the first quarter of 2006 and an $800 impairment charge recorded on
a
property in Houston, Texas during the third quarter of 2006, compared to a
$1.5
million charge related to a legal settlement recorded during the second quarter
of 2005 and $1.4 million recorded as incentive compensation related to $6.1
million in interest income realized on The Essex on Lake Merritt participating
loan.
Gain
on sale of real estate was
$0 for
the nine months ended September 30, 2006 compared to a gain of $6.4 million
recorded for the nine months ended September 30, 2005 resulting from the
recognition of a $5 million deferred gain due to the sale of The Essex on Lake
Merritt and $1.4 million from our taxable REIT subsidiaries.
Interest
and other income for
the
nine months ended September 30, 2006 was
comprised of $1.7 million for a gain on the sale of the Town & Country stock
recorded during the first quarter for 2006, $267 of interest income earned
on
the notes receivables, $200 in forfeited deposits from a potential disposition
and approximately $1.1 million in interest income on cash balances, as compared
to $6 million in interest income from the Essex on Lake Merritt participating
loan recorded in the third quarter of 2005. Interest income on cash balances
and
lease income from the RV parks were consistent for both periods for
approximately $421.
Equity
income in co-investments
decreased
$18.4 million for the nine months ended September 30, 2006 due to the fact
the
Company recorded $17.1 million in equity income related to Fund I properties
sold during the nine months ended September 30, 2005. For the nine months ended
September 30, 2006 the Company recorded a net loss on its investment in Fund
II
of $1.2 million.
Discontinued
operations
for the
nine months ended September 30, 2006 relates to the gain on sale of Peregrine
Point condominiums for $1.1 million, a gain on sale of the Vista Pointe joint
venture property for $8.8 million plus fees and promote income from the sale
of
$8.2 million. 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 nine months ended September 30, 2005 relates
to
the sale of the Eastridge Apartments in the third 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 September 30, 2006, there
was
no outstanding balance 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 eight of
Essex's multifamily communities. As of September 30, 2006, we had $80.0 million
outstanding under this line of credit, which bears an average interest rate
of
6.3% 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 $56 million. This line bears interest at LIBOR
plus 0.875%, and matures on June 30, 2007. The Company had the capacity to
issue
up to approximately $42 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.
During
the
third quarter of 2006, the Company sold 5.98 million shares of 4.875% Series
G
Cumulative Convertible Preferred Stock for 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 share liquidation preference, which is
equivalent to an initial conversion price of approximately $136.62 per share
of
common stock (the conversion rate will be subject to adjustment upon the
occurrence of specified events). On or after July 31, 2011, the Company may,
under certain circumstances, cause some or all of the Series G Preferred Stock
to be converted into that number of shares of common stock at the then
prevailing conversion rate.
During
the
third quarter of 2006, the Company issued and sold approximately 114,100 shares
of common stock for $12.4 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 development and redevelopment pipelines. The Company used
the
net proceeds from the Series G offering and common stock sales to pay down
outstanding borrowings under the Company’s lines of credit, to fund the
development pipeline and for general corporate purposes.
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 the Company’s common stock at an
initial exchange price of $103.25 per share subject to certain adjustments.
The
Notes will also be exchangeable prior to November 1, 2020, but only upon the
occurrence of certain specified events. On or after November 4, 2010, the
Operating Partnership may redeem all or a portion of the Notes at a redemption
price equal to the principal amount plus accrued and unpaid interest (including
additional interest, if any). Note holders may require the Operating Partnership
to repurchase all or a portion of the Notes at a purchase price equal to the
principal amount plus accrued and unpaid interest (including additional
interest, if any) on the Notes on November 1, 2010, November 1, 2015 and
November 1, 2020.
As
of
September 30, 2006, our mortgage notes payable totaled $1.1 billion which
consisted of $910.9 million in fixed rate debt with interest rates varying
from
4.27% to 8.29% and maturity dates ranging from 2007 to 2015 and $186.4 million
of tax-exempt variable rate demand bonds with a weighted average interest rate
of 4.8%. The tax-exempt variable rate demand bonds have maturity dates ranging
from 2006 to 2034, and are subject to interest rate caps.
The
Company pays quarterly dividends from cash available for distribution. Until
it
is distributed, cash available for distribution is invested by the Company
primarily in short-term investment grade securities or is used by the Company
to
reduce balances outstanding under its line of credit.
Derivative
Activity
During
the
third quarter of 2006 the Company entered into a ten-year forward-starting
interest rate swap for a notional amount of $50 million with a settlement date
of February 1, 2011. As of September 30, 2006, the Company has entered into
forward-starting interest rate swaps totaling a notional amount of $400 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
financing of debt that matures between 2007 and early 2011. The decrease in
the
fair value of these derivatives during the nine months ended September 30,
2006
was approximately $2.2 million and is reflected in accumulated other
comprehensive income (loss) in the Company’s consolidated financial statements.
No hedge ineffectiveness on cash flow hedges was recognized during the nine
months ended September 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 September 30, 2006, the Company had two development project
comprised of 513 units for an estimated cost of $167.3 million, of which $135.4
million remains to be expended, (excluding development
projects owned by Fund II).
The
Company has also incurred $7.8 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 September
30,
2006, the Company had seven development communities aggregating 1,845
units
that
were classified as predevelopment projects. The estimated total cost of the
predevelopment pipeline at September 30, 2006 is $557.0 million, of which $516.5
million remains to be expended.
The
Company had four other development projects that are under development
aggregating 137 units. The estimated total cost of the other development
projects at September 30, 2006 is $46.3 million, of which $24.9 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 September 30, 2006,
the
Company had eight communities, aggregating 2,600 units in various stages of
redevelopment. Total redevelopment cost of these projects as of September 30,
2006 is approximately $65.2 million, of which $43.4 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 has been Essex’s exclusive investment vehicle during 2005
and 2006. As of October 2006, management has fully committed the available
capital and Fund II will not make any additional acquisitions. Consistent with
Fund I, Essex records revenue for its asset management, property management,
development and redevelopment services when earned, and promote income should
Fund II exceed certain financial return benchmarks.
Contractual
Obligations and Commercial Commitments
The
following table summarizes the maturation or due dates of our contractual
obligations and other commitments at September 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
|
|
$
|
-
|
|
$
|
216,741
|
|
$
|
182,152
|
|
$
|
698,437
|
|
$
|
1,097,330
|
Exchangeable
bonds
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
225,000
|
|
|
225,000
|
Lines
of credit
|
|
|
-
|
|
|
-
|
|
|
80,000
|
|
|
-
|
|
|
80,000
|
Interest
on indebtedness
|
|
|
19,523
|
|
|
117,199
|
|
|
68,373
|
|
|
149,881
|
|
|
354,976
|
Development
commitments
|
|
|
14,100
|
|
|
175,700
|
|
|
47,800
|
|
|
-
|
|
|
237,600
|
Redevelopment
commitments
|
|
|
9,400
|
|
|
40,600
|
|
|
-
|
|
|
-
|
|
|
50,000
|
Essex
Apartment Value Fund II, L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
capital
commitment
|
|
|
-
|
|
|
27,797
|
|
|
-
|
|
|
-
|
|
|
27,797
|
|
|
$
|
43,023
|
|
$
|
578,037
|
|
$
|
378,325
|
|
$
|
1,073,318
|
|
$
|
2,072,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
the
size of predevelopment pipeline, 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 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 September 30, 2006 and 2005:
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$
|
10,686
|
|
$
|
8,259
|
|
$
|
42,543
|
|
$
|
73,038
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
20,666
|
|
|
20,323
|
|
|
61,432
|
|
|
60,093
|
Co-investments (1)
|
|
|
841
|
|
|
147
|
|
|
2,592
|
|
|
503
|
Gains not included in FFO (2)
|
|
|
(714)
|
|
|
-
|
|
|
(12,576)
|
|
|
(51,303)
|
Minority interests
|
|
|
1,376
|
|
|
937
|
|
|
4,931
|
|
|
7,707
|
Funds
from operations
|
|
$
|
32,855
|
|
$
|
29,666
|
|
$
|
98,922
|
|
$
|
90,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
from operations per share - diluted
|
|
$
|
1.26
|
|
$
|
1.15
|
|
$
|
3.83
|
|
$
|
3.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding diluted (3)
|
|
|
26,143,923
|
|
|
25,711,320
|
|
|
25,825,185
|
|
|
25,671,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) Amount
includes accumulated depreciation on Peregrine Point condominium
sales.
(3) Assumes
conversion of the weighted average operating partnership interests in the
Operating Partnership into shares of Company’s common stock.
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 September 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
|
|
$
|
-
|
|
69,541
|
|
147,200
|
|
24,764
|
|
157,388
|
|
737,002
|
(4)
|
$
|
1,135,895
|
|
$
|
1,189,244
|
|
Average
interest rate
|
|
|
-
|
|
6.0%
|
|
6.8%
|
|
6.9%
|
|
8.0%
|
|
5.7%
|
|
|
|
|
|
|
|
Variable
rate debt
|
|
$
|
-
|
|
-
|
|
-
|
|
80,000
|
|
-
|
|
186,435
|
(5)
|
$
|
266,435
|
|
$
|
266,435
|
|
Average
interest
|
|
|
-
|
|
-
|
|
-
|
|
6.3%
|
|
-
|
|
4.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. Also, $50 million covered by
a
forward-starting swap at a fixed rate of 5.65% with 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 September 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
September 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 September 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 sought 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 to resolve this lawsuit and these costs
were
paid during the third quarter of 2006.
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 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
2: Unregistered Sale of Equity Securities and Use of
Proceeds
During
October 2006, the Operating Partnership acquired Belmont Terrace, a 71-unit
apartment community located in Belmont, California. As part of the consideration
for this acquisition, the Operating Partnership issued approximately 72,685
partnership units, representing limited partnership interests in the Operating
Partnership, to the sellers of this property. Such units were valued in
aggregate at approximately $7.7 million. Such units were issued in a private
placement and pursuant to the exemption from registration set forth in Section
4(2) of the Securities Act of 1933, as
amended.
After one year after issuance, the units are exchangeable on a one-for-one
basis
into shares of Essex common stock. Were all of such units to be exchanged for
common stock, then Essex would issue 72,685 shares of common stock, which is
less than 1% of the number of its shares of common stock currently outstanding.
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 |
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.
|
|
10.2 |
Thirteenth
Amendment to First Amended and Restated Agreement of Limited Partnership
of Essex Portfolio, L.P., dated as of October 26, 2006.
|
|
10.3 |
Supplemental
Indenture, dated November 1, 2006, to the Indenture, dated October
28,
2005, by and among Essex Portfolio, L.P., Essex Property Trust, Inc.,
and
Wells Fargo Bank, N.A.
|
|
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:
November 7, 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
|
30