body_10-q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the quarterly period ended June 30, 2007
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:
25,160,844
shares of Common Stock as of August 3, 2007
ESSEX
PROPERTY TRUST, INC.
FORM
10-Q
INDEX
|
|
Page
No.
|
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements (Unaudited):
|
3
|
|
|
|
|
Consolidated
Balance Sheets as of June 30, 2007 and December 31, 2006
|
4
|
|
|
|
|
Consolidated
Statements of Operations for the three and six months ended June
30, 2007
and 2006
|
5
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity and Comprehensive Income for the
six
months ended June 30, 2007
|
6
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the six months ended June
30,
2007 and 2006
|
7
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
8
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
17
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
25
|
|
|
|
Item
4.
|
Controls
and Procedures
|
27
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
27
|
|
|
|
Item
1A.
|
Risk
Factors
|
27
|
|
|
|
Item
4.
|
Submissions
of Matters to a Vote of Security Holders
|
27
|
|
|
|
Item
6.
|
Exhibits
|
28
|
|
|
|
Signatures
|
28
|
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, 2006.
ESSEX
PROPERTY TRUST, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
(Unaudited)
(Dollars
in thousands, except per share amounts)
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
Rental
properties:
|
|
|
|
|
|
|
|
Land
and land improvements
|
|
$
|
641,951
|
|
$
|
560,880
|
|
Buildings
and improvements
|
|
|
2,326,267
|
|
|
2,108,307
|
|
|
|
|
2,968,218
|
|
|
2,669,187
|
|
Less
accumulated depreciation
|
|
|
(508,681)
|
|
|
(465,015)
|
|
|
|
|
2,459,537
|
|
|
2,204,172
|
|
Real
estate - held for sale, net
|
|
|
-
|
|
|
41,221
|
|
Real
estate under development
|
|
|
161,655
|
|
|
103,487
|
|
Investments
|
|
|
69,851
|
|
|
60,451
|
|
|
|
|
2,691,043
|
|
|
2,409,331
|
|
Cash
and cash equivalents-unrestricted
|
|
|
12,587
|
|
|
9,662
|
|
Cash
and cash equivalents-restricted
|
|
|
11,367
|
|
|
13,948
|
|
Marketable
securities
|
|
|
3,815
|
|
|
-
|
|
Notes
and other receivables from related parties
|
|
|
1,019
|
|
|
1,209
|
|
Notes
and other receivables
|
|
|
26,614
|
|
|
18,195
|
|
Prepaid
expenses and other assets
|
|
|
34,063
|
|
|
20,632
|
|
Deferred
charges, net
|
|
|
12,967
|
|
|
12,863
|
|
Total
assets
|
|
$
|
2,793,475
|
|
$
|
2,485,840
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
Mortgage
notes payable
|
|
$
|
1,202,122
|
|
$
|
1,060,704
|
|
Mortgage
notes payable - held for sale
|
|
|
-
|
|
|
32,850
|
|
Exchangeable
bonds
|
|
|
225,000
|
|
|
225,000
|
|
Lines
of credit
|
|
|
37,000
|
|
|
93,000
|
|
Accounts
payable and accrued liabilities
|
|
|
38,493
|
|
|
38,614
|
|
Dividends
payable
|
|
|
28,813
|
|
|
24,910
|
|
Other
liabilities
|
|
|
15,503
|
|
|
14,328
|
|
Deferred
gain
|
|
|
2,193
|
|
|
2,193
|
|
Total
liabilities
|
|
|
1,549,124
|
|
|
1,491,599
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
251,965
|
|
|
236,120
|
|
Cumulative
convertible preferred stock; $.0001 par value:
|
|
|
|
|
|
|
|
4.875%
Series G - 5,980,000 issued and outstanding
|
|
|
145,912
|
|
|
145,912
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Common
stock, $.0001 par value, 649,702,178 shares authorized
|
|
|
|
|
|
|
|
25,152,364
and 23,416,295 shares issued and outstanding
|
|
|
2
|
|
|
2
|
|
Cumulative
redeemable preferred stock; $.0001 par value:
|
|
|
|
|
|
|
|
7.8125%
Series F - 1,000,000 shares authorized,
|
|
|
|
|
|
|
|
issued
and outstanding, liquidation value
|
|
|
25,000
|
|
|
25,000
|
|
Excess
stock, $.0001 par value, 330,000,000 shares
|
|
|
|
|
|
|
|
authorized
and no shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
Additional
paid-in capital
|
|
|
904,876
|
|
|
686,937
|
|
Distributions
in excess of accumulated earnings
|
|
|
(97,500)
|
|
|
(97,457)
|
|
Accumulated
other comprehensive income (loss)
|
|
|
14,096
|
|
|
(2,273)
|
|
Total
stockholders' equity
|
|
|
846,474
|
|
|
612,209
|
|
Total
liabilities and stockholders' equity
|
|
$
|
2,793,475
|
|
$
|
2,485,840
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the unaudited consolidated financial
statements.
ESSEX
PROPERTY TRUST, INC. AND SUBSIDIARES
Consolidated
Statements of Operations
(Unaudited)
(Dollars
in thousands, except per share amounts)
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other property
|
|
$
|
96,707
|
|
$
|
83,717
|
|
$
|
188,861
|
|
$
|
165,951
|
Management
and other fees from affiliates
|
|
|
1,354
|
|
|
830
|
|
|
2,394
|
|
|
1,654
|
|
|
|
98,061
|
|
|
84,547
|
|
|
191,255
|
|
|
167,605
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
operating, excluding real estate taxes
|
|
|
23,932
|
|
|
21,246
|
|
|
47,052
|
|
|
42,906
|
Real
estate taxes
|
|
|
8,143
|
|
|
7,161
|
|
|
15,855
|
|
|
14,331
|
Depreciation
and amortization
|
|
|
25,166
|
|
|
19,907
|
|
|
46,843
|
|
|
39,227
|
Interest
|
|
|
20,491
|
|
|
18,919
|
|
|
38,757
|
|
|
37,330
|
Amortization
of deferred financing costs
|
|
|
678
|
|
|
497
|
|
|
1,355
|
|
|
1,192
|
General
and administrative
|
|
|
6,008
|
|
|
4,980
|
|
|
12,104
|
|
|
9,879
|
Other
expenses
|
|
|
-
|
|
|
800
|
|
|
-
|
|
|
1,770
|
|
|
|
84,418
|
|
|
73,510
|
|
|
161,966
|
|
|
146,635
|
Earnings
from operations
|
|
|
13,643
|
|
|
11,037
|
|
|
29,289
|
|
|
20,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
2,865
|
|
|
648
|
|
|
5,047
|
|
|
3,042
|
Equity
income (loss) in co-investments
|
|
|
463
|
|
|
(374)
|
|
|
2,445
|
|
|
(816)
|
Minority
interests
|
|
|
(5,069)
|
|
|
(4,555)
|
|
|
(10,376)
|
|
|
(9,365)
|
Income
before discontinued operations and
|
|
|
|
|
|
|
|
|
|
|
|
|
tax
provision
|
|
|
11,902
|
|
|
6,756
|
|
|
26,405
|
|
|
13,831
|
Income
tax provision
|
|
|
-
|
|
|
(138)
|
|
|
-
|
|
|
(175)
|
Income
before discontinued operations
|
|
|
11,902
|
|
|
6,618
|
|
|
26,405
|
|
|
13,656
|
Income
from discontinued operations (net of
|
|
|
|
|
|
|
|
|
|
|
|
|
minority
interests)
|
|
|
285
|
|
|
15,894
|
|
|
23,328
|
|
|
19,178
|
Net
income
|
|
|
12,187
|
|
|
22,512
|
|
|
49,733
|
|
|
32,834
|
Dividends
to preferred stockholders
|
|
|
(2,310)
|
|
|
(489)
|
|
|
(4,553)
|
|
|
(977)
|
Net
income available to common stockholders
|
|
$
|
9,877
|
|
$
|
22,023
|
|
$
|
45,180
|
|
$
|
31,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
common share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before discontinued operations available to
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders
|
|
$
|
0.39
|
|
$
|
0.27
|
|
$
|
0.91
|
|
$
|
0.55
|
Income
from discontinued operations
|
|
|
0.01
|
|
|
0.69
|
|
|
0.98
|
|
|
0.84
|
Net
income available to common stockholders
|
|
$
|
0.40
|
|
$
|
0.96
|
|
$
|
1.89
|
|
$
|
1.39
|
Weighted
average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
during the period
|
|
|
24,493,816
|
|
|
22,950,172
|
|
|
23,966,049
|
|
|
22,911,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before discontinued operations available to
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders
|
|
$
|
0.38
|
|
$
|
0.26
|
|
$
|
0.89
|
|
$
|
0.55
|
Income
from discontinued operations
|
|
|
0.01
|
|
|
0.69
|
|
|
0.94
|
|
|
0.83
|
Net
income available to common stockholders
|
|
$
|
0.39
|
|
$
|
0.95
|
|
$
|
1.83
|
|
$
|
1.38
|
Weighted
average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
during the period
|
|
|
25,104,021
|
|
|
23,226,466
|
|
|
24,688,005
|
|
|
23,154,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
per common share
|
|
$
|
0.93
|
|
$
|
0.84
|
|
$
|
1.86
|
|
$
|
1.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited
consolidated financial statements.
Consolidated
Statements of Stockholders' Equity and
Comprehensive
Income for the six months ended June 30, 2007
(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, 2006
|
|
1,000
|
|
|
25,000
|
|
23,416
|
|
|
2
|
|
|
686,937
|
|
|
(2,273)
|
|
|
(97,457)
|
|
612,209
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
49,733
|
|
|
49,733
|
Change
in fair value of cash flow hedges
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
16,369
|
|
|
-
|
|
|
16,369
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,102
|
Issuance
of common stock under:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation plans
|
|
-
|
|
|
-
|
|
38
|
|
|
-
|
|
|
2,365
|
|
|
-
|
|
|
-
|
|
|
2,365
|
Sale
of common stock
|
|
-
|
|
|
-
|
|
1,671
|
|
|
-
|
|
|
213,672
|
|
|
-
|
|
|
-
|
|
|
213,672
|
Conversion/Reallocation
of
minority interest
|
-
|
|
|
-
|
|
27
|
|
|
-
|
|
|
1,902
|
|
|
-
|
|
|
-
|
|
|
1,902
|
Dividends
declared
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(49,776)
|
|
|
(49,776)
|
Balances
at June 30, 2007
|
|
1,000
|
|
$
|
25,000
|
|
25,152
|
|
$
|
2
|
|
$
|
904,876
|
|
$
|
14,096
|
|
$
|
(97,500)
|
|
$
|
846,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the unaudited consolidated financial
statements.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars
in thousands)
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
Net
cash provided by operating activities
|
|
$
|
99,652
|
|
$
|
70,513
|
Cash
flows used in investing activities:
|
|
|
|
|
|
|
Additions
to real estate:
|
|
|
|
|
|
|
Acquisitions
and improvements to recent acquisitions
|
|
|
(219,237)
|
|
|
(60,115)
|
Capital
expenditures and redevelopment
|
|
|
(28,245)
|
|
|
(20,032)
|
Additions
to real estate under development
|
|
|
(75,502)
|
|
|
(21,606)
|
Dispositions
of real estate and investments
|
|
|
123,029
|
|
|
8,349
|
Changes
in restricted cash and refundable deposits
|
|
|
2,270
|
|
|
6,271
|
Purchases
of marketable securities
|
|
|
(3,815)
|
|
|
-
|
Additions
to notes and other receivables
|
|
|
(9,104)
|
|
|
(8,284)
|
Collections
of notes and other receivables
|
|
|
477
|
|
|
456
|
Contributions
to limited partnerships
|
|
|
(21,215)
|
|
|
(17,849)
|
Distributions
from limited partnerships
|
|
|
15,131
|
|
|
9,588
|
Net
cash used in investing activities
|
|
|
(216,211)
|
|
|
(103,222)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Proceeds
from mortgage notes payable and lines of credit
|
|
|
445,595
|
|
|
159,429
|
Repayment
of mortgage notes payable and lines of credit
|
|
|
(416,038)
|
|
|
(93,030)
|
Payments
of loans fees and related costs
|
|
|
(1,463)
|
|
|
(456)
|
Proceeds
from settlement of forward-starting swap
|
|
|
1,311
|
|
|
-
|
Net
proceeds from stock options exercised
|
|
|
1,765
|
|
|
2,113
|
Net
proceeds from sale of common stock
|
|
|
213,672
|
|
|
14,813
|
Distributions
to minority interest partners
|
|
|
(70,891)
|
|
|
(11,679)
|
Redemption
of minority interest limited partnership units
|
|
|
(8,288)
|
|
|
(5,073)
|
Common
and preferred stock dividends paid
|
|
|
(46,179)
|
|
|
(38,723)
|
Net
cash provided by financing activities
|
|
|
119,484
|
|
|
27,394
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
2,925
|
|
|
(5,315)
|
Cash
and cash equivalents at beginning of period
|
|
|
9,662
|
|
|
14,337
|
Cash
and cash equivalents at end of period
|
|
$
|
12,587
|
|
$
|
9,022
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
Cash
paid for interest, net of $2,317 and $1,260 capitalized
|
|
|
|
|
|
|
in
2007 and 2006, respectively
|
|
$
|
36,162
|
|
$
|
36,858
|
|
|
|
|
|
|
|
Supplemental
disclosure of noncash investing and financing activities:
|
|
|
|
|
|
|
Mortgage
notes assumed in connection with purchases
|
|
|
|
|
|
|
of
real estate
|
|
$
|
23,920
|
|
|
-
|
Land
contributed by a partner in a consolidated joint venture
|
|
$
|
22,200
|
|
|
-
|
|
|
|
|
|
|
|
See
accompanying notes to the unaudited consolidated financial
statements.
ESSEX
PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
June
30, 2007 and 2006
(Unaudited)
(1) Organization
and Basis of Presentation
The
unaudited consolidated financial statements of the Company are prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form
10-Q. In the opinion of management, all adjustments necessary for a
fair presentation of the financial position, results of operations and cash
flows for the periods presented have been included and are normal and recurring
in nature. These unaudited consolidated financial statements should
be read in conjunction with the audited consolidated financial statements
included in the Company's annual report on Form 10-K for the year ended December
31, 2006.
All
significant intercompany balances and transactions have been eliminated in
the
consolidated financial statements. Certain prior year balances have
been reclassified to conform to the current year presentation.
The
unaudited consolidated financial statements for the six months ended June 30,
2007 and 2006 include the accounts of the Company and Essex Portfolio, L.P.
(the
"Operating Partnership", which holds the operating assets of the
Company). See below for a description of entities consolidated by the
Operating Partnership. The Company is the sole general partner in the
Operating Partnership, with a 91.0% and 90.4% general partnership interest
as of
June 30, 2007 and December 31, 2006, respectively.
As
of
June 30, 2007, the Company has ownership interests in 136 apartment communities
(containing 27,808 units), five commercial investments (with approximately
463,840 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
(Ventura, Los Angeles, Santa Barbara, 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 have been sold, and Fund I
is in the final stages 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 utilizes leverage equal to approximately 60% of the estimated value
of
the underlying real estate. Fund II invested in apartment communities
in the Company’s targeted West Coast markets and, as of June 30, 2007, owned 11
apartment communities and three development projects. Essex records
revenue for its asset management, property management, development and
redevelopment services when earned, and promote income if Fund II exceeds
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 17 Down REIT
limited partnerships (comprising eleven properties), and an office building
that
is subject to loans made by the Company. The Company consolidates
these entities because it is deemed the primary beneficiary under FIN
46R. The total assets and liabilities related to these variable
interest entities (VIEs), net of intercompany eliminations, were approximately
$189.6 million and $136.5 million as of June 30, 2007 and $178.3
million and $110.9 million as of December 31, 2006,
respectively.
Interest
holders in VIEs consolidated by the Company are allocated net income equal
to
the cash payments made to those interest holders for services rendered or
distributions from cash flow. The remaining results of operations are
generally allocated to the Company. As of June 30, 2007 and December
31, 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 $71.7 million and $58.3 million, respectively,
at
June 30, 2007, and $78.5 million and $58.4 million, respectively, at December
31, 2006. The Company does not have a significant exposure to loss
from its involvement with these unconsolidated VIEs.
Stock-Based
Compensation
Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 123 Revised
(“SFAS No. 123(R)”), “Share-Based Payment”, a revision of SFAS No. 123
using the modified prospective approach. SFAS No. 123(R) requires
companies to recognize in the income statement the grant-date fair value of
stock options and other equity based compensation issued to
employees.
Stock-based
compensation expense for stock options and restricted stock awards under the
fair value method totaled $0.3 million and $0.5 million for the three months
ended June 30, 2007 and 2006, respectively, and $0.6 million for the six months
ended June 30, 2007 and 2006, respectively. The intrinsic value of
the stock options exercised during the three months ended June 30, 2007 and
2006
totaled $0.8 million and $0.9 million, respectively, and $2.7 million for the
six months ended June 30, 2007 and 2006, respectively. As of June 30,
2007, the intrinsic value of the stock options outstanding and fully vested
totaled $21.8 million and $17.2 million, respectively. As of June 30,
2007, total unrecognized compensation cost related to unvested share-based
compensation granted under the stock option plans and the restricted stock
awards totaled $1.8 million. The cost is expected to be recognized
over 3 to 5 years for the stock option plans and 7 years for the restricted
stock awards.
Stock-based
compensation expense for Z and Z-1 Units (collectively, “Z Units”) under the
fair value method totaled $0.4 million and $0.2 million for the three months
ended June 30, 2007 and 2006, respectively. Stock-based compensation
capitalized for stock options, restricted stock awards, and the Z Units totaled
$0.2 million for the three months ended June 30, 2007 and 2006,
respectively. As of June 30, 2007 the intrinsic value of the Z Units
subject to conversion totaled $16.0 million. As of June 30, 2007,
total unrecognized compensation cost related to Z Units subject to conversion
in
the future granted under the Z Units totaled $8.1 million. The cost
is expected to be recognized over 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, 2006.
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
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 establishes new evaluation and measurement
processes for all income tax positions taken, and requires expanded disclosures
of income tax matters. The adoption of this FIN did not have a
material impact on the Company’s consolidated financial position, results of
operations or cash flows.
In
September 2006, the FASB issued Statement No. 157, Fair Value
Measurements (“SFAS No. 157”). SFAS No. 157 provides guidance
for using fair value to measure assets and liabilities. This
statement clarifies the principle that fair value should be based on the
assumptions that market participants would use when pricing an asset or
liability. SFAS No. 157 establishes a fair value hierarchy, giving
the highest priority to quoted prices in active markets and the lowest priority
to unobservable data. This statement is effective in fiscal years beginning
after November 15, 2007. The Company believes that the adoption of
this standard will not have a material effect on its consolidated financial
statements.
In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS No.
159”). SFAS No. 159 expands opportunities to use fair value
measurement in financial reporting and permits entities to choose to measure
many financial instruments and certain other items at fair
value. This Statement is effective for fiscal years beginning after
November 15, 2007. The Company has not decided if it will choose to
measure any eligible financial assets and liabilities at fair value upon the
adoption of this standard on January 1, 2008.
(2) Significant
Transactions
(a)
Acquisitions
In
April
2007, the Company acquired Cardiff by the Sea Apartments located in Cardiff,
California for approximately $72 million. The community, which is in Northern
San Diego County, consists of 300 units and was built in 1986.
In
May
2007, the Company acquired Canyon Oaks apartments, built in 2005, consisting
of
250 units, located in San Ramon, California for approximately $64.3
million. The Company also acquired Coldwater Canyon apartments for
$8.3 million. Built in 1979, the property consists of 39 unit located
in Studio City, California.
In
June
2007, the Company acquired The Cairns, a 100-unit property built in 2005 and
located in the Lake Union area of Seattle, for $28.1 million.
In
June
2007, the Company entered into agreements to acquire ownership interests in
two
limited partnerships (one of the existing general partners is a related party)
which collectively own the Thomas Jefferson Apartments. Thomas
Jefferson, built in 1963, is a 156-unit community located in Sunnyvale,
California. This transaction is expected to close in the third
quarter of 2007. In June, the Company acquired Magnolia Lane,
built in 2001, for $5.4 million from a third-party. The property is a
32-unit community subject to a ground lease that expires in 64 years and is
adjacent to Thomas Jefferson.
(b)
Dispositions
The
Company sold six condominium units at Peregrine Point during the second quarter
of 2007, and the two remaining units were sold in July of 2007.
(c)
Joint Ventures
In
the
second quarter of 2007, the Company recorded a promote fee of $0.3 million
and
equity income of $0.3 million from its investment in Fund I. Fund I
is in the final stages of liquidation and no additional income is expected
to be
recorded in future periods.
In
May
2007, the Company entered into a joint venture with the land owner of Hillsdale
Garden Apartments, a 697-unit community located on a 30-acre land parcel in
San
Mateo, California. The Company contributed its leasehold interest in
the property for an 81.5% interest and the land owner contributed its fee
interest for an 18.5% interest in the joint venture.
(d)
Debt and Financing Activities
During
April 2007, the Company refinanced a mortgage loan for $35.7 million secured
by
the Tierra Vista community in the amount of $62.5 million, with a fixed interest
rate of 5.47%, which matures in April 2017. In conjunction with this
transaction the Company settled its first $50 million forward-starting swap
and
received $1.3 million from the counterparty. The swap settlement reduced the
effective interest rate on the new Tierra Vista mortgage loan to
5.19%.
In
June
2007, the Company originated a mortgage loan secured by the Cardiff by the
Sea
community purchased in April 2007 in the amount of $42.2 million. The loan
has a
fixed interest rate of 5.71% and matures in June 2017. The Company assumed
a
mortgage loan in conjunction with the acquisition of The Cairns community in
the
amount of $12.0 million, with a fixed interest rate of 5.5%, which matures
in
May 2014. Finally, the Company refinanced $18.6 million of debt
secured by the Highridge community with a $44.8 million fixed interest rate
loan
of 6.05%, which matures in June 2017.
(e)
Equity
During
the quarter, the Company sold 1,670,500 shares of its common stock for proceeds
of $213.7 million, net of underwriting fees and expenses. The Company used
the
net proceeds from the stock offerings to pay down outstanding borrowings under
the Company’s lines of credit and to fund acquisition and development
projects.
(f)
Development
The
River
Oaks and Hollywood predevelopment projects generated lease income totaling
$1.3
million during the second quarter of 2007, which was recorded as lease income
and included in interest and other income in the accompanying consolidated
statements of operations. Interest expense will be not capitalized on
these projects while they are leased, and depreciation expense will be recorded
on these properties until the leases expire. Accumulated depreciation
totaled $1.4 million for these projects as of June 30, 2007.
(3)
Investments
The
Company has investments in a number of joint ventures, which are accounted
for
under the equity method. The joint ventures own and operate apartment
communities. The following table details the Company's investments
(dollars in thousands):
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
Investments
in joint ventures accounted for under the equity
|
|
|
|
|
|
|
method
of accounting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited
partnership interest of 27.2% and general partner
|
|
|
|
|
|
|
interest
of 1% in Essex Apartment Value Fund II, L.P (Fund II)
|
|
$
|
59,298
|
|
$
|
45,598
|
Preferred
limited partnership interests in Mountain Vista
|
|
|
|
|
|
|
Apartments,
LLC (A)
|
|
|
1,182
|
|
|
6,806
|
Development
joint ventures
|
|
|
8,871
|
|
|
7,547
|
|
|
|
69,351
|
|
|
59,951
|
Investments
accounted for under the cost method of accounting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock interest in Multifamily Technology
|
|
|
|
|
|
|
Solutions,
Inc.
|
|
|
500
|
|
|
500
|
|
|
|
|
|
|
|
Total
investments
|
|
$
|
69,851
|
|
$
|
60,451
|
(A)
|
The
investment is held in an entity that includes an affiliate of The
Marcus
& Millichap Company (“TMMC”). TMMC’s Chairman is also the
Chairman of the Company.
|
The
combined summarized financial information of investments, which are accounted
for under the equity method, is as follows (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Balance
sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate and real estate under development
|
|
$
|
578,075
|
|
$
|
576,134
|
|
|
|
|
|
|
Other
assets
|
|
|
24,792
|
|
|
20,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
602,867
|
|
$
|
596,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
notes payable
|
|
$
|
316,960
|
|
$
|
301,665
|
|
|
|
|
|
|
Other
liabilities
|
|
|
15,999
|
|
|
74,793
|
|
|
|
|
|
|
Partners'
equity
|
|
|
269,908
|
|
|
220,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and partners' equity
|
|
$
|
602,867
|
|
$
|
596,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company's
share of equity
|
|
$
|
69,351
|
|
$
|
59,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Statements
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
revenues
|
|
$
|
10,697
|
|
$
|
10,231
|
|
$
|
22,835
|
|
$
|
19,741
|
Property
operating expenses
|
|
|
(4,503)
|
|
|
(4,353)
|
|
|
(9,470)
|
|
|
(8,508)
|
Net
operating income
|
|
|
6,194
|
|
|
5,878
|
|
|
13,365
|
|
|
11,233
|
Interest
expense
|
|
|
(3,236)
|
|
|
(4,407)
|
|
|
(7,254)
|
|
|
(8,562)
|
Depreciation
and amortization
|
|
|
(3,473)
|
|
|
(2,937)
|
|
|
(6,945)
|
|
|
(5,822)
|
Total
net (loss) income
|
|
$
|
(515)
|
|
$
|
(1,466)
|
|
$
|
(834)
|
|
$
|
(3,151)
|
Company's
share of operating net income (loss)
|
|
|
159
|
|
|
(374)
|
|
|
94
|
|
|
(816)
|
Company's
equity in gain on sale and gain on
partial
sale of the Company's interest
|
304
|
|
|
-
|
|
|
2,351
|
|
|
-
|
Company's
equity income (loss) in con-investments
|
$
|
463
|
|
$
|
(374)
|
|
$
|
2,445
|
|
$
|
(816)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the first quarter of 2007, the Company made a $1.1 million contribution to
a
development with a joint venture partner, and as of June 30, 2007 the Company
has made contributions to three developments held by joint venture entities
totaling $8.9 million. Two of the developments are located in the San
Francisco Bay Area and one of the developments is located in Southern
California. As of June 30, 2007, these developments are still in the
predevelopment stage.
During
March 2007, the Mountain Vista Apartments, LLC, a joint venture that owns the
Waterstone at Fremont apartments in Fremont, California, was recapitalized
with
the inclusion of a new joint venture partner, and as part of this transaction
the Company received $7.7 million in net distributions from the joint
venture. The Company accounted for this transaction as a partial sale
of the Company’s investment and recorded a gain of $2.0 million which is
included in equity income in co-investments as a result of this
transaction. As of June 30, 2007, the Company’s carrying value of its
remaining investment in the amended and restated Mountain Vista Apartments,
LLC
joint venture was $1.2 million.
The
Company has an agreement to distribute to the general contractor of Mirabella
apartments, 20% of the property’s cash flow after the Company receives a 9%
cumulative preferred return on its investment from operating cash flow and
a 12%
preferred return on its investment from capital transactions cash flow. To
date no distribution has been made to the general contractor under this
agreement.
(4) Notes
Receivable and Other Receivables from Related Parties
Notes
receivable and other receivables from related parties consist of the following
as of June 30, 2007 and December 31, 2006 (dollars in
thousands):
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
Related
party receivables, unsecured:
|
|
|
|
|
|
|
Loans
to officers made prior to July 31, 2002, secured,
|
|
|
|
|
|
|
bearing
interest at 8% (repaid in March 2007)
|
|
$
|
-
|
|
$
|
375
|
Other
related party receivables, substantially due on demand
|
|
|
1,019
|
|
|
834
|
Total
notes and other receivable from related parties
|
|
$
|
1,019
|
|
$
|
1,209
|
Other
related party receivables consist primarily of receivables from Fund I totaling
$0.6 million as of June 30, 2007 and accrued management fees from Fund II
totaling $0.4 million as of December 31, 2006.
(5)
Notes and Other Receivables
Notes
receivables secured by real estate, and other receivables consist of the
following as of June 30, 2007 and December 31, 2006 (dollars in
thousands):
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
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
|
|
|
7,349
|
|
|
7,309
|
Note
receivable, secured, bearing interest at LIBOR + 4.65%, due November
2008
|
|
|
9,183
|
|
|
7,807
|
Note
receivable, secured, bearing interest at LIBOR + 4.75%, due March
2012
|
|
|
7,002
|
|
|
-
|
Other
receivables
|
|
|
887
|
|
|
886
|
Total
notes and other receivables
|
|
$
|
26,614
|
|
$
|
18,195
|
|
|
|
|
|
|
|
(6)
Related Party Transactions
Management
and other fees from affiliates includes property management, asset management,
development and redevelopment fees from related parties of $1.4 million and
$0.8
million for the three months ended June 30, 2007 and 2006, respectively, and
$2.4 and $1.7 million for the six months ended June 30, 2007 and 2006,
respectively.
The
Company’s Chairman, George Marcus, is also the Chairman of TMMC, which is a real
estate brokerage firm. The Company paid brokerage commissions on the sale of
real estate totaling $0 and $0.8 million during the three months ended June
30,
2007 and 2006, respectively, and $1.3 million and $0.8 million, respectively,
during the six months ended June 30, 2007 and 2006, 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 Metro. 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 revenues, net operating
income, and assets for each of the reportable operating segments are summarized
as follows for the three months ended June 30, 2007 and 2006 (dollars in
thousands):
|
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
Revenues:
|
|
|
|
|
|
|
Southern
California
|
|
$
|
53,781
|
|
$
|
48,867
|
Northern
California
|
|
|
23,788
|
|
|
18,056
|
Seattle
Metro
|
|
|
15,850
|
|
|
13,621
|
Other
Regions
|
|
|
3,288
|
|
|
3,173
|
Total
property revenues
|
|
$
|
96,707
|
|
$
|
83,717
|
|
|
|
|
|
|
|
Net
operating income:
|
|
|
|
|
|
|
Southern
California
|
|
$
|
36,946
|
|
$
|
33,244
|
Northern
California
|
|
|
15,521
|
|
|
12,233
|
Seattle
Metro
|
|
|
10,413
|
|
|
8,634
|
Other
Regions
|
|
|
1,752
|
|
|
1,199
|
Total
net operating income
|
|
|
64,632
|
|
|
55,310
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
Southern
California
|
|
|
(12,328)
|
|
|
(10,850)
|
Northern
California
|
|
|
(6,306)
|
|
|
(4,160)
|
Seattle
Metro
|
|
|
(3,604)
|
|
|
(3,294)
|
Other
Regions
|
|
|
(2,928)
|
|
|
(1,603)
|
|
|
|
(25,166)
|
|
|
(19,907)
|
Interest
expense:
|
|
|
|
|
|
|
Southern
California
|
|
|
(7,492)
|
|
|
(6,768)
|
Northern
California
|
|
|
(4,631)
|
|
|
(4,541)
|
Seattle
Metro
|
|
|
(1,721)
|
|
|
(1,867)
|
Other
Regions
|
|
|
(6,647)
|
|
|
(5,743)
|
|
|
|
(20,491)
|
|
|
(18,919)
|
|
|
|
|
|
|
|
Amortization
of deferred financing costs
|
|
|
(678)
|
|
|
(497)
|
General
and administrative
|
|
|
(6,008)
|
|
|
(4,980)
|
Other
expenses
|
|
|
-
|
|
|
(800)
|
Management
and other fees from affiliates
|
|
1,354
|
|
|
830
|
Interest
and other income
|
|
|
2,865
|
|
|
648
|
Equity
income (loss) in co-investments
|
|
|
463
|
|
|
(374)
|
Minority
interests
|
|
|
(5,069)
|
|
|
(4,555)
|
Income
tax provision
|
|
|
-
|
|
|
(138)
|
|
|
|
|
|
|
|
Income
before discontinued operations
|
|
$
|
11,902
|
|
$
|
6,618
|
The
revenues, net operating income, and assets for each of the reportable operating
segments are summarized as follows for the six months ended June 30, 2007 and
2006 (dollars in thousands):
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
Revenues:
|
|
|
|
|
|
|
Southern
California
|
|
$
|
105,744
|
|
$
|
97,230
|
Northern
California
|
|
|
45,656
|
|
|
35,500
|
Seattle
Metro
|
|
|
30,894
|
|
|
26,892
|
Other
Regions
|
|
|
6,567
|
|
|
6,329
|
Total
property revenues
|
|
$
|
188,861
|
|
$
|
165,951
|
|
|
|
|
|
|
|
Net
operating income:
|
|
|
|
|
|
|
Southern
California
|
|
$
|
72,817
|
|
$
|
66,089
|
Northern
California
|
|
|
30,162
|
|
|
23,760
|
Seattle
Metro
|
|
|
20,354
|
|
|
16,891
|
Other
Regions
|
|
|
2,621
|
|
|
1,974
|
Total
net operating income
|
|
|
125,954
|
|
|
108,714
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
Southern
California
|
|
|
(23,673)
|
|
|
(21,257)
|
Northern
California
|
|
|
(12,481)
|
|
|
(8,236)
|
Seattle
Metro
|
|
|
(7,073)
|
|
|
(6,445)
|
Other
Regions
|
|
|
(3,616)
|
|
|
(3,289)
|
|
|
|
(46,843)
|
|
|
(39,227)
|
Interest
expense:
|
|
|
|
|
|
|
Southern
California
|
|
|
(14,081)
|
|
|
(13,123)
|
Northern
California
|
|
|
(9,133)
|
|
|
(9,201)
|
Seattle
Metro
|
|
|
(3,445)
|
|
|
(3,421)
|
Other
Regions
|
|
|
(12,098)
|
|
|
(11,585)
|
|
|
|
(38,757)
|
|
|
(37,330)
|
|
|
|
|
|
|
|
Amortization
of deferred financing costs
|
|
|
(1,355)
|
|
|
(1,192)
|
General
and administrative
|
|
|
(12,104)
|
|
|
(9,879)
|
Other
expenses
|
|
|
-
|
|
|
(1,770)
|
Management
and other fees from affiliates
|
|
2,394
|
|
|
1,654
|
Interest
and other income
|
|
|
5,047
|
|
|
3,042
|
Equity
income (loss) in co-investments
|
|
|
2,445
|
|
|
(816)
|
Minority
interests
|
|
|
(10,376)
|
|
|
(9,365)
|
Income
tax provision
|
|
|
-
|
|
|
(175)
|
Income
before discontinued operations
|
|
$
|
26,405
|
|
$
|
13,656
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
Assets:
|
|
|
|
|
|
|
Southern
California
|
|
$
|
1,335,370
|
|
$
|
1,244,037
|
Northern
California
|
|
|
698,956
|
|
|
565,405
|
Seattle
Metro
|
|
|
346,691
|
|
|
317,848
|
Other
Regions
|
|
|
78,520
|
|
|
76,882
|
Net
real estate assets
|
|
|
2,459,537
|
|
|
2,204,172
|
Non-segment
assets
|
|
|
333,938
|
|
|
281,668
|
Total
assets
|
|
$
|
2,793,475
|
|
$
|
2,485,840
|
|
|
|
|
|
|
|
(8) Net
Income Per Common Share
(Amounts
in thousands,
except per share and unit data)
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
June 30, 2007
|
|
|
June 30, 2006
|
|
|
|
|
|
Weighted-
|
|
|
Per
|
|
|
|
|
|
Weighted-
|
|
|
Per
|
|
|
|
|
|
average
|
|
|
Common
|
|
|
|
|
|
average
|
|
|
Common
|
|
|
|
|
|
Common
|
|
|
Share
|
|
|
|
|
|
Common
|
|
|
Share
|
|
|
|
Income
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available
to common shareholders
|
|
$
|
9,592
|
|
24,494
|
|
$
|
0.39
|
|
$
|
6,129
|
|
|
22,950
|
|
$
|
0.27
|
Income
from discontinued operations
|
|
|
285
|
|
24,494
|
|
|
0.01
|
|
|
15,894
|
|
|
22,950
|
|
|
0.69
|
|
|
|
9,877
|
|
|
|
$
|
0.40
|
|
|
22,023
|
|
|
|
|
$
|
0.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities (1)
|
|
|
-
|
|
610
|
|
|
|
|
|
-
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available
to common shareholders
|
|
|
9,592
|
|
25,104
|
|
$
|
0.38
|
|
|
6,129
|
|
|
23,226
|
|
$
|
0.26
|
Income
from discontinued operations
|
|
|
285
|
|
25,104
|
|
|
0.01
|
|
|
15,894
|
|
|
23,226
|
|
|
0.69
|
|
|
$
|
9,877
|
|
|
|
$
|
0.39
|
|
$
|
22,023
|
|
|
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2007
|
|
|
June 30, 2006
|
|
|
|
|
|
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
|
|
$
|
21,852
|
|
23,966
|
|
$
|
0.91
|
|
$
|
12,679
|
|
|
22,911
|
|
$
|
0.55
|
Income
from discontinued operations
|
|
|
23,328
|
|
23,966
|
|
|
0.98
|
|
|
19,178
|
|
|
22,911
|
|
|
0.84
|
|
|
|
45,180
|
|
|
|
$
|
1.89
|
|
|
31,857
|
|
|
|
|
$
|
1.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities (1)
|
|
|
-
|
|
722
|
|
|
|
|
|
-
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before discontinued operations available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common stockholders
|
|
|
21,852
|
|
24,688
|
|
$
|
0.89
|
|
|
12,679
|
|
|
23,155
|
|
$
|
0.55
|
Income
from discontinued operations
|
|
|
23,328
|
|
24,688
|
|
|
0.94
|
|
|
19,178
|
|
|
23,155
|
|
|
0.83
|
|
|
$
|
45,180
|
|
|
|
$
|
1.83
|
|
$
|
31,857
|
|
|
|
|
$
|
1.38
|
(1)
|
Weighted
convertible limited partnership units of 2,275,750 and 2,286,291
for the
three months ended June 30, 2007 and 2006, respectively, and 2,291,412
and
2,290,113 for the six months ended June 30, 2007 and 2006, respectively,
and Series Z incentive units of 213,205 and 183,771 for the three
months
ended June 30, 2007 and 2006, respectively, and 213,045 and 183,771
for
the six months ended June 30, 2007 and 2006, respectively, 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 original exchange rate was $103.25 per share of Essex common
stock. The exchangeable notes will also be exchangeable prior to
November 1, 2020, but only upon the occurrence of certain specified
events. During the six months ended June 30, 2007 the weighted
average common stock price exceeded the current strike price and therefore
common stock issuable upon exchange of the exchangeable notes was included
in
the diluted share count. The treasury method was used to determine
the shares to be added to the denominator for the calculation of earnings per
diluted share.
Stock
options of 4,000 and 19,148 for the three months ended June 30, 2007 and 2006,
respectively, and 2,500 and 10,704 for the six months ended June 30, 2007 and
2006, respectively, were not included in the diluted earnings per share
calculation because the exercise price of the options were greater than the
average market price of the common shares for the three and six months ended
and, therefore, were anti-dilutive.
The
5,980,000 shares of Series G cumulative convertible preferred stock have been
excluded from diluted earnings per share for the three and six months ended
June
30, 2007 as the effect was anti-dilutive.
(9)
Derivative Instruments and Hedging Activities
As
of
June 30, 2007 the Company had entered into nine forward-starting interest rate
swaps totaling a notional amount of $450 million with interest rates ranging
from 4.9% to 5.9% and settlements dates ranging from April 2008 to October
2011. These derivatives qualify for hedge accounting and will
economically hedge the cash flows associated with the refinancing of debt that
matures between April 2008 and October 2011. The fair value of the
derivatives increased $15.1 million during the six months ended June 30, 2007
to
a value of $12.8 million as of June 30, 2007, and the derivative asset was
recorded in prepaid and other assets in the Company’s consolidated financial
statements. The changes in the fair values of the derivatives are
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 six months ended June 30, 2007 and
2006.
During
April 2007, the Company refinanced a mortgage loan for $35.7 million secured
by
the Tierra Vista property in the amount of $62.5 million, with a fixed interest
rate of 5.47%, which matures in April 2017. In conjunction with this
transaction the Company settled its first $50 million forward-starting swap
and
received $1.3 million from the counterparty. The settlement of the
swap was deemed effective and reduces the effective interest rate on the new
Tierra Vista mortgage loan to 5.19% through the periodic amortization of the
realized gain from accumulated other comprehensive income to interest
expense.
(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 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. The
Company has recorded the gain on sale and operations for the three properties
as
part of discontinued operations in the accompanying consolidated statements
of
operations.
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.
During
the first and second quarter of 2007, the Company sold 13 and 6 condominium
units at the Peregrine Point property and recorded a gain of approximately
$0.6
million and $0.3 million net of taxes and expenses,
respectively. Starting in the third quarter of 2006, the Company has
been selling condominiums at Peregrine Point, and the 2 unsold units as of
June
30, 2007 were sold in July 2007. The Company has recorded the gain on
sale of condominiums and operations for Peregrine Point apartments as part
of
discontinued operations in the accompanying consolidated statements of
operations.
As
of
December 31, 2006, City Heights Apartments, a 687-unit community located in
Los
Angeles was classified as held for sale, and during February 2007 the property
was sold to a third-party for $120 million. The Company’s share of
the proceeds from the sale totaled $33.9 million, resulting in a $13.7 million
gain on sale to the Company, and an additional $10.3 million for fees from
the
City Heights joint venture partner are included in discontinued operations
in
the accompanying consolidated statements of operations.
The
components of discontinued operations are outlined below and include the
results
of operations for the respective periods that the Company owned such assets,
as
described above.
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
revenues
|
|
$
|
-
|
|
$
|
2,939
|
|
$
|
1,355
|
|
$
|
5,968
|
Interest
and other income
|
|
|
-
|
|
|
6
|
|
|
290
|
|
|
6
|
Revenues
|
|
|
-
|
|
|
2,945
|
|
|
1,645
|
|
|
5,974
|
Property
operating expenses
|
|
|
-
|
|
|
(1,083)
|
|
|
(535)
|
|
|
(2,282)
|
Interest
expense
|
|
|
-
|
|
|
(579)
|
|
|
(416)
|
|
|
(1,158)
|
Depreciation
and amortization
|
|
|
-
|
|
|
(768)
|
|
|
(41)
|
|
|
(1,539)
|
Minority
interests
|
|
|
-
|
|
|
(222)
|
|
|
(57)
|
|
|
(313)
|
Expenses
|
|
|
-
|
|
|
(2,652)
|
|
|
(1,049)
|
|
|
(5,292)
|
Gain
on sale of real estate
|
|
|
303
|
|
|
8,800
|
|
|
79,222
|
|
|
11,862
|
Equity
income co-investments
|
|
|
-
|
|
|
119
|
|
|
-
|
|
|
238
|
Promote
interest and fees
|
|
|
-
|
|
|
8,221
|
|
|
10,290
|
|
|
8,221
|
Minority
interests - OP units
|
|
|
(18)
|
|
|
(1,539)
|
|
|
(2,156)
|
|
|
(1,825)
|
Minority
interests - City Heights
|
|
|
-
|
|
|
-
|
|
|
(64,624)
|
|
|
-
|
Net
gain on sale of real estate
|
|
|
285
|
|
|
15,601
|
|
|
22,732
|
|
|
18,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
$
|
285
|
|
$
|
15,894
|
|
$
|
23,328
|
|
$
|
19,178
|
(11) Commitments
and Contingencies
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 2006 Annual Report on Form 10-K for the year ended
December 31, 2006 and our Current Report on Form 10-Q for the quarter ended
June 30, 2007.
Essex
is
a fully integrated Real Estate Investment Trust (REIT), and its property
revenues are generated primarily from apartment community
operations. Our investment strategy has two
components: constant monitoring of existing markets, and evaluation
of new markets to identify areas with the characteristics that underlie rental
growth. Our strong financial condition supports our investment
strategy by enhancing our ability to quickly shift our acquisition, development,
and disposition activities to markets that will optimize the performance of
the
portfolio.
As
of
June 30, 2007, we had ownership interests in 136 apartment communities,
comprising 27,808 apartment units. Our apartment communities are
located in the following major West Coast regions:
Southern
California (Ventura, Los Angeles, Santa Barbara, Orange, Riverside and
San Diego counties)
Northern
California (the San Francisco Bay Area)
SeattleMetro
(Seattle metropolitan area)
Other
Regions (Portland metropolitan area, and Houston, Texas)
As
of
June 30, 2007, we also had ownership interests in five commercial investments
(with approximately 463,840 square feet), two recreational vehicle parks
(comprising 338 spaces) and one manufactured housing community (containing
157
sites).
As
of
June 30, 2007, our consolidated development pipeline was comprised of three
development projects, seven predevelopment projects, and three Taxable REIT
Subsidiary (TRS) projects, aggregating 2,720 units, with total incurred costs
of
$161.7 million, and estimated remaining project costs of approximately $689.9
million for total estimated project costs of $851.6 million.
The
Company’s consolidated apartment communities are as follows:
|
As
of June 30, 2007
|
|
As
of June 30, 2006
|
|
|
Apartment
Homes
|
%
|
Apartment
Homes
|
%
|
Southern
California
|
12,725
|
52%
|
12,270
|
54%
|
Northern
California
|
5,805
|
23%
|
4,621
|
20%
|
Seattle
Metro
|
5,005
|
20%
|
4,905
|
21%
|
Other
Regions
|
1,177
|
5%
|
1,177
|
5%
|
Total
|
24,712
|
100%
|
22,973
|
100%
|
Comparison
of the Three Months Ended June 30, 2007 to the Three Months Ended June 30,
2006
Our
average financial occupancies for the Company’s stabilized apartment communities
or “Quarterly Same-Properties” (stabilized properties consolidated by the
Company for the three months ended June 30, 2007 and 2006) decreased 90 basis
points to 95.9% as of June 30, 2007 from 96.8% as of June 30, 2006 for the
Quarterly Same-Properties. Financial occupancy is defined as the
percentage resulting from dividing actual rental revenue by total possible
rental revenue. Actual rental revenue represents contractual rental revenue
pursuant to leases without considering delinquency and concessions. Total
possible rental revenue represents the value of all apartment units, with
occupied units valued at contractual rental rates pursuant to leases and vacant
units valued at estimated market rents. We believe that financial occupancy
is a
meaningful measure of occupancy because it considers the value of each vacant
unit at its estimated market rate. Financial occupancy may not completely
reflect short-term trends in physical occupancy and financial occupancy rates
as
disclosed by other REITs may not be comparable to our calculation of financial
occupancy.
The
regional breakdown of the Company’s Quarterly Same-Property portfolio for
financial occupancy for the quarter ended June 30, 2007 and 2006 is as
follows:
|
|
Three
months ended
|
|
|
June
30,
|
|
|
2007
|
|
2006
|
Southern
California
|
|
95.4%
|
|
96.1%
|
Northern
California
|
|
97.0%
|
|
98.2%
|
Seattle
Metro
|
|
96.6%
|
|
97.6%
|
Other
Regions
|
|
95.4%
|
|
96.6%
|
The
following table illustrates a breakdown of these revenue amounts, including
revenues attributable to the Quarterly Same-Properties.
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
Number
of
|
|
|
March
31,
|
|
|
Dollar
|
|
Percentage
|
|
|
Properties
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Change
|
|
Property
Revenues (dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern
California
|
56
|
|
$
|
46,027
|
|
$
|
43,592
|
|
$
|
2,435
|
|
5.6
|
%
|
Northern
California
|
16
|
|
|
14,862
|
|
|
13,660
|
|
|
1,202
|
|
8.8
|
|
Seattle
Metro
|
22
|
|
|
13,944
|
|
|
12,471
|
|
|
1,473
|
|
11.8
|
|
Other
Regions
|
5
|
|
|
2,686
|
|
|
2,550
|
|
|
136
|
|
5.3
|
|
Total
Same-Property revenues
|
99
|
|
|
77,519
|
|
|
72,273
|
|
|
5,246
|
|
7.3
|
|
Non-Same
Property Revenues (1)
|
|
|
|
19,188
|
|
|
11,444
|
|
|
7,744
|
|
67.7
|
|
Total
property revenues
|
|
|
$
|
96,707
|
|
$
|
83,717
|
|
$
|
12,990
|
|
15.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes properties acquired after
April 1, 2006, eleven redevelopment communities, three office buildings and
one
development community.
Quarterly
Same-Property Revenues increased by $5.2 million or 7.3% to $77.5 million
in the second quarter of 2007 from $72.3 million in the second quarter of
2006. The increase in the second quarter of 2007 was primarily
attributable to an increase in scheduled rents of $5.7 million or 8.0% compared
to the second quarter of 2006. Average rental rates for
Quarterly
Same-Property communities were $1,280 per unit in the second quarter of 2007
compared to $1,187 per unit in the second quarter of 2006. The
decline in occupancy decreased revenues by $0.8 million. Other income
increased $0.5 million quarter over quarter. Delinquency and rent
concessions were consistent between quarters.
Quarterly
Non-Same Property Revenues increased by $7.8 million or 67.7% to $19.2
million in the second quarter of 2007 from $11.4 million in the second quarter
of 2006. The increase was primarily due to ten communities acquired
since April 1, 2006 and eleven communities that are in
redevelopment.
Total
Expenses increased $10.9 million or 14.8% to $84.4 million in the second
quarter of 2007 from $73.5 million in the second quarter of
2006. Property operating expenses increased by $3.7 million or 12.9%
for the quarter, which is primarily due to the acquisition of ten communities
since April 1, 2006 and annual increases in property salaries and real estate
taxes. Depreciation expense increased by $5.3 million or 26.4% for
the second quarter of 2007, due to the acquisition of ten properties since
April
2006 and recording depreciation expense for the River Oaks and Hollywood
commercial buildings. General and administrative costs increased $1.0
million primarily due to an increase in costs related to employees working
on
Fund II development and redevelopment projects that can not be capitalized
by
the Company of approximately $0.4 million, a 7% increase the in number of
employees, and annual increases in salaries.
Other
expenses of $0.8 million for the second quarter of 2006 related to an
impairment charge resulting from a write-down of a property in Houston,
Texas.
Interest
and other income increased by $2.2 million in the second quarter of 2007
due to an increase in interest income of $0.8 million resulting mainly from
an
increase in outstanding structured finance loans, and an increase in lease
income of $1.3 million resulting from the income generated from the River Oaks
and Hollywood commercial buildings.
Equity
income (loss) in co-investments increased by $0.8 million during the second
quarter of 2007 due primarily to the recording of $0.3 million of equity income
from Fund I, and $0.2 million in preferred interest received from the Mountain
Vista, LLC joint venture. The Company recorded a loss of $0.4
million on its investment in Fund II during the second quarter of 2006, and
net
income from Fund II for the second quarter ended 2007 was approximately
breakeven.
Income
from discontinued operations for the second quarter of 2007 includes the
net gain on sale of 6 condominiums at Peregrine Point condominiums for $0.3
million. During the second quarter of 2006, the Company recorded a
gain of $8.8 million from the sale of the Vista Pointe joint venture property
and $8.2 million in fees.
Comparison
of the Six Months Ended June 30, 2007 to the Six Months Ended June 30,
2006
Our
average financial occupancies for the Company’s stabilized apartment communities
or “2007/2006 Same-Properties” (stabilized properties consolidated by the
Company for the six months ended June 30, 2007 and 2006) decreased 80 basis
points to 95.8% as of June 30, 2007 from 96.6% as of June 30, 2006.
The
regional breakdown of the Company’s 2007/2006 Same-Property portfolio for
financial occupancy for the six months ended June 30, 2007 and 2006 is as
follows:
|
|
Six
Months Ended
|
|
|
June
30,
|
|
|
2007
|
|
|
2006
|
Southern
California
|
|
95.6%
|
|
|
96.2%
|
Northern
California
|
|
96.2%
|
|
|
97.4%
|
Seattle
Metro
|
|
96.2%
|
|
|
97.1%
|
Other
Regions
|
|
95.2%
|
|
|
96.1%
|
The
following table illustrates a breakdown of these revenue amounts, including
revenues attributable to the six-month 2007/2006 Same-Properties.
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
Number
of
|
|
|
June
30,
|
|
|
Dollar
|
|
Percentage
|
|
|
Properties
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Change
|
|
Property
Revenues (dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007/2006
Same-Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern
California
|
56
|
|
$
|
91,828
|
|
$
|
86,770
|
|
$
|
5,058
|
|
5.8
|
%
|
Northern
California
|
16
|
|
|
29,233
|
|
|
26,851
|
|
|
2,382
|
|
8.9
|
|
Seattle
Metro
|
22
|
|
|
27,449
|
|
|
24,589
|
|
|
2,860
|
|
11.6
|
|
Other
Regions
|
5
|
|
|
5,325
|
|
|
5,022
|
|
|
303
|
|
6.0
|
|
Total
2007/2006 Same-Property revenues
|
99
|
|
|
153,835
|
|
|
143,232
|
|
|
10,603
|
|
7.4
|
|
2007/2006
Non-Same Property Revenues (1)
|
|
|
|
35,026
|
|
|
22,719
|
|
|
12,307
|
|
54.2
|
|
Total
property revenues
|
|
|
$
|
188,861
|
|
$
|
165,951
|
|
$
|
22,910
|
|
13.8
|
%
|
(1)
Includes properties acquired after January 1, 2006, eleven redevelopment
communities, three office buildings, and one development community.
2007/2006
Same-Property Revenues increased by $10.6 million or 7.4% to $153.8 million
for the six months ended 2007 from $143.2 million for the six months ended
2006. The increase was primarily attributable to an increase in
scheduled rents of $11.7 million or 8.3% compared to 2006. Average
rental rates for 2007/2006 Same-Property communities were $1,271 per unit for
the six months ended June 30, 2007 compared to $1,175 per unit for the six
months ended June 30, 2006. The decline in occupancy decreased
revenues by $1.7 million. Other income increased $1.2 million and
delinquency and rent concessions were consistent between periods.
2007/2006
Non-Same Property Revenues increased by $12.3 million or 54.2% to $35.0
million for the six months ended June 30, 2007 from $22.7 million for the six
months ended June 30, 2006. The increase was primarily due to ten
communities acquired since January 1, 2006 and eleven communities that are
in
redevelopment.
Total
Expenses increased $15.3 million or 10.4% to $162.0 million for the six
months ended June 30, 2007 from $146.7 million for the six months ended June
30,
2006. Property operating expenses increased by $5.7 million or 9.9%
for the six months ended June 30, 2007, which is primarily due to the
acquisition of ten communities and annual increases in property salaries and
real estate taxes. Depreciation expense increased by $7.6 million or
19.4% for the six months ended June 30, 2007, due to the acquisition of ten
properties after January 1, 2006 and recording depreciation expense for the
River Oaks and Hollywood commercial buildings. General and
administrative costs increased $2.2 million primarily due to an increase in
costs related to employees working on Fund II development and redevelopment
projects that can not be capitalized by the Company of approximately $0.7
million, 8.5% increase in the number of employees and annual increase in
salaries.
Other
expenses of $1.8 million for the six months ended June 30, 2006 relate to
$1.0 million in pursuit costs related to the Company’s attempt to acquire the
Town & Country REIT in the first quarter of 2006, and an impairment charge
recorded for $0.8 million resulting from a write-down of a property in Houston,
Texas in the second quarter of 2006.
Interest
and other income increased by $2.0 million for the six months ended June
30, 2007 due to an increase in interest income of $1.3 million resulting mainly
from an increase in outstanding structured finance loans, and in increase in
lease income of $2.4 million resulting from the income generated from the River
Oaks and Hollywood commercial buildings. During 2006, the Company
recorded a non-recurring gain of $1.7 million in sales of marketable
securities.
Equity
income (loss) in co-investments increased by $3.3 million during the six
months ended June 30, 2007 due primarily to the recording of $2.0 million from
the partial sale of the Company’s interest in the Mountain Vista, LLC joint
venture in and $0.2 million in preferred interest on this
investment. The 2007 increase also relates to $0.3 million of equity
income recorded from Fund I. The Company recorded a loss of
$0.8 million on its investment in Fund II during the six months ended June
30,
2006, and net income from Fund II for the six months ended June 30, 2007 was
approximately breakeven.
Income
from discontinued operations for the six months ended June 30, 2007
includes the sale of the City Heights joint venture property for a gain of
$13.7
million, net of minority interest, and $10.3 million in fees, and the net gain
on sale of 19 Peregrine Point condominiums for $0.9 million. During
the six months ended June 30, 2006, income from discontinued operations included
a gain of $8.8 million from the sale of the Vista Pointe joint venture property
and $8.2 million in fees, and a gain of $3.1 million on the sales of Vista
Capri
East, Casa Tierra, and Diamond Valley properties.
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.
At
June
30, 2007, the Company had $12.6 million of unrestricted cash and cash
equivalents. 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 from the disposition of real
estate are sufficient to meet all of our reasonably anticipated cash needs
during 2007. The timing, source and amounts of cash flows provided by
financing activities and used in investing activities are sensitive to changes
in interest rates and other fluctuations in the capital markets environment,
which can affect our plans for acquisitions, dispositions, development and
redevelopment activities.
The
company has a $200 million unsecured line of credit and, as of June 30, 2007,
there was no 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 rating on the credit facility
(currently BBB-) LIBOR plus 0.8%. The Company also has a $100 million
credit facility from Freddie Mac, which is secured by eight apartment
communities. As of June 30, 2007, we had $37 million outstanding
under this line of credit, which bears an average interest rate of 5.8% 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 $21 million. This line bears interest
at LIBOR plus 0.875%, and matures on May 30, 2008. During the first
quarter of 2007, the Company filed a new shelf registration statement with
the
SEC, allowing the Company to sell an undetermined number or amount of certain
equity and debt securities as defined in the prospectus.
During
March 2007, the Company entered into an unsecured revolving line of credit
for
$10 million with a commercial bank. At June 30, 2007 there was no
balance on the revolving line of credit and any future borrowings will be due
at
maturity in March 2008. Borrowing under this revolving line of credit
bears an interest rate at the bank’s Prime Rate less 2.0%. The line
is used to fund short-term working capital needs.
During
the second quarter of 2007, the Company issued and sold approximately 170,500
shares of common stock for $21.8 million, net of fees and commissions, under
its
Controlled Equity Offering program. Under this program, the Company may from
time to time sell shares of common stock into the existing trading market at
current market prices, and the Company used the net proceeds from such sales
to
primarily fund the development and redevelopment pipelines.
On
May 3,
2007, the Company sold 1,500,000 shares of its common stock for proceeds of
$191.9 million, net of underwriter fees and expenses. The Company will use
the net proceeds from the common stock sales to pay down outstanding borrowings
under the Company’s lines of credit, to fund real estate investments and for
general corporate purposes.
The
Company sold 5,980,000 shares of 4.875% Series G Cumulative Convertible
Preferred Stock for gross proceeds of $149.5 million during the third quarter
of
2006. Holders may convert Series G Preferred Stock into shares of the
Company’s common stock subject to certain conditions. The conversion
rate was initially .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). The conversion
rate is currently .1831 shares of common stock per $25 per share liquidation
preference. On or after July 31, 2011, the Company may, under certain
circumstances, cause some or all of the Series G Preferred Stock to be converted
into shares of common stock at the then prevailing conversion rate.
The
Company, through its 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
June 30, 2007, our mortgage notes payable totaled $1.2 billion which consisted
of $1.0 billion in fixed rate debt with interest rates varying from 4.86% to
8.18% and maturity dates ranging from 2007 to 2018 and $195.5 million of
tax-exempt variable rate demand bonds with a weighted average interest rate
of
4.9%. The tax-exempt variable rate demand
bonds
have maturity dates ranging from 2020 to 2039, and are subject to interest
rate
caps.
The
Company pays quarterly dividends from cash available for distribution. Until
it
is distributed, cash available for distribution is invested by the Company
primarily in short-term investment grade securities or is used by the Company
to
reduce balances outstanding under its line of credit.
Derivative
Activity
As
of
June 30, 2007 the Company had entered into nine forward-starting interest rate
swaps totaling a notional amount of $450 million with interest rates ranging
from 4.9% to 5.9% and settlements dates ranging from April 2008 to October
2011. These derivatives qualify for hedge accounting and will
economically hedge the cash flows associated with the refinancing of debt that
matures between April 2008 and October 2011. The fair value of the
derivatives increased $15.1 million during the six months ended June 30, 2007
to
a value of $12.8 million as of June 30, 2007, and the derivative asset was
recorded in prepaid and other assets in the Company’s consolidated financial
statements. The changes in the fair values of the derivatives are
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 quarter ended June 30, 2007 and
2006.
During
April 2007, the Company refinanced a mortgage loan for $35.7 million secured
by
the Tierra Vista property in the amount of $62.5 million, with a fixed interest
rate of 5.47%, which matures in April 2017. In conjunction with this
transaction the Company settled its first $50 million forward-starting swap
and
received $1.3 million from the counterparty. The settlement of the
swap was deemed effective and reduces the effective interest rate on the new
Tierra Vista mortgage loan to 5.19%.
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 TRS development projects, have not yet been
sold.
As of June 30, 2007, excluding development projects owned by Fund II, the
Company had three development projects comprised of 713 units for an estimated
cost of $219.1 million, of which $151.3 million remains to be
expended.
The
Company defines the predevelopment pipeline as new properties in negotiation
or
in the entitlement process with a high likelihood of becoming development
activities. As of June 30, 2007, the Company had development
communities aggregating 1,936 units that were classified as predevelopment
projects. The estimated total cost of the predevelopment pipeline at
June 30, 2007 is $605.1 million, of which $518.2 million remains to be
expended. The Company had other development projects owned by
TRS entities that are under development aggregating 71 units as of June 30,
2007. The estimated total cost of the other development projects at June 30,
2007 is $27.4 million, of which $20.4 million remains to be
expended.
The
Company expects to fund the development pipeline by using a combination of
some
or all of the following sources: its working capital, amounts available on
its
lines of credit, net proceeds from public and private equity and debt issuances,
and proceeds from the disposition of properties, if any.
Redevelopment
The
Company defines redevelopment activities as existing properties owned or
recently acquired, which have been targeted for additional investment by the
Company with the expectation of increased financial returns through property
improvement. The Company’s redevelopment strategy strives to improve
the financial and physical aspects of the Company’s redevelopment apartment
communities and to target a 10 percent return on the incremental renovation
investment. Many of the Company’s properties are older and in
excellent neighborhoods, providing lower density with large floor plans that
represent attractive redevelopment opportunities. During
redevelopment, apartment units may not be available for rent and, as a result,
may have less than stabilized operations. As of June 30, 2007, the
Company had fourteen major redevelopment communities aggregating 3,999 apartment
units with estimated redevelopment costs of $138.8 million, of which
approximately $92.0 million remains to be expended. These amounts
exclude redevelopment projects owned by Fund II.
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 utilizes leverage equal to approximately 60% of the estimated value
of
the underlying real estate. Fund II invested in apartment communities
in the Company’s targeted West Coast markets and, as of June 30, 2007, owned 11
apartment communities and three development projects. Essex records
revenue for its asset management, property management, development and
redevelopment services when earned, and promote income if Fund II exceeds
certain financial return benchmarks.
Contractual
Obligations and Commercial Commitments
The
following table summarizes the maturation or due dates of our contractual
obligations and other commitments at June 30, 2007, and the effect these
obligations could have on our liquidity and cash flow in future
periods:
|
|
|
|
|
|
2008
and
|
|
|
2010
and
|
|
|
|
|
|
|
(In
thousands)
|
|
|
2007
|
|
|
2009
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
Mortgage
notes payable
|
|
$
|
14,177
|
|
$
|
136,875
|
|
$
|
310,192
|
|
$
|
740,878
|
|
$
|
1,202,122
|
Exchangeable
bonds
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
225,000
|
|
|
225,000
|
Lines
of credit
|
|
|
-
|
|
|
37,000
|
|
|
-
|
|
|
-
|
|
|
37,000
|
Interest
on indebtedness
|
|
|
41,055
|
|
|
110,704
|
|
|
64,357
|
|
|
208,158
|
|
|
424,274
|
Development
commitments
|
|
|
61,300
|
|
|
90,400
|
|
|
-
|
|
|
-
|
|
|
151,700
|
Redevelopment
commitments
|
|
|
38,560
|
|
|
53,443
|
|
|
-
|
|
|
-
|
|
|
92,003
|
Essex
Apartment Value Fund II, L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
capital
commitment
|
|
|
-
|
|
|
13,383
|
|
|
-
|
|
|
-
|
|
|
13,383
|
|
|
$
|
155,092
|
|
$
|
441,805
|
|
$
|
374,549
|
|
$
|
1,174,036
|
|
$
|
2,145,482
|
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, 2006.
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 expected timing of the completion of the Thomas
Jefferson transaction, the size and cost of the predevelopment
pipeline, beliefs as to the adequacy of future cash flows to meet anticipated
cash needs, and the anticipated performance of existing properties.
Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors including, but not limited to, that the Company will fail to
achieve its business objectives, that the total projected costs of current
development 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, 2006, 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, 2006 and the following:
Development
and Redevelopment Activities
The
Company pursues apartment communities 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,
entitlement and government regulation;
|
· 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
believes that is has consistently applied the NAREIT definition of FFO to all
periods presented. However, there is judgment involved and 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 and
six months ended June 30, 2007 and 2006:
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$
|
9,877
|
|
$
|
22,023
|
|
$
|
45,180
|
|
$
|
31,857
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
25,166
|
|
|
20,675
|
|
|
46,884
|
|
|
40,766
|
Gains
not included in FFO (1)
|
|
|
(461)
|
|
|
(8,800)
|
|
|
(14,501)
|
|
|
(11,862)
|
Minority
interests and co-investments (2)
|
|
|
1,915
|
|
|
3,254
|
|
|
4,321
|
|
|
5,306
|
Funds
from operations
|
|
$
|
36,497
|
|
$
|
37,152
|
|
$
|
81,884
|
|
$
|
66,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
from operations per share - diluted
|
|
$
|
1.32
|
|
$
|
1.45
|
|
$
|
3.01
|
|
$
|
2.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding diluted (3)
|
|
|
27,592,976
|
|
|
25,697,237
|
|
|
27,192,463
|
|
|
25,628,728
|
(1)
|
For
the second quarter of 2007, the amount includes gains from Fund I
of $0.3
million and the depreciation add back for Peregrine Point of $0.2
million.
|
(2)
|
For
the second quarter of 2007, the amount includes the following adjustments:
(i) minority interest related to Operating Partnership units totaling
$1.3
million, and (ii) depreciation add back for co-investments not recognized
for GAAP totaling $0.6 million.
|
(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
Interest
Rate Hedging Activities
The
Company’s objective in using derivatives is to add stability to interest expense
and to manage its exposure to interest rate movements or other identified
risks. To accomplish this objective, the Company primarily uses interest
rate swaps as part of its cash flow hedging strategy. Interest rate
swaps designated as cash flow hedges involve the receipt of variable-rate
amounts in exchange for fixed-rate payments over the life of the agreements
without exchange of the underlying principal amount. As of June 30,
2007, we had entered into nine forward-starting swap contracts to mitigate
the
risk of changes in the interest-related cash outflows on forecasted issuance
of
long-term debt. The forward-starting swaps are cash flow hedges of
the variability in ten years of forecasted interest payments associated with
the
refinancing of the Company’s
long-term
debt between 2008 and 2011. As of June 30, 2007, the Company also had $195.5
million of variable rate indebtedness, of which $182.8 million is subject
to
interest rate cap protection. All derivative instruments are
designated as cash flow hedges, and the Company does not have any fair value
hedges as of June 30, 2007.
The
following table summarizes the notional amount, carrying value, and estimated
fair value of our derivative instruments used to hedge interest rates as of
June
30, 2007. The notional amount represents the aggregate amount
of a particular security that is currently hedged at one time, but does not
represent exposure to credit, interest rates or market risks. The table also
includes a sensitivity analysis to demonstrate the impact on our derivative
instruments from an increase or decrease in 10-year Treasury bill interest
rates
by 50 basis points, as of June 30, 2007.
|
|
|
|
|
|
|
|
Carrying
and
|
|
|
|
|
|
|
|
Notional
|
|
Maturity
|
|
|
Estimate
Fair
|
|
+
50
|
|
-
50
|
(Dollars
in thousands)
|
|
Amount
|
|
Date
Range
|
|
|
Value
|
|
Basis
Points
|
|
Basis
Points
|
Cash
flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate forward-starting swaps
|
$
|
450,000
|
|
2008-2011
|
|
$
|
12,789
|
|
$ |
26,308
|
$
|
(1,809)
|
Interest
rate caps
|
|
182,849
|
|
2008-2011
|
|
|
14
|
|
|
57
|
|
2
|
Total
cash flow hedges
|
$
|
632,849
|
|
2008-2011
|
|
$
|
12,803
|
|
$ |
26,365
|
$
|
(1,807)
|
Interest
Rate Sensitive Liabilities
The
Company is exposed to interest rate changes primarily as a result of its line
of
credit and long-term debt used to maintain liquidity and fund capital
expenditures and expansion of the Company’s real estate investment portfolio and
operations. The Company’s interest rate risk management objective is to limit
the impact of interest rate changes on earnings and cash flows and to lower
its
overall borrowing costs. To achieve its objectives the Company borrows primarily
at fixed rates and may enter into derivative financial instruments such as
interest rate swaps, caps and treasury locks in order to mitigate its interest
rate risk on a related financial instrument. The Company does not enter into
derivative or interest rate transactions for speculative purposes.
The
Company’s interest rate risk is monitored using a variety of techniques. The
table below presents the principal amounts and weighted average interest rates
by year of expected maturity to evaluate the expected cash flows. Management
believes that the carrying amounts of its LIBOR debt approximates fair value
as
of June 30, 2007 because interest rates, yields and other terms for these
instruments are consistent with yields and other terms currently available
to
the Company for similar instruments. Management has estimated that the fair
value of the Company’s $1.23 billion of fixed rate mortgage notes payable and
exchangeable bonds at June 30, 2007 is approximately $1.28 billion based on
the
terms of existing mortgage notes payable compared to those available in the
marketplace.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Years Ended
|
|
|
2007
|
|
2008(1)
|
|
2009
|
|
2010(2)
|
|
2011(3)
|
|
Thereafter
|
|
Total
|
|
|
Fair
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate debt
|
|
$
|
14,177
|
|
112,653
|
|
24,222
|
|
155,820
|
|
154,372
|
|
770,357
|
|
$
|
1,231,601
|
|
$
|
1,278,185
|
Average
interest rate
|
|
|
6.0%
|
|
6.8%
|
|
6.9%
|
|
8.0%
|
|
6.4%
|
|
5.0%
|
|
|
|
|
|
|
Variable
rate debt
|
|
$
|
-
|
|
-
|
|
37,000
|
|
-
|
|
-
|
|
195,521
|
(4)
|
$
|
232,521
|
|
$
|
232,521
|
Average
interest
|
|
|
-
|
|
-
|
|
5.8%
|
|
-
|
|
-
|
|
4.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
$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.
(2)
$150
million covered by three forward-starting swaps with fixed rates ranging from
5.099% to 5.824%, with a settlement date on or before January
1, 2011.
(3)
$125
million covered by forward-starting swaps with fixed rates ranging from 5.655%
to 5.8795%, with a settlement date on or before February 1, 2011. $50
million covered by a forward-starting swap with a fixed rate of 5.535%, with
a
settlement date on or before July, 1 2011. $50 million covered by a
forward-starting swap with a fixed rate of 5.343%., with a settlement date
on or
before October 1, 2011. The Company intends to encumber certain
unencumbered assets during 2011 in conjunction with the settlement of these
forward-starting swaps.
(4)
$182,849 subject to interest rate caps.
Item
4: Controls and Procedures
As
of
June 30, 2007, we carried out an evaluation, under the supervision and with
the
participation of management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rules 13a-15 of the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting management
to material information relating to the Company that is required to be included
in our periodic filings with the Securities and Exchange
Commission. There were no changes in the Company’s internal control
over financial reporting, that occurred during the quarter ended June 30, 2007,
that have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.
Part
II -- Other Information
Item
1: Legal Proceedings
Recently
there has been an increasing number of lawsuits against owners and managers
of
apartment communities alleging personal injury and property damage caused by
the
presence of mold in residential real estate. Some of these lawsuits
have resulted in substantial monetary judgments or settlements. The
Company has been sued for mold related matters and has settled some, but not
all, of such matters. Insurance carriers have reacted to mold related
liability awards by excluding mold related claims from standard policies and
pricing mold endorsements at prohibitively high rates. The Company
has, however, purchased pollution liability insurance, which includes some
coverage for mold. The Company has adopted 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 are not expected to have a material adverse effect on
the
Company’s financial condition, results of operations or cash flows.
The
Company carries comprehensive liability, fire, extended coverage and rental
loss
insurance for each of the Properties. There are, however, certain types of
extraordinary losses, such as, for example, losses for terrorism or earthquake,
for which the Company does not have insurance coverage. Substantially all of
the
Properties are located in areas that are subject to earthquake
activity.
The
Company is subject to various other lawsuits in the normal course of its
business operations. Such lawsuits are not expected to 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, 2006, as filed with the SEC and available at
www.sec.gov, and under the caption “Potential Factors Affecting Future
Operating Results,” in Item 2, Management’s Discussion and Analysis of Financial
Condition and Results of Operations, in Part I of this Form 10-Q.
Item
4: Submissions of Matters to a Vote of Security Holders
At
the
Company’s annual meeting, held on May 8, 2007 in Menlo Park, California, the
following votes of security holders occurred:
(a)
|
The
following persons were duly elected by the stockholders of the Company
as
Class I directors of the Company, each for a three (3) year term
(until
2010) and until their successors are elected and
qualified:
|
(1)
|
Keith
R. Guericke, 20,126,814 votes for and 341,741 votes
withheld;
|
(2)
|
Issie
N. Rabinovitch, 20,082,686 votes for and 385,869 votes withheld;
and
|
(3)
|
Thomas
E. Randlett, 19,102,970 votes for and 1,365,585 votes withheld;
and
|
(b)
|
The
stockholders ratified the appointment of KPMG LLP as the Company’s
independent public auditors for the year ended December 31, 2007
by a vote
of 19,998,331 for, 79,441 votes against and 8,588 votes
abstaining.
|
Item
6: Exhibits
|
12.1
|
Ratio
of Earnings to Fixed Charges
|
|
31.1
|
Certification
of Keith R. Guericke, Chief Executive Officer, pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
of Michael T. Dance, Chief Financial Officer, pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certification
of Keith R. Guericke, Chief Executive Officer, pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
|
32.2
|
Certification
of Michael T. Dance, Chief Financial Officer, pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
ESSEX
PROPERTY TRUST, INC.
|
|
(Registrant)
|
|
|
|
|
|
Date:
August 6, 2007
|
|
|
|
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
|