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 September 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:
25,183,276
shares of Common Stock as of November 2, 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 September 30, 2007 and December 31,
2006
|
4
|
|
|
|
|
Consolidated
Statements of Operations for the three and nine months ended September
30,
2007 and 2006
|
5
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity and Comprehensive Income for the
nine
months ended September 30, 2007
|
6
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended September
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
|
18
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
27
|
|
|
|
Item
4.
|
Controls
and Procedures
|
28
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
28
|
|
|
|
Item
1A.
|
Risk
Factors
|
28
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
28
|
|
|
|
Item
6.
|
Exhibits
|
29
|
|
|
|
Signatures
|
30
|
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)
|
|
|
September
30,
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
Rental
properties:
|
|
|
|
|
|
|
|
Land
and land improvements
|
|
$
|
679,818
|
|
$
|
560,880
|
|
Buildings
and improvements
|
|
|
2,452,040
|
|
|
2,108,307
|
|
|
|
|
3,131,858
|
|
|
2,669,187
|
|
Less
accumulated depreciation
|
|
|
(532,386)
|
|
|
(465,015)
|
|
|
|
|
2,599,472
|
|
|
2,204,172
|
|
Real
estate - held for sale, net
|
|
|
-
|
|
|
41,221
|
|
Real
estate under development
|
|
|
182,455
|
|
|
103,487
|
|
Investments
|
|
|
70,787
|
|
|
60,451
|
|
|
|
|
2,852,714
|
|
|
2,409,331
|
|
Cash
and cash equivalents-unrestricted
|
|
|
10,239
|
|
|
9,662
|
|
Cash
and cash equivalents-restricted
|
|
|
11,704
|
|
|
13,948
|
|
Marketable
securities
|
|
|
5,843
|
|
|
-
|
|
Notes
and other receivables from related parties
|
|
|
1,178
|
|
|
1,209
|
|
Notes
and other receivables
|
|
|
35,350
|
|
|
18,195
|
|
Prepaid
expenses and other assets
|
|
|
25,055
|
|
|
20,632
|
|
Deferred
charges, net
|
|
|
12,317
|
|
|
12,863
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,954,400
|
|
$
|
2,485,840
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
Mortgage
notes payable
|
|
$
|
1,233,281
|
|
$
|
1,060,704
|
|
Mortgage
notes payable - held for sale
|
|
|
-
|
|
|
32,850
|
|
Exchangeable
bonds
|
|
|
225,000
|
|
|
225,000
|
|
Lines
of credit
|
|
|
167,571
|
|
|
93,000
|
|
Accounts
payable and accrued liabilities
|
|
|
55,332
|
|
|
38,614
|
|
Dividends
payable
|
|
|
28,724
|
|
|
24,910
|
|
Other
liabilities
|
|
|
15,966
|
|
|
14,328
|
|
Deferred
gain
|
|
|
2,193
|
|
|
2,193
|
|
Total
liabilities
|
|
|
1,728,067
|
|
|
1,491,599
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
256,030
|
|
|
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
|
|
|
|
|
|
|
|
25,175,487
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
|
|
|
905,550
|
|
|
686,937
|
|
Distributions
in excess of accumulated earnings
|
|
|
(110,912)
|
|
|
(97,457)
|
|
Accumulated
other comprehensive income (loss)
|
|
|
4,751
|
|
|
(2,273)
|
|
Total
stockholders' equity
|
|
|
824,391
|
|
|
612,209
|
|
Total
liabilities and stockholders' equity
|
|
$
|
2,954,400
|
|
$
|
2,485,840
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the unaudited consolidated financial
statements.
Consolidated
Statements of Operations
(Unaudited)
(Dollars
in thousands, except per share amounts)
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other property
|
|
$
|
99,987
|
|
$
|
86,850
|
|
$
|
288,848
|
|
$
|
252,800
|
Management
and other fees from affiliates
|
|
|
1,268
|
|
|
1,872
|
|
|
3,662
|
|
|
3,526
|
|
|
|
101,255
|
|
|
88,722
|
|
|
292,510
|
|
|
256,326
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
operating, excluding real estate taxes
|
|
|
25,030
|
|
|
22,483
|
|
|
72,082
|
|
|
65,389
|
Real
estate taxes
|
|
|
8,675
|
|
|
7,314
|
|
|
24,530
|
|
|
21,645
|
Depreciation
and amortization
|
|
|
25,612
|
|
|
19,898
|
|
|
72,455
|
|
|
59,125
|
Interest
|
|
|
20,235
|
|
|
17,946
|
|
|
58,992
|
|
|
55,277
|
Amortization
of deferred financing costs
|
|
|
708
|
|
|
777
|
|
|
2,063
|
|
|
1,970
|
General
and administrative
|
|
|
6,415
|
|
|
5,289
|
|
|
18,519
|
|
|
15,168
|
Other
expenses
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,770
|
|
|
|
86,675
|
|
|
73,707
|
|
|
248,641
|
|
|
220,344
|
Earnings
from operations
|
|
|
14,580
|
|
|
15,015
|
|
|
43,869
|
|
|
35,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
2,407
|
|
|
1,686
|
|
|
7,454
|
|
|
4,728
|
Equity
income (loss) in co-investments
|
|
|
322
|
|
|
(368)
|
|
|
2,767
|
|
|
(1,184)
|
Minority
interests
|
|
|
(5,049)
|
|
|
(5,051)
|
|
|
(15,425)
|
|
|
(14,413)
|
Income
before discontinued operations and
|
|
|
|
|
|
|
|
|
|
|
|
|
tax
provision
|
|
|
12,260
|
|
|
11,282
|
|
|
38,665
|
|
|
25,113
|
Income
tax provision
|
|
|
-
|
|
|
(150)
|
|
|
-
|
|
|
(325)
|
Income
before discontinued operations
|
|
|
12,260
|
|
|
11,132
|
|
|
38,665
|
|
|
24,788
|
Income
from discontinued operations (net of
|
|
|
|
|
|
|
|
|
|
|
|
|
minority
interests)
|
|
|
48
|
|
|
1,345
|
|
|
23,376
|
|
|
20,523
|
Net
income
|
|
|
12,308
|
|
|
12,477
|
|
|
62,041
|
|
|
45,311
|
Dividends
to preferred stockholders
|
|
|
(2,311)
|
|
|
(1,791)
|
|
|
(6,864)
|
|
|
(2,768)
|
Net
income available to common stockholders
|
|
$
|
9,997
|
|
$
|
10,686
|
|
$
|
55,177
|
|
$
|
42,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
common share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before discontinued operations available to
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders
|
|
$
|
0.40
|
|
$
|
0.40
|
|
$
|
1.30
|
|
$
|
0.96
|
Income
from discontinued operations
|
|
|
0.00
|
|
|
0.06
|
|
|
0.96
|
|
|
0.89
|
Net
income available to common stockholders
|
|
$
|
0.40
|
|
$
|
0.46
|
|
$
|
2.26
|
|
$
|
1.85
|
Weighted
average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
during the period
|
|
|
25,165,276
|
|
|
23,142,385
|
|
|
24,370,184
|
|
|
22,988,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before discontinued operations available to
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders
|
|
$
|
0.39
|
|
$
|
0.39
|
|
$
|
1.27
|
|
$
|
0.94
|
Income
from discontinued operations
|
|
|
0.00
|
|
|
0.06
|
|
|
0.94
|
|
|
0.88
|
Net
income available to common stockholders
|
|
$
|
0.39
|
|
$
|
0.45
|
|
$
|
2.21
|
|
$
|
1.82
|
Weighted
average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
during the period
|
|
|
25,555,928
|
|
|
23,677,569
|
|
|
24,983,765
|
|
|
23,353,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
per common share
|
|
$
|
0.93
|
|
$
|
0.84
|
|
$
|
2.79
|
|
$
|
2.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the unaudited consolidated financial
statements.
Consolidated
Statements of Stockholders' Equity and
Comprehensive
Income for the nine months ended September 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
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
62,041
|
|
|
62,041
|
Change
in fair value of cash flow hedges
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,024
|
|
|
-
|
|
|
7,024
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,065
|
Issuance
of common stock under:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation plans
|
|
-
|
|
|
-
|
|
74
|
|
|
-
|
|
|
4,746
|
|
|
-
|
|
|
-
|
|
|
4,746
|
Sale
of common stock
|
|
-
|
|
|
-
|
|
1,671
|
|
|
-
|
|
|
213,672
|
|
|
-
|
|
|
-
|
|
|
213,672
|
Repurchase
of common stock
|
|
-
|
|
|
-
|
|
(13)
|
|
|
-
|
|
|
(1,409)
|
|
|
-
|
|
|
-
|
|
|
(1,409)
|
Conversion/Reallocation
of minority interest
|
-
|
|
|
-
|
|
27
|
|
|
-
|
|
|
1,604
|
|
|
-
|
|
|
-
|
|
|
1,604
|
Dividends
declared
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(75,496)
|
|
|
(75,496)
|
Balances
at September 30, 2007
|
|
1,000
|
|
$
|
25,000
|
|
25,175
|
|
$
|
2
|
|
$
|
905,550
|
|
$
|
4,751
|
|
$
|
(110,912)
|
|
$
|
824,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the unaudited consolidated financial
statements.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars
in thousands)
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
Net
cash provided by operating activities
|
|
$
|
158,148
|
|
$
|
138,540
|
|
|
|
|
|
|
|
Cash
flows used in investing activities:
|
|
|
|
|
|
|
Additions
to real estate:
|
|
|
|
|
|
|
Acquisitions
and improvements to recent acquisitions
|
|
|
(333,110)
|
|
|
(161,998)
|
Capital
expenditures and redevelopment
|
|
|
(52,124)
|
|
|
(30,147)
|
Additions
to real estate under development
|
|
|
(96,236)
|
|
|
(53,996)
|
Dispositions
of real estate and investments
|
|
|
124,103
|
|
|
15,883
|
Changes
in restricted cash and refundable deposits
|
|
|
1,979
|
|
|
5,162
|
Purchases
of marketable securities
|
|
|
(5,843)
|
|
|
-
|
Additions
to notes and other receivables
|
|
|
(19,192)
|
|
|
(15,279)
|
Collections
of notes and other receivables
|
|
|
1,472
|
|
|
2,295
|
Contributions
to limited partnerships
|
|
|
(22,164)
|
|
|
(35,526)
|
Distributions
from limited partnerships
|
|
|
15,330
|
|
|
9,588
|
Net
cash used in investing activities
|
|
|
(385,785)
|
|
|
(264,018)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Proceeds
from mortgage notes payable and lines of credit
|
|
|
665,709
|
|
|
281,325
|
Repayment
of mortgage notes payable and lines of credit
|
|
|
(494,331)
|
|
|
(233,442)
|
Payments
of loans fees and related costs
|
|
|
(1,516)
|
|
|
(472)
|
Net
proceeds from issuance of preferred stock - Series G
|
|
|
-
|
|
|
145,912
|
Proceeds
from settlement of forward-starting swap
|
|
|
1,311
|
|
|
-
|
Net
proceeds from stock options exercised
|
|
|
3,786
|
|
|
3,136
|
Net
proceeds from sale of common stock
|
|
|
213,672
|
|
|
27,225
|
Redemption
of common stock
|
|
|
(1,409)
|
|
|
-
|
Distributions
to minority interest partners
|
|
|
(77,145)
|
|
|
(17,482)
|
Redemption
of minority interest limited partnership units
|
|
|
(9,983)
|
|
|
(6,360)
|
Common
and preferred stock dividends paid
|
|
|
(71,880)
|
|
|
(58,559)
|
Net
cash provided by financing activities
|
|
|
228,214
|
|
|
141,283
|
Net
increase in cash and cash equivalents
|
|
|
577
|
|
|
15,805
|
Cash
and cash equivalents at beginning of period
|
|
|
9,662
|
|
|
14,337
|
Cash
and cash equivalents at end of period
|
|
$
|
10,239
|
|
$
|
30,142
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
Cash
paid for interest, net of $3,561 and $2,413 capitalized
|
|
|
|
|
|
|
in
2007 and 2006, respectively
|
|
$
|
52,443
|
|
$
|
52,386
|
|
|
|
|
|
|
|
Supplemental
disclosure of noncash investing and financing activities:
|
|
|
|
|
|
|
Mortgage
notes assumed in connection with purchases
|
|
|
|
|
|
|
of
real estate
|
|
$
|
43,839
|
|
|
-
|
Land
contributed by a partner in a consolidated joint venture
|
|
$
|
22,200
|
|
|
-
|
Issuance
of DownREIT units in connection with
|
|
|
|
|
|
|
with
purchase of real estate
|
|
$
|
7,067
|
|
|
-
|
|
|
|
|
|
|
|
See
accompanying notes to the unaudited consolidated financial
statements.
ESSEX
PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
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 nine months ended September
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
September 30, 2007 and December 31, 2006, respectively.
As
of
September 30, 2007, the Company has ownership interests in 138 apartment
communities (containing 28,364 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 September 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.
Marketable
Securities
Marketable
securities consist of funds held by the Company’s wholly owned captive insurance
subsidiary which are invested primarily in U.S. treasury or agency securities
with original maturities of more than three months when
purchased. The Company has classified these debt securities as
held-to-maturity securities, and the Company reports the securities at amortized
cost. Realized gains and losses and interest income are included in
interest and other income on the consolidated statement of
operations.
Variable
Interest Entities
In
accordance with Financial Accounting Standards Board (FASB) Interpretation
No.
46 Revised (FIN 46R), “Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51”, the Company consolidates 19 DownREIT limited
partnerships (comprising twelve 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
$225.5
million
and $164.6 million as of September 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 September 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 $78.5 million and $58.3 million and $58.4
million, as of September 30, 2007 and December 31, 2006,
respectively. 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 $0.4 million for the three months ended September
30,
2007 and 2006, respectively, and $1.0 million and $1.1 million for the nine
months ended September 30, 2007 and 2006, respectively. The intrinsic
value of the stock options exercised during the three months ended September
30,
2007 and 2006 totaled $2.2 million and $1.0 million, respectively, and $4.9
million and $3.7 million for the nine months ended September 30, 2007 and 2006,
respectively. As of September 30, 2007, the intrinsic value of the
stock options outstanding and fully vested totaled $15.8 million and $20.3
million, respectively. As of September 30, 2007, total unrecognized
compensation cost related to unvested share-based compensation granted under
the
stock option plans and the restricted stock awards totaled $3.4
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 for the three months ended September
30,
2007 and 2006, respectively, and $1.1 million for the nine months ended
September 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 September 30, 2007 and 2006,
respectively, and $0.6 million and $0.4 million for the nine months ended
September 30, 2007 and 2006, respectively. As of September 30, 2007
the intrinsic value of the Z Units subject to conversion totaled $16.0
million. As of September 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 10 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
September 2007, the Company acquired Mill Creek at Windermere, a 400-unit
community located in San Ramon, California, for $100.5 million. Built in 2005,
the property is located within Windermere, a master planned
community.
In
September 2007, the Company acquired Thomas Jefferson Apartments for $28 million
in a DownREIT transaction that included issuing 7,006 DownREIT units to a
related party. The property, which was managed by Essex before the acquisition,
is a 156-unit apartment complex located in Sunnyvale, California. Built in
1963,
the property is located adjacent to Magnolia Lane, another Essex community
purchased in the second quarter of 2007.
(b)
Dispositions
The
Company sold the two remaining condominium units at Peregrine Point in July
of
2007.
(c)
Joint Ventures
As
discussed further in Note 3, the Company acquired the general contractor's
profit participation interest in the Mirabella property for $9
million. Accordingly, Mirabella is now wholly owned by the
Company.
(d)
Debt and Financing Activities
In
July
2007, the Company paid-off a mortgage loan secured by Monterra del Sol for
$2.6
million with a fixed interest rate of 7.56%.
In
August
2007, the Company originated a mortgage loan secured by the Coldwater Canyon
community purchased in May 2007 in the amount of $5.9 million, with a fixed
interest rate of 6.1%, which matures in August 2017. The Company also
refinanced an $11.6 million mortgage loan secured by the Capri at Sunny Hills
community with a new loan in the amount of $19.2 million, with a fixed interest
rate of 5.8%, which matures in August 2012.
In
September 2007, the Company assumed two loans in conjunction with the
acquisition of the Thomas Jefferson community. The first loan is for
$14 million with a fixed interest rate of 5.7% due in March 2017, and the second
loan is for $6 million with a fixed interest rate of 5.9% due in March
2017.
(e)
Equity
In
August
2007, the Company’s Board of Directors authorized a stock repurchase plan to
allow the Company to acquire shares in an aggregate of up to $200
million. The program supersedes the common stock repurchase plan that
Essex announced on May 16, 2001. During the quarter the Company
repurchased and retired 12,600 shares of its common stock for approximately
$1.4
million.
(f)
Structured Finance
In
September 2007, the Company, closed on a $14 million bridge loan for the
completion and lease-up of London Flats, a 146-unit apartment community located
in Vancouver, Washington. The loan refinanced a construction loan,
incorporating additional proceeds for interior upgrades to the remaining phases;
exterior and common area upgrades and interest reserves to take the project
through lease-up and stabilization. The floating rate, LIBOR-based
bridge loan, leveraged the project to approximately 85% of cost. The
loan is full recourse, and has a term of 18 months with one, 6-month extension
option.
The
Company has investments in a number of joint ventures, which are accounted
for
under the equity method. The joint ventures primarily own and operate
apartment communities. The following table details the Company's
investments (dollars in thousands):
|
|
|
September
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)
|
|
$
|
59,270
|
|
$
|
45,598
|
Preferred
limited partnership interests in Mountain Vista
|
|
|
|
|
|
|
Apartments,
LLC (A)
|
|
|
1,182
|
|
|
6,806
|
Development
joint ventures
|
|
|
9,835
|
|
|
7,547
|
|
|
|
70,287
|
|
|
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
|
|
$
|
70,787
|
|
$
|
60,451
|
(A)
|
The
investment is held in an entity that includes an affiliate of The
Marcus
& Millichap Company (“TMMC”), and is the general partner. TMMC’s
Chairman is also the Chairman of the
Company.
|
The
combined summarized financial information of investments, which are accounted
for under the equity method, is as follows (dollars in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Balance
sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate and real estate under development
|
|
$
|
590,438
|
|
$
|
576,134
|
|
|
|
|
|
|
Other
assets
|
|
|
18,622
|
|
|
20,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
609,060
|
|
$
|
596,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
notes payable
|
|
$
|
318,630
|
|
$
|
301,665
|
|
|
|
|
|
|
Other
liabilities
|
|
|
17,090
|
|
|
74,793
|
|
|
|
|
|
|
Partners'
equity
|
|
|
273,340
|
|
|
220,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and partners' equity
|
|
$
|
609,060
|
|
$
|
596,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company's
share of equity
|
|
$
|
70,287
|
|
$
|
59,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Statements
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
revenues
|
|
$
|
11,761
|
|
$
|
10,887
|
|
$
|
34,596
|
|
$
|
30,631
|
Property
operating expenses
|
|
|
(4,335)
|
|
|
(5,074)
|
|
|
(13,805)
|
|
|
(13,600)
|
Net
operating income
|
|
|
7,426
|
|
|
5,813
|
|
|
20,791
|
|
|
17,031
|
Interest
expense
|
|
|
(3,369)
|
|
|
(4,169)
|
|
|
(10,623)
|
|
|
(12,731)
|
Depreciation
and amortization
|
|
|
(3,485)
|
|
|
(3,122)
|
|
|
(10,431)
|
|
|
(8,945)
|
Total
net income (loss)
|
|
$
|
572
|
|
$
|
(1,478)
|
|
$
|
(263)
|
|
$
|
(4,645)
|
Company's
share of operating net income (loss)
|
|
|
322
|
|
|
(368)
|
|
|
421
|
|
|
(1,184)
|
Company's
equity in gain on sale and gain on
partial
sale of the Company's interest
|
-
|
|
|
-
|
|
|
2,346
|
|
|
-
|
Company's
equity income (loss) in co-investments
|
$
|
322
|
|
$
|
(368)
|
|
$
|
2,767
|
|
$
|
(1,184)
|
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 September 30, 2007 the
Company has made contributions to three developments held by joint venture
entities totaling $9.8 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 September 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 September 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 had a developer 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. During the third quarter of 2007, the Company acquired
the general contractor's interest in the Mirabella property for $9 million
in
lieu of distributing a percentage of future cash flows to the general contractor
per the agreement. Accordingly, Mirabella is now wholly owned by the
Company.
(4) Notes
Receivable and Other Receivables from Related Parties
Notes
receivable and other receivables from related parties consist of the following
as of September 30, 2007 and December 31, 2006 (dollars in
thousands):
|
|
|
September
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
|
|
|
1,178
|
|
|
834
|
Total
notes and other receivable from related parties
|
|
$
|
1,178
|
|
$
|
1,209
|
Other
related party receivables include accrued management and development fees
from
Fund II totaling $0.6 million and $0.4 million as of September 30, 2007 and
December 31, 2006, respectively.
(5)
Notes and Other Receivables
Notes
receivables secured by real estate, and other receivables consist of the
following as of September 30, 2007 and December 31, 2006 (dollars in
thousands):
|
|
|
September
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 + 4.65%, due January
2008
|
|
|
8,215
|
|
|
7,807
|
Note
receivable, secured, bearing interest at LIBOR + 3.38%, due February
2009
|
|
|
9,651
|
|
|
-
|
Note
receivable, secured, bearing interest at LIBOR + 3.69%, due June
2009
|
|
|
7,343
|
|
|
7,309
|
Note
receivable, secured, bearing interest at LIBOR + 4.75%, due March
2011
|
|
|
7,068
|
|
|
-
|
Other
receivables
|
|
|
880
|
|
|
886
|
Total
notes and other receivables
|
|
$
|
35,350
|
|
$
|
18,195
|
As
of
September 30, 2007, the Company originated four notes receivables totaling
$32.3
million which are mezzanine or bridge loans. The borrowers under each
note receivable have the right to extend the maturity date if certain criteria
are met specific to each agreement. During August 2006, the Company
originated a loan with the owners of a 26-unit apartment community in Sherman
Oaks, California. The proceeds from the loan financed the conversion of the
units to condominiums for sale. Effective July 1, 2007, the Company
has ceased accruing interest on the note, due to the current velocity of sales,
pricing, and status of the interest reserve. The Company believes
that the current recorded balance of
$8.2
million is collectible.
(6)
Related Party Transactions
Management
and other fees from affiliates includes property management, asset management,
development and redevelopment fees from related parties of $1.3 million and
$1.9
million for the three months ended September 30, 2007 and 2006, respectively,
and $3.7 and $3.5 million for the nine months ended September 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 during the three months ended September 30, 2007 and
2006, and $1.3 million and $0.8 million, respectively, during the nine months
ended September 30, 2007 and 2006.
Mr.
Marcus was also an investor in the two partnerships that owned the Thomas
Jefferson Apartments that was acquired by the Company during September 2007
in a
DownREIT transaction. In conjunction with that transaction, Mr.
Marcus received 7,006 DownREIT units in exchange for his partnership interests
in Thomas Jefferson Apartments.
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 September 30,
2007
and 2006 (dollars in thousands):
|
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
Revenues:
|
|
|
|
|
|
|
Southern
California
|
|
$
|
54,515
|
|
$
|
50,362
|
Northern
California
|
|
|
25,708
|
|
|
18,985
|
Seattle
Metro
|
|
|
16,403
|
|
|
14,310
|
Other
Regions
|
|
|
3,361
|
|
|
3,193
|
Total
property revenues
|
|
$
|
99,987
|
|
$
|
86,850
|
|
|
|
|
|
|
|
Net
operating income:
|
|
|
|
|
|
|
Southern
California
|
|
$
|
37,028
|
|
$
|
34,352
|
Northern
California
|
|
|
16,919
|
|
|
12,609
|
Seattle
Metro
|
|
|
10,681
|
|
|
8,855
|
Other
Regions
|
|
|
1,654
|
|
|
1,237
|
Total
net operating income
|
|
|
66,282
|
|
|
57,053
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
(25,612)
|
|
|
(19,898)
|
Interest
expense
|
|
|
(20,235)
|
|
|
(17,946)
|
Amortization
of deferred financing costs
|
|
|
(708)
|
|
|
(777)
|
General
and administrative
|
|
|
(6,415)
|
|
|
(5,289)
|
Other
expenses
|
|
|
-
|
|
|
-
|
Management
and other fees from affiliates
|
|
1,268
|
|
|
1,872
|
Interest
and other income
|
|
|
2,407
|
|
|
1,686
|
Equity
income (loss) in co-investments
|
|
|
322
|
|
|
(368)
|
Minority
interests
|
|
|
(5,049)
|
|
|
(5,051)
|
Income
tax provision
|
|
|
-
|
|
|
(150)
|
|
|
|
|
|
|
|
Income
before discontinued operations
|
|
$
|
12,260
|
|
$
|
11,132
|
|
|
|
|
|
|
|
The
revenues, net operating income, and assets for each of the reportable operating
segments are summarized as follows for the nine months ended September 30,
2007
and 2006 (dollars in thousands):
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
Revenues:
|
|
|
|
|
|
|
Southern
California
|
|
$
|
160,259
|
|
$
|
147,591
|
Northern
California
|
|
|
71,364
|
|
|
54,486
|
Seattle
Metro
|
|
|
47,297
|
|
|
41,202
|
Other
Regions
|
|
|
9,928
|
|
|
9,521
|
Total
property revenues
|
|
$
|
288,848
|
|
$
|
252,800
|
|
|
|
|
|
|
|
Net
operating income:
|
|
|
|
|
|
|
Southern
California
|
|
$
|
109,849
|
|
$
|
100,441
|
Northern
California
|
|
|
47,080
|
|
|
36,370
|
Seattle
Metro
|
|
|
31,035
|
|
|
25,745
|
Other
Regions
|
|
|
4,272
|
|
|
3,210
|
Total
net operating income
|
|
|
192,236
|
|
|
165,766
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
(72,455)
|
|
|
(59,125)
|
Interest
expense
|
|
|
(58,992)
|
|
|
(55,277)
|
Amortization
of deferred financing costs
|
|
|
(2,063)
|
|
|
(1,970)
|
General
and administrative
|
|
|
(18,519)
|
|
|
(15,168)
|
Other
expenses
|
|
|
-
|
|
|
(1,770)
|
Management
and other fees from affiliates
|
|
3,662
|
|
|
3,526
|
Interest
and other income
|
|
|
7,454
|
|
|
4,728
|
Equity
income (loss) in co-investments
|
|
|
2,767
|
|
|
(1,184)
|
Minority
interests
|
|
|
(15,425)
|
|
|
(14,413)
|
Income
tax provision
|
|
|
-
|
|
|
(325)
|
Income
before discontinued operations
|
|
$
|
38,665
|
|
$
|
24,788
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
Assets:
|
|
|
|
|
|
|
Southern
California
|
|
$
|
1,341,567
|
|
$
|
1,244,037
|
Northern
California
|
|
|
827,572
|
|
|
565,405
|
Seattle
Metro
|
|
|
351,345
|
|
|
317,848
|
Other
Regions
|
|
|
78,988
|
|
|
76,882
|
Net
rental properties
|
|
|
2,599,472
|
|
|
2,204,172
|
Real
estate - held for sale, net
|
|
|
-
|
|
|
41,221
|
Real
estate under development
|
|
|
182,455
|
|
|
103,487
|
Investments
|
|
|
70,787
|
|
|
60,451
|
Notes
and other receivables
|
|
|
35,350
|
|
|
18,195
|
Other
non-segment assets
|
|
|
66,336
|
|
|
58,314
|
Total
assets
|
|
$
|
2,954,400
|
|
$
|
2,485,840
|
(8) Net
Income Per Common Share
|
(Amounts
in thousands, except per share and unit
data)
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
September
30, 2007
|
|
|
September
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
|
|
$
|
9,949
|
|
25,165
|
|
$
|
0.40
|
|
$
|
9,341
|
|
|
23,142
|
|
$
|
0.40
|
Income
from discontinued operations
|
|
|
48
|
|
25,165
|
|
|
0.00
|
|
|
1,345
|
|
|
23,142
|
|
|
0.06
|
|
|
|
9,997
|
|
|
|
$
|
0.40
|
|
|
10,686
|
|
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities (1)
|
|
|
-
|
|
391
|
|
|
|
|
|
-
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before discontinued operations available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common stockholders
|
|
|
9,949
|
|
25,556
|
|
$
|
0.39
|
|
|
9,341
|
|
|
23,678
|
|
$
|
0.39
|
Income
from discontinued operations
|
|
|
48
|
|
25,556
|
|
|
0.00
|
|
|
1,345
|
|
|
23,678
|
|
|
0.06
|
|
|
$
|
9,997
|
|
|
|
$
|
0.39
|
|
$
|
10,686
|
|
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2007
|
|
|
September
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
|
|
$
|
31,801
|
|
24,370
|
|
$
|
1.30
|
|
$
|
22,020
|
|
|
22,988
|
|
$
|
0.96
|
Income
from discontinued operations
|
|
|
23,376
|
|
24,370
|
|
|
0.96
|
|
|
20,523
|
|
|
22,988
|
|
|
0.89
|
|
|
|
55,177
|
|
|
|
$
|
2.26
|
|
|
42,543
|
|
|
|
|
$
|
1.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities (1)
|
|
|
-
|
|
614
|
|
|
|
|
|
-
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before discontinued operations available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common stockholders
|
|
|
31,801
|
|
24,984
|
|
$
|
1.27
|
|
|
22,020
|
|
|
23,354
|
|
$
|
0.94
|
Income
from discontinued operations
|
|
|
23,376
|
|
24,984
|
|
|
0.94
|
|
|
20,523
|
|
|
23,354
|
|
|
0.88
|
|
|
$
|
55,177
|
|
|
|
$
|
2.21
|
|
$
|
42,543
|
|
|
|
|
$
|
1.82
|
(1)
|
Weighted
convertible limited partnership units of 2,273,992 and 2,281,874
for the
three months ended September 30, 2007 and 2006, respectively, and
2,285,541 and 2,287,377 for the nine months ended September 30, 2007
and
2006, respectively, and Series Z incentive units of 213,205 and 183,771
for the three months ended September 30, 2007 and 2006, respectively,
and 213,045 and 183,771 for the nine months ended September 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 nine months ended September 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 45,004 and 0 for the three months ended September 30, 2007 and 2006,
respectively, and 19,753 and 0 for the nine months ended September 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 nine 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 nine months ended
September 30, 2007 as the effect was anti-dilutive.
(9)
|
Derivative
Instruments and Hedging
Activities
|
As
of
September 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 $5.7 million during the nine months ended September 30,
2007 to a value of $3.4 million as of September 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 nine months ended
September 30, 2007 and 2006.
(10)
|
Discontinued
Operations
|
In
the
normal course of business, the Company will receive offers for sale of its
properties, either solicited or unsolicited. For those offers that are accepted,
the prospective buyer will usually require a due diligence period before
consummation of the transaction. It is not unusual for matters to
arise that result in the withdrawal or rejection of the offer during this
process. Essex classifies real estate as "held for sale" when all
criteria under SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (“SFAS 144”) have been met.
In
January 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.
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, net of minority interest, 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.
In
July
2007, the Company sold the final 2 condominium units at the Peregrine Point
property for a gain of $0.1 million net of taxes and expenses. For
the nine months ended September 30, 2007, the Company sold 21 condominium units
at the Peregrine Point property and recorded a gain of $1.0 million net of
taxes
and expenses. The Company started selling the units in the third
quarter of 2006, and recorded the sale of 28 units and recorded a gain of $1.1
million net of taxes and expenses. 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.
The
components of discontinued operations are outlined below and include the
results
of operations for the respective periods that the Company owned such assets,
as
described above.
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
revenues
|
|
$
|
-
|
|
$
|
2,820
|
$
|
1,355
|
|
$
|
8,788
|
Interest
and other income
|
|
|
-
|
|
|
14
|
|
290
|
|
|
21
|
Revenues
|
|
|
-
|
|
|
2,834
|
|
1,645
|
|
|
8,809
|
Property
operating expenses
|
|
|
-
|
|
|
(1,046)
|
|
(535)
|
|
|
(3,329)
|
Interest
expense
|
|
|
-
|
|
|
(579)
|
|
(416)
|
|
|
(1,736)
|
Depreciation
and amortization
|
|
|
-
|
|
|
(768)
|
|
(41)
|
|
|
(2,307)
|
Minority
interests
|
|
|
-
|
|
|
(161)
|
|
(57)
|
|
|
(475)
|
Expenses
|
|
|
-
|
|
|
(2,554)
|
|
(1,049)
|
|
|
(7,847)
|
Gain
on sale of real estate
|
|
|
53
|
|
|
1,170
|
|
79,222
|
|
|
13,032
|
Equity
income co-investments
|
|
|
-
|
|
|
-
|
|
-
|
|
|
238
|
Promote
interest and fees
|
|
|
-
|
|
|
-
|
|
10,343
|
|
|
8,221
|
Minority
interests - OP units
|
|
|
(5)
|
|
|
(105)
|
|
(2,161)
|
|
|
(1,930)
|
Minority
interests - City Heights
|
|
|
-
|
|
|
-
|
|
(64,624)
|
|
|
-
|
Net
gain on sale of real estate
|
|
|
48
|
|
|
1,065
|
|
22,780
|
|
|
19,561
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
$
|
48
|
|
$
|
1,345
|
$
|
23,376
|
|
$
|
20,523
|
(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
September 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
September 30, 2007, we had ownership interests in 138 apartment communities,
comprising 28,364 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
September 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
September 30, 2007, our consolidated development pipeline was comprised
of three development projects and seven predevelopment projects and two
land parcels held for future development aggregating 2,716 units, with total
incurred costs of $182.4 million, and estimated remaining project costs of
approximately $667.3 million for total estimated project costs of $849.7
million.
The
Company’s consolidated apartment communities are as follows:
|
As
of September 30, 2007
|
|
As
of September 30, 2006
|
|
|
Apartment
Units
|
%
|
Apartment
Units
|
%
|
Southern
California
|
12,725
|
50%
|
12,118
|
51%
|
Northern
California
|
6,361
|
25%
|
5,318
|
23%
|
Seattle
Metro
|
5,005
|
20%
|
4,905
|
21%
|
Other
Regions
|
1,177
|
5%
|
1,177
|
5%
|
Total
|
25,268
|
100%
|
23,518
|
100%
|
Comparison
of the Three Months Ended September 30, 2007 to the Three Months Ended September
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 September 30, 2007 and 2006) decreased 70
basis points to 96.0% as of September 30, 2007 from 96.7% as of September 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 September 30, 2007 and 2006 is as
follows:
|
|
Three
months ended
|
|
|
September
30,
|
|
|
2007
|
|
2006
|
Southern
California
|
|
95.6%
|
|
96.5%
|
Northern
California
|
|
97.1%
|
|
97.3%
|
Seattle
Metro
|
|
96.0%
|
|
97.2%
|
Other
Regions
|
|
94.6%
|
|
94.9%
|
The
following table illustrates a breakdown of these revenue amounts, including
revenues attributable to the Quarterly Same-Properties.
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
Number
of
|
|
|
September
30,
|
|
|
Dollar
|
|
Percentage
|
|
|
Properties
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Change
|
|
Property
Revenues (dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern
California
|
56
|
|
$
|
46,481
|
|
$
|
44,834
|
|
$
|
1,647
|
|
3.7
|
%
|
Northern
California
|
16
|
|
|
15,287
|
|
|
14,032
|
|
|
1,255
|
|
8.9
|
|
Seattle
Metro
|
23
|
|
|
14,729
|
|
|
13,390
|
|
|
1,339
|
|
10.0
|
|
Other
Regions
|
5
|
|
|
2,714
|
|
|
2,603
|
|
|
111
|
|
4.3
|
|
Total
Same-Property revenues
|
100
|
|
|
79,211
|
|
|
74,859
|
|
|
4,352
|
|
5.8
|
|
Non-Same
Property Revenues (1)
|
|
|
|
20,776
|
|
|
11,991
|
|
|
8,785
|
|
73.3
|
|
Total
property revenues
|
|
|
$
|
99,987
|
|
$
|
86,850
|
|
$
|
13,137
|
|
15.1
|
%
|
(1)
Includes properties acquired after
July 1, 2006, ten redevelopment communities, three office buildings and one
development community.
Quarterly
Same-Property Revenues increased by $4.3 million or 5.8% to $79.2 million
in the third quarter of 2007 from $74.9 million in the third quarter of
2006. The increase in the third quarter of 2007 was primarily
attributable to an increase in scheduled rents of $5.1 million or 7.0% compared
to the third quarter of 2006. Average monthly rental rates for
Quarterly Same-Property communities were $1,302 per unit in the third quarter
of
2007 compared to $1,218 per unit in the
third
quarter of 2006. The decline in occupancy decreased revenues by $0.7
million of which $0.3 million was caused by vacancy created by units that were
under renovation. Delinquency and rent concessions increased $0.3
million and other income increased $0.2 million third quarter of 2007 compared
to third quarter of 2006.
Quarterly
Non-Same Property Revenues increased by $8.8 million or 73.3% to $20.8
million in the third quarter of 2007 from $12.0 million in the third quarter
of
2006. The increase was primarily due to twelve communities acquired
since July 1, 2006.
Total
Expenses increased $13.0 million or 17.6% to $86.7 million in the third
quarter of 2007 from $73.7 million in the third quarter of
2006. Property operating expenses increased by $3.9 million or 13.1%
for the quarter, which is primarily due to the acquisition of twelve communities
since July 1, 2006 and annual increases in property salaries and real estate
taxes. Depreciation expense increased by $5.7 million or 28.7% for
the third quarter of 2007, due to the acquisition of twelve properties since
July 2006 and recording depreciation expense for the River Oaks and Hollywood
commercial buildings, which are predevelopment properties with short-term tenant
leases. Interest expense increased $2.3 million or 12.7% for the
third quarter of 2007 due to an increase in funding of development and
acquisitions on the Company’s lines of credit and an increase of outstanding
mortgage notes payable. General and administrative costs increased
$1.1 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, an increase in number of employees
and annual increases in compensation.
Interest
and other income increased by $0.7 million in the third quarter of 2007 due
to an increase in lease income of $1.2 million resulting from the income
generated from the River Oaks and Hollywood commercial buildings offset by
a
$0.5 million decrease in interest income. During the third quarter of
2006, the Company recorded $0.9 million in interest income on the cash balances
resulting from the $145.9 million Series G preferred stock
transaction.
Equity
income (loss) in co-investments increased by $0.7 million during the third
quarter of 2007 due primarily to the recording of $0.2 million of equity income
from Fund II, and $0.2 million in preferred interest received from the Mountain
Vista, LLC joint venture. The Company incurred a loss of $0.4
million in equity income (loss) in co-investments related to Fund II during
the
third quarter of 2006.
Income
from discontinued operations for the third quarter of 2007 includes the net
gain on sale of the final two condominiums at Peregrine Point of $0.1
million. During the third quarter of 2006, the Company sold the first
28 units and recorded a net gain of $1.1 million.
Comparison
of the Nine Months Ended September 30, 2007 to the Nine Months Ended September
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 nine months ended September 30, 2007 and 2006) decreased 80
basis points to 95.8% as of September 30, 2007 from 96.6% as of September 30,
2006.
The
regional breakdown of the Company’s 2007/2006 Same-Property portfolio for
financial occupancy for the nine months ended September 30, 2007 and 2006 is
as
follows:
|
|
Nine
Months Ended
|
|
|
September
30,
|
|
|
2007
|
|
2006
|
Southern
California
|
|
95.6%
|
|
96.3%
|
Northern
California
|
|
96.5%
|
|
97.4%
|
Seattle
Metro
|
|
96.1%
|
|
97.1%
|
Other
Regions
|
|
95.0%
|
|
95.7%
|
The
following table illustrates a breakdown of these revenue amounts, including
revenues attributable to the nine-month 2007/2006
Same-Properties.
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
Number
of
|
|
September
30,
|
|
Dollar
|
|
Percentage
|
|
|
Properties
|
|
2007
|
|
|
2006
|
|
Change
|
|
Change
|
|
Property
Revenues (dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
2007/2006
Same-Properties:
|
|
|
|
|
|
|
|
|
|
|
|
Southern
California
|
56
|
$
|
138,309
|
|
$
|
131,604
|
$
|
6,705
|
|
5.1
|
%
|
Northern
California
|
16
|
|
44,520
|
|
|
40,883
|
|
3,637
|
|
8.9
|
|
Seattle
Metro
|
22
|
|
41,773
|
|
|
37,625
|
|
4,148
|
|
11.0
|
|
Other
Regions
|
5
|
|
8,039
|
|
|
7,625
|
|
414
|
|
5.4
|
|
Total
2007/2006 Same-Property revenues
|
99
|
|
232,641
|
|
|
217,737
|
|
14,904
|
|
6.8
|
|
2007/2006
Non-Same Property Revenues (1)
|
|
|
56,207
|
|
|
35,063
|
|
21,144
|
|
60.3
|
|
Total
property revenues
|
|
$
|
288,848
|
|
$
|
252,800
|
$
|
36,048
|
|
14.3
|
%
|
(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 $14.9 million or 6.8% to $232.6 million
for the nine months ended September 30, 2007 from $217.8 million for the nine
months ended September 30, 2006. The increase was primarily
attributable to an increase in scheduled rents of $16.7 million or 7.8% compared
to 2006. Average monthly rental rates for 2007/2006 Same-Property
communities were $1,281 per unit for the nine months ended September 30, 2007
compared to $1,189 per unit for the nine months ended September 30,
2006. The decline in occupancy decreased revenues by $2.4 million of
which $0.7 million was caused by vacancy created by units that were under
renovation. Delinquency and rent concessions increased $0.6 million
and other income increased $1.2 million for the nine months ended September
30,
2007compared to the nine months ended September 30, 2006.
2007/2006
Non-Same Property Revenues increased by $21.1 million or 60.3% to $56.2
million for the nine months ended September 30, 2007 from $35.1 million for
the
nine months ended September 30, 2006. The increase was primarily due
to twelve communities acquired since January 1, 2006.
Total
Expenses increased $28.3 million or 12.8% to $248.6 million for the nine
months ended September 30, 2007 from $220.3 million for the nine months ended
September 30, 2006. Property operating expenses increased by $9.6
million or 11.0% for the nine months ended September 30, 2007, which is
primarily due to the acquisition of twelve communities and annual increases
in
property salaries and real estate taxes. Depreciation expense
increased by $13.3 million or 22.5% for the nine months ended September 30,
2007, due to the acquisition of twelve properties after January 1, 2006 and
recording depreciation expense for the River Oaks and Hollywood commercial
buildings, which are predevelopment properties with short-term tenant
leases. Interest expense increased $3.7 million or 6.7% due primarily
to an increase of in interest expense of $2.3 million in the third quarter
of
2007 due to an increase in funding of development and acquisitions on the
Company’s lines of credit and an increase of outstanding mortgage notes
payable. General and administrative costs increased $3.4 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 $1.1 million, and an increase in the number of
employees and annual increases in compensation.
Other
expenses of $1.8 million for the nine months ended September 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 $2.7 million for the nine months ended
September 30, 2007 due primarily to an increase in lease income of $3.6 million
resulting from the income generated from the River Oaks and Hollywood commercial
buildings, and an increase of $1.1 million in interest income earned from the
mezzanine/bridge loans, offset by a gain recorded in 2006 from sale of Town
& Country stock. During the first quarter of 2006, the Company recorded a
non-recurring gain of $1.7 million related to the sale of Town & Country
stock.
Equity
income (loss) in co-investments increased by $4.0 million during the nine
months ended September 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 the first quarter of 2007 and $0.3 million in preferred interest
earned on this investment during the second and third quarters of
2007. The increase in 2007 also relates to $0.4 million of equity
income recorded from Fund I, and $0.1
million
of equity income earned from its investment in Fund II. The Company
incurred a loss of $1.2 million in equity income (loss) in co-investments
related to Fund II during the nine months ended September 30, 2006.
.
Income
from discontinued operations for the nine months ended September 30, 2007
includes the sale of the City Heights joint venture property for a gain of
$13.7
million, which is net of minority interest, and $10.3 million in fees, and
the
net gain on sale of 21 Peregrine Point condominiums for $1.0
million. During the nine months ended September 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, a gain of $3.1
million on the sales of Vista Capri East, Casa Tierra, and Diamond Valley
properties, and a gain of $1.1 million from the sale of the first 28
condominiums at Peregrine Point.
Liquidity
and Capital Resources
Standard
and Poor's (“S&P”) rating has issued a corporate credit rating of BBB/Stable
for Essex Property Trust, Inc. and Essex Portfolio L.P.
At
September 30, 2007, the Company had $10.2 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 September 30,
2007, there was $58 million balance on the line at an average interest rate
of
6.7% for the quarter. 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 an S&P rating on the credit
facility (currently BBB-) at LIBOR plus 0.8%. The Company also has a
$100 million credit facility from Freddie Mac, which is secured by eight
apartment communities which matures in January 2009. As of September
30, 2007, the Company had $100 million outstanding under this line of credit
at
an average interest rate of 5.9% for the quarter. The underlying
interest rate on this line is between 55 and 59 basis points over the Freddie
Mac Reference Rate. During March 2007, the Company entered into an
unsecured revolving line of credit for $10 million with a commercial bank with
an initial maturity date of March 2008. As of September 30, 2007
there was a $9.6 million balance on the revolving line of credit at an average
interest rate of 5.4% for the quarter. 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. The Company’s line of credit agreements contain debt covenants
related to limitations on indebtedness and liabilities, maintenance of minimum
levels of consolidated earnings before depreciation, interest and amortization
and maintenance of minimum tangible net worth. Certain terms and
covenants of the $200 million unsecured line of credit were amended during
the
third quarter of 2007. The Company was in compliance with the line of
credit covenants as of September 30, 2007 and December 31, 2006.
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
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. No sales
of common stock occurred during the third quarter of 2007.
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 used net
proceeds from the common stock sales to reduce outstanding borrowings under
the
Company’s lines of credit.
In
August
2007, the Company’s Board of Directors authorized a stock repurchase plan to
allow the Company to acquire shares in an aggregate of up to $200
million. The program supersedes the common stock repurchase plan that
Essex announced on May 16, 2001. During the quarter the Company
repurchased and retired 12,600 shares of its common stock for approximately
$1.4
million.
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
.1834 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
September 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 2008 to 2018 and $199.4
million of tax-exempt variable rate demand bonds with a weighted average
interest rate of 4.8%. The tax-exempt variable rate demand bonds have maturity
dates ranging from 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
September 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 $5.7 million during the nine months ended September 30,
2007 to a value of $3.4 million as of September 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
September 30, 2007 and 2006.
Development
and Predevelopment Pipeline
The
Company defines development activities as new properties that are being
constructed, or are newly constructed and, in the case of development
communities, are in a phase of lease-up and have not yet reached stabilized
operations; or, in the case of TRS development projects, have not yet been
sold. As of September 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 $131.8 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 September 30, 2007, the Company had development
communities aggregating 1,937 units that were classified as predevelopment
projects. The estimated total cost of the predevelopment pipeline at
September 30, 2007 is $623.9 million, of which $535.5 million remains to be
expended. The Company may also acquire land for future development
purposes. The Company owns two land parcels held for future
development aggregating 66 units as of September 30, 2007. The Company has
incurred $6.7 million to acquire entitlements as of September 30, 2007.
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 September 30, 2007, the Company had thirteen major
redevelopment communities aggregating 3,891 apartment units with estimated
redevelopment costs of $133.7 million, of which approximately $82.6 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 September 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 September 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
|
|
$
|
-
|
|
$
|
141,852
|
|
$
|
322,548
|
|
$
|
768,881
|
|
$
|
1,233,281
|
Exchangeable
bonds
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
225,000
|
|
|
225,000
|
Lines
of credit
|
|
|
-
|
|
|
167,571
|
|
|
-
|
|
|
-
|
|
|
167,571
|
Interest
on indebtedness
|
|
|
23,477
|
|
|
128,671
|
|
|
67,859
|
|
|
212,433
|
|
|
432,440
|
Development
commitments
|
|
|
45,550
|
|
|
86,250
|
|
|
-
|
|
|
-
|
|
|
131,800
|
Redevelopment
commitments
|
|
|
13,195
|
|
|
69,386
|
|
|
-
|
|
|
-
|
|
|
82,581
|
Essex
Apartment Value Fund II, L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
capital
commitment
|
|
|
-
|
|
|
13,383
|
|
|
-
|
|
|
-
|
|
|
13,383
|
|
|
$
|
82,222
|
|
$
|
607,113
|
|
$
|
390,407
|
|
$
|
1,206,314
|
|
$
|
2,286,056
|
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 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 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 is 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 it has consistently applied the NAREIT definition of FFO to all
periods presented. However, there is judgment involved and other
REITs in calculating FFO may apply different judgment, 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
nine months ended September 30, 2007 and 2006:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
September
30,
|
|
|
September
30,
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
$
|
9,997
|
|
$
|
10,686
|
|
$
|
55,177
|
|
$
|
42,543
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
25,612
|
|
|
20,666
|
|
|
72,496
|
|
|
61,432
|
Gains
not included in FFO (1)
|
|
(64)
|
|
|
(714)
|
|
|
(14,565)
|
|
|
(12,576)
|
Minority
interests and co-investments (2)
|
|
1,777
|
|
|
2,217
|
|
|
6,098
|
|
|
7,523
|
Funds
from operations
|
$
|
37,322
|
|
$
|
32,855
|
|
$
|
119,206
|
|
$
|
98,922
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
from operations per share - diluted
|
$
|
1.33
|
|
$
|
1.26
|
|
$
|
4.34
|
|
$
|
3.83
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding diluted (3)
|
|
28,043,125
|
|
|
26,143,923
|
|
|
27,482,406
|
|
|
25,825,185
|
(1)
|
For
the third quarter of 2007, the amount includes depreciation add back
for
Peregrine Point of $0.1 million.
|
(2)
|
For
the third 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 totaling
$0.5
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 September
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
September 30, 2007, the Company also had $366.9 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 September
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
September 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 September 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
|
|
$
|
3,427
|
$
|
18,106
|
$
|
(12,384)
|
Interest
rate caps
|
|
182,849
|
|
2008-2011
|
|
|
12
|
|
39
|
|
3
|
Total
cash flow hedges
|
$
|
632,849
|
|
2008-2011
|
|
$
|
3,439
|
$
|
18,145
|
$
|
(12,381)
|
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 September 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 $1.26 billion of fixed rate mortgage notes payable and
exchangeable bonds at September 30, 2007 is approximately $1.32 billion based
on
the terms of existing mortgage notes payable compared to those available in
the
marketplace.
For
the Years Ended
|
|
|
2008(1)
|
|
2009
|
|
2010(2)
|
|
2011(3)
|
|
Thereafter
|
|
Total
|
|
Fair
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate debt
|
|
$
|
112,070
|
|
24,036
|
|
155,279
|
|
153,808
|
|
813,734
|
|
$
|
1,258,927
|
$
|
1,323,978
|
|
Average
interest rate
|
|
|
6.8%
|
|
7.2%
|
|
8.0%
|
|
6.3%
|
|
5.2%
|
|
|
|
|
|
|
Variable
rate debt
|
|
$
|
9,571
|
|
158,000
|
|
-
|
|
-
|
|
199,354
|
(4)
|
$
|
366,925
|
$
|
366,925
|
|
Average
interest
|
|
|
5.4%
|
|
5.9%
|
|
-
|
|
-
|
|
4.8%
|
|
|
|
|
|
|
(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
September 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 September
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
2: Unregistered Sales of Equity Securities and Use of
Proceeds
During
September 2007, the Company acquired the Thomas Jefferson apartments in
Sunnyvale, California, by acquiring ownership interests in the two limited
partnerships that collectively owned the property. In connection with this
acquisition, the limited partnerships were restructured to provide for limited
partnership units, or DownREIT units, that are redeemable for cash or at the
Company's sole discretion, cash or shares of the common stock of the
Company. A total of 62,873 such units were issued. The
issuance of such units was pursuant to the exemption from registration set
forth
in Section 4(2) of the Securities Act of 1933, as amended.
Issuer
Purchases of Equity Securities
Period
|
Total
Number of Shares Purchased
|
|
Average
Price Paid per Share
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans
or
Programs
|
|
Maximum
Number of Shares that may Yet be Purchased Under the Plans or
Programs
|
|
September
3, 2007 to
September
28, 2007
|
12,600
|
$111.74
|
|
12,600
|
|
(1)
|
(1)
As of
September 30, 2007, there was $198.6 million available under the stock
repurchase plan to repurchase additional shares.
In
August
2007, the Company’s Board of Directors authorized a stock repurchase plan to
allow the Company to acquire shares in an aggregate of up to $200
million. The program supersedes the common stock repurchase plan that
Essex announced on May 16, 2001. During the quarter the Company
repurchased and retired 12,600 shares of its common stock for approximately
$1.4
million
Item
6: Exhibits
|
10.1
|
First
Amendment to Fourth Amended and Restated Revolving Credit Agreement,
dated
as of September 28, 2007, among Essex Portfolio, L.P., Bank of America
and
other lenders as specified therein.
|
|
10.2
|
Agreement
to Restructure Partnership Between Western-Mountain View II Investors,
a
California Limited Partnership and Essex Portfolio, L.P., a California
Limited Partnership Agreement and Essex Property Trust, Inc., a
Maryland
Corporation and Essex Management Corporation, a California Corporation
and
General Partners of the Partnership. (The related agreement to
restructure
the Western-San Jose IV Investors Limited Partnership, a California
Limited Partnership, has basically the same terms as the exhibit
and is
not being filed, but will be furnished to the SEC upon
request.)
|
|
12.1
|
Ratio
of Earnings to Fixed Charges
|
|
31.1
|
Certification
of Keith R. Guericke, Chief Executive Officer, pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
of Michael T. Dance, Chief Financial Officer, pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certification
of Keith R. Guericke, Chief Executive Officer, pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
|
32.2
|
Certification
of Michael T. Dance, Chief Financial Officer, pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
ESSEX
PROPERTY TRUST, INC.
|
|
(Registrant)
|
|
|
|
|
|
Date:
November 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
|