body_10-k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(MARK
ONE)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended December 31, 2007
OR
[ ]
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 1-13106
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)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each
class
|
Name of each exchange
on which registered
|
Common
Stock, $.0001 par value
Rights
to purchase Series A Junior Participating
|
New
York Stock Exchange
New
York Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.Yes [X] No [ ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X]
No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated
filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer [X]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [
]
(Do
not check if a smaller reporting company)
|
Smaller
reporting company [ ]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
[ ] No [X]
As of
June 30, 2007, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $2,892,312,848. The aggregate
market value was computed with reference to the closing price on the New York
Stock Exchange on such date. Shares of common stock held by executive officers,
directors and holders of more than ten percent of the outstanding common stock
have been excluded from this calculation because such persons may be deemed to
be affiliates. This exclusion does not reflect a determination that such persons
are affiliates for any other purposes.
As of
February 25, 2008, 25,520,479 shares of Common Stock ($.0001 par value)
were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
The
following document is incorporated by reference in Part III of the Annual Report
on Form 10-K: Proxy statement for the annual meeting of stockholders of Essex
Property Trust, Inc. to be held May 6, 2008
Essex
Property Trust, Inc.
2007
ANNUAL REPORT ON FORM 10-K
TABLE
OF CONTENTS
Part
I.
|
|
Page
|
Item
1.
|
Business
|
1
|
Item
1A.
|
Risk
Factors
|
8
|
Item
1B.
|
Unresolved
Staff Comments
|
18
|
Item
2.
|
Properties
|
18
|
Item
3.
|
Legal
Proceedings
|
24
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
24
|
Part
II.
|
|
|
Item
5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
25
|
Item
6.
|
Selected
Financial Data
|
28
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
31
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risks
|
42
|
Item
8.
|
Financial
Statements and Supplementary Data
|
43
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
43
|
Item
9A.
|
Controls
and Procedures
|
43
|
Item
9B.
|
Other
Information
|
43
|
Part
III.
|
|
|
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
44
|
Item
11.
|
Executive
Compensation
|
44
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
44
|
Item
13.
|
Certain
Relationships and Related Transactions , and Director
Independence
|
44
|
Item
14.
|
Principal
Accounting Fees and Services
|
44
|
Part
IV.
|
|
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
45
|
Signatures
|
|
S-1
|
PART
I
Forward
Looking Statements
This Form
10-K contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Such forward-looking statements are described in Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, in the section, “Forward Looking Statements.” Our actual
results could differ materially from those set forth in each forward-looking
statement. Certain factors that might cause such a difference are
discussed in this report, including Item 1A, Risk Factors of this Form
10-K.
Item
1. Business
OVERVIEW
Essex
Property Trust, Inc. (“Essex” or the “Company”) is a Maryland corporation that
operates as a self-administered and self-managed real estate investment trust
(“REIT”). Essex owns all of its interest in its real properties
directly or indirectly through Essex Portfolio, L.P. (the “Operating
Partnership”). Essex is the sole general partner of the Operating
Partnership and as of December 31, 2007 owns a 90.9% general partnership
interest. In this report, the terms “we,” “us” and “our” refer
to Essex Property Trust, its Operating Partnership and the Operating
Partnership’s subsidiaries.
The
Company has elected to be treated as a REIT for federal income tax purposes,
commencing with the year ended December 31, 1994 as the Company completed an
initial public offering on June 13, 1994. In order to maintain
compliance with REIT tax rules, the Company utilizes taxable REIT subsidiaries
for various revenue generating or investment activities. Each of the taxable
REIT subsidiary entities are consolidated by the Company.
We are
engaged primarily in the ownership, operation, management, acquisition,
development and redevelopment of real estate. The majority of our
real estate consists of apartment communities. As of December 31,
2007, we owned or held an interest in 134 apartment communities, aggregating
27,489 units, located predominantly along the West Coast (collectively, the
“Properties”, and individually, a “Property”). Our other properties included six
office buildings (totaling approximately 478,040 square feet) two recreational
vehicle parks (totaling 338 spaces), and one manufactured housing community
(containing 157 sites). We currently have six development projects with 1,079
units in various stages of active development (together with the Properties, the
“Portfolio”).
The
Company’s website address is http://www.essexpropertytrust.com. The
Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports, and the Proxy Statement
for its Annual Meeting of Stockholders are available, free of charge, on our
website as soon as practicable after we file the reports with the Securities and
Exchange Commission (“SEC”).
BUSINESS
OBJECTIVES AND STRATEGIES
The
following is a discussion of our business objectives and strategies in regards
to real estate investment and management. One or more of these
criteria may be amended or rescinded from time to time without stockholder
vote.
Business
Objectives
Our
primary business objectives are to increase shareholders’ value by investing in
properties located in supply constrained markets, and by improving operating
results and the value of our Properties, while maintaining a strong balance
sheet. We intend to achieve these objectives by:
·
|
Maximizing
property income by maintaining a high level of occupancy while
increasing rental income;
|
·
|
Expanding
our Portfolio through acquisitions, development and, when appropriate,
redevelopment of apartment communities in selected major
metropolitan areas;
|
·
|
Optimizing
financial performance through a portfolio asset allocation program, and to
increase or decrease investments in a market based on projected changes in
regional economic and local market conditions;
and
|
·
|
Maintaining
a strong balance sheet by identifying and utilizing capital resources that
provide positive leverage (i.e. investment yield that exceeds capital
cost).
|
We cannot
assure our shareholders that we will achieve our business
objectives.
Research Driven
Approach – We
believe that successful real estate investment decisions and portfolio growth
begin with extensive regional economic research and local market knowledge.
Utilizing a proprietary research model that we have developed over the last two
decades, we continually assess markets where we currently operate, as well as
markets where we consider future investment opportunities by
evaluating:
·
|
Markets
in major metropolitan areas that have regional population primarily in
excess of one million, thereby creating liquidity, which is an
important element when modifying the geographic concentration of the
Company’s portfolio in response to changing market
conditions;
|
·
|
Constraints
on new supply driven by: (i) low availability of developable land sites
where competing housing could be built; (ii) political growth barriers,
such as protected land, urban growth boundaries, and potential lengthy and
expensive development permit processes; and (iii) natural limitations to
development, such as mountains or
waterways;
|
·
|
Rental
demand is enhanced by affordability of rents compared to expensive
for-sale housing; and
|
·
|
Housing
demand that is based on proximity to jobs, high quality of life and
related commuting factors, as well as potential job
growth.
|
Recognizing
that all real estate markets are cyclical, we regularly evaluate the results of
our regional economic, as well as, our local market research and adjust the
geographic focus of our portfolio accordingly. We seek to increase our portfolio
allocation in markets projected to have the strongest local economies and to
decrease such allocations in markets projected to have declining economic
conditions. Likewise, the Company also seeks to increase its portfolio
allocation in markets that have attractive property valuations and to decrease
such allocations in markets that have inflated valuations and low relative
yields.
Property
Operations – We manage our Properties by focusing on strategies that will
generate above-average rental growth, tenant retention/satisfaction and
long-term asset appreciation. We intend to achieve this by utilizing the
strategies set forth below:
·
|
Property Management
– The Chief
Operating Officer, Divisional Managers, Regional Portfolio Managers and
Area Managers are accountable for the performance and maintenance of the
Properties. They supervise, provide training for the on-site managers,
manage budgeted expectations against performance, monitor market trends
and prepare operating and capital
budgets.
|
·
|
Capital Preservation –
The Capital and Maintenance department is responsible for the planning,
budgeting and completion of major deferred maintenance and capital
improvement projects at our
Properties.
|
·
|
Business Planning and Control
– Comprehensive business plans are implemented in conjunction with
every investment decision. These plans include benchmarks for
future financial performance, based on collaborative discussions between
on-site managers and senior management.
|
· |
Development and Redevelopment
– We focus on acquiring and developing apartment communities in
supply constrained markets, and redeveloping our existing communities to
improve the financial and physical aspects of our
communities. |
CURRENT
BUSINESS ACTIVITIES
Acquisitions
Acquisitions
have been a significant growth component of our business. During 2007, we
completed a series of acquisitions that added to our overall
Portfolio.
Southern
California
·
|
In
March 2007, the Company acquired two adjacent apartment communities
aggregating 108 units located in Santa Barbara, California for
approximately $21.2 million. Lucero Village, built in 1973, consists of
70-units and The Continental, built in 1965, consists of
38-units.
|
·
|
In
April 2007, the Company acquired Cardiff by the Sea Apartments located in
Cardiff, California for $72.0 million. The community, which is in Northern
San Diego County, consists of 300-units and was built in
1986.
|
·
|
In
May 2007, the Company acquired Coldwater Canyon apartments for $8.3
million. Built in 1979, the property consists of 39-units
located in Studio City, California.
|
·
|
In
March 2007, the Company acquired Harvest Park apartments, built in 2004
with a condominium map for $22.5 million. This apartment community has
104-units and is located in Santa Rosa,
California.
|
·
|
In
May 2007, the Company acquired Canyon Oaks apartments, located in San
Ramon, California, for $64.3 million. Built in 2005 and
consisting of 250-units, the property is within Windermere, a master
planned community, and is the sister property to Mill Creek at Windermere,
acquired in September 2007.
|
·
|
In
June 2007, the Company acquired Magnolia Lane, built in 2001, for $5.4
million. The property is a 32-unit community subject to a
ground lease that expires in 64 years and is adjacent to Thomas Jefferson,
another Essex community, purchased in September
2007.
|
·
|
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, and is the sister property to Canyon Oaks, acquired during the
second quarter of 2007.
|
·
|
The
Company also acquired Thomas Jefferson Apartments in September 2007 for
$28.0 million in a DownREIT transaction that included issuing 7,006
DownREIT units to a related party. The community, 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 June
2007.
|
Seattle
Metro
·
|
In
June 2007, the Company acquired The Cairns, a 100-unit property built in
2005 and located in the Lake Union area of Seattle, for $28.1
million.
|
Dispositions
As part
of our strategic plan to own quality real estate in supply-constrained markets,
we continually evaluate our Properties and sell those which no longer meet our
strategic criteria. We may use the capital generated from the dispositions to
invest in higher-return Properties, repurchase our common stock, or repay
debts. We believe that the sale of these Properties will not have a
material impact on our future results of operations or cash flows nor will their
sale materially affect our ongoing operations. Generally, any impact of earnings
dilution resulting from these dispositions will be offset by the positive impact
of our acquisitions, development and redevelopment activities.
·
|
In
February 2007, the Company sold the joint venture property City Heights
Apartments, a 687-unit community located in Los Angeles, California for
$120.0 million. The Company’s share of the proceeds from the sale totaled
$33.9 million, resulting in a $13.7 million gain on sale to the Company,
and an additional $10.3 million for fees from the joint venture
partner, both of which are included in income from discontinued
operations.
|
·
|
The
Company sold the 21 remaining condominium units at Peregrine Point during
the first three quarters of 2007, resulting in a gain of $1.0 million net
of taxes and expenses.
|
·
|
In
December 2007, the Company sold four communities (875-units) in the
Portland metropolitan area for $97.5 million, resulting in a gain of $47.6
million net of minority interest. The proceeds from the sale
were used in a tax-free reverse exchange for the purchase of Mill Creek at
Windermere in September 2007.
|
·
|
In
January 2008, the Company collected $7.5 million and recognized income of
$6.3 million from the sale of its preferred interest in Waterstone at
Fremont Apartments, located in Fremont,
California.
|
Development
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. As of December 31, 2007, excluding development projects
owned by Essex Apartment Value Fund II, L.P. (“Fund II”), the Company had three
development projects comprised of 684 units for an estimated cost of $236.7
million, of which $125.8 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 December 31, 2007, the Company had five development
communities aggregating 1,658 units that were classified as predevelopment
projects. The estimated total cost of the predevelopment pipeline at
December 31, 2007 was $508.4 million, of which $411.3 million remains to be
expended. The Company may also acquire land for future
development purposes. The Company owned five land parcels held
for future development aggregating 434 units as of December 31, 2007. The
Company had incurred $25.5 million in costs related to these five land parcels
as of December 31, 2007.
The
following table sets forth information regarding the Company’s consolidated
development pipeline:
|
|
|
|
|
|
|
As
of 12/31/07 ($ in millions)
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Incurred
|
|
Projected
|
Development
Pipeline
|
|
Location
|
|
Units
|
|
|
Project
Cost(1)
|
|
|
Project
Cost
|
|
Stabilization
|
Development
Projects
|
|
|
|
|
|
|
|
|
|
|
|
|
Belmont
Station
|
|
Los
Angeles, CA
|
|
275
|
|
$
|
71.1
|
|
$
|
55.5
|
|
Dec-08
|
The
Grand
|
|
Oakland,
CA
|
|
238
|
|
|
96.2
|
|
|
42.0
|
|
May-09
|
Fourth
Street
|
|
Berkeley,
CA
|
|
171
|
|
|
69.4
|
|
|
13.4
|
|
Aug-10
|
|
|
|
|
684
|
|
|
236.7
|
|
|
110.9
|
|
|
Predevelopment
projects
|
|
various
|
|
1,658
|
|
|
508.4
|
|
|
97.1
|
|
Nov-10
to Jul-14
|
Land
held for future development
|
|
various
|
|
434
|
|
|
25.5
|
|
|
25.5
|
|
-
|
Consolidated
Development Pipeline
|
|
|
|
2,776
|
|
$
|
770.6
|
|
$
|
233.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes incurred costs and
estimated costs to complete these development projects.
Redevelopment
Pipeline
The
Company defines redevelopment communities 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. During redevelopment, apartment units may not be
available for rent and, as a result, may have less than stabilized
operations. As of December 31, 2007, the Company had ownership
interests in thirteen major redevelopment communities aggregating 3,891
apartment units with estimated redevelopment costs of $135.6 million, of which
approximately $74.6 million remains to be expended. These amounts
exclude redevelopment projects owned by Fund II. The following
table illustrates these consolidated redevelopment projects:
|
|
|
|
|
|
|
As
of 12/31/07 ($ in thousands)
|
|
|
|
|
|
|
|
Estimated
|
|
|
Incurred
|
Redevelopment
Pipeline
|
|
Location
|
|
Units
|
|
|
Renovation
Cost(1)
|
|
Project
Cost
|
Southern
California
|
|
|
|
|
|
|
|
|
|
|
Avondale
at Warner Center
|
|
Woodland
Hills, CA
|
|
446
|
|
$
|
14,070
|
|
$
|
11,188
|
Highridge
|
|
Rancho
Palos Verde, CA
|
|
255
|
|
|
16,063
|
|
|
1,976
|
Mira
Monte
|
|
Mira
Mesa, CA
|
|
355
|
|
|
6,060
|
|
|
5,900
|
Pathways
|
|
Long
Beach, CA
|
|
296
|
|
|
10,721
|
|
|
5,788
|
Northern
California
|
|
|
|
|
|
|
|
|
|
|
Boulevard
(Treetops)
|
|
Fremont,
CA
|
|
172
|
|
|
8,387
|
|
|
5,757
|
Bridgeport
(Summerhill Commons)
|
|
Newark,
CA
|
|
184
|
|
|
4,586
|
|
|
3,869
|
Marina
Cove
|
|
Santa
Clara, CA
|
|
292
|
|
|
9,858
|
|
|
805
|
Montclaire
(Oak Pointe) - Phase I-III
|
|
Sunnyvale,
CA
|
|
390
|
|
|
15,106
|
|
|
5,688
|
Wimbledon
Woods
|
|
Hayward,
CA
|
|
560
|
|
|
9,350
|
|
|
7,195
|
Seattle
Metro
|
|
|
|
|
|
|
|
|
|
|
Palisades
- Phase I and II
|
|
Bellevue,
WA
|
|
192
|
|
|
6,951
|
|
|
6,461
|
Sammamish
View(2)
|
|
Bellevue,
WA
|
|
153
|
|
|
3,875
|
|
|
3,875
|
Woodland
Commons
|
|
Bellevue,
WA
|
|
236
|
|
|
11,779
|
|
|
1,240
|
Foothill
Commons
|
|
Bellevue,
WA
|
|
360
|
|
|
18,804
|
|
|
1,298
|
Total
Redevelopment Pipeline
|
|
|
|
3,891
|
|
$
|
135,610
|
|
$
|
61,040
|
(1) Includes incurred costs and
estimated costs to complete these redevelopment projects.
(2) The redevelopment at this
community was completed in the fourth quarter of 2007, and will be added back to
Same-Property operations (as defined in Item 7) during the fourth quarter of
2008.
In March
2007, the Company obtained a mortgage loan secured by the Camino Ruiz Square
community purchased in December 2006 in the amount of $21.1 million, with a
fixed interest rate of 5.36%, which matures on April 1, 2017.
In April
2007, the Company refinanced a mortgage loan for $35.7 million secured by the
Tierra Vista community in the amount of $62.5 million, with a fixed interest
rate of 5.47%, which matures in April 2017.
In June
2007, the Company obtained a mortgage loan secured by the Cardiff by the Sea
community purchased in April 2007 in the amount of $42.2 million. The loan has a
fixed interest rate of 5.71% and matures in June 2017. The Company assumed a
mortgage loan in conjunction with the acquisition of The Cairns community in the
amount of $12.0 million, with a fixed interest rate of 5.5%, which matures in
May 2014. Finally, the Company refinanced $18.6 million of debt
secured by the Highridge community with a $44.8 million fixed interest rate loan
of 6.05%, which matures in June 2017.
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 obtained 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 $6.0 million with a fixed interest rate of 5.9% due in March
2017.
In
December 2007, the Company and a joint venture partner obtained a construction
loan in the amount of $17.5 million secured by the Main Street predevelopment
project in Walnut Creek, California. The loan is variable based on
LIBOR plus 125 basis points and matures in December 2009. The initial
funding on this loan was approximately $12.1 million, and the remainder of the
loan will be used for predevelopment costs.
In
January 2008, the Company obtained a mortgage loan in the amount of $49.9
million secured by Mirabella, a community located in Marina Del Rey,
California. The loan has a fixed interest rate of 5.21%, which
matures in January 2018.
Structured
Finance
In March
2007, the Company originated a $6.9 million mezzanine loan receivable for the
acquisition and capital improvement of California Hill, a 153-unit,
age-restricted apartment community located in Concord,
California. The floating rate note receivable is based on LIBOR
with a 5% floor for the LIBOR rate plus 4.75%. The note receivable is
due in March 2011.
In
September 2007, the Company originated a $14.0 million bridge loan for the
completion and lease-up of Valley View, 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 note receivable
is based on LIBOR with a 5% floor for the LIBOR rate plus 3.38%. The
note receivable is due in February 2009.
In
October 2007, the Company originated a $14.0 million bridge loan secured by 301
Ocean Avenue a 47-unit apartment community located in Santa Monica, California
and the interest payments are guaranteed by the owner of the
asset. The floating rate note receivable is based on LIBOR with a 5%
floor for the LIBOR rate plus 2.95%. The note receivable is due in
April 2009.
Derivative
Transactions
In March
2007, the Company entered into a ten-year forward-starting interest rate swap
for a notional amount of $50 million and a settlement date on or before October
1, 2011, to manage interest rate exposure on identified future debt
obligations.
In April
2007, in conjunction with the refinance of the Tierra Vista mortgage loan, the
Company settled a $50 million forward-starting swap and received $1.3 million
from the counterparty. The accounting for the swap settlement reduces the
effective interest rate on the new Tierra Vista mortgage loan to
5.19%.
As of
December 31, 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 as they
are expected to 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 decreased $8.0 million during
the year ended December 31, 2007 to a liability value of $10.2 million as of
December 31, 2007, and the derivative liability was recorded in other
liabilities in the Company’s consolidated financial statements. The
changes in the fair values of the derivatives are reflected in accumulated other
comprehensive (loss) income in the Company’s consolidated financial
statements. No hedge ineffectiveness on cash flow hedges was
recognized during the year ended December 31, 2007 and 2006.
Equity
Transactions
During
the second quarter of 2007, the Company issued and sold 1,670,500 shares of its
common stock for $213.7 million at an average stock price of $127.91 per share,
net of underwriter fees and expenses.
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 2007, the Company repurchased
and retired 323,259 shares of its common stock for approximately $32.6 million,
net of fees and commissions. During January 2008, the Company
repurchased an additional 137,500 shares for $13.2 million, net of fees and
commissions. The Company has repurchased 460,759 shares for $45.8
million at an average stock price of $99.30 per share since the stock repurchase
plan was approved in August.
ESSEX
APARTMENT VALUE FUNDS
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. The assets in Fund I were sold during 2004 and 2005,
and Fund I was liquidated in 2007.
Fund II
has eight institutional investors, and the Company, with combined partner equity
commitments of $265.9 million. Essex has committed $75.0 million to Fund II,
which represents a 28.2% interest as general partner and limited partner. Fund
II utilitized debt as leverage of approximately 65% of the estimated value of
the underlying real estate. Fund II invested in apartment communities
in the Company’s targeted West Coast markets and, as of December 31, 2007, owned
eleven apartment communities and three development projects. There
was no acquisition or disposition activity in Fund II in the year ended December
31, 2007. Essex records revenue for its asset management, property
management, development and redevelopment services when earned, and promote
income when realized if Fund II exceeds certain financial return
benchmarks.
Fund
II - Development and Redevelopment Pipeline
As of
December 31, 2007, the following table sets forth information regarding Fund
II’s development and redevelopment pipelines:
|
|
|
|
|
|
|
As
of 12/31/07 ($ in millions)
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Incurred
|
|
Projected
|
Development
Pipeline - Fund II
|
|
Location
|
|
Units
|
|
|
Project
Cost(1)
|
|
|
Project
Cost
|
|
Stabilization
|
Development
Projects
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastlake
2851 on Lake Union
|
|
Seattle,
WA
|
|
127
|
|
$
|
35.4
|
|
$
|
24.7
|
|
Jul-08
|
Studio
40-41
|
|
Studio
City, CA
|
|
149
|
|
|
60.6
|
|
|
30.7
|
|
Aug-09
|
Cielo
|
|
Chatsworth,
CA
|
|
119
|
|
|
39.4
|
|
|
12.3
|
|
Sep-09
|
Fund
II - Development Pipeline
|
|
|
|
395
|
|
$
|
135.4
|
|
$
|
67.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redevelopment
Pipeline - Fund II
|
|
|
|
|
|
|
|
|
|
|
|
|
Redevelopment
Projects
|
|
|
|
|
|
|
|
|
|
|
|
|
Regency
Tower - Phase I - II
|
|
Oakland,
CA
|
|
178
|
|
$
|
4.5
|
|
$
|
3.7
|
|
|
The
Renaissance
|
|
Los
Angeles, CA
|
|
168
|
|
|
5.0
|
|
|
3.6
|
|
|
Fund
II - Redevelopment Pipeline
|
|
|
|
346
|
|
$
|
9.5
|
|
$
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes
incurred costs and estimated costs to complete these development and
redevelopment projects.
OFFICES
AND EMPLOYEES
The
Company is headquartered in Palo Alto, California, and has regional offices in
Woodland Hills, California; Irvine, California; San Diego, California and
Bellevue, Washington. As of December 31, 2007, the Company had approximately 917
employees.
INSURANCE
The
Company carries comprehensive liability, fire, extended coverage and rental loss
insurance for each of the Properties with a $5.0 million deductible per
incident. There are, however, certain types of extraordinary losses, such as,
for example, losses from 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 believes it has a proactive approach to its
potential earthquake losses. The Company utilizes third-party seismic
consultants for its acquisitions and performs seismic upgrades to those
acquisitions that are determined to have a higher level of potential loss from
an earthquake. The Company utilizes internal and third-party loss
models to help to determine its exposure. The majority of the
Company’s Properties are lower density garden-style apartments which may be less
susceptible to earthquake damage. The Company will continue to
monitor third-party earthquake insurance pricing and conditions and may consider
obtaining third-party coverage if it deems it cost effective.
Although
the Company may carry insurance for potential losses associated with its
Properties, employees, residents, and compliance with applicable laws, it may
still incur losses due to uninsured risks, deductibles, co-payments or losses in
excess of applicable insurance coverage and those losses may be
material.
COMPETITION
There are
numerous housing alternatives that compete with our apartment communities in
attracting residents. These include other apartment communities and
single-family homes that are available for rent in the markets in which the
properties are located. The Properties also compete for residents with new and
existing homes and condominiums that are for sale. If the demand for our
Properties is reduced or if competitors develop and/or acquire competing
properties on a more cost-effective basis, rental rates and occupancy may drop,
which may have a material adverse affect on our financial condition and results
of operations.
We face
competition from other real estate investment trusts, businesses and other
entities in the acquisition, development and operation of properties. Some of
the competitors are larger and have greater financial resources than we do. This
competition may result in increased costs of properties we acquire and/or
develop.
WORKING
CAPITAL
We
believe that cash flows generated by our operations, existing cash balances,
availability under existing lines of credit, access to capital markets and the
ability to generate cash gains from the disposition of real estate are
sufficient to meet all of our reasonably anticipated cash needs during
2008. 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.
ENVIRONMENTAL
CONSIDERATIONS
See the
discussion under the caption, “Possible environmental liabilities” in Item 1A,
Risk Factors, for information concerning the potential effect of environmental
regulations on our operations.
OTHER
MATTERS
Certain
Policies of the Company
We intend
to continue to operate in a manner that will not subject us to regulation under
the Investment Company Act of 1940. The Company has in the past five years and
may in the future (i) issue securities senior to its common stock, (ii) fund
acquisition activities with borrowings under its line of credit and (iii) offer
shares of common stock and/or units of limited partnership interest in the
Operating Partnership or affiliated partnerships as partial consideration for
property acquisitions. The Company from time to time acquires partnership
interests in partnerships and joint ventures, either directly or indirectly
through subsidiaries of the Company, when such entities’
underlying
assets are real estate. In general, the Company does not (i) underwrite
securities of other issuers or (ii) actively trade in loans or other
investments.
We invest
primarily in apartment communities that are located in predominantly coastal
markets within Southern California, the San Francisco Bay Area, and the Seattle
metropolitan area. The Company currently intends to continue to invest in
apartment communities in such regions. However, these practices may
be reviewed and modified periodically by management.
Item
1A. Risk Factors
Our
business, operating results, cash flows and financial conditions are subject to
various risks and uncertainties, including, without limitation, those set forth
below, any one of which could cause our actual results to vary materially from
recent results or from our anticipated future results.
We depend on our
key personnel - Our success depends on our ability to attract and retain
executive officers, senior officers and company managers. There is substantial
competition for qualified personnel in the real estate industry and the loss of
several of our key personnel could have an adverse effect on us.
Debt
financing – At December 31, 2007, we had approximately $1.66 billion of
indebtedness (including $233.1 million of variable rate indebtedness, of which
$152.7 million is subject to interest rate protection agreements). We are
subject to the risks normally associated with debt financing, including the
following:
·
|
cash
flow may not be sufficient to meet required payments of principal and
interest;
|
·
|
inability
to refinance maturing indebtedness on encumbered
properties;
|
·
|
the
terms of any refinancing may not be as favorable as the terms of existing
indebtedness;
|
·
|
inability
to comply with debt covenants could cause an acceleration of the maturity
date; and
|
·
|
repaying
debt before the scheduled maturity date could result in prepayment
penalties.
|
Uncertainty of
our ability to refinance balloon payments - As of December 31, 2007, we
had approximately $1.66 billion of mortgage debt, exchangeable bonds and line of
credit borrowings, most of which are subject to balloon payments (see Notes 8
and 9 to the Company’s consolidated financial statements for more details). We
do not expect to have sufficient cash flows from operations to make all of these
balloon payments. These mortgages, bonds and lines of credit borrowings have the
following scheduled principal and balloon payments:
2008--$125.2
million;
2009--$185.7
million;
2010--$154.8
million;
2011--$166.5
million;
2012--$32.2
million;
Thereafter--$993.3
million.
We may
not be able to refinance such mortgage indebtedness, bonds, or lines of
credit. The Properties subject to these mortgages could be foreclosed
upon or otherwise transferred to the lender. This could cause us to
lose income and asset value. We may be required to refinance the debt
at higher interest rates or on terms that may not be as favorable as the terms
of existing indebtedness.
The
Company’s current financing activities have not been severely impacted by the
tightening in the credit markets. Our strong balance sheet, the
established relationships with our unsecured line of credit bank group and
access to Fannie Mae and Freddie Mac secured debt financing have insulated us
from the turmoil being experienced by many other real estate companies.
Recently, we have experienced some expansion in credit spreads as Fannie Mae and
Freddie Mac’s tier 4 financing are currently at approximately 200 basis points
over the relevant U.S. treasury securities.
Debt financing on
Properties may result in insufficient cash flow - Where possible, we
intend to continue to use leverage to increase the rate of return on our
investments and to provide for additional investments that we could not
otherwise make. There is a risk that the cash flow from the Properties will be
insufficient to meet both debt payment obligations and the distribution
requirements of the real estate investment trust provisions of the Internal
Revenue Code. We may obtain additional debt financing in the future through
mortgages on some or all of the Properties. These mortgages may be recourse,
non-recourse, or cross-collateralized.
As of
December 31, 2007, the Company had 74 of its 123 consolidated apartment
communities encumbered by debt. Of the 74 communities, 51 are secured by deeds
of trust relating solely to those properties. With respect to the
remaining
23 communities, there are 5 cross-collateralized mortgages secured by 8
communities, 7 communities, 3 communities, 3 communities, and 2 communities,
respectively. The holders of this indebtedness will have claims against these
communities and, to the extent indebtedness is cross-collateralized, lenders may
seek to foreclose upon communities which are not the primary collateral for
their loan. This may accelerate other indebtedness secured by communities.
Foreclosure of communities would reduce our income and net asset
value.
Risk of rising
interest rates -
Current interest rates could potentially increase rapidly, which could result in
higher interest expense on our variable rate indebtedness. Prolonged interest
rate increases could negatively impact our ability to make acquisitions and
develop properties at economic returns on investment and our ability to
refinance existing borrowings at acceptable rates.
As of
December 31, 2007, we had approximately $220.9 million of long-term variable
rate indebtedness bearing interest at floating rates tied to the rate of
short-term tax-exempt revenue bonds (which mature at various dates from 2020
through 2034), $12.2 million of short-term variable rate indebtedness bearing
interest at LIBOR plus 1.25% related to a predevelopment project due in 2009,
and $169.8 million of variable rate indebtedness under our lines of credit. Of
the $169.8 million of variable rate indebtedness under our lines of credit,
$100.0 million is bearing interest at the Freddie Mac Reference Rate plus from
0.55% to 0.59%, $61.0 million is bearing interest at the underlying interest
rate based on a tiered rate structure tied to the Company’s corporate ratings
and is currently at LIBOR plus 0.80%, and $8.8 million is bearing interest at
the underlying interest rate based on the bank’s Prime Rate less 2.0%.
Approximately $152.7 million of the long-term indebtedness is subject to
interest rate cap protection agreements, which may reduce the risks associated
with fluctuations in interest rates. The remaining $68.2 million of long-term
variable rate indebtedness was not subject to any interest rate cap protection
agreements as of December 31, 2007. An increase in interest rates may have an
adverse effect on our net income and results of operations.
Risk of losses on
interest rate hedging arrangements – Periodically, we have entered into
agreements to reduce the risks associated with increases in interest rates, and
may continue to do so. Although these agreements may partially protect against
rising interest rates, they also may reduce the benefits to us if interest rates
decline. If a hedging arrangement is not indexed to the same rate as the
indebtedness that is hedged, we may be exposed to losses to the extent that the
rate governing the indebtedness and the rate governing the hedging arrangement
change independently of each other. Finally, nonperformance by the other party
to the hedging arrangement may subject us to increased credit risks. In order to
minimize counterparty credit risk, our policy is to enter into hedging
arrangements only with A-rated financial institutions.
Bond compliance
requirements may limit income from certain properties - At December 31,
2007, we had approximately $220.9 million of variable rate tax-exempt financing
relating to the following apartment communities: Inglenook Court, Wandering
Creek, Boulevard (Treetops), Huntington Breakers, Camarillo Oaks, Fountain Park,
Anchor Village and Hidden Valley (Parker Ranch). This tax-exempt financing
subjects these properties to certain deed restrictions and restrictive
covenants. We expect to engage in tax-exempt financings in the future. In
addition, the Internal Revenue Code and rules and regulations thereunder impose
various restrictions, conditions and requirements excluding interest on
qualified bond obligations from gross income for federal income tax purposes.
The Internal Revenue Code also requires that at least 20% of apartment units be
made available to residents with gross incomes that do not exceed a specified
percentage, generally 50%, of the median income for the applicable family size
as determined by the Housing and Urban Development Department of the federal
government. In addition to federal requirements, certain state and local
authorities may impose additional rental restrictions. These restrictions may
limit income from the tax-exempt financed properties if we are required to lower
rental rates to attract residents who satisfy the median income test. If the
Company does not reserve the required number of apartment homes for residents
satisfying these income requirements, the tax-exempt status of the bonds may be
terminated, the obligations under the bond documents may be accelerated and we
may be subject to additional contractual liability.
Adverse effect to
property income and value due to general real estate investment risks -
Real property investments are subject to a variety of risks. The yields
available from equity investments in real estate depend on the amount of income
generated and expenses incurred. If the properties do not generate sufficient
income to meet operating expenses, including debt service and capital
expenditures, cash flow and the ability to make distributions to stockholders
will be adversely affected.
Income
from the Properties may be further adversely affected by, among other things,
the following factors:
·
|
the
general economic climate;
|
·
|
local
economic conditions in which the Properties are located, such as
oversupply of housing or a reduction in demand for rental
housing;
|
·
|
the
attractiveness of the properties to
tenants;
|
·
|
competition
from other available space; and
|
·
|
the
Company’s ability to provide for adequate maintenance and
insurance.
|
As leases
on the Properties expire, tenants may enter into new leases on terms that are
less favorable to us. Income and real estate values also may be adversely
affected by such factors as applicable laws (e.g., the Americans with
Disabilities Act of 1990 and tax laws), interest rate levels and the
availability and terms of financing. Real estate investments are
relatively illiquid and, therefore, our ability to vary our portfolio promptly
in response to changes in economic or other conditions may be quite
limited.
Economic
environment and impact on operating results - The national economy and
the economies of the western states in markets where we operate can impact our
operating results. Some of these markets are concentrated in high-tech sectors,
which have experienced economic downturns, and could again in the future. Our
property type and diverse geographic locations provide some degree of risk
mitigation. However, we are not immune to prolonged economic downturns. Although
we believe we are well positioned to meet these challenges, it is possible a
reduction in rental rates, occupancy levels, property valuations and increases
in operating costs such as advertising, turnover and repair and maintenance
expense could occur in the event of economic uncertainty.
Due to
the Company's concentration in supply restricted markets, the Company has not
experienced any material adverse impact from increases in supply of unsold
single family residences.
Risk of
Inflation/Deflation - Substantial inflationary or deflationary pressures
could have a negative effect on rental rates and property operating
expenses.
Risks that
acquisitions will fail to meet expectations - We intend to continue to
acquire apartment communities. However, there are risks that acquisitions will
fail to meet our expectations. Our estimates of future income, expenses and the
costs of improvements or redevelopment that are necessary to allow us to market
an acquired property as originally intended may prove to be inaccurate. We
expect to finance future acquisitions, in whole or in part, under various forms
of secured or unsecured financing or through the issuance of partnership units
by the Operating Partnership or related partnerships or additional equity by the
Company. The use of equity financing, rather than debt, for future developments
or acquisitions could dilute the interest of the Company’s existing
stockholders. If we finance new acquisitions under existing lines of credit,
there is a risk that, unless we obtain substitute financing, the Company may not
be able to secure further lines of credit for new development or such lines of
credit may be not available on advantageous terms.
Risks that
development and redevelopment activities will be delayed, not completed, and/or
not achieve expected results - We pursue apartment community development
and redevelopment projects and these projects generally require various
governmental and other approvals, which have no assurance of being received. Our
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, without limitation, adverse weather conditions,
entitlement and government regulations, labor shortages, or unforeseen
complications;
|
·
|
occupancy
rates and rents at a completed project may be less than anticipated;
and
|
·
|
expenses
at projects may be higher than
anticipated.
|
These
risks may reduce the funds available for distribution to the Company’s
stockholders. Further, the development of properties is also subject to the
general risks associated with real estate investments. For further information
regarding these risks, please see “Adverse Effect to Property Income and Value
Due to General Real Estate Investment Risks.”
The geographic
concentration of the
Company’s Properties and
fluctuations in local markets may adversely impact our financial condition and
operating results – The Company generated significant amounts of rental
revenues for the year ended December 31, 2007, from properties concentrated in
Southern California (Los Angeles, Orange, Santa Barbara, San Diego, and
Ventura counties), Northern California (the San Francisco Bay Area), and the
Seattle metropolitan area. As of December 31, 2007, 81% of the
Company’s property revenues were generated from Properties located in
California. This geographic concentration could present risks if local property
market performance falls below expectations. The economic condition of these
markets could affect occupancy, market rental rates, and expenses, as well as
impact the income generated from the Properties and their underlying asset
values.
The
financial results of major local employers also may impact the cash flow and
value of certain of the Properties. This could have a negative impact on our
financial condition and operating results, which could affect our ability to pay
expected dividends to our stockholders.
Competition in
the apartment community market may adversely affect operations and the rental
demand for our Properties - There are numerous housing alternatives that
compete with our apartment communities in attracting residents. These include
other apartment communities and single-family homes that are available for rent
in the markets in which the Properties are located. The Properties also compete
for residents with new and existing homes and condominiums that are for sale. If
the demand for our Properties is reduced or if competitors develop and/or
acquire competing properties on a more cost-effective basis, rental rates may
drop, which may have a material adverse affect on our financial condition and
results of operations.
We also
face competition from other real estate investment trusts, businesses and other
entities in the acquisition, development and operation of apartment communities.
Some of the competitors are larger and have greater financial resources than we
do. This competition may result in an increase in costs and prices of apartment
communities that we acquire and/or develop.
Dividend
requirements as a result of preferred stock may lead to a possible inability to
sustain dividends -
We have Series F Cumulative Redeemable Preferred Stock (“Series F
Preferred Stock”) with an aggregate liquidation preference of approximately $25
million outstanding and Series G Cumulative Convertible Preferred Stock (“Series
G Preferred Stock”) with an aggregate liquidation preference of approximately
$149.5 million outstanding. In addition, we are required under limited
conditions to issue Series B Cumulative Redeemable Preferred Stock (“Series B
Preferred Stock”) with an aggregate liquidation preference of $80 million and
Series D Cumulative Redeemable Preferred Stock (“Series D Preferred Stock”) with
an aggregate liquidation preference of $50 million in each case in exchange for
outstanding preferred interests in the Operating Partnership. The terms of the
Series B, D, F and G Preferred Stock provide for certain cumulative preferential
cash distributions per each share of preferred stock.
These
terms also provide that while such preferred stock is outstanding, we cannot
authorize, declare, or pay any distributions on our common stock, unless all
distributions accumulated on all shares of such preferred stock have been paid
in full. Our failure to pay distributions on such preferred stock would impair
our ability to pay dividends on our common stock. Our credit agreement limits
our ability to pay dividends on our preferred stock if we fail to satisfy a
fixed charge coverage ratio.
If the
Company wishes to issue any common stock in the future (including upon the
exercise of stock options), the funds required to continue to pay cash dividends
at current levels will be increased. The Company’s ability to pay
dividends will depend largely upon the performance of our current properties and
other properties that may be acquired or developed in the future.
If the
Company cannot pay dividends on its common stock, the Company’s status as a real
estate investment trust may be jeopardized. Our ability to pay dividends on our
common stock is further limited by the Maryland General Corporation Law. Under
the Maryland General Corporation Law, the Company may not make a distribution on
stock if, after giving effect to such distribution, either:
·
|
we
would not be able to pay our indebtedness as it becomes due in the usual
course of business; or
|
·
|
our
total assets would be less than our total liabilities, including the
liquidation preference on our Series B, Series D, Series F, and Series G
preferred stock.
|
Resale of shares
pursuant to our effective registration statement or that are issued upon
conversion of our convertible preferred stock may have an adverse effect on the
market price of the shares – The Company has the following effective
registration statements, which allows for the resale into the public stock of
common stock held by stockholders, as specified in the registration
statements:
·
|
A
registration statement, declared effective in 2003, which covers the
resale of certain shares, including (i) up to 2,270,490 shares of
common stock that are issuable upon exchange of limited partnership
interests in the Operating Partnership and (ii) up to 1,473,125 shares
that are issuable upon exchange of limited partnership interests in
certain other real estate
partnerships;
|
·
|
Registration
statements, declared effective in 2006, that cover (i) the resale of up to
142,076 shares issuable in connection with our Waterford and Vista
Belvedere acquisitions and (ii) the resale of shares issuable in
connection with the exchange rights of our 3.625% Exchangeable Senior
Notes, as to which there is a principal amount of $225 million
outstanding.
|
During
the third quarter of 2006, we issued, pursuant to a registration statement,
5,980,000 shares of 4.875% Series G Cumulative Preferred Stock for estimated
gross proceeds of $149.5 million; such shares are convertible, subject to
certain conditions, into common stock, which could be resold into the public
market.
The
resale of the shares of common stock pursuant to these various registration
statements or that are issued upon conversion of our outstanding convertible
preferred stock may have an adverse effect on the market price of our
shares.
The exchange and
repurchase rights of Exchangeable Senior Notes and Series G Preferred
Stock may be detrimental to holders of common stock - The
Operating Partnership has $225 million principal amount of 3.625% Exchangeable
Senior Notes (the “Notes”) outstanding which mature on November 1, 2025. The
Notes are exchangeable into the Company's common stock on or after November 1,
2020 or prior to November 1, 2020 under certain circumstances. The Notes are
redeemable at the Company's option for cash at any time on or after November 4,
2010 and are subject to repurchase for cash at the option of the holder on
November 1st in the
years 2010, 2015 and 2020, or upon the occurrence of certain events. The Notes
are senior unsecured and unsubordinated obligations of the Company.
In 2006,
the Company sold 5,980,000 shares of 4.875% Series G Cumulative Convertible
Preferred Stock (the “Series G Preferred Stock”) for gross proceeds of $149.5
million. Holders may convert Series G Preferred Stock into shares of
the Company’s common stock subject to certain conditions. The
conversion rate will initially be .1830 shares of common stock per $25 share
liquidation preference, which is equivalent to an initial conversion price of
$136.62 per share of common stock (the conversion rate will be subject to
adjustment upon the occurrence of specified events). On or after July
31, 2011, the Company may, under certain circumstances cause some or all of the
Series G Preferred Stock to be converted into shares of common stock at the then
prevailing conversion rate. Further, if a fundamental change occurs,
as defined in the articles supplementary for the Series G Preferred Stock, then
the holders may require the Company to repurchase all or part of their Series G
Preferred Stock subject to certain conditions.
The
exchange of the Notes and/or Series G Preferred Stock for common stock would
dilute stockholder ownership in the Company, and such exchange could adversely
affect the market price of our common stock and our ability to raise capital
through the sale of additional equity securities. If the Notes and
Series G Preferred Stock are not exchanged, the repurchase price of the Notes
and Series G Preferred Stock may discourage or impede transactions that might
otherwise be in the interest of the holders of common stock. Further, these
repurchase rights may be triggered in situations where the Company needs to
conserve its cash reserves, in which event such repurchase might adversely
affect the Company and its common stockholders.
Our future
issuances of common stock, preferred stock or convertible debt securities could
adversely affect the market price of our common stock - In order to finance our
property acquisition and development activities, we have issued and sold common
stock, preferred stock and convertible debt securities. For example,
during 2007, the Company sold 1,500,000 shares of its common stock in
a public offering for proceeds of $191.8 million, net of underwriter fees and
expenses. During 2007 and 2006, pursuant to a Controlled Equity
Offering program that the Company entered into with Cantor Fitzgerald & Co.,
the Company issued and sold approximately 170,500 and 427,700 shares of common
stock for $21.9 million and $48.3 million, net of fees and commissions,
respectively. The Company may in the future sell further shares of
common stock pursuant to a Controlled Equity Offering program with Cantor
Fitzgerald &Co.
In 2006,
the Company issued 5,980,000 shares of 4.875% Series G Cumulative Convertible
Preferred Stock for gross proceeds of approximately $149.5
million. In 2005, the Operating Partnership sold $225 million
principal amount of 3.625% Exchangeable Senior Notes, which are exchangeable
into the Company’s common stock under certain conditions.
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 of equity and
debt securities as defined in the prospectus. Future sales of common
stock, preferred stock or convertible debt securities may dilute stockholder
ownership in the Company and could adversely affect the market price of the
common stock.
Our Chairman is
involved in other real estate activities and investments, which may lead to
conflicts of interest - Our Chairman, George M. Marcus is not an employee
of the Company, and is involved in other real estate activities and investments,
which may lead to conflicts of interest. Mr. Marcus owns interests in various
other real estate-related businesses and investments. He is the Chairman of The
Marcus & Millichap Company, or (“TMMC”), which is a holding company for
certain real estate brokerage and services companies. TMMC has an interest in
Pacific
Property
Company, a company that invests in apartment communities.
Mr.
Marcus has agreed not to divulge any information that may be received by him in
his capacity as Chairman of the Company to any of his affiliated companies and
that he will abstain his vote on any and all resolutions by the Company Board of
Directors regarding any proposed acquisition and/or development of an apartment
community where it appears that there may be a conflict of interest with any of
his affiliated companies. Notwithstanding this agreement, Mr. Marcus and
his affiliated entities may potentially compete with us in acquiring and/or
developing apartment communities, which competition may be detrimental to
us. In addition, due to such potential competition for real estate
investments, Mr. Marcus and his affiliated entities may have a conflict of
interest with us, which may be detrimental to the interests of the Company’s
stockholders.
The influence of
executive officers, directors and significant stockholders may be detrimental to
holders of common stock - As of December 31, 2007, George M. Marcus, the
Chairman of our Board of Directors, wholly or partially owned 1,768,773 shares
of common stock (including shares issuable upon exchange of limited partnership
interests in the Operating Partnership and certain other partnerships and
assuming exercise of all vested options). This represents approximately 7.1% of
the outstanding shares of our common stock. Mr. Marcus currently does not have
majority control over us. However, he currently has, and likely will continue to
have, significant influence with respect to the election of directors and
approval or disapproval of significant corporate actions. Consequently, his
influence could result in decisions that do not reflect the interests of all our
stockholders.
Under the
partnership agreement of the Operating Partnership, the consent of the holders
of limited partnership interests is generally required for any amendment of the
agreement and for certain extraordinary actions. Through their ownership of
limited partnership interests and their positions with us, our directors and
executive officers, including Mr. Marcus, have substantial influence on us.
Consequently, their influence could result in decisions that do not reflect the
interests of all stockholders.
The voting rights
of preferred stock may allow holders of preferred stock to impede actions that
otherwise benefit holders of common stock - In general, the holders of
our outstanding shares of preferred stock do not have any voting rights.
However, if full distributions are not made on any outstanding preferred stock
for six quarterly distributions periods, the holders of preferred stock who have
not received distributions, voting together as a single class, will have the
right to elect two additional directors to serve on our Board of
Directors.
These
voting rights continue until all distributions in arrears and distributions for
the current quarterly period on the preferred stock have been paid in full. At
that time, the holders of the preferred stock are divested of these voting
rights, and the term and office of the directors so elected immediately
terminates. While any shares of our preferred stock are outstanding, the Company
may not, without the consent of the holders of two-thirds of the outstanding
shares of each series of preferred stock, each voting separately as a single
class:
·
|
authorize
or create any class or series of stock that ranks senior to such preferred
stock with respect to the payment of dividends, rights upon liquidation,
dissolution or winding-up of our
business;
|
·
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amend,
alter or repeal the provisions of the Company’s Charter or Bylaws,
including by merger or consolidation, that would materially and adversely
affect the rights of such series of preferred stock;
or
|
·
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in
the case of the preferred stock into which our preferred units are
exchangeable, merge or consolidate with another entity or transfer
substantially all of its assets to another entity, except if such
preferred stock remains outstanding with the surviving entity and has the
same terms and in certain other
circumstances.
|
These
voting rights of the preferred stock may allow holders of preferred stock to
impede or veto actions that would otherwise benefit the holders of our common
stock.
The redemption
rights of the Series B preferred units, Series D preferred units, Series F
preferred stock and Series G preferred stock may be detrimental to holders of
the Company’s common stock - Upon the occurrence of one of the
following events, the terms of the Operating Partnership’s Series B and D
Preferred Units require it to redeem all of such units and the terms of the
Company’s Series F Preferred Stock and the Series G Preferred Stock provide the
holders of the majority of the outstanding Series F Preferred Stock and Series G
Preferred Stock the right to require the Company to redeem all of such
stock:
·
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the
Company completes a “going private” transaction and its common stock is no
longer registered under the Securities Exchange Act of 1934, as
amended;
|
·
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the
Company completes a consolidation or merger or sale of substantially all
of its assets and the surviving entity’s debt securities do not possess an
investment grade rating;
|
·
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the
Company fails to qualify as a REIT;
or
|
·
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in
the case of Series G preferred stock, The Company common stock is not
traded on a major exchange.
|
The
aggregate redemption price of the Series B Preferred Units would be $80 million,
the aggregate redemption price of the Series D Preferred Units would be $50
million, the aggregate redemption price of the Series F Preferred Stock would be
$25 million and the aggregate redemption price of the Series G Preferred Stock
would be $149.5 million, plus, in each case, any accumulated
distributions.
These
redemption rights may discourage or impede transactions that might otherwise be
in the interest of holders of common stock. Further, these redemption rights
might trigger situations where the Company needs to conserve its cash reserves,
in which event such redemption might adversely affect the Company and its common
holders.
Maryland business
combination law may not allow certain transactions between the Company and its
affiliates to proceed without compliance with such law - Under Maryland law,
“business combinations” between a Maryland corporation and an interested
stockholder or an affiliate of an interested stockholder are prohibited for five
years after the most recent date on which the interested stockholder becomes an
interested stockholder. These business combinations include a merger,
consolidation, share exchange, or, in circumstances specified in the statute, an
asset transfer or issuance or reclassification of equity securities. An
interested stockholder is defined as any person (and certain affiliates of such
person) who beneficially owns ten percent or more of the voting power of the
then-outstanding voting stock. The law also requires a supermajority stockholder
vote for such transactions. This means that the transaction must be approved by
at least:
·
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80%
of the votes entitled to be cast by holders of outstanding voting shares;
and
|
·
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Two-thirds
of the votes entitled to be cast by holders of outstanding voting shares
other than shares held by the interested stockholder with whom the
business combination is to be
effected.
|
The
statute permits various exemptions from its provisions, including business
combinations that are exempted by the board of directors prior to the time that
the interested stockholder becomes an interested stockholder. These
voting provisions do not apply if the stockholders receive a minimum price, as
defined under Maryland law. As permitted by the statute, the Board of
Directors of the Company irrevocably has elected to exempt any business
combination by us, George M. Marcus, William A. Millichap, who are the chairman
and a director of the Company, respectively, and TMMC or any entity owned or
controlled by Messrs. Marcus and Millichap and TMMC. Consequently, the five-year
prohibition and supermajority vote requirement described above will not apply to
any business combination between us and Mr. Marcus, Mr. Millichap, or TMMC. As a
result, we may in the future enter into business combinations with Messrs.
Marcus and Millichap and TMMC, without compliance with the supermajority vote
requirements and other provisions of the Maryland General Corporation
Law.
Anti-takeover
provisions contained in the Operating Partnership agreement, charter, bylaws,
and certain provisions of Maryland law could delay, defer or prevent a change in
control - While
the Company is the sole general partner of the Operating Partnership, and
generally has full and exclusive responsibility and discretion in the management
and control of the Operating Partnership, certain provisions of the Operating
Partnership agreement place limitations on the Company’s ability to act with
respect to the Operating Partnership. Such limitations could delay, defer or
prevent a transaction or a change in control that might involve a premium price
for our stock or otherwise be in the best interest of the stockholders or that
could otherwise adversely affect the interest of the Company’s stockholders. The
partnership agreement provides that if the limited partners own at least 5% of
the outstanding units of partnership interest in the Operating Partnership, the
Company cannot, without first obtaining the consent of a majority-in-interest of
the limited partners in the Operating Partnership, transfer all or any portion
of our general partner interest in the Operating Partnership to another entity.
Such limitations on the Company’s ability to act may result in our being
precluded from taking action that the Board of Directors believes is in the best
interests of the Company’s stockholders. As of December 31, 2007, the limited
partners held or controlled approximately 9.1% of the outstanding units of
partnership interest in the Operating Partnership, allowing such actions to be
blocked by the limited partners.
The
Company’s Charter authorizes the issuance of additional shares of common stock
or preferred stock and the setting of the preferences, rights and other terms of
such preferred stock without the approval of the holders of the common stock. We
may establish one or more series of preferred stock that could delay defer or
prevent a transaction or a change in control. Such a transaction might involve a
premium price for our stock or otherwise be in the best interests of the holders
of common stock. Also, such a class of preferred stock could have dividend,
voting or other rights that could adversely affect the interest of holders of
common stock.
The
Company’s Charter, as well as the Company’s stockholder rights plan, contains
other provisions that may delay, defer or prevent a transaction or a change in
control that might be in the best interest of the Company’s stockholders. The
Company’s stockholder rights plan is designed, among other things, to prevent a
person or group from gaining control of the Company without offering a fair
price to all of the Company’s stockholders. The Bylaws may be amended by the
Board of Directors to include provisions that would have a similar effect,
although the Company presently has no such intention. The Charter contains
ownership provisions limiting the transferability and
ownership
of shares of capital stock, which may have the effect of delaying, deferring or
preventing a transaction or a change in control. For example, subject to
receiving an exemption from the Board of Directors, potential acquirers may not
purchase more than 6% in value of the stock (other than qualified pension trusts
which can acquire 9.9%). This may discourage tender offers that may be
attractive to the holders of common stock and limit the opportunity for
stockholders to receive a premium for their shares of common stock.
The
Maryland General Corporations Law restricts the voting rights of shares deemed
to be “control shares.” Under the Maryland General Corporations
Law, “control shares” are those which, when aggregated with any other shares
held by the acquirer, entitle the acquirer to exercise voting power within
specified ranges. Although the Bylaws exempt the Company from the control share
provisions of the Maryland General Corporations Law, the Board of Directors may
amend or eliminate the provisions of the Bylaws at any time in the future.
Moreover, any such amendment or elimination of such provision of the Bylaws may
result in the application of the control share provisions of the Maryland
General Corporations Law not only to control shares which may be acquired in the
future, but also to control shares previously acquired. If the provisions of the
Bylaws are amended or eliminated, the control share provisions of the Maryland
General Corporations Law could delay, defer or prevent a transaction or change
in control that might involve a premium price for the stock or otherwise be in
the best interests of the Company’s stockholders.
The Company’s
joint ventures and joint ownership of Properties and partial interests in
corporations and limited partnerships could limit the Company’s ability to
control such Properties and partial interests - Instead of purchasing
apartment communities directly, we have invested and may continue to invest in
joint ventures. Joint venture partners often have shared control over
the operation of the joint venture assets. Therefore, it is possible that a
joint venture partner in an investment might become bankrupt, or have economic
or business interests or goals that are inconsistent with our business interests
or goals, or be in a position to take action contrary to our instructions or
requests, or our policies or objectives. Consequently, a joint venture partners’
actions might subject property owned by the joint venture to additional risk.
Although we seek to maintain sufficient influence over any joint venture to
achieve its objectives, we may be unable to take action without our joint
venture partners’ approval, or joint venture partners could take actions binding
on the joint venture without our consent. Should a joint venture
partner become bankrupt, we could become liable for such partner’s share of
joint venture liabilities.
From time
to time, we, through the Operating Partnership, invest in corporations, limited
partnerships, limited liability companies or other entities that have been
formed for the purpose of acquiring, developing or managing real property. In
certain circumstances, the Operating Partnership’s interest in a particular
entity may be less than a majority of the outstanding voting interests of that
entity. Therefore, the Operating Partnership’s ability to control the daily
operations of such an entity may be limited. Furthermore, the Operating
Partnership may not have the power to remove a majority of the board of
directors (in the case of a corporation) or the general partner or partners (in
the case of a limited partnership) of such an entity in the event that its
operations conflict with the Operating Partnership’s objectives. The Operating
Partnership may not be able to dispose of its interests in such an entity. In
the event that such an entity becomes insolvent, the Operating Partnership may
lose up to its entire investment in and any advances to the entity. We have, and
in the future may, enter into transactions that could require us to pay the tax
liabilities of partners, which contribute assets into joint ventures or the
Operating Partnership, in the event that certain taxable events, which are
within our control, occur. Although we plan to hold the contributed assets or
defer recognition of gain on their sale pursuant to the like-kind exchange rules
under Section 1031 of the Internal Revenue Code, we can provide no assurance
that we will be able to do so and if such tax liabilities were incurred they can
expect to have a material impact on our financial position.
Dedicated
investment activities and other factors specifically related to Fund II -
Fund II involves risks to us such as the following:
·
|
our
partners in Fund II might remove the Company as the general partner of
Fund II;
|
·
|
our
partners in Fund II might become bankrupt (in which event we might become
generally liable for the liabilities of Fund
II);
|
·
|
our
partners in Fund II might have economic or business interests or goals
that are inconsistent with our business interests or
goals;
|
·
|
our
partners in Fund II might fail to fund capital commitments as
contractually required; or
|
· |
our
partners in Fund II might fail to approve decisions regarding Fund II that
are in the Company’s best interest. |
We will,
however, generally seek to maintain sufficient influence over Fund II to permit
it to achieve its business objectives.
Investments in
mortgages and other real estate securities – The Company may invest in
securities related to real estate, which could adversely affect our ability to
make distributions to stockholders. The Company may purchase
securities issued by entities which own real estate and invest in mortgages or
unsecured debt obligations. These mortgages may be first, second or third
mortgages that may or may not be insured or otherwise guaranteed. In general,
investments in mortgages include the following risks:
·
|
that
the value of mortgaged property may be less than the amounts owed, causing
realized or unrealized losses;
|
·
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the
borrower may not pay indebtedness under the mortgage when due, requiring
us to foreclose, and the amount recovered in connection with the
foreclosure may be less than the amount
owed;
|
·
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that
interest rates payable on the mortgages may be lower than our cost of
funds; and
|
·
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in
the case of junior mortgages, that foreclosure of a senior mortgage would
eliminate the junior mortgage.
|
If any of
the above were to occur, cash flows from operations and our ability to make
expected dividends to stockholders could be adversely affected.
Possible
environmental liabilities - Under various federal, state and local laws,
ordinances and regulations, an owner or operator of real estate is liable for
the costs of removal or remediation of certain hazardous or toxic substances on,
in, to or migrating from such property. Such laws often impose liability without
regard as to whether the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. The presence of such substances,
or the failure to properly remediate such substances, may adversely affect the
owner’s or operator’s ability to sell or rent such property or to borrow using
such property as collateral. Persons exposed to such substances, either through
soil vapor or ingestion of the substances may claim personal injury damages.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances or wastes also may be liable for the costs of removal or remediation
of such substances at the disposal or treatment facility to which such
substances or wastes were sent, whether or not such facility is owned or
operated by such person. Certain environmental laws impose liability for release
of asbestos-containing materials (“ACMs”) into the air, and third parties may
seek recovery from owners or operators of real properties for personal injury
associated with ACMs. In connection with the ownership (direct or indirect),
operation, management and development of real properties, the Company could be
considered an owner or operator of such properties or as having arranged for the
disposal or treatment of hazardous or toxic substances and, therefore, may be
potentially liable for removal or remediation costs, as well as certain other
costs, including governmental fines and costs related to injuries of persons and
property.
Investments
in real property create a potential for environmental liabilities on the part of
the owner of such real property. We carry certain limited insurance coverage for
this type of environmental risk. We have conducted environmental studies which
revealed the presence of groundwater contamination at certain Properties. Such
contamination at certain of these properties was reported to have migrated
on-site from adjacent industrial manufacturing operations. The former industrial
users of the Properties were identified as the source of contamination. The
environmental studies noted that certain Properties are located adjacent to any
possible down gradient from sites with known groundwater contamination, the
lateral limits of which may extend onto such properties. The environmental
studies also noted that at certain of these properties, contamination existed
because of the presence of underground fuel storage tanks, which have been
removed. In general, in connection with the ownership, operation, financing,
management and development of real properties, we may be potentially liable for
removal or clean-up costs, as well as certain other costs and environmental
liabilities. We may also be subject to governmental fines and costs related to
injuries to persons and property.
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, such matters, which matters remain unresolved and
pending. 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 limited
coverage for mold, although the insurance may not cover all pending or future
mold claims. The Company has adopted programs designed to manage the
existence of mold in its properties as well as guidelines for promptly
addressing and resolving reports of mold to minimize any impact mold might have
on residents or the property. The Company cannot assure you that it
will not be sued in the future for mold related matters and cannot assure you
that the liabilities resulting from such current or future mold related matters
will not be substantial. The costs of carrying insurance to address
potential mold related claims may also be substantial.
California
has enacted legislation commonly referred to as “Proposition 65” requiring that
“clear and reasonable” warnings be given to consumers who are exposed to
chemicals known to the State of California to cause cancer or reproductive
toxicity, including tobacco smoke. Although we have sought to comply with
Proposition 65 requirements, we cannot assure you that we will not be adversely
affected by litigation relating to Proposition 65.
Methane
gas is a naturally-occurring gas that is commonly found below the surface in
several areas, particularly in the Southern California coastal areas.
Methane is a non-toxic gas, but can be ignitable in confined spaces.
Although naturally-occurring, methane gas is not regulated at the state or
federal level, some local governments, such as the County of Los Angeles, have
imposed requirements that new buildings install detection systems in areas where
methane gas is known to be located.
Methane
gas is also associated with certain industrial activities, such as former
municipal waste landfills. Radon is also a naturally-occurring gas
that is found below the surface. The Company cannot assure you that
it will not be adversely affected by costs related to its compliance with
methane gas related requirements or litigation costs related to methane or radon
gas.
The
Company has almost no indemnification agreements from third parties for
potential environmental clean-up costs at its Properties. The Company has no way
of determining at this time the magnitude of any potential liability to which it
may be subject arising out of unknown environmental conditions or violations
with respect to the properties formerly owned by the Company. No assurance can
be given that existing environmental studies with respect to any of the
Properties reveal all environmental liabilities, that any prior owner or
operator of a Property did not create any material environmental condition not
known to the Company, or that a material environmental condition does not exist
as to any one or more of the Properties. The Company has limited insurance
coverage for the types of environmental liabilities described
above.
General uninsured
losses - 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. In January 2007, the Company canceled its then
existing earthquake policy and established a wholly owned insurance subsidiary,
Pacific Western Insurance LLC (“PWI”). Through PWI, the Company is
self-insured as it relates to earthquake related
losses. Additionally, as of January 2008, PWI provides property and
casualty insurance coverage for the first $5.0 million of the Company’s property
level insurance claims per incident.
Although
the Company may carry insurance for potential losses associated with its
Properties, employees, residents, and compliance with applicable laws, it may
still incur losses due to uninsured risks, deductibles, co-payments or losses in
excess of applicable insurance coverage and those losses may be
material. In the event of a substantial loss, insurance coverage may
not be able to cover the full current market value of replacement cost of the
Company’s lost investment. Inflation, changes in building codes and
ordinances, environmental considerations and other factors might also affect the
Company’s ability to replace or renovate an apartment community after it has
been damaged or destroyed.
Changes in real
estate tax and other laws - Generally we do not directly pass through
costs resulting from changes in real estate tax laws to residential property
tenants. We also do not generally pass through increases in income, service or
other taxes, to tenants under leases. These costs may adversely affect funds
from operations and the ability to make distributions to stockholders.
Similarly, compliance with changes in (i) laws increasing the potential
liability for environmental conditions existing on properties or the
restrictions on discharges or other conditions or (ii) rent control or rent
stabilization laws or other laws regulating housing may result in significant
unanticipated decrease in revenue or increase in expenditures, which would
adversely affect funds from operations and the ability to make distributions to
stockholders.
Changes in
financing policy; no limitation on debt – We have adopted a policy of
maintaining a debt-to-total-market-capitalization ratio of less than 50%. The
calculation of debt-to-total-market-capitalization is as follows: total
indebtedness divided by the sum of total indebtedness plus total equity market
capitalization. As used in this calculation, total equity market
capitalization is equal to the aggregate market value of the outstanding shares
of common stock (based on the greater of current market price or the gross
proceeds per share from public offerings of the outstanding shares plus any
undistributed net cash flow), assuming the conversion of all limited partnership
interests in the Operating Partnership into shares of common stock and the gross
proceeds of the preferred units and preferred stock. Based on this calculation
(including the current market price and excluding undistributed net cash flow),
our debt-to-total-market-capitalization ratio was approximately 35.7% as of
December 31, 2007.
Our
organizational documents do not limit the amount or percentage of indebtedness
that may be incurred. Accordingly, the Board of Directors of The Company could
change current policies and the policies of the Operating Partnership regarding
indebtedness. If we changed these policies, we could incur more debt, resulting
in an increased risk of default on our obligations and the obligations of the
Operating Partnership, and an increase in debt service requirements that could
adversely affect our financial condition and results of operations. Such
increased debt could exceed the underlying value of the Properties.
We are subject to
certain tax risks - The Company has elected
to be taxed as a REIT under the Internal Revenue Code. The Company’s
qualification as a REIT requires it to satisfy numerous requirements (some on an
annual and quarterly basis) established under highly technical and complex
Internal Revenue Code provisions for which there are only limited judicial or
administrative interpretations, and involves the determination of various
factual matters and circumstances not entirely within the Company’s control.
Although the Company intends that its current organization and method of
operation enable it to qualify as a REIT, the Company cannot assure you that it
so qualifies or that it will be able to remain so qualified in the future.
Future legislation, new regulations, administrative interpretations or court
decisions (any of which could have retroactive effect) could adversely the
Company’s ability to qualify as a REIT or adversely affect its stockholders. If
it fails to qualify as a REIT in any taxable year, the Company would be subject
to U.S. federal income tax (including any applicable alternative minimum tax) on
its taxable income at corporate rates, and would not be allowed to deduct
dividends paid to its shareholders in computing its taxable income. The Company
may also be disqualified from treatment as a REIT for the four taxable years
following the year in which it failed to qualify. The additional tax liability
would reduce its net earnings available for investment or distribution to
stockholders, and it would no longer be required to make distributions to its
stockholders. Even if the Company continues to qualify as a REIT, it will
continue to be subject to certain federal, state and local taxes on its income
and property.
The
Company has established several taxable REIT subsidiaries. Despite the Company’s
qualification as a REIT, its taxable REIT subsidiaries must pay U.S. federal
income tax on their taxable income. While the Company will attempt to ensure
that its dealing with its taxable REIT subsidiaries does not
adversely affect its REIT qualification, the Company cannot provide assurance
that it will successfully achieve that result. Furthermore, the Company may be
subject to a 100% penalty tax, or its taxable REIT subsidiaries may
be denied deductions, to the extent its dealings with its taxable REIT
subsidiaries’ are not deemed to be arm’s length in nature. No
assurances can be given that The Company’s dealings with its taxable REIT
subsidiaries’ will be arm’s length in nature.
From time
to time, we may transfer or otherwise dispose of some of our Properties. Under
the Internal Revenue Code, any gain resulting from transfers of Properties that
we hold as inventory or primarily for sale to customers in the ordinary course
of business would be treated as income from a prohibited transaction subject to
a 100% penalty tax. Since we acquire properties for investment purposes, we do
not believe that our occasional transfers or disposals of property are
prohibited transactions. However, whether property is held for investment
purposes is a question of fact that depends on all the facts and circumstances
surrounding the particular transaction. The Internal Revenue Service may contend
that certain transfers or disposals of properties by us are prohibited
transactions. If the Internal Revenue Service were to argue successfully that a
transfer or disposition of property constituted a prohibited transaction, then
the Company would be required to pay a 100% penalty tax on any gain allocable to
the Company from the prohibited transaction and the Company’s ability to retain
future gains on real property sales may be jeopardized. Income from a
prohibited transaction might adversely affect the Company’s ability to satisfy
the income tests for qualification as a REIT for U.S. federal income tax
purposes. Therefore, no assurances can be given that the Company will
be able to satisfy the income tests for qualification as a REIT.
Item
1B. Unresolved Staff Comments.
None.
Item
2. Properties
Our core
apartment Portfolio as of December 31, 2007 (including partial ownership
interests) was comprised of 134 apartment communities (comprising 27,489
apartment units), of which 13,205 units are located in Southern California,
8,462 units are located in the San Francisco Bay Area, 5,520 units are located
in the Seattle metropolitan area, and 302 units are located in the other areas
which consists of one community in Houston, Texas. The Company’s
apartment communities accounted for 97.5% of the Company’s revenue for the year
ended December 31, 2007.
Occupancy
Rates
The 134
apartment communities had an average Same-Properties occupancy (as defined in
Item 7), based on “financial occupancy,” during the year ended December 31,
2007, of approximately 95.9%. With respect to stabilized apartment communities
with sufficient operating history, occupancy figures are based on financial
occupancy (the percentage resulting from dividing actual rental revenue by total
possible rental revenue). Actual rental revenue represents contractual 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.
As of
December 31, 2007, the headquarters building was 100% occupied by the Company
and the Southern California office building was 100% occupied, based on physical
occupancy. With respect to office buildings, occupancy figures are based on
“physical occupancy” which refers to the percentage resulting from dividing
leased and occupied square footage by rentable square footage. With respect to
recreational vehicle parks, manufactured housing communities, or apartment
communities which have not yet stabilized or have insufficient operating
history, occupancy figures are based on “physical occupancy” which refers to the
percentage resulting from dividing leased and occupied units by rentable
units.
For the
year ended December 31, 2007, none of the Company’s Properties had book values
equal to 10% or more of total assets of the Company or gross revenues equal to
10% or more of aggregate gross revenues of the Company.
Apartment
Communities
Our
apartment communities are generally suburban garden apartments and town homes
comprising multiple clusters of two and three story buildings situated on three
to fifteen acres of land. The apartment communities have on average of 205
units, with a mix of studio, one, two and some three-bedroom units. A wide
variety of amenities are available at each apartment community, including
covered parking, fireplaces, swimming pools, clubhouses with complete fitness
facilities, volleyball and playground areas and tennis courts.
We
select, train and supervise a full team of on-site service and maintenance
personnel. We believe that the following primary factors enhance our ability to
retain tenants:
·
|
located
near employment centers
|
·
|
well
built communities that have been well maintained since acquisition;
and
|
· |
proactive
customer service approach. |
Office
and Other Commercial Buildings
The
Company’s corporate headquarters is located in an office building with
approximately 17,400 square feet located at 925 East Meadow Drive, Palo Alto,
California. The Company acquired the property in 1997. In December 2007, the
Company acquired the adjacent property at 935 East Meadow Drive, and the Company
will be making improvements to the building though the third quarter
of 2008. This building is approximately 14,500 square feet and will
be solely occupied by the Company. The Company also owns an office building in
Southern California (Woodland Hills), comprised of approximately 38,900 square
feet building, of which the Company occupies approximately 11,500 square feet at
December 31, 2007. The building has nine third-party tenants occupying
approximately 27,400 square feet. The largest single tenant occupies
approximately 10,900 square feet. The Company acquired the Woodland Hills
property in 2001. The Company has a mortgage loan receivable on an office
building with approximately 110,000 square feet located in Irvine, California,
which is consolidated in accordance with GAAP. The Company also has
two predevelopment projects, Cadence Campus which is an office
building comprised of 262,500 square feet, and Essex-Hollywood a commercial
building currently utilitized as a production studio of 35,000 square feet, and
both properties are 100% leased to single tenants.
Recreational
Vehicle Parks and Manufactured Housing Community
The
Company owns two recreational vehicle parks (comprising of 338 spaces), acquired
in the Company’s December 2002 acquisition of John M. Sachs, Inc., and located
in El Cajon, California. The Company
also owns one manufactured housing community (containing 157 sites), acquired in
the Company’s December 2002 acquisition of John M. Sachs, Inc., and located in
Vista, California.
The
following tables describe the Company’s Properties as of December 31, 2007. The
first table describes the Company’s apartment communities and the second table
describes the Company’s other real estate assets.
|
|
|
|
|
|
Rentable
|
|
|
|
|
|
|
|
|
|
|
|
|
Square
|
|
Year
|
|
Year
|
|
|
Apartment
Communities (1)
|
|
Location
|
|
Units
|
|
Footage
|
|
Built
|
|
Acquired
|
|
Occupancy(2)
|
Southern
California
|
|
|
|
|
|
|
|
|
|
|
|
|
Alpine
Country
|
|
Alpine,
CA
|
|
108
|
|
81,900
|
|
1986
|
|
2002
|
|
94%
|
Alpine
Village
|
|
Alpine,
CA
|
|
306
|
|
254,400
|
|
1971
|
|
2002
|
|
96%
|
Barkley,
The(3)(4)
|
|
Anaheim,
CA
|
|
161
|
|
139,800
|
|
1984
|
|
2000
|
|
97%
|
Bonita
Cedars
|
|
Bonita,
CA
|
|
120
|
|
120,800
|
|
1983
|
|
2002
|
|
98%
|
Camarillo
Oaks
|
|
Camarillo,
CA
|
|
564
|
|
459,000
|
|
1985
|
|
1996
|
|
96%
|
Camino
Ruiz Square
|
|
Camarillo,
CA
|
|
160
|
|
105,448
|
|
1990
|
|
2006
|
|
97%
|
Mountain
View
|
|
Camarillo,
CA
|
|
106
|
|
83,900
|
|
1980
|
|
2004
|
|
98%
|
Cardiff
by the Sea
|
|
Cardiff,
CA
|
|
300
|
|
284,460
|
|
1986
|
|
2007
|
|
97%
|
Cambridge
|
|
Chula
Vista, CA
|
|
40
|
|
22,100
|
|
1965
|
|
2002
|
|
96%
|
Woodlawn
Colonial
|
|
Chula
Vista, CA
|
|
159
|
|
104,500
|
|
1974
|
|
2002
|
|
93%
|
Mesa
Village
|
|
Clairemont,
CA
|
|
133
|
|
43,600
|
|
1963
|
|
2002
|
|
99%
|
Parcwood(5)
|
|
Corona,
CA
|
|
312
|
|
270,000
|
|
1989
|
|
2004
|
|
95%
|
Coral
Gardens
|
|
El
Cajon, CA
|
|
200
|
|
182,000
|
|
1976
|
|
2002
|
|
94%
|
Tierra
del Sol/Norte
|
|
El
Cajon, CA
|
|
156
|
|
117,000
|
|
1969
|
|
2002
|
|
97%
|
Grand
Regency
|
|
Escondido,
CA
|
|
60
|
|
42,400
|
|
1967
|
|
2002
|
|
98%
|
Valley
Park(6)
|
|
Fountain
Valley, CA
|
|
160
|
|
169,700
|
|
1969
|
|
2001
|
|
96%
|
Capri
at Sunny Hills(6)
|
|
Fullerton,
CA
|
|
100
|
|
128,100
|
|
1961
|
|
2001
|
|
97%
|
Wilshire
Promenade
|
|
Fullerton,
CA
|
|
149
|
|
128,000
|
|
1992(7)
|
|
1997
|
|
94%
|
Montejo(6)
|
|
Garden
Grove, CA
|
|
124
|
|
103,200
|
|
1974
|
|
2001
|
|
97%
|
CBC
Apartments
|
|
Goleta,
CA
|
|
148
|
|
91,538
|
|
1962
|
|
2006
|
|
98%
|
Chimney
Sweep Apartments
|
|
Goleta,
CA
|
|
91
|
|
88,370
|
|
1967
|
|
2006
|
|
95%
|
Hampton
Court (Columbus)
|
|
Glendale,
CA
|
|
83
|
|
71,500
|
|
1974(8)
|
|
1999
|
|
94%
|
Hampton
Place (Lorraine)
|
|
Glendale,
CA
|
|
132
|
|
141,500
|
|
1970(9)
|
|
1999
|
|
95%
|
Devonshire
|
|
Hemet,
CA
|
|
276
|
|
207,200
|
|
1988
|
|
2002
|
|
92%
|
Huntington
Breakers
|
|
Huntington
Beach, CA
|
342
|
|
241,700
|
|
1984
|
|
1997
|
|
97%
|
Hillsborough
Park
|
|
La
Habra, CA
|
|
235
|
|
215,500
|
|
1999
|
|
1999
|
|
96%
|
Trabuco
Villas
|
|
Lake
Forest, CA
|
|
132
|
|
131,000
|
|
1985
|
|
1997
|
|
98%
|
Marbrisa
|
|
Long
Beach, CA
|
|
202
|
|
122,800
|
|
1987
|
|
2002
|
|
97%
|
Pathways
|
|
Long
Beach, CA
|
|
296
|
|
197,700
|
|
1975(10)
|
|
1991
|
|
85%
|
Bunker
Hill
|
|
Los
Angeles, CA
|
|
456
|
|
346,600
|
|
1968
|
|
1998
|
|
96%
|
Cochran
Apartments
|
|
Los
Angeles, CA
|
|
58
|
|
51,400
|
|
1989
|
|
1998
|
|
93%
|
Kings
Road
|
|
Los
Angeles, CA
|
|
196
|
|
132,100
|
|
1979(11)
|
|
1997
|
|
96%
|
Marbella,
The
|
|
Los
Angeles, CA
|
|
60
|
|
50,108
|
|
1991
|
|
2005
|
|
90%
|
Marina
City Club(12)
|
|
Los
Angeles, CA
|
|
101
|
|
127,200
|
|
1971
|
|
2004
|
|
95%
|
Park
Place
|
|
Los
Angeles, CA
|
|
60
|
|
48,000
|
|
1988
|
|
1997
|
|
93%
|
Renaissance,
The(5)
|
|
Los
Angeles, CA
|
|
168
|
|
154,268
|
|
1990(13)
|
|
2006
|
|
84%
|
Windsor
Court
|
|
Los
Angeles, CA
|
|
58
|
|
46,600
|
|
1988
|
|
1997
|
|
93%
|
Mirabella(14)
|
|
Marina
Del Rey, CA
|
|
188
|
|
176,800
|
|
2000
|
|
2000
|
|
98%
|
Mira
Monte
|
|
Mira
Mesa, CA
|
|
355
|
|
262,600
|
|
1982(15)
|
|
2002
|
|
96%
|
Hillcrest
Park
|
|
Newbury
Park, CA
|
|
608
|
|
521,900
|
|
1973(16)(17)
|
1998
|
|
96%
|
Fairways(18)
|
|
Newport
Beach, CA
|
|
74
|
|
107,100
|
|
1972
|
|
1999
|
|
90%
|
Country
Villas
|
|
Oceanside,
CA
|
|
180
|
|
179,700
|
|
1976
|
|
2002
|
|
97%
|
Mission
Hills
|
|
Oceanside,
CA
|
|
282
|
|
244,000
|
|
1984
|
|
2005
|
|
97%
|
Mariner's
Place
|
|
Oxnard,
CA
|
|
105
|
|
77,200
|
|
1987
|
|
2000
|
|
98%
|
Monterey
Villas
|
|
Oxnard,
CA
|
|
122
|
|
122,100
|
|
1974(19)
|
|
1997
|
|
98%
|
Tierra
Vista
|
|
Oxnard,
CA
|
|
404
|
|
387,100
|
|
2001
|
|
2001
|
|
96%
|
Monterra
del Mar
|
|
Pasadena,
CA
|
|
123
|
|
74,400
|
|
1972(20)
|
|
1997
|
|
94%
|
Monterra
del Rey
|
|
Pasadena,
CA
|
|
84
|
|
73,100
|
|
1972(21)
|
|
1999
|
|
92%
|
Monterra
del Sol
|
|
Pasadena,
CA
|
|
85
|
|
69,200
|
|
1972(22)
|
|
1999
|
|
96%
|
Villa
Angelina(6)
|
|
Placentia,
CA
|
|
256
|
|
217,600
|
|
1970
|
|
2001
|
|
97%
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentable
|
|
|
|
|
|
|
|
|
|
|
|
|
Square
|
|
Year
|
|
Year
|
|
|
Apartment
Communities (1)
|
|
Location
|
|
Units
|
|
Footage
|
|
Built
|
|
Acquired
|
|
Occupancy(2)
|
Southern
California (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fountain
Park
|
|
Playa
Vista, CA
|
|
705
|
|
608,900
|
|
2002
|
|
2004
|
|
96%
|
Highridge(6)
|
|
Rancho
Palos Verdes, CA
|
255
|
|
290,200
|
|
1972(23)
|
|
1997
|
|
92%
|
Bluffs
II, The(24)
|
|
San
Diego, CA
|
|
224
|
|
126,700
|
|
1974
|
|
1997
|
|
98%
|
Summit
Park
|
|
San
Diego, CA
|
|
300
|
|
229,400
|
|
1972
|
|
2002
|
|
97%
|
Vista
Capri - North
|
|
San
Diego, CA
|
|
106
|
|
51,800
|
|
1975
|
|
2002
|
|
98%
|
Brentwood
(Hearthstone)(6)
|
|
Santa
Ana, CA
|
|
140
|
|
154,800
|
|
1970
|
|
2001
|
|
96%
|
Treehouse(6)
|
|
Santa
Ana, CA
|
|
164
|
|
135,700
|
|
1970
|
|
2001
|
|
95%
|
Hope
Ranch Collection
|
|
Santa
Barbara, CA
|
|
108
|
|
126,700
|
|
1965&73
|
|
2007
|
|
95%
|
Carlton
Heights
|
|
Santee,
CA
|
|
70
|
|
48,400
|
|
1979
|
|
2002
|
|
94%
|
Hidden
Valley (Parker Ranch)(25)
|
|
Simi
Valley, CA
|
|
324
|
|
310,900
|
|
2004
|
|
2004
|
|
94%
|
Meadowood
|
|
Simi
Valley, CA
|
|
320
|
|
264,500
|
|
1986
|
|
1996
|
|
91%
|
Shadow
Point
|
|
Spring
Valley, CA
|
|
172
|
|
131,200
|
|
1983
|
|
2002
|
|
97%
|
Coldwater
Canyon
|
|
Studio
City, CA
|
|
39
|
|
34,125
|
|
1979
|
|
2007
|
|
70%
|
Lofts
at Pinehurst, The
|
|
Ventura,
CA
|
|
118
|
|
71,100
|
|
1971(26)
|
|
1997
|
|
97%
|
Pinehurst(27)
|
|
Ventura,
CA
|
|
28
|
|
21,200
|
|
1973
|
|
2004
|
|
98%
|
Woodside
Village
|
|
Ventura,
CA
|
|
145
|
|
136,500
|
|
1987
|
|
2004
|
|
96%
|
Walnut
Heights
|
|
Walnut,
CA
|
|
163
|
|
146,700
|
|
1964
|
|
2003
|
|
94%
|
Avondale
at Warner Center
|
|
Woodland
Hills, CA
|
|
446
|
|
331,000
|
|
1970(28)
|
|
1997
|
|
92%
|
|
|
|
|
13,205
|
|
11,038,017
|
|
|
|
|
|
95%
|
Northern
California
|
|
|
|
|
|
|
|
|
|
|
|
|
Belmont
Terrace
|
|
Belmont,
CA
|
|
71
|
|
72,951
|
|
1974
|
|
2006
|
|
96%
|
Carlmont
Woods(5)
|
|
Belmont,
CA
|
|
195
|
|
107,200
|
|
1971
|
|
2004
|
|
98%
|
Davey
Glen(5)
|
|
Belmont,
CA
|
|
69
|
|
65,974
|
|
1962
|
|
2006
|
|
92%
|
Pointe
at Cupertino, The
|
|
Cupertino,
CA
|
|
116
|
|
135,200
|
|
1963(29)
|
|
1998
|
|
98%
|
Harbor
Cove(5)
|
|
Foster
City, CA
|
|
400
|
|
306,600
|
|
1971
|
|
2004
|
|
97%
|
Stevenson
Place
|
|
Fremont,
CA
|
|
200
|
|
146,200
|
|
1971(30)
|
|
1983
|
|
95%
|
Boulevard
(Treetops)
|
|
Fremont,
CA
|
|
172
|
|
131,200
|
|
1978(31)
|
|
1996
|
|
87%
|
Waterstone
at Fremont (Mountain Vista)(32)
|
|
Fremont,
CA
|
|
526
|
|
433,100
|
|
1975
|
|
2000
|
|
94%
|
City
View (Wimbledon Woods)
|
|
Hayward,
CA
|
|
560
|
|
462,400
|
|
1975(33)
|
|
1998
|
|
95%
|
Alderwood
Park(5)
|
|
Newark,
CA
|
|
96
|
|
74,624
|
|
1987
|
|
2006
|
|
97%
|
Bridgeport
(Summerhill Commons)
|
|
Newark,
CA
|
|
184
|
|
139,000
|
|
1987(34)
|
|
1987
|
|
96%
|
Regency
Towers(5)
|
|
Oakland,
CA
|
|
178
|
|
140,900
|
|
1975(35)
|
|
2005
|
|
92%
|
San
Marcos (Vista del Mar)
|
|
Richmond,
CA
|
|
432
|
|
407,600
|
|
2003
|
|
2003
|
|
96%
|
Mt.
Sutro
|
|
San
Francisco, CA
|
|
99
|
|
64,000
|
|
1973
|
|
2001
|
|
98%
|
Carlyle,
The
|
|
San
Jose, CA
|
|
132
|
|
129,200
|
|
2000
|
|
2000
|
|
97%
|
Enclave,
The(5)
|
|
San
Jose, CA
|
|
637
|
|
525,463
|
|
1998
|
|
2005
|
|
96%
|
Esplanade
|
|
San
Jose, CA
|
|
278
|
|
279,000
|
|
2002
|
|
2004
|
|
97%
|
Waterford,
The
|
|
San
Jose, CA
|
|
238
|
|
219,600
|
|
2000
|
|
2000
|
|
98%
|
Hillsdale
Garden Apartments(36)
|
|
San
Mateo, CA
|
|
697
|
|
611,505
|
|
1948
|
|
2006
|
|
96%
|
Bel
Air
|
|
San
Ramon, CA
|
|
462
|
|
391,000
|
|
1988(37)
|
|
1997
|
|
96%
|
Canyon
Oaks
|
|
San
Ramon, CA
|
|
250
|
|
237,894
|
|
2005
|
|
2007
|
|
94%
|
Foothill
Gardens
|
|
San
Ramon, CA
|
|
132
|
|
155,100
|
|
1985
|
|
1997
|
|
94%
|
Mill
Creek at Windermere
|
|
San
Ramon, CA
|
|
400
|
|
381,060
|
|
2005
|
|
2007
|
|
93%
|
Twin
Creeks
|
|
San
Ramon, CA
|
|
44
|
|
51,700
|
|
1985
|
|
1997
|
|
94%
|
Le
Parc Luxury Apartments
|
|
Santa
Clara, CA
|
|
140
|
|
113,200
|
|
1975(38)
|
|
1994
|
|
98%
|
Marina
Cove(39)
|
|
Santa
Clara, CA
|
|
292
|
|
250,200
|
|
1974(40)
|
|
1994
|
|
98%
|
Harvest
Park
|
|
Santa
Rosa, CA
|
|
104
|
|
116,628
|
|
2004
|
|
2007
|
|
95%
|
Bristol
Commons
|
|
Sunnyvale,
CA
|
|
188
|
|
142,600
|
|
1989
|
|
1997
|
|
97%
|
Brookside
Oaks(6)
|
|
Sunnyvale,
CA
|
|
170
|
|
119,900
|
|
1973
|
|
2000
|
|
99%
|
Magnolia
Lane(41)
|
|
Sunnyvale,
CA
|
|
32
|
|
31,541
|
|
2001
|
|
2007
|
|
97%
|
Montclaire,
The (Oak Pointe)
|
|
Sunnyvale,
CA
|
|
390
|
|
294,100
|
|
1973(42)
|
|
1988
|
|
90%
|
Summerhill
Park
|
|
Sunnyvale,
CA
|
|
100
|
|
78,500
|
|
1988
|
|
1988
|
|
98%
|
Thomas
Jefferson(6)
|
|
Sunnyvale,
CA
|
|
156
|
|
110,824
|
|
1969
|
|
2007
|
|
100%
|
Windsor
Ridge
|
|
Sunnyvale,
CA
|
|
216
|
|
161,800
|
|
1989
|
|
1989
|
|
96%
|
Vista
Belvedere
|
|
Tiburon,
CA
|
|
76
|
|
78,300
|
|
1963
|
|
2004
|
|
94%
|
Tuscana
|
|
Tracy,
CA
|
|
30
|
|
29,088
|
|
2007
|
|
2007
|
|
84%
|
|
|
|
|
8,462
|
|
7,195,152
|
|
|
|
|
|
96%
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentable
|
|
|
|
|
|
|
|
|
|
|
|
Square
|
|
Year
|
|
Year
|
|
|
Apartment
Communities (1)
|
|
Location
|
|
Units
|
|
Footage
|
|
Built
|
|
Acquired
|
|
Occupancy(2)
|
Seattle,
Washington Metropolitan Area
|
|
|
|
|
|
|
|
|
|
|
|
|
Cedar
Terrace
|
|
Bellevue,
WA
|
|
180
|
|
174,200
|
|
1984
|
|
2005
|
|
95%
|
Emerald
Ridge-North
|
|
Bellevue,
WA
|
|
180
|
|
144,000
|
|
1987
|
|
1994
|
|
95%
|
Foothill
Commons
|
|
Bellevue,
WA
|
|
360
|
|
288,300
|
|
1978(43)
|
|
1990
|
|
99%
|
Palisades,
The
|
|
Bellevue,
WA
|
|
192
|
|
159,700
|
|
1977(44)
|
|
1990
|
|
94%
|
Sammamish
View
|
|
Bellevue,
WA
|
|
153
|
|
133,500
|
|
1986(45)
|
|
1994
|
|
87%
|
Woodland
Commons
|
|
Bellevue,
WA
|
|
236
|
|
172,300
|
|
1978(43)
|
|
1990
|
|
99%
|
Canyon
Pointe
|
|
Bothell,
WA
|
|
250
|
|
210,400
|
|
1990
|
|
2003
|
|
97%
|
Inglenook
Court
|
|
Bothell,
WA
|
|
224
|
|
183,600
|
|
1985
|
|
1994
|
|
94%
|
Salmon
Run at Perry Creek
|
|
Bothell,
WA
|
|
132
|
|
117,100
|
|
2000
|
|
2000
|
|
97%
|
Stonehedge
Village
|
|
Bothell,
WA
|
|
196
|
|
214,800
|
|
1986
|
|
1997
|
|
95%
|
Park
Hill at Issaquah
|
|
Issaquah,
WA
|
|
245
|
|
277,700
|
|
1999
|
|
1999
|
|
96%
|
Wandering
Creek
|
|
Kent,
WA
|
|
156
|
|
124,300
|
|
1986
|
|
1995
|
|
98%
|
Bridle
Trails
|
|
Kirkland,
WA
|
|
108
|
|
73,400
|
|
1986(46)
|
|
1997
|
|
97%
|
Evergreen
Heights
|
|
Kirkland,
WA
|
|
200
|
|
188,300
|
|
1990
|
|
1997
|
|
96%
|
Laurels
at Mill Creek, The
|
|
Mill
Creek, WA
|
|
164
|
|
134,300
|
|
1981
|
|
1996
|
|
97%
|
Morning
Run(5)
|
|
Monroe,
WA
|
|
222
|
|
221,786
|
|
1991
|
|
2005
|
|
97%
|
Anchor
Village(6)
|
|
Mukilteo,
WA
|
|
301
|
|
245,900
|
|
1981
|
|
1997
|
|
96%
|
Castle
Creek
|
|
Newcastle,
WA
|
|
216
|
|
191,900
|
|
1997
|
|
1997
|
|
95%
|
Brighton
Ridge
|
|
Renton,
WA
|
|
264
|
|
201,300
|
|
1986
|
|
1996
|
|
96%
|
Fairwood
Pond
|
|
Renton,
WA
|
|
194
|
|
189,200
|
|
1997
|
|
2004
|
|
95%
|
Forest
View
|
|
Renton,
WA
|
|
192
|
|
182,500
|
|
1998
|
|
2003
|
|
96%
|
Cairns,
The
|
|
Seattle,
WA
|
|
100
|
|
70,806
|
|
2006
|
|
2007
|
|
95%
|
Fountain
Court
|
|
Seattle,
WA
|
|
320
|
|
207,000
|
|
2000
|
|
2000
|
|
96%
|
Linden
Square
|
|
Seattle,
WA
|
|
183
|
|
142,200
|
|
1994
|
|
2000
|
|
97%
|
Maple
Leaf
|
|
Seattle,
WA
|
|
48
|
|
35,500
|
|
1986
|
|
1997
|
|
99%
|
Spring
Lake
|
|
Seattle,
WA
|
|
69
|
|
42,300
|
|
1986
|
|
1997
|
|
99%
|
Tower
@ 801(5)
|
|
Seattle,
WA
|
|
173
|
|
118,500
|
|
1970
|
|
2005
|
|
97%
|
Wharfside
Pointe
|
|
Seattle,
WA
|
|
142
|
|
119,200
|
|
1990
|
|
1994
|
|
97%
|
Echo
Ridge(5)
|
|
Snoqualmie,
WA
|
|
120
|
|
124,539
|
|
2000
|
|
2005
|
|
97%
|
|
|
|
|
5,520
|
|
4,688,531
|
|
|
|
|
|
96%
|
Other
Region
|
|
|
|
|
|
|
|
|
|
|
|
|
St.
Cloud
|
|
Houston,
TX
|
|
302
|
|
306,800
|
|
1968
|
|
2002
|
|
93%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
302
|
|
306,800
|
|
|
|
|
|
93%
|
Total/Weighted
Average
|
|
|
|
27,489
|
|
23,228,500
|
|
|
|
|
|
96%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentable
|
|
|
|
|
|
|
|
|
|
|
|
|
Square
|
|
Year
|
|
Year
|
|
|
Other
real estate assets(1)
|
|
Location
|
|
Tenants
|
|
Footage
|
|
Built
|
|
Acquired
|
|
Occupancy(2)
|
Office
Buildings
|
|
|
|
|
|
|
|
|
|
|
|
|
535
- 575 River Oaks(47)
|
|
San
Jose, CA
|
|
1
|
|
262,500
|
|
1990
|
|
2007
|
|
100%
|
925
East Meadow Drive(48)
|
|
Palo
Alto, CA
|
|
1
|
|
17,400
|
|
1988
|
|
1997
|
|
100%
|
935
East Meadow Drive(49)
|
|
Palo
Alto, CA
|
|
-
|
|
14,500
|
|
1962
|
|
2007
|
|
0%
|
6230
Sunset Blvd(47)
|
|
Los
Angeles, CA
|
|
1
|
|
35,000
|
|
1938
|
|
2006
|
|
100%
|
17461
Derian Ave(50)
|
|
Irvine,
CA
|
|
3
|
|
110,000
|
|
1983
|
|
2000
|
|
100%
|
22110-22120
Clarendon Street(51)
|
|
Woodland
Hills, CA
|
|
9
|
|
38,940
|
|
1982
|
|
2001
|
|
100%
|
Total
Office Buildings
|
|
|
|
15
|
|
478,340
|
|
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recreational
Vehicle Parks
|
|
|
|
|
|
|
|
|
|
|
|
|
Circle
RV
|
|
El
Cajon, CA
|
|
179
spaces
|
|
|
|
1977
|
|
2002
|
|
(52)
|
Vacationer
|
|
El
Cajon, CA
|
|
159
spaces
|
|
|
|
1973
|
|
2002
|
|
(52)
|
Total
Recreational Vehicle Parks
|
|
|
|
338
spaces
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured
Housing Community
|
|
|
|
|
|
|
|
|
|
|
|
|
Green
Valley
|
|
Vista,
CA
|
|
157
sites
|
|
|
|
1973
|
|
2002
|
|
(52)
|
Total
Manufactured Housing Community
|
|
|
|
157
sites
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footnotes to the Company’s
Properties Listing as of December 31, 2007
|
(1)
|
Unless
otherwise specified, the Company has a 100% ownership interest in each
Property.
|
(2)
|
For
apartment communities, occupancy rates are based on financial occupancy
for the year ended December 31, 2007; for the office buildings,
recreational vehicle parks, manufactured housing communities or properties
which have not yet stabilized or have insufficient operating history,
occupancy rates are based on physical occupancy as of December 31, 2007.
For an explanation of how financial occupancy and physical occupancy are
calculated, see “Properties-Occupancy Rates” in this Item
2.
|
(3)
|
The
Company has a 30% special limited partnership interest in the entity that
owns this apartment community. This investment was made under arrangements
whereby the Essex Management Corporation (“EMC”) became the general
partner and the existing partners were granted the right to require the
applicable partnership to redeem their interest for cash. Subject to
certain conditions, the Company may, however, elect to deliver an
equivalent number of shares of the Company’s common stock in satisfaction
of the applicable partnership's cash redemption
obligation.
|
|
(4)
|
The
community is subject to a ground lease, which, unless extended, will
expire in 2082.
|
(5)
|
This
community is owned by Fund II. The Company has a 28.2% interest in Fund II
which is accounted for using the equity method of
accounting.
|
(6)
|
The
Company holds a 1% special limited partner interest in the partnerships
which own these apartment communities. These investments were made under
arrangements whereby EMC became the 1% sole general partner and the other
limited partners were granted the right to require the applicable
partnership to redeem their interest for cash. Subject to certain
conditions, the Company may, however, elect to deliver an equivalent
number of shares of the Company’s common stock in satisfaction of the
applicable partnership’s cash redemption
obligation.
|
(7)
|
In
2002 the Company purchased an additional 21 units adjacent to this
apartment community for $3 million. This property was built in
1992.
|
(8)
|
The
Company completed a $1.6 million redevelopment in
2000.
|
(9)
|
The
Company completed a $2.3 million redevelopment in
2000.
|
(10)
|
The
Company is in the process of performing a $10.7 million
redevelopment.
|
(11)
|
The
Company completed a $6.2 million redevelopment in
2007. .
|
(12)
|
This
community is subject to a ground lease, which, unless extended, will
expire in 2067.
|
(13)
|
Fund
II is in the process of performing a $5.0 million
redevelopment.
|
(14)
|
During
the third quarter of 2007, the Company acquired full ownership by
purchasing the general contractor's interest for $9
million.
|
(15)
|
The
Company is in the process of performing a $6.1 million
redevelopment.
|
(16)
|
The
Company completed an $11.0 million redevelopment in
2001.
|
(17)
|
The
Company completed an additional $3.6 million redevelopment in
2005.
|
(18)
|
This
community is subject to a ground lease, which, unless extended, will
expire in 2027.
|
(19)
|
The
Company completed a $3.2 million redevelopment in
2002.
|
(20)
|
The
Company completed a $1.9 million redevelopment in
2000.
|
(21)
|
The
Company completed a $1.9 million redevelopment in
2001.
|
(22)
|
The
Company completed a $1.7 million redevelopment in
2001.
|
(23)
|
The
Company is in the process of performing a $16.1 million
redevelopment.
|
(25)
|
The
Company and EMC have a 74.0% and 1% member interests,
respectively.
|
(26)
|
The
Company completed a $3.5 million redevelopment in
2002.
|
(27)
|
The
community is subject to a ground lease, which, unless extended, will
expire in 2028.
|
(28)
|
The
Company is in the process of performing a $14.1 million
redevelopment.
|
(29)
|
The
Company completed a $2.7 million redevelopment in
2001.
|
(30)
|
The
Company completed a $4.5 million redevelopment in
1998.
|
(31)
|
The
Company is in the process of performing an $8.4 million
redevelopment.
|
(32)
|
The
Company had a preferred limited partnership interest. In March 2007, the
Company sold part of its limited partnership interest, and in January
2008, the Company sold its remaining
interest.
|
(33)
|
The
Company is in the process of performing a $9.4 million
redevelopment.
|
(34)
|
The
Company is in the process of performing a $4.6 million redevelopment
|
(35)
|
Fund
II is in the process of performing a $4.5 million
redevelopment.
|
(36)
|
The
community was subject to a ground lease, which, unless extended, would
expire in 2047. In the second quarter of 2007, the Company
entered into a joint venture partnership with a third-party, and the
Company contributed the improvements for an 81.5% interest and the joint
venture partner contributed the title to the land for an 18.5% interest in
the partnership.
|
(37)
|
The
Company completed construction of 114 units of the 462 total units in
2000.
|
(38)
|
The
Company completed a $3.4 million redevelopment in
2002.
|
(39)
|
A
portion of this community on which 84 units are presently located is
subject to a ground lease, which, unless extended, will expire in
2028.
|
(40)
|
The
Company is in the process of performing a $9.9 million
redevelopment.
|
(41)
|
The
community is subject to a ground lease, which, unless extended, will
expire in 2070.
|
(42)
|
The
Company is in the process of performing a $15.1 million
redevelopment.
|
(43)
|
The
Company is in the process of performing a joint $30.6 million
redevelopment at these communities.
|
(44)
|
The
Company is in the process of performing a $7.0 million redevelopment
|
(45)
|
The
Company is in the process of performing a $3.9 million
redevelopment.
|
(46)
|
The
Company is in the process of performing a $5.1 million redevelopment and
completed construction of 16 units of the community’s 108 units in
2006. Operations were restabilized in the second quarter of
2006.
|
(47)
|
The
property is leased to a single tenant on a short-term basis, and is
included in the Company’s predevelopment
pipeline.
|
(48)
|
The
Company occupies 100% of this
property.
|
(49)
|
The
property is currently vacant and under a $2.0 million redevelopment. The
Company expects to occupy 100% of this property upon completion of the
redevelopment in approximately the third quarter of
2008.
|
(50)
|
The
Company has a mortgage receivable, and consolidates this property in
accordance with GAAP. The Company occupies 4.6% of this
property.
|
(51)
|
The
Company occupies 30% of this
property.
|
(52)
|
The
Company leased these three properties in 2003 to an unrelated third party
for approximately 5 years with an option to purchase the property in
approximately 2008.
|
Item
3. Legal Proceedings
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
4. Submission of Matters to a Vote of Security Holders
During
the fourth quarter of 2007, no matters were submitted to a vote of security
holders.
Part
II
The
shares of the Company’s common stock are traded on the New York Stock Exchange
(“NYSE”) under the symbol ESS.
Market
Information
The
Company’s common stock has been traded on the NYSE since June 13, 1994. The
high, low and closing price per share of common stock reported on the NYSE for
the quarters indicated are as follows:
Quarter
Ended
|
High
|
Low
|
Close
|
December
31, 2007
September
28, 2007
June
30, 2007
March
30, 2007
December
29, 2006
September
29, 2006
June
30, 2006
March
31, 2006
|
$
127.35
$
123.50
$
133.40
$
148.54
$
133.99
$
128.57
$
111.90
$
111.10
|
$
94.08
$
102.00
$
114.19
$
124.78
$
119.76
$
111.54
$
100.90
$
92.10
|
$
97.49
$
117.57
$
116.30
$
124.78
$
129.25
$
121.40
$
111.66
$
108.73
|
The
closing price as of February 25, 2008 was $110.25.
Holders
The
approximate number of holders of record of the shares of the Company’s common
stock was 263 as of February 25, 2008. This number does not include
stockholders whose shares are held in trust by other entities. The actual number
of stockholders is greater than this number of holders of record.
Return
of Capital
Under
provisions of the Internal Revenue Code of 1986, as amended, the portion of the
cash dividend, if any, that exceeds earnings and profits is considered a return
of capital. The return of capital is generated due to a variety of factors,
including the deduction of non-cash expenses, primarily depreciation, in the
determination of earnings and profits.
The
status of the cash dividends distributed for the years ended December 31, 2007,
2006 and 2005 related to common stock, Series F and Series G preferred stock for
tax purposes are as follows:
|
|
2007
|
|
2006
|
|
2005
|
Common
stock
|
|
|
|
|
|
|
Ordinary
income
|
|
75.65%
|
|
100.00%
|
|
74.91%
|
Capital
gains
|
|
24.35%
|
|
0.00%
|
|
25.09%
|
Return
of capital
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
|
|
100.00%
|
|
100.00%
|
|
100.00%
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Series
F and G Preferred stock(1)
|
|
|
|
|
|
|
Ordinary
income
|
|
75.65%
|
|
100.00%
|
|
74.91%
|
Capital
gains
|
|
24.35%
|
|
0.00%
|
|
25.09%
|
Return
of capital
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
|
|
100.00%
|
|
100.00%
|
|
100.00%
|
|
|
|
|
|
|
|
|
(1)
|
Series
G was issued during the third quarter of
2006.
|
Dividends
and Distributions
Since its
initial public offering on June 13, 1994, the Company has paid regular quarterly
dividends to its stockholders. The Company has paid the following dividends per
share of common stock:
Year
Ended
|
|
Annual
Dividend
|
|
|
Quarter
Ended
|
|
2005
|
|
2006
|
|
2007
|
1994
|
|
$
|
0.915
|
|
|
|
March
31,
|
|
$ 0.810
|
|
$ 0.840
|
|
$ 0.930
|
1995
|
|
$ |
1.685
|
|
|
|
June
30,
|
|
$ 0.810
|
|
$ 0.840
|
|
$ 0.930
|
1996
|
|
$
|
1.720
|
|
|
|
September
31,
|
|
$ 0.810
|
|
$ 0.840
|
|
$ 0.930
|
1997
|
|
$
|
1.770
|
|
|
|
December
31,
|
|
$ 0.810
|
|
$ 0.840
|
|
$ 0.930
|
1998
|
|
$
|
1.950
|
|
|
|
Annual
Dividend
|
|
$
3.240
|
|
$ 3.360
|
|
$ 3.720
|
1999
|
|
$ |
2.150
|
|
|
|
|
|
|
|
|
|
|
2000
|
|
$ |
2.380
|
|
|
|
|
|
|
|
|
|
|
2001
|
|
$
|
2.800
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
$ |
3.080
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
$ |
3.120
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
$ |
3.160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future
distributions by the Company will be at the discretion of the Board of Directors
and will depend on the actual cash flows from operations of the Company, its
financial condition, capital requirements, the annual distribution requirements
under the REIT provisions of the Internal Revenue Code, applicable legal
restrictions and such other factors as the Board of Directors deems relevant.
There are currently no contractual restrictions on the Company’s present or
future ability to pay dividends.
On
February 27, 2008, the Company announced the Board of Directors approved a
$0.09 per share increase to the quarterly cash dividend, which represents a
$0.36 increase on an annualized basis. Accordingly, the first quarter
dividend distribution, payable on April 15, 2008 to stockholders as of record as
of March 31, 2008, will be $1.02 per share.
Dividend
Reinvestment and Share Purchase Plan
The
Company has adopted a dividend reinvestment and share purchase plan designed to
provide holders of Common Stock with a convenient and economical means to
reinvest all or a portion of their cash dividends in shares of Common Stock and
to acquire additional shares of Common Stock through voluntary purchases.
Computershare, LLC, which serves as the Company’s transfer agent, administers
the dividend reinvestment and share purchase plan. For a copy of the plan,
contact Computershare, LLC at (312) 360-5354.
Stockholder
Rights Plan
In 1998,
the Company adopted a stockholder rights plan that is designed to enhance the
ability of all of the Company’s stockholders to realize the long-term value of
their investment. The rights plan is designed, in part, to prevent a person or
group from gaining control of the Company without offering a fair price to all
of the Company’s stockholders.
On
October 13, 1998, the Board declared a one-for-one preferred share purchase
right (a “Right”) for each outstanding share of Common Stock. Each Right
entitles the registered holder to purchase from the Company one one-hundredth of
a share of Series A Junior Participating Preferred Stock, par value $.0001 per
share, of the Company, at a price of $99.13 per one-hundredth of a share,
subject to adjustment. The description and terms of the Rights are set forth in
a Rights Agreement dated as of November 11, 1998, as amended between the Company
and Computershare, LLC as Rights Agent.
Securities
Authorized for Issuance under Equity Compensation Plans
See our
disclosure in the 2007 Proxy Statement under the heading “Equity Compensation
Plan Information”, which disclosure is incorporated herein by reference.
Issuance
of Registered Equity Securities
Period
|
|
Total
Number
of
Shares Sold
|
|
Average
Price
per
Share
|
|
Proceeds
(net of fees
and
commissions)
|
4/5/07
to 5/6/07
|
1,670,500
|
|
$127.91
|
|
$213,672,000
|
During
the second quarter of 2007 the Company sold 1,670,500 shares of common stock for
proceeds of $213.7 million, net of underwriter fees and expenses. The
Company used the net proceeds from the stock offerings to pay down outstanding
borrowings under the Company’s lines of credit and to fund acquisition and
development projects.
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
|
|
Total
Amount that May Yet be Purchased Under the Plans or
Programs
|
9/12/07
to 9/17/07
|
12,600
|
|
$111.60
|
|
12,600
|
|
$198,593,456
|
|
11/13/07
to 11/30/07
|
196,059
|
|
$101.90
|
|
208,659
|
|
$178,615,425
|
|
12/4/07
to 12/21/07
|
114,600
|
|
$98.20
|
|
323,259
|
|
$167,358,504
|
|
Total
|
323,259
|
|
$100.90
|
|
323,259
|
|
$167,358,504
|
|
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 2007 the Company repurchased
and retired 323,259 shares of its common stock for approximately $32.6
million. During January 2008, the Company repurchased and retired
137,500 shares of its common stock for approximately $13.2
million. Since the Company announced the inception of the stock
repurchase plan, the Company has repurchased and retired 460,759 shares for
$45.8 million at an average stock price of $99.40 per share, including
commissions.
Unregistered
Sale 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.
Item
6. Selected Financial Data
The
following tables set forth summary financial and operating information for the
Company from January 1, 2003 through December 31, 2007.
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006(1)
|
|
2005(1)
|
|
2004(1)
|
|
2003(1)
|
|
|
|
(In thousands, except per share amounts)
|
|
|
OPERATING
DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other property
|
|
$
|
383,433
|
|
$
|
334,770
|
|
$
|
303,235
|
|
$
|
266,722
|
|
$
|
233,800
|
Management
and other fees from affiliates
|
|
|
5,090
|
|
|
5,030
|
|
|
10,951
|
|
|
23,146
|
|
|
6,027
|
|
|
|
388,523
|
|
|
339,800
|
|
|
314,186
|
|
|
289,868
|
|
|
239,827
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
operating expenses, excluding depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
amortization
|
|
|
128,424
|
|
|
114,398
|
|
|
104,479
|
|
|
93,666
|
|
|
77,307
|
Depreciation
and amortization
|
|
|
100,389
|
|
|
78,094
|
|
|
74,849
|
|
|
66,414
|
|
|
51,814
|
Amortization
of deferred financing costs
|
|
|
3,071
|
|
|
2,745
|
|
|
1,947
|
|
|
1,560
|
|
|
1,187
|
General
and administrative
|
|
|
26,273
|
|
|
22,234
|
|
|
19,148
|
|
|
18,042
|
|
|
9,549
|
Interest
|
|
|
80,995
|
|
|
72,898
|
|
|
70,784
|
|
|
60,709
|
|
|
49,985
|
Other
expenses
|
|
|
800
|
|
|
1,770
|
|
|
5,827
|
|
|
-
|
|
|
-
|
|
|
|
339,952
|
|
|
292,139
|
|
|
277,034
|
|
|
240,391
|
|
|
189,842
|
Earnings
from operations
|
|
|
48,571
|
|
|
47,661
|
|
|
37,152
|
|
|
49,477
|
|
|
49,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on the sales of real estate
|
|
|
-
|
|
|
-
|
|
|
6,391
|
|
|
7,909
|
|
|
-
|
Interest
and other income
|
|
|
10,310
|
|
|
6,176
|
|
|
8,524
|
|
|
3,077
|
|
|
668
|
Equity
income (loss) in co-investments
|
|
|
3,120
|
|
|
(1,503)
|
|
|
18,553
|
|
|
40,683
|
|
|
2,349
|
Minority
interests
|
|
|
(19,937)
|
|
|
(18,807)
|
|
|
(20,709)
|
|
|
(28,133)
|
|
|
(25,827)
|
Income
from continuing operations before income tax provision
|
|
|
42,064
|
|
|
33,527
|
|
|
49,911
|
|
|
73,013
|
|
|
27,175
|
Income
tax provision
|
|
|
(400)
|
|
|
(525)
|
|
|
(2,538)
|
|
|
(257)
|
|
|
-
|
Income
from continuing operations
|
|
|
41,664
|
|
|
33,002
|
|
|
47,373
|
|
|
72,756
|
|
|
27,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations (net of minority interests)
|
|
|
73,974
|
|
|
29,746
|
|
|
32,343
|
|
|
6,937
|
|
|
7,915
|
Net
income
|
|
|
115,638
|
|
|
62,748
|
|
|
79,716
|
|
|
79,693
|
|
|
35,090
|
Write
off of Series C preferred units offering costs
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(625)
|
Amortization
of discount on Series F preferred stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(336)
|
Dividends
to preferred stockholders
|
|
|
(9,174)
|
|
|
(5,145)
|
|
|
(1,953)
|
|
|
(1,952)
|
|
|
(195)
|
Net
income available to common stockholders
|
|
$
|
106,464
|
|
$
|
57,603
|
|
$
|
77,763
|
|
$
|
77,741
|
|
$
|
33,934
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from continuing operations available to
|
|
|
|
|
|
|
|
common
stockholders
|
|
$
|
1.32
|
|
$
|
1.21
|
|
$
|
1.98
|
|
$
|
3.09
|
|
$
|
1.21
|
Net
income available to common stockholders
|
|
$
|
4.34
|
|
$
|
2.50
|
|
$
|
3.38
|
|
$
|
3.39
|
|
$
|
1.58
|
Weighted
average common stock outstanding
|
|
|
24,548
|
|
|
23,082
|
|
|
23,039
|
|
|
22,921
|
|
|
21,468
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from continuing operations available to
|
|
|
|
|
|
|
|
common
stockholders
|
|
$
|
1.29
|
|
$
|
1.18
|
|
$
|
1.94
|
|
$
|
3.06
|
|
$
|
1.20
|
Net
income available to common stockholders
|
|
$
|
4.24
|
|
$
|
2.45
|
|
$
|
3.32
|
|
$
|
3.36
|
|
$
|
1.57
|
Weighted
average common stock outstanding
|
|
|
25,101
|
|
|
23,551
|
|
|
23,389
|
|
|
23,156
|
|
|
21,679
|
Cash
dividend per common share
|
|
$
|
3.72
|
|
$
|
3.36
|
|
$
|
3.24
|
|
$
|
3.16
|
|
$
|
3.12
|
|
|
|
As
of December 31,
|
|
|
|
2007
|
|
|
2006(1)
|
|
2005(1)
|
|
2004(1)
|
|
2003(1)
|
BALANCE
SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in rental properties (before accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
depreciation)
|
|
$
|
3,117,759
|
|
$
|
2,669,187
|
|
$
|
2,431,629
|
|
$
|
2,371,194
|
|
$
|
1,984,122
|
|
Net
investment in rental proerties
|
|
|
2,575,772
|
|
|
2,204,172
|
|
|
2,042,589
|
|
|
2,041,542
|
|
|
1,718,359
|
|
Real
estate under development
|
|
|
233,445
|
|
|
107,620
|
|
|
54,416
|
|
|
38,320
|
|
|
55,183
|
|
Total
assets
|
|
|
2,980,323
|
|
|
2,485,840
|
|
|
2,239,290
|
|
|
2,217,217
|
|
|
1,916,811
|
|
Total
secured indebtedness
|
|
|
1,362,873
|
|
|
1,186,554
|
|
|
1,129,918
|
|
|
1,161,184
|
|
|
976,545
|
|
Total
unsecured indebtedness
|
|
|
294,818
|
|
|
225,000
|
|
|
225,000
|
|
|
155,800
|
|
|
12,500
|
|
Cumulative
convertible preferred stock
|
|
|
145,912
|
|
|
145,912
|
|
|
-
|
|
-
|
-
|
|
|
-
|
|
Cumulative
redeemable preferred stock
|
|
|
25,000
|
|
|
25,000
|
|
|
25,000
|
|
|
25,000
|
|
|
25,000
|
|
Stockholders'
equity (less redeemable preferred stock)
|
|
|
765,318
|
|
|
587,209
|
|
|
555,967
|
|
|
566,277
|
|
|
556,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of and for the years ended December 31,
|
|
|
|
2007
|
|
|
2006(1) |
|
2005(1) |
|
2004(1) |
|
2003(1) |
OTHER
DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
coverage ratio(2)
|
|
|
3.0
|
X
|
2.8
|
X
|
2.7
|
X
|
3.0
|
X
|
3.1
|
X
|
Same-property
gross operating margin(3)(4)
|
|
|
67%
|
|
|
67%
|
|
|
66%
|
|
|
65%
|
|
|
66%
|
|
Average
same-property monthly rental rate per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
apartment
unit(4)(5)
|
|
$
|
1,314
|
|
$
|
1,225
|
|
$
|
1,149
|
|
$
|
1,055
|
|
$
|
1,088
|
|
Average
same-property monthly operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
apartment unit(4)(6)
|
|
$
|
437
|
|
$
|
421
|
|
$
|
395
|
|
$
|
331
|
|
$
|
325
|
|
Total
apartment units (at end of period)
|
|
|
27,489
|
|
|
27,553
|
|
|
26,587
|
|
|
25,518
|
|
|
26,012
|
|
Same-property
occupancy rate(7)
|
|
|
96%
|
|
|
96%
|
|
|
97%
|
|
|
96%
|
|
|
96%
|
|
Total
Properties (at end of period)
|
|
|
134
|
|
|
130
|
|
|
126
|
|
|
131
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006(1)
|
|
2005(1)
|
|
2004(1)
|
|
2003(1)
|
|
|
(Dollars
in thousands)
|
RECONCILIATION
OF NET INCOME TO
|
|
|
|
|
|
|
|
|
|
|
ADJUSTED
EBITDA (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
115,638
|
|
$
|
62,748
|
|
$
|
79,716
|
|
$
|
79,693
|
|
$
|
35,090
|
|
Interest
expense
|
|
|
80,995
|
|
|
72,898
|
|
|
70,784
|
|
|
60,709
|
|
|
49,985
|
|
Tax
expense
|
|
|
400
|
|
|
525
|
|
|
2,538
|
|
|
257
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
100,389
|
|
|
78,094
|
|
|
74,849
|
|
|
66,414
|
|
|
51,814
|
|
Amortization
of deferred financing costs
|
|
|
3,071
|
|
|
2,745
|
|
|
1,947
|
|
|
1,560
|
|
|
1,187
|
|
Gain
on the sales of real estate
|
|
|
-
|
|
|
-
|
|
|
(6,391)
|
|
|
(7,909)
|
|
|
-
|
|
Gain
on the sales of co-investment activities, net
|
|
|
(2,046)
|
|
|
-
|
|
|
(18,116)
|
|
|
(39,242)
|
|
|
-
|
|
Minority
interests
|
|
|
19,937
|
|
|
18,807
|
|
|
20,709
|
|
|
28,133
|
|
|
25,827
|
|
Income
from discontinued operations (net of minority interest)
|
|
|
(73,974)
|
|
|
(29,746)
|
|
|
(32,343)
|
|
|
(6,937)
|
|
|
(7,915)
|
|
Adjusted
EBITDA(2)
|
|
|
244,410
|
|
|
206,071
|
|
|
193,693
|
|
|
182,678
|
|
|
155,988
|
|
Interest
expense
|
|
|
80,995
|
|
|
72,898
|
|
|
70,784
|
|
|
60,709
|
|
|
49,985
|
|
Interest
coverage ratio(2)
|
|
|
3.0
|
X
|
2.8
|
X
|
2.7
|
X
|
3.0
|
X
|
3.1
|
X
|
(1)
|
The
above financial and operating information from January 1 through December
31, 2003 reflect the retroactive adoption of FIN 46R and SFAS No.
123. The results of operations for 2006, 2005, 2004 and
2003 have been reclassified to reflect discontinued operations for
properties sold subsequent to December 31,
2006.
|
(2)
|
Interest
coverage ratio represents earnings before minority interests, gain on
sales of real estate, interest expense, taxes, depreciation and
amortization (“adjusted EBITDA”) divided by interest
expense. The Company believes that the interest coverage ratio
is useful to readers because it is frequently used by investors, lenders,
security analysts and other interested parties in the evaluation of
companies in our industry. In addition, the Company believes
that this ratio is useful in evaluating our performance compared to that
of other companies in our industry because the calculation of the adjusted
EBITDA component of the interest coverage ratio generally eliminates the
effects of financing costs, income taxes, and depreciation and
amortization, which items may vary for different companies for reasons
unrelated to operating performance.
|
The
adjusted EBITDA component of the interest coverage ratio, however, is not a
recognized measurement under U.S. generally accepted accounting principles, or
GAAP. When analyzing our operating performance, readers should use
the interest coverage ratio and its adjusted EBITDA component in addition to,
and not as an alternative for, net income, as determined in accordance with
GAAP. Because not all companies use identical calculations, our
presentation of the interest coverage ratio and its adjusted EBITDA component
may not be comparable to similarly titled measures of other
companies. Furthermore, the interest coverage ratio is not intended
to be a measure of free cash flow for our management’s discretionary use, as it
does not consider certain cash requirements such as income tax payments, debt
service requirements, capital expenditures and other fixed
charges. The amounts shown for the interest coverage ratio and
adjusted EBITDA may also differ from the amounts calculated under similarly
titled definitions in our debt instruments, which can be further adjusted to
reflect certain other cash and non-cash charges and are used to determine
compliance with financial covenants and our ability to engage in certain
activities such as incurring additional debt and making certain restricted
payments.
(3)
|
Gross
operating margin represents rental revenues and other property income less
property operating expenses, exclusive of depreciation and amortization,
divided by rental revenues and other property
income.
|
(4)
|
A
stabilized apartment community, or “Same-Property” apartment units (as
defined in Item 7), are those units in properties that the Company has
consolidated for the entire two years as of the end of the period set
forth. The number of apartment units in such properties may vary at each
year-end. Percentage changes in averages per unit do not correspond to
total Same-Property revenues and expense percentage changes which are
discussed in Item 7—Management’s Discussion and Analysis of Financial
Condition and Results of
Operations.
|
(5)
|
Average
Same-Property monthly rental rate per apartment unit represents total
scheduled rent for the same property apartment units for the period
(actual rental rates on occupied apartment units plus market rental rates
on vacant apartment units) divided by the number of such apartment units
and further divided by the number of months in the
period.
|
(6)
|
Average
Same-Property monthly expenses per apartment unit represents total monthly
operating expenses, exclusive of depreciation and amortization, for the
same property apartment units for the period divided by the total number
of such apartment units and further divided by the number of months in the
period.
|
(7)
|
Occupancy
rates are based on financial occupancy. For an explanation of how
financial occupancy is calculated, see Item 7 – Management’s Discussion
and Analysis of Financial Condition and Results of
Operations.
|
The
following discussion and analysis should be read in conjunction with the
accompanying consolidated financial statements and notes
thereto. These consolidated financial statements include all
adjustments which are, in the opinion of management, necessary to reflect a fair
statement of the results and all such adjustments are of a normal recurring
nature.
OVERVIEW
The
Company is a self-administered and self-managed REIT that acquires, develops,
redevelops and manages apartment communities in selected residential areas
located primarily in the West Coast of the United States. The Company
owns all of its interests in its real properties, directly or indirectly,
through the Operating Partnership. The Company is the sole general
partner of the Operating Partnership and, as of December 31, 2007, had an
approximately 90.9% general partner interest in the Operating
Partnership.
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
December 31, 2007, we had ownership interests in 134 apartment communities,
comprising 27,489 apartment units. Our apartment communities are
located in the following major West Coast regions:
Southern
California (Los Angeles, Orange, Riverside, Santa Barbara, San Diego, and
Ventura counties)
Northern
California (the San Francisco Bay Area)
Seattle Metro
(Seattle metropolitan area)
Other
Region (Houston,
Texas)
As of
December 31, 2007, we also had ownership interests in six office buildings (with
approximately 478,340 square feet), two recreational vehicle parks (comprising
338 spaces) and one manufactured housing community (containing 157
sites).
As of
December 31, 2007, our consolidated development pipeline was comprised of three
development projects, five predevelopment projects and five land parcels held
for future development aggregating 2,776 units, with total incurred costs of
$233.5 million, and estimated remaining project costs of approximately $537.1
million for total estimated project costs of $770.6 million.
By
region, the Company's operating results for 2007 and rent growth analysis for
2008 are as follows:
Southern
California Region: As of December 31, 2007, this region
represented 48% of our apartment units. During the year ended December 31, 2007,
Same-Property (as defined below) revenues increased 4.4% as compared to
2006. The Company expects in 2008 new residential supply of 12,200
single family homes and 15,600 apartment units which represents a total new
supply of 0.5% of existing stock. The Company expects this region to
add 40,000 new jobs and generate market rent growth ranging from 1% to 3% in
2008.
Northern
California Region: As of December 31, 2007, this region
represented 31% of our apartment units. Same-Property revenues
increased 9.4% in 2007 as compared to 2006. The Company expects in
2008 new residential supply of 5,800 single family homes and 7,200 apartment
units which represents a total new supply of 0.4% of existing
stock. The Company expects this region to add 38,000 new jobs and
generate market rent growth ranging from 5% to 7% in 2008.
Seattle Metro
Region: As of
December 31, 2007, this region represented 20% of our apartment
units. Same-Property revenues increase 11.0% in 2007 as compared to
2006. The Company expects in 2008 new residential supply of 8,000
single family homes and 4,500 apartment units which represents a total new
supply of 1.2% of existing stock. The Company expects this region to
add 28,000 new jobs and generate market rent growth ranging from 5% to 7%
in 2008.
Other
Region: As of December 31, 2007, the remaining 1% of our units related to
a community located in Houston, Texas. During December 2007, the
Company sold four communities that were located in the Portland metropolitan
region.
The
Company’s consolidated apartment communities are as follows:
|
As
of December 31, 2007
|
|
As
of December 31, 2006
|
|
Apartment
Units
|
%
|
|
Apartment
Units
|
%
|
Southern
California
|
12,725
|
52%
|
|
12,965
|
55%
|
Northern
California
|
6,361
|
26%
|
|
5,389
|
23%
|
Seattle
Metro
|
5,005
|
21%
|
|
4,905
|
21%
|
Other
Regions
|
302
|
1%
|
|
302
|
1%
|
Total
|
24,393
|
100%
|
|
23,561
|
100%
|
|
|
|
|
|
|
Joint
venture properties including Fund II communities and communities sold in 2007
including City Heights and the four Portland metropolitan communities are not
included in the consolidated apartment communities’ results for both periods
presented in the table above.
RESULTS
OF OPERATIONS
Comparison
of Year Ended December 31, 2007 to the Year Ended December 31, 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 years ended December 31, 2007 and 2006) decreased 60 basis
points to 95.9% for the year ended December 31, 2007 from 96.5% for the year
ended December 31, 2006. 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 2007/2006 Same-Property portfolio for
financial occupancy for the years ended December 31, 2007 and 2006 is as
follows:
|
Years
ended
|
|
December
31,
|
|
2007
|
|
2006
|
Southern
California
|
95.6%
|
|
96.3%
|
Northern
California
|
96.8%
|
|
96.7%
|
Seattle
Metro
|
96.3%
|
|
96.8%
|
Other
Regions
|
92.5%
|
|
90.6%
|
The
following table provides a breakdown of revenue amounts, including the
revenues attributable to 2007/2006 Same-Properties.
|
|
|
|
|
Years
Ended
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
December
31,
|
|
|
Dollar
|
|
Percentage
|
|
|
|
Properties
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Change
|
|
Property
Revenues (dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007/2006
Same-Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern
California
|
|
56
|
|
$
|
185,060
|
|
$
|
177,336
|
|
$
|
7,724
|
|
4.4
|
%
|
Northern
California
|
|
16
|
|
|
60,024
|
|
|
54,887
|
|
|
5,137
|
|
9.4
|
|
Seattle
Metro
|
|
22
|
|
|
56,427
|
|
|
50,852
|
|
|
5,575
|
|
11.0
|
|
Other
Regions
|
|
1
|
|
|
2,015
|
|
|
1,980
|
|
|
35
|
|
1.8
|
|
Total
2007/2006 Same-Property revenues
|
|
95
|
|
|
303,526
|
|
|
285,055
|
|
|
18,471
|
|
6.5
|
|
2007/2006
Non-Same Property Revenues (1)
|
|
|
|
|
79,907
|
|
|
49,715
|
|
|
30,192
|
|
60.7
|
|
Total
property revenues
|
|
|
|
$
|
383,433
|
|
$
|
334,770
|
|
$
|
48,663
|
|
14.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes
twelve communities acquired after January 1, 2006, eleven redevelopment
communities, three office buildings and one development community.
2007/2006 Same-Property
Revenues increased by $18.5 million or 6.5% to $303.5 million for 2007
compared to $285.1 million for 2006. The increase was primarily
attributable to an increase in scheduled rents of $20.4 million or 7.3% as
compared to 2006. Average monthly rental rates for 2007/2006
Same-Property communities were $1,314 per unit for 2007 compared to $1,225 per
unit for 2006. The decline in occupancy of 60 basis points in 2007
compared to 2006 decreased revenues by $2.3 million of which $0.8 million was
caused by vacancy created by units that were under renovation. Bad
debt expense and rent concessions increased $0.8 million, ratio utility billing
system (“RUBS”) income increased $0.8 million, and ancillary property income
increased $0.4 million for 2007 compared to 2006.
2007/2006 Non-Same Property
Revenues increased by $30.2 million or 60.7% to $79.9 million for 2007
compared to $49.7 million for 2006. The increase was primarily due to
twelve communities acquired since January 1, 2006.
Management and other fees from
affiliates increased only slightly by $0.1 million to $5.1 million
in 2007. These fees consist of $4.8 million in fee income primarily
from Fund II and $0.3 million in promote income from Fund I in 2007, compared to
$3.8 million in fee income primarily from Fund II and $1.2 million in promote
income from Fund I in 2006.
Total Expenses increased
$47.8 million or 16.4% to $340.0 million for 2007 from $292.1 million for
2006. Property operating expenses increased by $14.0 million or 12.3%
for 2007, which is primarily due to the acquisition of twelve communities,
annual increases in property salaries. The increase includes an
increase of real estate taxes of $4.0 million due primarily to the increase in
the number of communities, increase in assessments for the Company’s California
communities that are limited to 2% per year and large increases in assessments
of the communities located in the Seattle metropolitan
area. Depreciation expense increased by $22.3 million or 28.5%
for 2007, due to the acquisition of twelve communities after January 1, 2006 and
recording depreciation expense for the Cadence Campus and Hollywood commercial
buildings, which are predevelopment properties with short-term tenant
leases. Interest expense increased $8.1 million or 11.1% due
primarily to due to an increase in funding of redevelopment and acquisitions on
the Company’s lines of credit and an increase of outstanding mortgage notes
payable. General and administrative costs increased $4.0 million or
18.2% 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 $1.5 million, an increase in the number of employees,
annual increases in compensation and increased bonuses.
Other expenses of $0.8
million for 2007 consists of a $0.5 million reserve for loan loss resulting from
the write-down of an impaired mezzanine note receivable related to a condominium
project located in Sherman Oaks, California, and a $0.3 million accrual for
unpaid business taxes related to the sale of the Essex on Lake Merritt in
2004. Other expenses of $1.8 million for the year ended 2006, relate
to $1.0 million in pursuit costs related to the Company’s attempt to acquire the
Town & Country REIT, and a $0.8 million impairment charge resulting from a
write-down of a community in Houston, Texas.
Interest and other income
increased by $4.1 million or 66.9% to $10.3 million for 2007 from $6.2 million
for 2006 due primarily to an increase in lease income of $4.7 million resulting
from the income generated from the Cadence Campus and Hollywood commercial
buildings, and an increase of $1.5 million in interest income earned from the
mezzanine/bridge loans, compared to the Company recorded a
non-recurring gain of $1.7 million related to the sale of Town & Country
REIT stock in 2006.
Equity income (loss) in
co-investments increased by $4.6 million to $3.1 million for 2007
compared to a loss of $1.5 million for 2006, 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 plus $0.3 million of
equity income recorded from Fund I, and $0.4 million of equity income earned
from its investment in Fund II during 2007. Fund II operations for
2006 included $2.7 million in depreciation resulting in the Company recording a
loss of $1.5 million in equity income (loss) in co-investments related to Fund
II during 2006.
Income from discontinued
operations for 2007 includes the gain from the sale of four
communities in the Portland metropolitan region, net of minority interest, of
$47.6 million, sale of the City Heights joint venture property for a gain, net
of minority interest, of $13.7 million, $10.3 million in fees from the
joint venture partner, and the net gain on sale of 21 condominiums at Peregrine
Point for $1.0 million. During the year ended 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 $2.0 million from the sale of the first 45
condominiums at Peregrine Point.
33
Comparison
of Year Ended December 31, 2006 to the Year Ended December 31,
2005
Our
average financial occupancies for the Company’s stabilized apartment communities
or “2006/2005 Same-Properties” (stabilized properties consolidated by the
Company for the years ended December 31, 2006 and 2005) for the year ended
December 31, 2006 decreased to 96.5% from 96.6% for the year ended December 31,
2005.
The
regional breakdown of the Company’s stabilized 2006/2005 Same-Property portfolio
for financial occupancy for the years ended December 31, 2006 and 2005 is as
follows:
|
Years
ended
|
|
December
31,
|
|
2006
|
|
2005
|
Southern
California
|
96.3%
|
|
96.5%
|
Northern
California
|
96.7%
|
|
97.1%
|
Seattle
Metro
|
96.9%
|
|
96.7%
|
Other
Regions
|
90.6%
|
|
88.1%
|
The
following table provides a breakdown of revenue amounts, including the revenues
attributable to 2006/2005 Same-Properties.
|
|
|
|
|
Years
Ended
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
December
31,
|
|
|
Dollar
|
|
Percentage
|
|
|
|
Properties
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
Change
|
|
Property
Revenues (dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006/2005
Same-Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern
California
|
|
53
|
|
$
|
174,156
|
|
$
|
164,550
|
|
$
|
9,606
|
|
5.8
|
%
|
Northern
California
|
|
16
|
|
|
54,887
|
|
|
50,625
|
|
|
4,262
|
|
8.4
|
|
Seattle
Metro
|
|
21
|
|
|
48,663
|
|
|
44,551
|
|
|
4,112
|
|
9.2
|
|
Other
Regions
|
|
1
|
|
|
1,980
|
|
|
1,843
|
|
|
137
|
|
7.4
|
|
Total
2006/2005 Same-Property revenues
|
|
91
|
|
|
279,686
|
|
|
261,569
|
|
|
18,117
|
|
6.9
|
|
2006/2005
Non-Same Property Revenues (1)
|
|
|
|
|
55,084
|
|
|
41,666
|
|
|
13,418
|
|
32.2
|
|
Total
property revenues
|
|
|
|
$
|
334,770
|
|
$
|
303,235
|
|
$
|
31,535
|
|
10.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes
eight communities acquired subsequent to January 1, 2005, ten redevelopment
communities, and three office buildings.
2006/2005 Same-Property
Revenues increased by $18.1 million or 6.9% to $279.7 million for 2006
compared to $261.6 million for 2005. The increase was primarily
attributable to an increase in rental rates of $17.4 million or 6.5%, an
increase of $0.7 million in RUBS revenue, an increase of $0.7 million in
ancillary property income, and a decrease in rent concessions of $0.9 million
compared to the 2005. Bad debt expense was consistent for the
two years, and occupancy decreased in 2006 by $0.9 million as compared to
2005.
2006/2005 Non-Same Property
Revenues increased by $13.4 million or 32.2% to $55.1 million for 2006
compared to $41.7 million for 2005. The increase in non-same property
revenues was primarily due to eight properties acquired since January 1,
2005.
Management and other fees from
affiliates decreased by approximately $5.9 million or 54.1% for 2006 due
primarily to $7.1 million in promote income recorded during the year ended 2005
related to the sale of Fund I assets, as compared to $1.2 million in promote
income from Fund I during 2006.
Total Expenses increased
$15.1 million or 5.5% to $292.1 million for 2006 from $277.0 million for
2005. The increase was primarily due to increases in utility expense,
real estate taxes, insurance expense, and salaries. Utility expense
increased by $3.1 million over the prior year due mainly to higher natural gas
and electrical prices. Real estate taxes increased $2.8 million over
the prior year due mainly to increases in assessment of properties in the
Seattle metropolitan area and new acquisitions. Insurance expense
increased $0.9 million over prior year due to increases in earthquake and
property liability premiums. Salaries increased mainly due to an
increase in payroll salaries over the prior year, an increase in equity based
compensation expense, and higher operating expenses due to the acquisition of
eight communities in 2006.
Interest expense increased by
$2.1 million or 3% for 2006 to $72.9 million, net of $3.9 million in capitalized
interest, compared to $70.8 million, net of $1.1 in capitalized interest for
2005. The increase was mainly due to an increase in total outstanding
debt of $57 million between 2006 and 2005, and higher short-term borrowing
rates.
Other expenses decreased $4.1
million or 69.6% to $1.8 million for the year ended 2006 compared to $5.8
million
for the
year ended 2005. During 2006, the Company incurred $1.0 million in
net pursuit costs related to the Company’s attempt to acquire the Town &
Country REIT in the first quarter of 2006 and the Company recorded a $0.8
million impairment charge on a property in Houston, Texas during the third
quarter of 2006. During 2005, the Company recorded the following
other expenses: (i) a $1.5 million charge related to a legal settlement, (ii)
$1.4 million in incentive compensation costs related to $6.1 million in interest
income realized on The Essex on Lake Merritt participating loan in the third
quarter of 2005, (iii) an impairment loss of $1.3 million related to a property
in Houston, Texas in the fourth quarter of 2005, and (iv) pre-payment penalties
and write-off of deferred charges in the amount of $1.6 million related to the
early termination of various mortgage notes payable during the fourth quarter of
2005.
Gain on sale of real estate
was $0 for 2006 compared to a gain of $6.4 million recorded for 2005
resulting from the recognition of a $5.0 million deferred gain due to the sale
of The Essex on Lake Merritt and $1.4 million from taxable REIT subsidiary
activity.
Interest and other income was
comprised of $1.7 million for a gain on the sale of the Town & Country REIT
stock recorded during the first quarter for 2006, $0.7 million of interest
income earned on notes receivables, $0.2 million in forfeited deposits from a
potential disposition and approximately $1.9 million in interest income on cash
balances, as compared to $6.1 million in interest income from the Essex on Lake
Merritt participating loan recorded in the third quarter of
2005. Lease income from the RV parks was consistent for both
periods.
Equity (loss) income in
co-investments decreased $20.1 million for 2006 primarily due to gains
from the sale of Fund I properties during the year ended 2005 totaling $18.1
million. For 2006 the Company recorded a net loss on its investment
in Fund II of $1.5 million, and there were no property sales in Fund I or II
during 2006.
Income tax provision
decreased by $2.0 million during 2006 due to less taxable income related
to taxable REIT subsidiary activity.
Income from discontinued
operations for 2006 relates primarily to the gain on sale of 45 Peregrine
Point condominiums for $2.0 million, a gain on sale of the Vista Pointe joint
venture property for $8.8 million plus fees and promote income from that sale of
$8.2 million, a gain of $3.1 million on the sales of the Vista Capri East, Casa
Tierra, and Diamond Valley properties, and a gain of $6.7 million on the sale of
Emerald Palms community. Discontinued operations for 2005
relates primarily to the sale of the Eastridge Apartments in the second quarter
of 2005, for a gain on sale of $28.5 million, a gain of $0.7 million attributed
to the sale of four small assets, and $1.2 million in rental revenues related to
the Eastridge community.
Liquidity
and Capital Resources
Standard
and Poor's (“S&P”) has issued a corporate credit rating of BBB/Stable for
Essex Property Trust, Inc. and Essex Portfolio, L.P.
At
December 31, 2007, the Company had $10.0 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 gains from the disposition of real
estate are sufficient to meet all of our reasonably anticipated cash needs
during 2008. The timing, source and amounts of cash flows provided by
financing activities and used in investing activities are sensitive to changes
in interest rates and other fluctuations in the capital markets environment,
which can affect our plans for acquisitions, dispositions, development and
redevelopment activities.
Essex has
a $200.0 million unsecured line of credit and, as of December 31, 2007, there
was $61.0 million balance on the line at an average interest rate of 6.2%. 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%. We also have a $100.0 million credit facility from Freddie Mac,
which is secured by eight apartment communities and which matures in January
2009. As of December 31, 2007, the Company had $100.0 million
outstanding under this line of credit at an average interest rate of 5.4%. The
underlying interest rate on this line is between 55 and 59 basis points over the
Freddie Mac Reference Rate. In 2007, the Company entered into an
unsecured revolving line of credit for $10.0 million with a commercial bank with
an initial maturity date of March 2008. Borrowing under this
revolving line of credit bears an interest rate at the bank’s Prime Rate less
2.0%. As of December 31, 2007 there was an $8.8 million balance on
the revolving line of credit at an average interest rate of 5.6%. 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 $200.0 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 December 31, 2007 and December 31, 2006. Fund
II has a credit facility aggregating $21.0 million. This line bears
interest at LIBOR plus 0.875% and matures on May 30, 2008.
During
the first quarter of 2007, the Company filed a new shelf registration statement
with the SEC, allowing the Company to sell an undetermined number or amount of
certain equity and debt securities as defined in the prospectus.
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 2007 the Company repurchased
and retired 323,259 shares of its common stock for approximately $32.6 million,
net of fees and commissions. During January 2008, the Company
repurchased an additional 137,500 shares for $13.2 million, net of fees and
commissions. As of February 2008, the company may repurchase
approximately an additional $154 million of common stock under the
current plan.
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 was .1836 shares of common stock
per $25 per share liquidation preference as of December 31, 2007. 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 $225.0 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
December 31, 2007, our mortgage notes payable totaled $1.26 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 $233.1 million
of tax-exempt variable rate demand bonds with a weighted average interest rate
of 4.5%. The tax-exempt variable rate demand bonds have maturity dates ranging
from 2009 to 2039, and are subject to interest rate caps.
In
January 2008, the Company obtained a mortgage loan in the amount of $49.9
million secured by Mirabella, a community located in Marina Del Rey,
California. The loan has a fixed interest rate of 5.21%, which
matures in January 2018, and the net proceeds were used to reduce outstanding
borrowings under the Company’s lines of credit.
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.
The
Company’s current financing activities have not been severely impacted by the
tightening in the credit markets. Our strong balance sheet, the
established relationships with our unsecured line of credit bank group and
access to Fannie Mae and Freddie Mac secured debt financing have insulated us
from the turmoil being experienced by many other real estate companies.
Recently, we have experienced some expansion in credit spreads as Fannie Mae and
Freddie Mac’s tier 4 financing are currently at approximately 200 basis points
over the relevant U.S. treasury securities.
Derivative
Activity
In April
2007, the Company settled a $50.0 million forward-starting swap and received
$1.3 million from the counterparty. The accounting for the swap
settlement reduces the effective interest rate on the new Tierra Vista mortgage
loan to 5.19%. As of December 31, 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 as they are expected to 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 decreased $7.9 million
during the year ended December 31, 2007 to a liability value of $10.2 million as
of December 31, 2007, and the derivative liability was recorded in other
liabilities in the Company’s consolidated financial statements. The
changes in the fair values of the derivatives are reflected in accumulated other
comprehensive (loss) income in the Company’s consolidated financial
statements. No hedge ineffectiveness on cash flow hedges was
recognized during the year ended December 31, 2007 and 2006.
Issuance
of Common Stock
During
April 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 anticipates using the net proceeds from
such sales to fund development, redevelopment pipelines, and pay down
outstanding borrowings under the Company’s lines of credit.
During
May 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.
Capital
Expenditures
Non-revenue
generating capital expenditures are improvements and upgrades that extend the
useful life of the property. For the year ended December 31, 2007, non-revenue
generating capital expenditures totaled approximately $919 per unit. The Company
expects to incur approximately $950 per unit in non-revenue generating capital
expenditures for the year ended December 31, 2008. These expenditures do not
include the improvements required in connection with the origination of mortgage
loans, expenditures for deferred maintenance on acquisition properties,
expenditures for property renovations and improvements which are expected to
generate additional revenue, and renovation expenditures required pursuant to
tax-exempt bond financings. Revenue-generating expenditures totaled
$11.0 million during 2007, and the Company expects to incur approximately $6.0
million in revenue generating capital expenditures for the year ended December
31, 2008. The Company expects that cash from operations and/or its
lines of credit will fund such expenditures. However, there can be no assurance
that the actual expenditures incurred during 2008 and/or the funding thereof
will not be significantly different than the Company’s current
expectations.
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. As of December 31, 2007, excluding development projects
owned by Fund II, the Company had three development projects comprised of 684
units for an estimated cost of $236.7 million, of which $125.8 million remains
to be expended. See discussion in the section, “Risks that
development activities will be delayed or not completed and/or fail to achieve
expected results” in Item 1A, Risk Factors, of this Form 10-K.
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 December 31, 2007, the Company had five development
communities aggregating 1,658 units that were classified as predevelopment
projects. The estimated total cost of the predevelopment pipeline at
December 31, 2007 was $508.4 million, of which $411.3 million remains to be
expended. The Company may also acquire land for future
development purposes. The Company owned five land parcels held
for future development aggregating 434 units as of December 31, 2007. The
Company had incurred $25.5 million in costs related to these five land parcels
as of December 31, 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
Pipeline
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 December 31, 2007,
the Company had thirteen major redevelopment communities aggregating 3,891
apartment units with estimated redevelopment costs of $135.6 million, of which
approximately $74.6 million remains to be expended. These amounts
exclude redevelopment projects owned by Fund II.
Alternative
Capital Sources
Fund II
has eight institutional investors, and 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 utilized debt as leverage equal to approximately 65% 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 December 31,
2007, owned eleven apartment communities and three development
projects. Essex records revenue for its asset management, property
management, development and redevelopment services when earned, and promote
income when realized 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 December 31, 2007, and the effect such
obligations could have on our liquidity and cash flow in future
periods:
|
|
|
|
|
|
2009
and
|
|
|
2011
and
|
|
|
|
|
|
|
(In
thousands)
|
|
|
2008
|
|
|
2010
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
Mortgage
notes payable
|
|
$
|
116,357
|
|
$
|
179,502
|
|
$
|
198,728
|
|
$
|
768,286
|
|
$
|
1,262,873
|
Exchangeable
bonds
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
225,000
|
|
|
225,000
|
Lines
of credit
|
|
|
8,818
|
|
|
161,000
|
|
|
-
|
|
|
-
|
|
|
169,818
|
Interest
on indebtedness
|
|
|
87,000
|
|
|
93,100
|
|
|
57,900
|
|
|
204,800
|
|
|
442,800
|
Development
commitments
|
|
|
153,000
|
|
|
260,600
|
|
|
89,800
|
|
|
33,700
|
|
|
537,100
|
Redevelopment
commitments
|
|
|
42,700
|
|
|
31,900
|
|
|
-
|
|
|
-
|
|
|
74,600
|
Essex
Apartment Value Fund II, L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
capital
commitment
|
|
|
13,383
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
13,383
|
|
|
$
|
421,258
|
|
$
|
726,102
|
|
$
|
346,428
|
|
$
|
1,231,786
|
|
$
|
2,725,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
$222.7 million and $163.9 million as of December 31, 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 December 31, 2007 and 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 December 31, 2007 and 2006, respectively. The Company
does not have a significant exposure to loss from its involvement with these
unconsolidated VIEs.
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; and (iii) internal cost capitalization. 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 assesses each entity in which it has an investment or contractual
relationship to determine if it may be deemed to be a VIE. If such an
entity is a VIE, then the Company analyzes the expected losses and expected
residual returns to determine who is the primary beneficiary. If the
Company is the primary beneficiary, then the entity is
consolidated. The analysis required to identify VIEs and primary
beneficiaries is complex and judgmental, and the analysis must be applied to
various types of entities and legal structures.
The
Company assesses the carrying value of its real estate investments by monitoring
investment market conditions and performance compared to budget for operating
properties and joint ventures, and by monitoring estimated costs for properties
under development. Local market knowledge and data is used to assess carrying
values of properties and the market value of acquisition opportunities. Whenever
events or changes in circumstances indicate that the carrying amount of a
property held for investment may not be fully recoverable, the carrying amount
is evaluated. If the sum of the property’s expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the property, then the Company will recognize an impairment loss equal to the
excess of the carrying amount over the fair value of the property. Adverse
changes in market conditions or poor operating results of real estate
investments could result in impairment charges. When the Company determines that
a property is held for sale, it discontinues the periodic depreciation of that
property. The criteria for determining when a property is held for sale requires
judgment and has potential financial statement impact as depreciation would
cease and an impairment loss could occur upon determination of held for sale
status. Assets held for sale are reported at the lower of the carrying amount or
estimated fair value less costs to sell. With respect to investments in and
advances to joint ventures and affiliates, the Company looks to the underlying
properties to assess performance and the recoverability of carrying amounts for
those investments in a manner similar to direct investments in real estate
properties. An impairment charge or investment valuation charge is recorded if
the carrying value of the investment exceeds its fair value.
The
Company capitalizes all direct and certain indirect costs, including interest
and real estate taxes, incurred during development and redevelopment activities.
Interest is capitalized on real estate assets that require a period of time to
get them ready for their intended use. The amount of interest capitalized is
based upon the average amount of accumulated development expenditures during the
reporting period. Included in capitalized costs are management’s estimates of
the direct and incremental personnel costs and indirect project costs associated
with our development and redevelopment activities. Indirect project costs
consist primarily of personnel costs associated with construction administration
and development accounting, legal fees, and various office costs that clearly
relate to projects under development.
The
Company bases its estimates on historical experience 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.
Forward
Looking Statements
Certain
statements in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and elsewhere in this Annual Report on Form 10-K
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 Company's expectations as to the timing of completion of current
development and redevelopment projects and the stabilization dates of such
projects, expectation as to the total projected costs and rental rates of
development and redevelopment projects, beliefs as to the adequacy of future
cash flows to meet operating requirements and to provide for dividend payments
in accordance with REIT requirements, expectations as to the amount of capital
expenditures, expectations as to the amount of non-revenue generating capital
expenditures, future acquisitions, the Company's and Fund II’s development
and redevelopment pipeline, the
anticipated
performance of existing properties, anticipated results from various geographic
regions, statements regarding the Company's financing activities, and the use of
proceeds from such activities.
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 actual completion of development and
redevelopment projects will be subject to delays, that the stabilization dates
of such projects will be delayed, that the total projected costs of current
development and redevelopment projects will exceed expectations, , that such
development and redevelopment projects will not be completed, that development
and redevelopment projects and acquisitions will fail to meet expectations, that
estimates of future income from an acquired property may prove to be inaccurate,
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 actual non-revenue generating capital expenditures will
exceed the Company's current expectations, 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 this Form 10-K, and those risk
factors and special considerations set forth in the Company's other filings with
the Securities and Exchange Commission (the "SEC") which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. All forward-looking statements are
made as of today, and the Company assumes no obligation to update this
information.
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 this Annual Report on Form 10-K 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;
|
· occupancy
rates and rents at a completed project may be less than anticipated;
and
|
· expenses
at a completed development project may be higher than
anticipated.
|
These
risks may reduce the funds available for distribution to the Company's
stockholders. Further, the development and redevelopment of properties is also
subject to the general risks associated with real estate
investments.
Interest
Rate Fluctuations
The
Company monitors changes in interest rates and believes that it is well
positioned from both a liquidity and interest rate risk perspective. However,
current interest rates are at historic lows and potentially could increase
rapidly to levels more in line with higher historical levels. 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, nor should it be considered to be,
as 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 remains 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 from the sales of previously depreciated operating real
estate assets allows investors and analysts to readily identify the
operating results of the long-term assets that form the core of a REIT’s
activity and assists in comparing those operating results between
periods.
|
Management
has consistently applied the NAREIT definition of FFO to all periods
presented. However, other REITs in calculating FFO may vary from the
NAREIT definition for this measure, and thus their disclosure of FFO may not be
comparable to Essex’s calculation.
The
following table sets forth the Company’s calculation of FFO for 2007 and 2006
(in thousands except for per share data).
|
|
|
For
the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended
|
|
|
For
the quarter ended
|
|
|
|
12/31/07
|
|
|
12/31/07
|
|
|
9/30/07
|
|
|
6/30/07
|
|
|
3/31/07
|
Net
income available to common stockholders
|
|
$
|
106,464,000
|
|
$
|
51,287,000
|
|
$
|
9,997,000
|
|
$
|
9,877,000
|
|
$
|
35,303,000
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
102,250,000
|
|
|
29,754,000
|
|
|
21,718,000
|
|
|
25,166,000
|
|
|
25,612,000
|
Gains
not included in FFO
|
|
|
(66,470,000)
|
|
|
(51,905,000)
|
|
|
(64,000)
|
|
|
(461,000)
|
|
|
(14,040,000)
|
Minority
interests and co-investments(1)
|
|
|
11,665,000
|
|
|
5,563,000
|
|
|
1,781,000
|
|
|
1,915,000
|
|
|
2,406,000
|
Funds
from Operations
|
|
$
|
153,909,000
|
|
$
|
34,699,000
|
|
$
|
33,432,000
|
|
$
|
36,497,000
|
|
$
|
49,281,000
|
Weighted
average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
diluted(2)
|
|
|
27,596,668
|
|
|
27,838,516
|
|
|
28,043,125
|
|
|
27,592,976
|
|
|
26,735,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended
|
|
|
For
the quarter ended
|
|
|
|
12/31/06
|
|
|
12/31/06
|
|
|
9/30/06
|
|
|
6/30/06
|
|
|
3/31/06
|
Net
income available to common stockholders
|
|
$
|
57,603,000
|
|
$
|
15,060,000
|
|
$
|
10,686,000
|
|
$
|
22,023,000
|
|
$
|
9,834,000
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
83,034,000
|
|
|
21,602,000
|
|
|
20,666,000
|
|
|
20,675,000
|
|
|
20,091,000
|
Gains
not included in FFO
|
|
|
(19,666,000)
|
|
|
(7,090,000)
|
|
|
(714,000)
|
|
|
(8,800,000)
|
|
|
(3,062,000)
|
Minority
interests and co-investments(1)
|
|
|
9,547,000
|
|
|
2,023,000
|
|
|
2,217,000
|
|
|
3,254,000
|
|
|
2,053,000
|
Funds
from Operations
|
|
$
|
130,518,000
|
|
$
|
31,595,000
|
|
$
|
32,855,000
|
|
$
|
37,152,000
|
|
$
|
28,916,000
|
Weighted
average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
diluted(2)
|
|
|
26,029,774
|
|
|
26,508,994
|
|
|
26,143,923
|
|
|
25,697,237
|
|
|
25,572,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amount
includes the following: (i) minority interest related to Operating
Partnership units, and (ii) depreciation add back for co-investments.
|
(2)
|
Assumes
conversion of all dilutive outstanding operating partnership interests in
the Operating Partnership.
|
The
following table sets forth the Company’s cash flows for 2007 and 2006 (in
thousands).
|
|
|
For
the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended
|
|
|
For
the quarter ended
|
|
|
|
12/31/07
|
|
|
12/31/2007
|
|
|
9/30/2007
|
|
|
6/30/2007
|
|
|
3/31/2007
|
Cash
flow provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
190,877
|
|
$
|
32,729
|
|
$
|
58,496
|
|
$
|
39,721
|
|
$
|
59,931
|
Investing
activities
|
|
|
(377,872)
|
|
|
7,913
|
|
|
(169,574)
|
|
|
(190,573)
|
|
|
(25,638)
|
Financing
activities
|
|
|
187,287
|
|
|
(40,927)
|
|
|
108,730
|
|
|
148,401
|
|
|
(28,917)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended
|
|
|
For
the quarter ended
|
|
|
|
12/31/06
|
|
|
12/31/06
|
|
|
9/30/06
|
|
|
6/30/06
|
|
|
3/31/06
|
Cash
flow provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
159,935
|
|
$
|
21,395
|
|
$
|
68,027
|
|
$
|
26,642
|
|
$
|
43,871
|
Investing
activities
|
|
|
(312,874)
|
|
|
(48,856)
|
|
|
(160,796)
|
|
|
(29,489)
|
|
|
(73,733)
|
Financing
activities
|
|
|
148,266
|
|
|
6,983
|
|
|
113,889
|
|
|
2,460
|
|
|
24,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
7A. Quantitative and Qualitative Disclosures About Market Risks
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 December
31, 2007, we have 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 of forecasted interest payments associated with the refinancing
of the Company’s long-term debt between 2007 and 2011. As of December 31, 2007,
the Company also had $233.1 million of variable rate indebtedness, of which
$152.7 million is subject to interest rate cap protection. All
of our derivative instruments are designated as cash flow hedges, and the
Company does not have any fair value hedges as of December 31,
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 December 31, 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 December 31,
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
|
|
$
|
(10,240)
|
$
|
5,828
|
$
|
(27,504)
|
Interest
rate caps
|
|
152,749
|
|
2008-2011
|
|
|
13
|
|
42
|
|
3
|
Total
cash flow hedges
|
$
|
602,749
|
|
2008-2011
|
|
$
|
(10,227)
|
$
|
5,870
|
$
|
(27,501)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 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 $1.25 billion of fixed rate
mortgage notes payable and exchangeable bonds at December 31, 2007 is
approximately $1.30 billion based on the terms of existing mortgage notes
payable compared to those available in the
marketplace.
|
|
|
For
the Years Ended December 31
|
|
|
|
2008(1)
|
|
|
2009
|
|
|
2010(2)
|
|
|
2011(3)
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
Fair
value
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate debt
|
|
$
|
116,357
|
|
$
|
24,689
|
|
$
|
154,813
|
|
$
|
166,545
|
|
$
|
32,183
|
|
$
|
760,148
|
|
$
|
1,254,735
|
|
$
|
1,301,938
|
Average
interest rate
|
|
|
6.8%
|
|
|
7.2%
|
|
|
8.0%
|
|
|
6.3%
|
|
|
5.2%
|
|
|
5.2%
|
|
|
|
|
|
|
Variable
rate LIBOR debt
|
|
$
|
8,818
|
|
$
|
173,150
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
220,988
|
(4)
|
$
|
402,956
|
|
$
|
402,956
|
Average
interest rate
|
|
|
5.6%
|
|
|
5.7%
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4.5%
|
|
|
|
|
|
|
(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)
$152,749 subject to interest rate caps.
Item
8. Financial Statements and Supplementary Data
The
response to this item is submitted as a separate section of this Form 10-K. See
Item 15.
None.
Item
9A. Controls and Procedures
As of
December 31, 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 December 31, 2007, that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended). Our management assessed the
effectiveness of our internal control over financial reporting as of
December 31, 2007. In making this assessment, our management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in Internal Control-Integrated Framework. Our management has
concluded that, as of December 31, 2007, our internal control over
financial reporting was effective based on these criteria. Our independent
registered public accounting firm, KPMG LLP, has issued an audit report on the
effectiveness of our internal control over financial reporting, which is
included herein.
Item
9B. Other Information
None.
PART
III
Item
10. Directors, Executive Officers and Corporate Governance
The
information required by Item 10 is incorporated by reference from the Company’s
definitive proxy statement for its annual stockholders’ meeting to be held on
May 6, 2008.
Item
11. Executive Compensation
The
information required by Item 11 is incorporated by reference from the Company’s
definitive proxy statement for its annual stockholders’ meeting to be held on
May 6, 2008.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The
information required by Item 12 is incorporated by reference from the Company’s
definitive proxy statement for its annual stockholders’ meeting to be held on
May 6, 2008.
Item
13. Certain Relationships and Related Transactions and Director
Independence
The
information required by Item 13 is incorporated by reference from the Company’s
definitive proxy statement for its annual stockholders’ meeting to be held on
May 6, 2008.
Item
14. Principal Accounting Fees and Services
The
information required by Item 14 is incorporated by reference from the Company’s
definitive proxy statement for its annual stockholders’ meeting to be held on
May 6, 2008.
Item
15. Exhibits and Financial Statement Schedules
(A)
Financial Statements
(1) Consolidated
Financial Statements
|
Page
|
Reports
of Independent Registered Public Accounting Firm
|
F-1
|
Consolidated
Balance Sheets:
As
of December 31, 2007 and 2006
|
F-4
|
Consolidated
Statements of Operations:
Years
ended December 31, 2007, 2006 and 2005
|
F-5
|
Consolidated
Statements of Stockholders’ Equity:
Years
ended December 31, 2007, 2006 and 2005
|
F-6
|
Consolidated
Statements of Cash Flows:
Years
ended December 31, 2007, 2006 and 2005
|
F-7
|
Notes
to the Consolidated Financial Statements
|
F-9
|
(2) Financial
Statement Schedule - Schedule III - Real Estate and Accumulated
Depreciation as of December 31, 2007
|
|
(3) See
the Exhibit Index immediately following the signature page and
certifications for a list of exhibits filed or incorporated by reference
as part
of this report.
|
|
(B)
Exhibits
The
Company hereby files, as exhibits to this Form 10-K, those exhibits listed on
the Exhibit Index referenced in Item 15(A)(3) above.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors
Essex
Property Trust, Inc.:
We have
audited Essex Property Trust, Inc.’s internal control over financial reporting
as of December 31, 2007, based on criteria established in Internal
Control–Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Essex Property Trust, Inc.’s management
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting included in Management’s Report on Internal Control over
Financial Reporting, appearing under Item 9A. Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control, based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Essex Property Trust, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31,
2007, based on criteria established in Internal Control–Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Essex
Property Trust, Inc. and subsidiaries as of December 31, 2007 and 2006, and
the related consolidated statements of operations, stockholders’ equity, and
cash flows for each of the years in the three-year period ended
December 31, 2007, and our report dated February 27, 2008, expressed an
unqualified opinion on those consolidated financial statements.
/S/ KPMG
LLP
KPMG
LLP
San
Francisco, California
Report
of Independent Registered Public Accounting Firm
The Board
of Directors
Essex
Property Trust, Inc.:
We have
audited the accompanying consolidated balance sheets of Essex Property Trust,
Inc. and subsidiaries as of December 31, 2007 and 2006, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the years in the three-year period ended December 31, 2007. In
connection with our audits of the consolidated financial statements, we have
also audited the accompanying financial statement schedule III. These
consolidated financial statements and the accompanying financial statement
schedule III are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements and the accompanying financial statement schedule III based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Essex Property Trust, Inc.
and subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule III, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Essex Property Trust, Inc.’s internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control–Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
February 27, 2008 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
/S/ KPMG
LLP
KPMG
LLP
San
Francisco, California
February
27, 2008
Consolidated
Balance Sheets
December
31, 2007 and 2006
(Dollars
in thousands, except share amounts)
|
|
|
2007
|
|
|
2006
|
ASSETS
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
Rental
properties:
|
|
|
|
|
|
|
Land
and land improvements
|
|
$
|
670,494
|
|
$
|
560,880
|
Buildings
and improvements
|
|
|
2,447,265
|
|
|
2,108,307
|
|
|
|
3,117,759
|
|
|
2,669,187
|
Less
accumulated depreciation
|
|
|
(541,987)
|
|
|
(465,015)
|
|
|
|
2,575,772
|
|
|
2,204,172
|
|
|
|
|
|
|
|
Real
estate - held for sale, net
|
|
|
-
|
|
|
41,221
|
Real
estate under development
|
|
|
233,445
|
|
|
107,620
|
Co-investments
|
|
|
64,191
|
|
|
56,318
|
|
|
|
2,873,408
|
|
|
2,409,331
|
Cash
and cash equivalents-unrestricted
|
|
|
9,956
|
|
|
9,662
|
Cash
and cash equivalents-restricted
|
|
|
12,527
|
|
|
13,948
|
Marketable
securities
|
|
|
2,017
|
|
|
-
|
Notes
receivable and other receivables from related parties
|
|
|
904
|
|
|
1,209
|
Notes
and other receivables
|
|
|
49,632
|
|
|
18,195
|
Prepaid
expenses and other assets
|
|
|
20,286
|
|
|
20,632
|
Deferred
charges, net
|
|
|
11,593
|
|
|
12,863
|
Total
assets
|
|
$
|
2,980,323
|
|
$
|
2,485,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
Mortgage
notes payable
|
|
$
|
1,262,873
|
|
$
|
1,060,704
|
Mortgage
notes payable - held for sale
|
|
|
-
|
|
|
32,850
|
Exchangeable
bonds
|
|
|
225,000
|
|
|
225,000
|
Lines
of credit
|
|
|
169,818
|
|
|
93,000
|
Accounts
payable and accrued liabilities
|
|
|
58,148
|
|
|
38,613
|
Dividends
payable
|
|
|
28,521
|
|
|
24,910
|
Other
liabilities
|
|
|
15,580
|
|
|
14,328
|
Deferred
gain
|
|
|
2,193
|
|
|
2,193
|
Total
liabilities
|
|
|
1,762,133
|
|
|
1,491,598
|
Commitments
and contingencies
|
|
|
|
|
|
|
Minority
interests
|
|
|
281,960
|
|
|
236,121
|
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;
|
|
|
|
|
|
|
24,876,737
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
|
|
|
857,109
|
|
|
686,937
|
Distributions
in excess of accumulated earnings
|
|
|
(82,805)
|
|
|
(97,457)
|
Accumulated
other comprehensive (loss) income
|
|
|
(8,988)
|
|
|
(2,273)
|
Total
stockholders' equity
|
|
|
790,318
|
|
|
612,209
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
2,980,323
|
|
$
|
2,485,840
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
Consolidated
Statements of Operations
Years
ended December 31, 2007, 2006 and 2005
(Dollars
in thousands, except per share and share amounts)
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Rental
and other property
|
|
$
|
383,433
|
|
$
|
334,770
|
|
$
|
303,235
|
Management
and other fees from affiliates
|
|
5,090
|
|
|
5,030
|
|
|
10,951
|
|
|
388,523
|
|
|
339,800
|
|
|
314,186
|
Expenses:
|
|
|
|
|
|
|
|
|
Property
operating, excluding real estate taxes
|
|
95,849
|
|
|
85,811
|
|
|
78,715
|
Real
estate taxes
|
|
32,575
|
|
|
28,587
|
|
|
25,764
|
Depreciation
and amortization
|
|
100,389
|
|
|
78,094
|
|
|
74,849
|
Interest
|
|
80,995
|
|
|
72,898
|
|
|
70,784
|
Amortization
of deferred financing costs
|
|
3,071
|
|
|
2,745
|
|
|
1,947
|
General
and administrative
|
|
26,273
|
|
|
22,234
|
|
|
19,148
|
Other
expenses
|
|
800
|
|
|
1,770
|
|
|
5,827
|
|
|
339,952
|
|
|
292,139
|
|
|
277,034
|
Earnings
from operations
|
|
|
48,571
|
|
|
47,661
|
|
|
37,152
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of real estate
|
|
-
|
|
|
-
|
|
|
6,391
|
Interest
and other income
|
|
10,310
|
|
|
6,176
|
|
|
8,524
|
Equity
income (loss) in co-investments
|
|
3,120
|
|
|
(1,503)
|
|
|
18,553
|
Minority
interests
|
|
(19,937)
|
|
|
(18,807)
|
|
|
(20,709)
|
Income
before discontinued operations and tax provision
|
|
42,064
|
|
|
33,527
|
|
|
49,911
|
Income
tax provision
|
|
(400)
|
|
|
(525)
|
|
|
(2,538)
|
Income
before discontinued operations
|
|
41,664
|
|
|
33,002
|
|
|
47,373
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations (net of minority interests
|
|
73,974
|
|
|
29,746
|
|
|
32,343
|
Net
income
|
|
115,638
|
|
|
62,748
|
|
|
79,716
|
Dividends
to preferred stockholders
|
|
(9,174)
|
|
|
(5,145)
|
|
|
(1,953)
|
Net
income available to common stockholders
|
|
$
|
106,464
|
|
$
|
57,603
|
|
$
|
77,763
|
Per
share data:
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Income
before discontinued operations available to common
stockholders
|
|
$
|
1.32
|
|
$
|
1.21
|
|
$
|
1.98
|
Income
from discontinued operations
|
|
3.02
|
|
|
1.29
|
|
|
1.40
|
Net
income available to common stockholders
|
|
$
|
4.34
|
|
$
|
2.50
|
|
$
|
3.38
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding during the year
|
|
24,548,003
|
|
|
23,081,682
|
|
|
23,038,561
|
Diluted:
|
|
|
|
|
|
|
|
|
Income
before discontinued operations available to common
stockholders
|
|
$
|
1.29
|
|
$
|
1.18
|
|
$
|
1.94
|
Income
from discontinued operations
|
|
2.95
|
|
|
1.27
|
|
|
1.38
|
Net
income available to common stockholders
|
|
$
|
4.24
|
|
$
|
2.45
|
|
$
|
3.32
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding during the year
|
|
25,100,974
|
|
|
23,551,042
|
|
|
23,388,503
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
Consolidated
Statements of Stockholders’ Equity
Years
ended December 31, 2007, 2006 and 2005
(Dollars
and shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
F
|
|
|
|
|
|
Additional
|
|
in
excess of
|
|
other
|
|
|
|
|
Preferred
stock |
|
Common
stock
|
|
paid-in
|
accumulated
|
|
comprehensive
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
capital
|
|
earnings
|
|
(loss)
income
|
|
Total
|
Balances
at December 31, 2004
|
|
1,000
|
$
|
25,000
|
|
23,041
|
$
|
2
|
$
|
646,744
|
$
|
(80,469)
|
$
|
-
|
$
|
591,277
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
79,716
|
|
-
|
|
79,716
|
Change
in fair value of cash flow hedges
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
660
|
|
660
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,376
|
Issuance
of common stock under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock-based
compensation plans
|
|
-
|
|
-
|
|
103
|
|
-
|
|
5,767
|
|
-
|
|
-
|
|
5,767
|
Retirement
of common stock
|
|
-
|
|
-
|
|
(286)
|
|
-
|
|
(25,000)
|
|
-
|
|
-
|
|
(25,000)
|
Reallocation
of minority interest
|
|
-
|
|
-
|
|
-
|
|
-
|
|
5,135
|
|
-
|
|
-
|
|
5,135
|
Dividends
declared
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(76,588)
|
|
-
|
|
(76,588)
|
Balances
at December 31, 2005
|
|
1,000
|
|
25,000
|
|
22,858
|
|
2
|
|
632,646
|
|
(77,341)
|
|
660
|
|
580,967
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
62,748
|
|
-
|
|
62,748
|
Change
in fair value of cash flow hedges
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(2,933)
|
|
(2,933)
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,815
|
Issuance
of common stock under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock-based
compensation plans
|
|
-
|
|
-
|
|
92
|
|
-
|
|
5,575
|
|
-
|
|
-
|
|
5,575
|
Issuance
of common stock
|
|
-
|
|
-
|
|
427
|
|
-
|
|
48,273
|
|
-
|
|
-
|
|
48,273
|
Conversion/reallocation
of minority interest
|
|
-
|
|
-
|
|
39
|
|
-
|
|
443
|
|
-
|
|
-
|
|
443
|
Dividends
declared
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(82,864)
|
|
-
|
|
(82,864)
|
Balances
at December 31, 2006
|
|
1,000
|
|
25,000
|
|
23,416
|
|
2
|
|
686,937
|
|
(97,457)
|
|
(2,273)
|
|
612,209
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
115,638
|
|
-
|
|
115,638
|
Settlement
of forward-starting swap
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
1,311
|
|
1,311
|
Change
in fair value of cash flow hedges and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
of gain on settlement of swap
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(8,026)
|
|
(8,026)
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,923
|
Issuance
of common stock under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock-based
compensation plans
|
|
-
|
|
-
|
|
87
|
|
-
|
|
5,648
|
|
-
|
|
-
|
|
5,648
|
Issuance
of common stock
|
|
-
|
|
-
|
|
1,671
|
|
-
|
|
213,672
|
|
-
|
|
-
|
|
213,672
|
Retirement
of common stock
|
|
-
|
|
-
|
|
(323)
|
|
-
|
|
(32,644)
|
|
-
|
|
-
|
|
(32,644)
|
Conversion/reallocation
of minority interest
|
|
-
|
|
-
|
|
26
|
|
-
|
|
(16,504)
|
|
-
|
|
-
|
|
(16,504)
|
Dividends
declared
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(100,986)
|
|
-
|
|
(100,986)
|
Balances
at December 31, 2007
|
|
1,000
|
$
|
25,000
|
|
24,877
|
$
|
2
|
$
|
857,109
|
$
|
(82,805)
|
$
|
(8,988)
|
$
|
790,318
|
See
accompanying notes to consolidated financial statements.
Consolidated
Statements of Cash Flows
Years
ended December 31, 2007, 2006 and 2005
(Dollars
in thousands)
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
115,638
|
|
$
|
62,748
|
|
$
|
79,716
|
Minority
interests
|
|
|
26,508
|
|
|
22,738
|
|
|
24,271
|
Adjustments
to reconcile net income to net
|
|
|
|
|
|
|
|
|
|
cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Gain
on the sales of real estate
|
|
|
(66,559)
|
|
|
(22,096)
|
|
|
(37,802)
|
The
Company's share of gain on the sales of co-investments
assets
|
|
|
(2,046)
|
|
|
-
|
|
|
(18,115)
|
Impairment
loss and reserve for loan loss
|
|
|
500
|
|
|
800
|
|
|
1,300
|
Equity
(income) loss of co-investments
|
|
|
(320)
|
|
|
1,503
|
|
|
(7,420)
|
Depreciation
and amortization
|
|
|
100,389
|
|
|
83,036
|
|
|
80,075
|
Amortization
of deferred financing costs
|
|
|
3,071
|
|
|
2,743
|
|
|
1,970
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other assets
|
|
|
2,458
|
|
|
493
|
|
|
(4,762)
|
Accounts
payable and accrued liabilities
|
|
|
9,984
|
|
|
6,162
|
|
|
4,709
|
Other
liabilities
|
|
|
1,254
|
|
|
1,808
|
|
|
667
|
Net
cash provided by operating activities
|
|
|
190,877
|
|
|
159,935
|
|
|
124,609
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Additions
to real estate:
|
|
|
|
|
|
|
|
|
|
Acquisitions
of real estate
|
|
|
(336,312)
|
|
|
(199,107)
|
|
|
(91,496)
|
Improvements
to recent acquisitions
|
|
|
(5,145)
|
|
|
(5,238)
|
|
|
(5,009)
|
Redevelopment
|
|
|
(38,618)
|
|
|
(25,609)
|
|
|
(14,229)
|
Revenue
generating capital expenditures
|
|
|
(11,044)
|
|
|
(4,788)
|
|
|
(2,933)
|
Non-revenue
generating capital expenditures
|
|
|
(22,620)
|
|
|
(19,120)
|
|
|
(14,568)
|
Additions
to real estate under development
|
|
|
(142,967)
|
|
|
(68,362)
|
|
|
(24,861)
|
Dispositions
of real estate
|
|
|
218,069
|
|
|
38,092
|
|
|
68,585
|
Changes
in restricted cash and refundable deposits
|
|
|
467
|
|
|
4,371
|
|
|
7,318
|
Purchases
of marketable securities
|
|
|
(7,776)
|
|
|
-
|
|
|
-
|
Sales
of marketable securities
|
|
|
5,759
|
|
|
-
|
|
|
-
|
Advances
under notes and other receivables
|
|
|
(36,145)
|
|
|
(26,125)
|
|
|
(3,220)
|
Collections
of notes and other receivables
|
|
|
3,724
|
|
|
21,234
|
|
|
4,880
|
Contributions
to co-investments
|
|
|
(21,647)
|
|
|
(38,395)
|
|
|
(4,799)
|
Distributions
from co-investments
|
|
|
16,385
|
|
|
10,171
|
|
|
49,489
|
Net
cash used in investing activities
|
|
|
(377,870)
|
|
|
(312,876)
|
|
|
(30,843)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Borrowings
under mortgage and other notes payable and lines of credit
|
|
|
866,397
|
|
|
324,228
|
|
|
205,096
|
Repayment
of mortgage and other notes payable and lines of credit
|
|
|
(678,383)
|
|
|
(266,965)
|
|
|
(389,363)
|
Additions
to deferred charges
|
|
|
(1,800)
|
|
|
(587)
|
|
|
(6,339)
|
Proceeds
from settlement of derivative instruments
|
|
|
1,311
|
|
|
-
|
|
|
-
|
Proceeds
from exchangeable bonds
|
|
|
-
|
|
|
-
|
|
|
225,000
|
Retirement
of common stock
|
|
|
(32,644)
|
|
|
-
|
|
|
(25,000)
|
Net
proceeds from stock options exercised
|
|
|
4,321
|
|
|
4,287
|
|
|
4,489
|
Net
proceeds from issuance of common stock
|
|
|
213,672
|
|
|
48,273
|
|
|
-
|
Net
proceeds from issuance of preferred stock, Series G
|
|
|
-
|
|
|
145,912
|
|
|
-
|
Contributions from minority interest partners |
|
|
4,000 |
|
|
- |
|
|
- |
Distributions
to minority interest partners
|
|
|
(82,715)
|
|
|
(21,657)
|
|
|
(23,165)
|
Redemption
of minority interest limited partnership units
|
|
|
(9,233)
|
|
|
(4,779)
|
|
|
(4,528)
|
Dividends
paid
|
|
|
(97,639)
|
|
|
(80,446)
|
|
|
(76,263)
|
Net
cash provided by (used in) financing activities
|
|
|
187,287
|
|
|
148,266
|
|
|
(90,073)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
294
|
|
|
(4,675)
|
|
|
3,693
|
Cash
and cash equivalents at beginning of year
|
|
|
9,662
|
|
|
14,337
|
|
|
10,644
|
Cash
and cash equivalents at end of year
|
|
$
|
9,956
|
|
$
|
9,662
|
|
$
|
14,337
|
(Continued)
ESSEX
PROPERTY TRUST, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
Years
ended December 31, 2007, 2006 and 2005
(Dollars
in thousands)
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest, net of $5,100, $3,900 and $1,100
|
|
|
|
|
|
|
|
|
|
capitalized
in 2007, 2006 and 2005, respectively
|
|
$
|
74,397
|
|
$
|
68,686
|
|
$
|
71,619
|
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
|
|
|
|
|
|
|
|
|
|
purchase
of real estate
|
|
$
|
7,067
|
|
|
-
|
|
|
-
|
Issuance
of Operating Partnership units in
|
|
|
|
|
|
|
|
|
|
connection
with the purchase of real estate
|
|
|
-
|
|
$
|
7,704
|
|
|
-
|
Land
contributed by a partner in a consolidated joint venture
|
|
|
|
|
|
|
|
|
|
Accrual
of dividends
|
|
$
|
28,521
|
|
$
|
24,910
|
|
$
|
22,496
|
Change
in value of cash flow hedges and amortization of swap
settlement
|
|
|
|
|
|
|
|
|
|
included
in other liabilities or other assets as applicable
|
|
$
|
(8,026)
|
|
$
|
(2,933)
|
|
$
|
660
|
Reclassification
between stockholder's equity and minority interests
|
|
|
|
|
|
|
|
|
|
resulting
from conversions and equity transactions
|
|
$
|
(16,504)
|
|
$
|
443
|
|
$
|
5,135
|
Accruals
for capital expenditures included in the year-end balance
of
|
|
|
|
|
|
|
|
|
|
accounts
payable and accrued liabilities
|
|
$
|
8,703
|
|
$
|
4,804
|
|
$
|
4,636
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
ESSEX
PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006 and 2005
(Dollars
in thousands, except for per share and per unit amounts)
(1)
Organization
The
accompanying consolidated financial statements present the accounts of Essex
Property Trust, Inc. (the “Company”), which include the accounts of the Company
and Essex Portfolio, L.P. (the Operating Partnership, which holds the operating
assets of the Company). The Company was incorporated in the state of Maryland in
March 1994. On June 13, 1994, the Company commenced operations with the
completion of an initial public offering (the “Offering”) in which it issued
6,275,000 shares of common stock at $19.50 per share. The net proceeds of the
Offering of $112.1 million were used to acquire a 77.2% general partnership
interest in the Operating Partnership.
The
Company has a 90.9% general partner interest and the limited partners own a 9.1%
interest in the Operating Partnership as of December 31, 2007. The limited
partners may convert their 2,273,472 Operating Partnership units into an
equivalent number of shares of common stock. The Company has reserved shares of
common stock for such conversions. These conversion rights may be exercised by
the limited partners at any time through 2024.
As of
December 31, 2007, the Company owned or had ownership interests in 134 apartment
communities, (aggregating 27,489 units), six office buildings, two
recreational vehicle parks (totaling 338 spaces), and one manufactured housing
community (containing 157 sites) (collectively, the “Properties”). The
Properties are located in Southern California (Los Angeles, Orange, Riverside,
Santa Barbara, San Diego, and Ventura counties), Northern California (the San
Francisco Bay Area), the Seattle metropolitan area, and other region (Houston,
Texas).
(2)
Summary of Critical and Significant Accounting Policies
(a)
Principles of Consolidation
The
accounts of the Company, its controlled subsidiaries and the variable interest
entities (“VIEs”) in which it is the primary beneficiary are consolidated in the
accompanying financial statements. All significant inter-company accounts and
transactions have been eliminated.
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), an office building that is
subject to loans made by the Company, and prior to the sale of the property
during 2007, the buildings and improvements that were owned by a third-party
subject to a ground lease on land that was owned by the Company. The
Company consolidates these entities because it is deemed the primary beneficiary
under FIN 46R. The consolidated total assets and liabilities related
to these VIEs, net of intercompany eliminations, were approximately $222.7
million and $163.9 million, respectively, as of December 31, 2007 and $269.5
million and $145.5 million, respectively,
as of December 31, 2006.
The
DownREIT entities that collectively own twelve apartment communities were
investments made under arrangements whereby Essex Management Company (“EMC”)
became the general partner, the Operating Partnership became a special limited
partner, and the other limited partners were granted rights of redemption for
their interests. Such limited partners can request to be redeemed and the
Company can elect to redeem their rights for cash or by issuing shares of its
common stock on a one share per unit basis. Conversion values will be based on
the market value of the Company's common stock at the time of redemption
multiplied by the number of units stipulated under the above arrangements. The
other limited partners receive distributions based on the Company's current
dividend rate times the number of units held. As of December 31, 2007, the
maximum number of shares that could be issued to meet redemption of these
DownREIT entities is 1,201,012. As of December 31, 2007 and 2006, the
carrying value of the other limited partners' interests is presented at their
historical cost and is classified within minority interests in the accompanying
consolidated balance sheets.
Minority
interests include the 9.1% and 9.6% limited partner interests in the Operating
Partnership not held by the Company at December 31, 2007 and 2006, respectively.
The Company periodically adjusts the carrying value of minority interest in the
Operating Partnership to reflect its share of the book value of the Operating
Partnership. Such adjustments are recorded to stockholders’ equity as a
reallocation of minority interest in the Operating Partnership in the
accompanying consolidated statements of stockholders’ equity. The
minority interest balance also includes the Operating Partnership’s cumulative
redeemable preferred units (see Note 12).
Interest
holders in VIEs consolidated by the Company are allocated a priority of 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
December 31, 2007 and 2006 the Company was involved with two VIEs, of which it
is not deemed to be the primary beneficiary. Total assets of these
entities were approximately $71.7 million and $78.5 million and total
liabilities were approximately $58.3 million and $58.4 million, as of
December 31, 2007 and 2006, respectively. The Company does not have a
significant exposure to loss from its involvement with these unconsolidated
VIEs.
(b)
Real Estate Rental Properties
Significant
expenditures, which improve or extend the life of an asset and have a useful
life of greater than one year, are capitalized. Operating real estate
assets are stated at cost and consist of land, buildings and improvements,
furniture, fixtures and equipment, and other costs incurred during their
development, redevelopment and acquisition. Expenditures for
maintenance and repairs are charged to expense as incurred.
The
depreciable life of various categories of fixed assets is as
follows:
Computer
software and equipment
|
3 -
5 years
|
Interior
unit improvements
|
5
years
|
Land
improvements and certain exterior components of real
property
|
10 years
|
Real
estate structures
|
30
years
|
In
accordance with SFAS No. 67, “Accounting for Costs and Initial Rental Operations
of Real Estate Projects,” the Company capitalizes predevelopment costs incurred
in the pursuit of new development opportunities, in the negotiation process, as
well as the entitlement process with a high likelihood of the projects becoming
development activities. Predevelopment costs for which a future
development is no longer considered probable are charged to
expense. All costs incurred with the predevelopment, development or
redevelopment of real estate assets are capitalized if they are clearly
associated with the predevelopment, development or redevelopment of rental
property, or are associated with the construction or expansion of real
property. Such capitalized costs include land, land improvements,
allocated costs of the Company’s project management staff, construction costs,
as well as interest and related loan fees, property taxes and
insurance. Capitalization begins for predevelopment, development, and
redevelopment projects when activity commences. Capitalization ends
when the apartment home is completed and the property is available for a new
resident.
In
accordance with FASB’s Statement of Financial Accounting Standard No. 141
(“SFAS No. 141”) “Business
Combinations,” the Company allocates the purchase price of real estate to
land and building, and identifiable intangible assets, such as the value of
above, below and at-market in-place leases. The values of the above and below
market leases are amortized and recorded as either a decrease (in the case of
above market leases) or an increase (in the case of below market leases) to
rental revenue over the remaining term of the associated leases
acquired. The value of acquired at-market leases are amortized to
expense over the term the Company expects to retain the acquired tenant, which
is generally 20 months.
In
accordance with SFAS No. 141 and its applicability to acquired in-place leases,
we perform the following evaluation for properties we acquire:
(1)
|
estimate the value of the real
estate “as if vacant” as of the acquisition date;
|
(2)
|
allocate that value among land
and building and determine the associated asset life for each;
|
(3)
|
compute the value of the
difference between the “as if vacant” value and the purchase price, which
will represent the total intangible assets;
|
(4)
|
allocate the value of the above
and below market leases to the intangible assets and determine the
associated life of the above market/ below market
leases;
|
(5)
|
allocate
the remaining intangible value to the at-market in-place leases or
customer relationships, if any, and the associated lives of these
assets.
|
Whenever
events or changes in circumstances indicate that the carrying amount of a
property held for investment or held for sale may not be fully recoverable, the
carrying amount will be evaluated for impairment. If the sum of the property’s
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount (including intangible assets) of the property, then the
Company will recognize an impairment loss equal to the excess
of the
carrying amount over the fair value of the property. Such fair value
of a property is determined using conventional real estate valuation methods,
such as discounted cash flow, the property’s unleveraged yield in comparison to
the unleveraged yields and sales prices of similar properties that have been
recently sold, and other third party information, if
available. Properties held for sale are carried at the lower of cost
and fair value less estimated costs to sell.
During
the second quarter of 2006, the Company recorded an impairment loss of $0.8
million and in fourth quarter of 2005 the Company recorded an impairment loss of
$1.3 million resulting from write-downs of a property’s value in Houston, Texas,
to reduce the property’s carrying value to its estimated fair
value. The impairment charges are recorded in other expenses in the
accompanying consolidated statements of 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. The Company classifies real estate as "held for sale" when
all criteria under Statement of Financial Accounting Standard No. 144 (“SFAS No.
144”), "Accounting for the
Impairment or Disposal of Long-Lived Assets" have been met. In
accordance with SFAS No. 144, the Company presents income and gains/losses on
properties sold as discontinued operations net of minority interests. Real
estate investments accounted for under the equity method of accounting remain
classified in continuing operations upon disposition. (See Note 7 for
a description of the Company’s discontinued operations for 2007, 2006, and
2005).
(c) Co-investments
The
Company owns investments in joint ventures (“co-investments”) in which it has
significant influence, but its ownership interest does not meet the criteria for
consolidation in accordance with FIN 46R or Emerging Issues Task Force Consensus
No. 04-05 (“EITF 04-05”), “Determing Whether a General Partner
or the General Partners as a Group, Controls a Limited Partnership or Similar
Entity When the Limited Partners Have Certain
Rights.” Therefore, the Company accounts for these
investments using the equity method of accounting. Under the equity method
of accounting, the investment is carried at the cost of assets contributed, plus
the Company’s equity in earnings less distributions received and the Company’s
share of losses.
A
majority of these co-investments compensate the Company for its asset management
services and some of these investments may provide promote distributions if
certain financial return benchmarks are achieved. Asset management
fees are recognized when earned, and promote fees are recognized when the
earnings events have occurred and the amount is determinable and collectible.
Asset management fees and promote fees are reflected in interest and other and
equity income in co-investments, respectively, in the accompanying consolidated
statements of operations.
(d)
Revenues and Gains on Sale of Real Estate
Revenues
from tenants renting or leasing apartment units, recreational vehicle park
spaces or manufactured housing community spaces are recorded when due from
tenants and are recognized monthly as they are earned, which is not materially
different than on a straight-line basis. Units or spaces are rented
under short-term leases (generally, lease terms of 6 to 12 months) and may
provide no rent for one or two months, depending on the market conditions and
leasing practices of the Company’s competitors in each sub-market at the time
the leases are executed. Revenues from tenants leasing
commercial space are recorded on a straight-line basis over the life of the
respective lease.
The
Company recognizes gains on sales of real estate when a contract is in place, a
closing has taken place, the buyer’s initial and continuing investment is
adequate to demonstrate a commitment to pay for the property and the Company
does not have a substantial continuing involvement in the property.
(e)
Cash Equivalents and Restricted Cash
Highly
liquid investments with original maturities of three months or less when
purchased are classified as cash equivalents. Restricted cash balances relate
primarily to reserve requirements for capital replacement at certain Properties
in connection with the Company’s mortgage debt.
(f) Marketable
Securities
Marketable
securities consist of 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.
(g)
Notes Receivable and Interest Income
Notes
receivable relate to real estate financing arrangements including mezzanine and
bridge loans that exceed one year. They bear interest at a rate based on the
borrower’s credit quality and are recorded at face value. Interest is recognized
over the life of the note. The Company requires collateral for the
notes.
Each note
is analyzed to determine if it is impaired pursuant to SFAS No. 114, “Accounting by Creditors for
Impairment of a Loan”. A note is impaired if it is probable
that the Company will not collect all principal and interest contractually
due. The Company does not accrue interest when a note is considered
impaired. All cash receipts on impaired notes are applied to reduce the
principal amount of such notes until the principal has been recovered and,
thereafter, are recognized as interest income.
(h)
Interest Rate Protection, Swap, and Forward Contracts
The
Company has from time to time used interest rate protection, swap and forward
contracts to manage its interest rate exposure on current or identified future
debt transactions. The Company accounts for such derivative contracts using SFAS
No. 133. Under SFAS No. 133, derivative instruments are required to be included
in the balance sheet at fair value. The changes in the fair value of the
derivatives are accounted for depending on the use of the derivative and whether
it has been designated and qualifies as a part of a hedging
relationship.
The
Company records all derivatives on the balance sheet at fair value. The
accounting for changes in the fair value of derivatives depends on the intended
use of the derivative and the resulting designation. Derivatives used to hedge
the exposure to changes in the fair value of an asset, liability, or firm
commitment attributable to a particular risk, such as interest rate risk, are
considered fair value hedges. Derivatives used to hedge the exposure to
variability in expected future cash flows, or other types of forecasted
transactions, are considered cash flow hedges.
For
derivatives designated as fair value hedges, changes in the fair value of the
derivative and the hedged item related to the hedged risk are recognized in
earnings. For derivatives designated as cash flow hedges, the effective portion
of changes in the fair value of the derivative is initially reported in other
comprehensive income (outside of earnings) and subsequently reclassified to
earnings when the hedged transaction affects earnings, and the ineffective
portion of changes in the fair value of the derivative is recognized directly in
earnings. The Company assesses the initial and ongoing effectiveness
of each hedging relationship by comparing the changes in fair value or cash
flows of the derivative hedging instrument with the changes in fair value or
cash flows of the designated hedged item or transaction. For derivatives not
designated as hedges, changes in fair value are recognized in earnings. All
existing instruments are considered cash flow hedges, and the Company does not
have any fair value hedges as of December 31, 2007.
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.
Amounts
reported in accumulated other comprehensive (loss) income related to derivatives
will be reclassified to interest expense as interest payments are made on the
Company’s hedged debt. The Company is hedging its exposure to the
variability in future cash flows for a portion of its forecasted transactions
over a maximum period of 46 months as of December 31, 2007.
(i)
Deferred Charges
Deferred
charges are principally comprised of loan fees and related costs which are
amortized over the terms of the related borrowing in a manner which approximates
the effective interest method.
Generally
in any year in which the Company qualifies as a real estate investment trust
(“REIT”) under the Internal Revenue Code (the “Code”), it is not subject to
federal income tax on that portion of its income that it distributes to
stockholders. No provision for federal income taxes, other than the taxable REIT
subsidiaries discussed below has been made in the accompanying consolidated
financial statements for each of the three years in the period ended December
31, 2007, as the Company has elected to be and believes it qualifies under the
Code as a REIT and has made distributions during the periods in amounts to
preclude the Company from paying federal income tax.
In order
to maintain compliance with REIT tax rules, the Company utilizes taxable REIT
subsidiaries for
various revenue generating or investment activities. The taxable REIT
subsidiaries’ are consolidated by the Company. The activities and tax related
provisions, assets and liabilities are not material.
The
status of cash dividends distributed for the years ended December 31, 2007,
2006, and 2005 related to common stock, Series F, and Series G preferred stock
are classified for tax purposes as follows:
|
|
2007
|
|
2006
|
|
2005
|
Common
stock
|
|
|
|
|
|
|
Ordinary
income
|
|
75.65%
|
|
100.00%
|
|
74.91%
|
Capital
gains
|
|
24.35%
|
|
0.00%
|
|
25.09%
|
Return
of capital
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
|
|
100.00%
|
|
100.00%
|
|
100.00%
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Series
F and G Preferred stock(1)
|
|
|
|
|
|
|
Ordinary
income
|
|
75.65%
|
|
100.00%
|
|
74.91%
|
Capital
gains
|
|
24.35%
|
|
0.00%
|
|
25.09%
|
Return
of capital
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
|
|
100.00%
|
|
100.00%
|
|
100.00%
|
|
|
|
|
|
|
|
|
(1)
|
Series
G was issued during the third quarter of
2006.
|
(k) Preferred
Stock
The
Company classifies its Series G Cumulative Convertible Preferred Stock (“Series
G Preferred Stock”) based on Emerging Issues Task Force Topic D-98,
(“EITF D-98”) “Classification
and Measurement of Redeemable Securities.” The Series G Preferred Stock
contains fundamental change provisions that allow the holder to redeem the
preferred stock for cash if certain events occur. The redemption
under these provisions is not solely within the Company’s control, thus the
Company has classified the Series G Preferred Stock as temporary equity in the
accompanying consolidated balance sheets.
The
Company classifies its Series F Cumulative Redeemable Preferred Stock (“Series F
Preferred Stock”) based on EITF D-98. The Series F Preferred Stock
contains fundamental change provisions that allow the holder to redeem the
preferred stock for cash if certain events occur. The redemption
under these provisions is within the Company’s control, and thus the Company has
classified the Series F Preferred Stock as permanent equity in the accompanying
consolidated balance sheets.
(l)
Stock-based Compensation
The
Company accounts for share based compensation using the fair value method of
accounting. The estimated fair value of stock options granted by the
Company is being amortized over the vesting period of the stock
options. The estimated grant date fair values of the long term
incentive plan units (discussed in Note 14) are being amortized over the
expected service periods.
(m)
Legal costs
Legal
costs associated with matters arising out of the normal course of our business
are expensed as incurred. Legal costs incurred in connection with non-recurring
litigation that is not covered by insurance are accrued when amounts are
probable and estimable.
(n)
Accounting Estimates and Reclassifications
The
preparation of consolidated financial statements, in accordance with U.S.
generally accepted accounting principles (“GAAP”), 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 receivable and its 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 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, total assets or total liabilities.
(o)
New Accounting Pronouncements
In July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes-an Interpretation of FASB Statement 109” (“FIN 48”). 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 on January 1, 2007 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”
(“FAS 157”). FAS 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. FAS 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”). FAS 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 does not plan to
measure any eligible financial assets and liabilities at fair value upon the
adoption of this standard on January 1, 2008.
In
December 2007, the FASB issued revised SFAS No. 141, “Business
Combinations” (“FAS 141(R)”). FAS141(R)
establishes principles and requirements for how the acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree;
recognizes
and measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. The objective of the guidance is to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a business combination
and its effects. FAS 141(R) is effective for business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Management is
currently evaluating the impact FAS 141(R) will have on the Company’s
consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“FAS 160”). FAS 160 establishes accounting
and reporting standards that require the ownership interests in subsidiaries
held by parties other than the parent be clearly identified, labeled, and
presented in the consolidated statement of financial position within equity, but
separate from the parent’s equity; the amount of consolidated net income
attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of income;
changes in a parent’s ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted for consistently;
when a subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary be initially measured at fair value; and
entities provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. The objective of the guidance is to improve the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements. FAS 160 is effective
for fiscal years beginning on or after December 15, 2008. Management is
currently evaluating the impact FAS 160 will have on the Company’s consolidated
financial statements.
(3)
Real Estate
(a)
Sales of Real Estate and Assets Held for Sale
Each
property is considered a separately identifiable component of the Company and is
reported in discontinued operations when the operations and cash flows of the
property have been (or will be) eliminated from the ongoing operations of the
Company as a result of a disposal transaction.
In
December 2007, the Company sold four communities (875-units) in the Portland
metropolitan area for $97.5 million, resulting in a gain of $47.6 million net of
minority interest. The proceeds from the sale were used in a tax-free
reverse exchange for the purchase of Mill Creek at Windermere in September
2007
In
February 2007, the Company sold the joint venture property City Heights
Apartments, a 687-unit community located in Los Angeles, California for $120
million. The Company’s share of the proceeds from the sale totaled $33.9
million, resulting in a $13.7 million gain on sale to the Company, and an
additional $10.3 million for fees from the joint venture partner, both of which
are included in income from discontinued operations. As of December
31, 2006, City Heights was classified as held for sale.
For the
year ended December 31, 2005, the gain on the sale of the Eastridge apartment
community was $28.5 million. An additional $2.2 million was deferred
as of December 31, 2007 and 2006. The $2.2 million was deferred
because it is due and payable to the Company only upon the sale of units
following a condominium conversion which was still in progress as of December
31, 2007. This transaction was included in discontinued
operations as we had no other ongoing involvement with the
Property.
For the
year ended December 31, 2005, $5.0 million previously deferred gain on the sale
of The Essex on Lake Merritt apartment community was recognized on the cost
recovery method when the cash was received. The $5.0 million was deferred
because it was due and payable to the Company only upon the sale of units
following a condominium conversion. The sale transaction was included in
continuing operations as we continued to manage the rented apartment units in
the project during the conversion process.
(b)
Co-investments
The
Company has joint venture investments in a number of co-investments
which are accounted for under the equity method. The joint ventures own and
operate apartment communities.
Essex
Apartment Value Fund, L.P. (“Fund I”), was an investment fund organized by the
Company in 2001 to add value through rental growth and asset appreciation,
utilizing the Company’s acquisition, development, redevelopment and asset
management capabilities. Fund I was considered fully invested in 2003. An
affiliate of the Company, Essex VFGP, L.P. (“VFGP”), was a 1% general partner
and was a 20.4% limited partner. The Operating Partnership owned a 99% limited
partnership interest in VFGP. Fund I acquired or developed
ownership interests in 19 apartment communities, representing 5,406 apartment
units.
Fund I
sold its apartment communities during 2004 and 2005. The Fund I
dispositions in 2005 resulted in the Company recognizing equity income from the
gain on the sale of investments of $18.1 million, and $7.0 million in promote
income. During 2006, the Company recorded an additional $1.2 million
in promote income related to the dispositions of assets in 2005, and during 2007
the Company recorded $0.3 million in gain on its investment and $0.3 million in
promote income related to the final liquidation of Fund I assets.
Essex
Apartment Value Fund II, L.P. (“Fund II”), has eight institutional investors,
and 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 utilized debt as leverage equal
to approximately 65% of the estimated value of the underlying real
estate. Fund II invests in apartment communities in the Company’s
targeted West Coast markets with an emphasis on investment opportunities in the
Seattle metropolitan area and the San Francisco Bay Area. Subject to certain
exceptions, Fund II had been Essex’s primary investment vehicle during 2005 and
2006. As of October 2006, Fund II was fully invested and closed for any future
acquisitions or development. As of December 31, 2007, Fund II owned
eleven apartment communities and three development
projects. No
properties have been sold by Fund II. Consistent with Fund I, Essex
records revenue for its asset management, property management, development and
redevelopment services when earned, and promote income when realized if Fund II
exceeds certain financial return benchmarks.
In August
2005, the Company purchased 500,000 Series A Preferred shares in Multifamily
Technology Solutions, Inc. (“MTS”). The Company owns less than 5% of
the voting stock of MTS and therefore accounts for this investment on the cost
method.
During
2006, the Company made a contribution to a development with a joint venture
partner totaling $3.4 million, and made additional contributions to this joint
venture of $0.7 million during 2007. The development is located in
Southern California and as of December 31, 2007 was 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 December 31, 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. During January 2008, the Company
collected $7.5 million in connection with the return of its remaining
interest in the joint venture and recognized income of $6.3 million from
its preferred interest.
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 became wholly owned by the
Company.
|
|
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)
|
$
|
58,419
|
$
|
45,598
|
Preferred
limited partnership interest in Mountain Vista
|
|
|
|
Apartments
LLC (A)
|
|
1,182
|
|
6,806
|
Development
joint venture
|
|
4,090
|
|
3,414
|
|
|
63,691
|
|
55,818
|
Investments
accounted for under the cost method of accounting:
|
|
|
|
|
|
Series
A Preferred Stock interest in Multifamily Technology Solutions,
Inc.
|
|
500
|
|
500
|
|
|
|
|
|
Total
investments
|
$
|
64,191
|
$
|
56,318
|
|
|
|
|
|
|
(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 co-investments, which are accounted
for under the equity method, is as follows:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
Balance
sheets:
|
Rental
properties and real estate under development
|
$
|
614,266
|
$
|
576,134
|
|
|
Other
assets
|
|
16,184
|
|
20,681
|
|
|
Total
assets
|
$
|
630,450
|
$
|
596,815
|
|
|
|
|
|
|
|
|
|
Mortgage
notes payable
|
$
|
322,615
|
$
|
301,665
|
|
|
Other
liabilities
|
|
24,014
|
|
74,793
|
|
|
Partners'
equity
|
|
283,821
|
|
220,357
|
|
|
Total
liabilities and partners' equity
|
$
|
630,450
|
$
|
596,815
|
|
|
|
|
|
|
|
|
|
Company's
share of equity
|
$
|
63,691
|
$
|
55,818
|
|
|
|
|
|
|
|
|
|
|
Years
ended
|
|
|
December
31,
|
|
|
2007
|
|
2006
|
|
2005
|
Statements
of operations:
|
Property
revenues
|
$
|
46,559
|
$
|
43,031
|
$
|
28,156
|
Property
operating expenses
|
|
(18,551)
|
|
(20,464)
|
|
(11,761)
|
Net
operating income
|
|
28,008
|
|
22,567
|
|
16,395
|
Gain
on the sale of real estate
|
|
-
|
|
-
|
|
41,985
|
Interest
expense
|
|
(13,888)
|
|
(17,000)
|
|
(11,042)
|
Depreciation
and amortization
|
|
(14,116)
|
|
(12,395)
|
|
(7,037)
|
Net
income (loss
|
$
|
4
|
$
|
(6,828)
|
$
|
40,301
|
|
|
|
|
|
|
|
Company's
share of co-investment net income (loss)
|
|
1,074
|
|
(1,503)
|
|
18,553
|
Company's
gain on partial sale of its interest
|
|
2,046
|
|
-
|
|
-
|
|
|
|
|
|
|
|
Income
(loss) for co-investments
|
$
|
3,120
|
$
|
(1,503)
|
$
|
18,553
|
|
|
|
|
|
|
(c)
Real Estate Under Development
The
Company defines real estate under 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. As of December 31, 2007, excluding development projects owned
by Fund II, the Company had three development projects comprised of 684 units
for an estimated cost of $236.7 million, of which $125.8 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 December 31, 2007, the Company had five development
communities aggregating 1,658 units that were classified as predevelopment
projects. The estimated total cost of the predevelopment pipeline at
December 31, 2007 is $508.4 million, of which $411.3 million remains to be
expended. The Company owns land parcels held for future development
aggregating 434 units as of December 31, 2007. The Company had
incurred $25.5 million in costs related to these five land parcels as of
December 31, 2007.
(4)
Notes Receivable and Other Receivables from Related Parties
Notes
receivable and other receivables from related parties consist of the following
as of December 31, 2007 and 2006:
|
|
2007
|
|
2006
|
|
|
|
|
|
Related
party receivables, unsecured:
|
|
|
|
Loans
to officers made prior to July 31, 2002, secured,
|
|
|
|
bearing
interest of 8%, due beginning April 2007
|
$
|
-
|
$
|
375
|
Other
related party receivables, substantially due on demand
|
|
904
|
|
834
|
Total
notes and other receivable from related parties
|
$
|
904
|
$
|
1,209
|
Other
related party receivables include accrued management and development fees from
Fund II totaling $0.5 million and $0.4 million as of December 31, 2007 and 2006,
respectively.
(5)
Notes and Other Receivables
Notes
receivables, secured by real estate, and other receivables consist of the
following as December 31, 2007 and 2006:
|
|
2007
|
|
2006
|
|
|
|
|
|
Note
receivable, secured, bearing interest at 12%, due June
2008
|
$
|
2,193
|
$
|
2,193
|
Note
receivable, secured, bearing interest at LIBOR + 3.69%, due June
2009
|
|
7,346
|
|
7,309
|
Note
receivable, secured, bearing interest at LIBOR + 4.65%, due January
2008
|
|
5,448
|
|
7,807
|
Note
receivable, secured, bearing interest at LIBOR + 3.38%, due February
2009
|
|
7,128
|
|
-
|
Note
receivable, secured, bearing interest at LIBOR + 4.75%, due March
2011
|
|
10,999
|
|
-
|
Note
receivable, secured, bearing interest at LIBOR + 2.95%, due April
2009
|
|
14,010
|
|
-
|
Other
receivables
|
|
2,508
|
|
886
|
|
$
|
49,632
|
$
|
18,195
|
|
|
|
|
|
As of
December 31, 2007, the Company originated five notes receivables totaling $47.4
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
had ceased accruing interest on the note, due to the current velocity of sales,
pricing, and status of the interest reserve. During the fourth
quarter of 2007, the Company recorded an allowance for loan loss in the amount
of $0.5 million on this impaired note receivable, which is approximately equal
to accrued and unpaid interest recorded from inception of the note through June
30, 2007. The Company believes that the current loan balance of $5.4
million is collectible through the future sales of 17 unsold condominium
units.
(6)
Related Party Transactions
Management
and other fees from affiliates includes management, promote, development and
redevelopment fees totaling $5.1 million, $5.0 million, and $11.0 million for
the years ended December 31, 2007, 2006, and 2005, respectively.
The
Company’s Chairman, George Marcus, is the Chairman of TMMC, which is a real
estate brokerage firm. During the years ended December 31, 2007, 2006, and 2005,
the Company paid brokerage commissions totaling $1.3 million, $0.8 million, and
$0 to TMMC on the purchase and sales of real estate.
Mr.
Marcus was 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 those
apartments. The Company's independent Board of Directors approved the
acquisition of the apartment community.
Mr.
Marcus is the Chairman of the Urban Housing Group (“UHG”), a subsidiary of
TMMC. During December 2007, UHG sold the rights to the Company to
acquire the Fourth Street development land parcel in Berkeley, California for
$2.8 million. The amount paid to the Urban Housing Group included
reimbursement for the costs incurred by UHG to entitle the property for
development. The Company's independent Board of Directors approved the
acquisition of the rights to the land parcel.
(7)
Discontinued Operations
In the
normal course of business, the Company will receive offers for sale of its
properties, either solicited or unsolicited. For those offers that are accepted,
the prospective buyer will usually require a due diligence period before
consummation of the transaction. It is not unusual for matters to
arise that result in the withdrawal or rejection of the offer during this
process. Essex classifies real estate as "held for sale" when all
criteria under SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (“SFAS 144”) have been met.
In
January 2005, the Company sold four non-core assets that were acquired for $14.9
million. The four non-core assets were: The Riviera Recreational
Vehicle Park and a Manufactured Home Park, located in Las Vegas, Nevada, for
which the Company had previously entered into master lease and option agreements
with an unrelated entity; and two small office buildings, located in San Diego
California. The Company recorded a gain of $0.7 million on the sale
of these assets. The Company has recorded the gain on sale and
operations for these assets as part of discontinued operations in the
accompanying consolidated statements of operations.
In June
2005, the Company sold the Eastridge apartments, a 188-unit apartment community
located in San Ramon, California for approximately $47.5 million. In
conjunction with the sale, the Company deferred $2.2 million of the gain on the
sale of Eastridge because Essex, through a TRS, originated a participating loan
to the buyer in the amount of approximately $2.2 million, which allows the
Company to financially participate in the buyer’s condominium conversion
plan. The gain on the sale of the Eastridge property net of the
deferral of the $2.2 participating loan was $28.5 million. The
Company has recorded the gain on sale and operations for Eastridge apartments as
part of discontinued operations in the accompanying consolidated statements of
operations.
In
January 2006, the Company sold Vista Capri East and Casa Tierra apartment
communities for approximately $7.0 million and in March 2006, the Company sold
Diamond Valley, a Recreational Vehicle Park, for approximately $1.3
million. The total combined gain was $3.1 million. 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
$46.0 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.
In
December 2006, the Company sold Emerald Palms, a 152-unit apartment community
located in San Diego for approximately $20.5 million, for a gain of
approximately $6.7 million. The Company has recorded the gain on sale
and operations for Emerald Palms apartments as part of discontinued operations
in the accompanying consolidated statements of operations.
As of
December 31, 2006, City Heights Apartments, a 687-unit community located in Los
Angeles was classified as held for sale, and during February 2007 the property
was sold to a third-party for $120 million. The Company’s share of
the proceeds from the sale totaled $33.9 million, resulting in a $13.7 million
gain, 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.
The
Company sold the 21 remaining condominium units at the Peregrine Point property
during the first three quarters of 2007, 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 45 units and recorded a gain of
$2.0 million net of taxes and expenses during 2006. 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.
In
December 2007, the Company sold four communities (875-units) in the Portland
metropolitan area for $97.5 million, resulting in a gain of $47.6 million, net
of minority interest. The Company has recorded the gain on sale and
operations for the four communities 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.
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Rental
revenues
|
$
|
9,466
|
$
|
19,537
|
$
|
21,267
|
Interest
and other income
|
|
290
|
|
41
|
|
1,231
|
Equity
income co-investments
|
|
-
|
|
238
|
|
477
|
Revenues
|
|
9,756
|
|
19,816
|
|
22,975
|
|
|
|
|
|
|
|
Property
operating expenses
|
|
(3,779)
|
|
(7,611)
|
|
(8,159)
|
Interest
expense
|
|
(416)
|
|
(2,314)
|
|
(2,830)
|
Depreciation
and amortization
|
|
(1,861)
|
|
(4,940)
|
|
(5,300)
|
Minority
interests
|
|
(129)
|
|
(1,199)
|
|
(821)
|
Expenses
|
|
(6,185)
|
|
(16,064)
|
|
(17,110)
|
|
|
|
|
|
|
|
Income
from real estate sold
|
|
3,571
|
|
3,752
|
|
5,865
|
|
|
|
|
|
|
|
Gain
on sale of real estate
|
|
52,874
|
|
20,503
|
|
29,219
|
Gain
on sale of real estate - City Heights
|
|
78,306
|
|
-
|
|
-
|
Promote
interest and fees
|
|
10,290
|
|
8,221
|
|
-
|
Minority
interests
|
|
(6,443)
|
|
(2,730)
|
|
(2,741)
|
Minority
interests - City Heights
|
|
(64,624)
|
|
-
|
|
-
|
|
|
70,403
|
|
25,994
|
|
26,478
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
$
|
73,974
|
$
|
29,746
|
$
|
32,343
|
|
|
|
|
|
|
|
(8)
Mortgage Notes Payable and Exchangeable Bonds
Mortgage
notes payable and exchangeable bonds consist of the following as of December 31,
2007 and 2006:
The
aggregate scheduled principal payments of mortgage notes payable and
exchangeable bonds are as follows:
|
2007
|
|
2006
|
|
|
|
|
Mortgage
notes payable to a pension fund, secured by deeds of trust, bearing
interest
|
at
rates ranging from 6.62% to 8.18%, principal and interest payments due
monthly,
|
and
maturity dates ranging from October 2008 through October 2010. Under
certain
|
conditions
a portion of these loans can be converted to an unsecured note
payable.
|
Three
loans are cross-collateralized by a total of 13
properties
$ |
|
224,876
|
$
|
228,663
|
|
|
|
|
Mortgage
notes payable, secured by deeds of trust, bearing interest at
ranges
|
|
|
|
ranging
from 4.86% to 7.90%, principal and interest payments due
monthly,
|
|
|
|
and
maturity dates ranging from March 2008 through June 2018
|
804,859
|
|
645,702
|
Mortgage
notes payable - held for sale, secured by deed of trust, bearing
interest
|
at
6.90%, principal and interest payments due monthly, and maturity date
of
|
January
2008. Repaid in February 2007
|
-
|
|
32,850
|
|
|
|
|
Multifamily
housing mortgage revenue bonds secured by deeds of trust
on
|
|
|
|
rental
properties and guaranteed by collateral pledge agreements,
payable
|
|
|
|
monthly
at a variable rate as defined in the Loan Agreement
|
|
|
|
(approximately
4.50% at December 2007 and 4.60% at December 2006),
|
|
|
|
plus
credit enhancement and underwriting fees ranging from
approximately
|
|
|
|
1.2%
to 1.9%. The bonds are primairly convertible to a fixed rate at the
Company's
|
|
|
|
option.
Among the terms imposed on the properties, which are security
for
|
|
|
|
the
bonds, is a requirement that 20% of the units are subject to tenant
income
|
|
|
|
criteria.
Principal balances are due in full at various maturity dates from
December
|
|
|
|
2009
through December 2039. $152.7 million of these bonds are
subject to various
|
|
|
|
interest
rate cap agreements which limit the maximum interest rate to such
bonds
|
233,138
|
|
186,339
|
|
|
|
|
Exchangeable
bonds, unsecured obligations of the Operating Partnership and
guaranteed
|
by
the Company, bearing interest at 3.625% per year, payable November 1 and
May 1
|
of
each year, which mature on November 1, 2025. The bonds are
exchangeable
|
at
the option of the holder into cash and, in certain circumstances at the
Company's
|
option,
shares of the Company's common stock at an initial exchange price
of
|
$103.25
per share subject to certain adjustments. These bonds will also
be
|
exchangeable
prior to November 1, 2020 under certain circumstances. The
bonds are
|
redeemable
at the Company's option for cash at any time on or after November
4,
|
2010
and are subject to repurchase for cash at the option of the holder on
November 1st
|
in
years 2010, 2015, and 2020 or upon the occurrence of certain
events
|
225,000
|
|
225,000
|
|
|
|
|
$
|
1,487,873
|
$
|
1,318,554
|
|
|
|
|
The aggregate scheduled principle payments of mortgage notes payable and
exchangeable bonds are as follows:
2008
|
$
|
116,357
|
2009
|
|
24,689
|
2010
|
|
154,813
|
2011
|
|
166,545
|
2012
|
|
32,183
|
Thereafter
|
|
993,286
|
|
|
|
|
$
|
1,487,873
|
Repayment
of debt before the scheduled maturity date could result in prepayment
penalties.
(9)
Lines of Credit
The
Company has three outstanding lines of credit in the aggregate committed amount
of $310.0 million as of December 31, 2007. In March 2006, the Company
renegotiated its revolving line of credit to increase the maximum principal
amount to $200.0 million from $185.0 million. Additionally, the
maturity date was extended from April 2007 to March 2009, with an option for a
one-year extension, and the underlying rate, based on a tiered rate structure
tied to
the Company’s corporate ratings, was reduced to LIBOR plus 0.8% from LIBOR plus
1.0%. Certain terms and covenants of the $200.0 million unsecured
line of credit were amended during the third quarter of 2007. The
balance on this line of credit was $61.0 million as of December 31, 2007, which
yielded an average interest rate of 6.2%. No amounts were outstanding
as of December 31, 2006. The Company also has a $100 million credit
facility from Freddie Mac, which is secured by eight of the Company’s apartment
communities. The underlying interest rate on this line is between 55
and 59 and basis points over the Freddie Mac Reference Rate. As
of December 31, 2007 and 2006, $100.0 million and $93.0 million was
outstanding under this line of credit, respectively, which yielded an average
interest rate of 5.4% and 6.2% as of December 31, 2007 and 2006, respectively,
and matures in January 2009. During March 2007, the Company entered into an
unsecured revolving line of credit for $10.0 million with a commercial bank with
an initial maturity date of March 2008. Borrowings under this revolving line of
credit bear an interest rate at the bank’s Prime Rate less
2.0%. As of December 31, 2007, there was an $8.8 million
balance on the revolving line of credit at an average interest rate of
5.6%. The 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. The Company was in
compliance with the line of credit covenants as of December 31, 2007 and
2006.
(10)
Derivative Instruments and Hedging Activities
During
March 2007, the Company entered into a ten-year forward-starting interest rate
swap for a notional amount of $50 million and a settlement date on or before
October 1, 2011.
During
April 2007, the Company refinanced a mortgage loan for $35.7 million secured by
the Tierra Vista property in the amount of $62.5 million, with a fixed interest
rate of 5.47%, which matures in April 2017. In conjunction with this
transaction the Company settled a $50 million forward-starting swap and received
$1.3 million from the counterparty. The accounting for the swap
settlement reduces the effective interest rate on the new Tierra Vista
mortgage loan to 5.19%.
As of
December 31, 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 as they
are expected to 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 decreased $7.9 million during
the year ended December 31, 2007 to a liability value of $10.2 million as of
December 31, 2007, and the derivative liability was recorded in other
liabilities in the Company’s consolidated financial statements. The
changes in the fair values of the derivatives are reflected in accumulated other
comprehensive (loss) income in the Company’s consolidated financial
statements. No hedge ineffectiveness on cash flow hedges was
recognized during the year ended December 31, 2007 and 2006.
(11)
Lease Agreements
During
the fourth quarter of 2003, the Company entered into lease and purchase option
agreements with unrelated third parties related to its five recreational vehicle
(“RV”) parks that were comprised of 1,717 spaces and two manufactured housing
communities that contain 607 sites. At the time of agreement, the
unrelated third parties had an option to purchase the assets in approximately
four years for approximately $41.7 million, which was a 5% premium to the gross
book value of the assets. The Company received $0.5 million as consideration for
entering into the option agreement and a non-refundable upfront payment of $4.0
million, which was recorded as deferred revenue and has been amortized into
income over the five year lease term. Under the lease agreements,
Essex receives fixed monthly lease payments and passes through all executory
costs such as property taxes. In January 2005, the Company sold
Riviera RV Resort and Riviera Mobile Home Park. As of December 31,
2007, the Company still owns two RV parks totaling 338 spaces, and one
manufactured housing community that contains 157 sites.
The
Company owns two predevelopment projects that it leases to
tenants. Cadence Campus is an office building, and Essex-Hollywood is
a commercial building currently utilitized as a production studio, and both
properties are 100% leased to single tenants. The lease at Cadence
Campus will expire in January 2009 and the tenant has a right to two six-month
extensions, and the Essex-Hollywood lease will expire in July
2008. These two properties generated lease income totaling $4.7
million during the year ended December 31, 2007, which was recorded as net lease
income and included in interest and other income in the accompanying
consolidated statements of operations. Interest expense is not being
capitalized on these properties while they are leased, and depreciation expense
is being recorded on these properties until the leases expire.
The
Company is also a lessor of an office building located in Southern California.
The tenants’ lease terms expire at various times through 2009 with average
annual lease payments of approximately $1.3 million. The future
minimum non-cancelable base rent to be received under the Cadence Campus,
Essex-Hollywood, the two office buildings in Southern California, the RV parks
and manufactured housing community operating leases for each of the years ending
after December 31, 2007 are summarized as follows:
|
|
Future
|
|
|
Minimum
|
|
|
Rent
|
2008
|
$
|
6,184
|
2009
|
|
4,149
|
2010
|
|
1,439
|
2011
|
|
695
|
2012
|
|
183
|
2013
and thereafter
|
|
474
|
|
$
|
13,124
|
|
|
|
The
Company is also a lessee of an office building located in Palo Alto next to the
Company’s headquarters. The lease term expires on September 30, 2009,
with average annual lease payments of approximately $0.2 million.
(12)
Equity Transactions
Preferred
Securities Offerings
As of
December 31, 2007, the Company, either directly or through the Operating
Partnership, has the following cumulative preferred securities
outstanding:
|
|
|
|
|
Liquidation
|
Description |
|
Issue
Date |
|
Preference
|
7.875%
Series B |
|
February
1998 |
1,200,000
units
|
$ 60,000
|
7.875%
Series B |
|
April
1998 |
400,000
units
|
$ 20,000
|
7.875%
Series D |
|
July
1999
|
2,000,000
units
|
$ 50,000
|
7.8125%
Series F |
|
September
2003 |
1,000,000
shares
|
$ 25,000
|
4.875%
Series G |
|
July
2006 |
5,980,000
shares
|
$ 149,500
|
Dividends
on the securities are payable quarterly. The holders of the securities have
limited voting rights if the required dividends are in arrears. The Series B and
D preferred units represent preferred interests issued by the Operating
Partnership and are included in minority interests in the accompanying
consolidated balance sheets. The preferred units can be exchanged for
Series B and D preferred stock of the Company under limited
conditions.
In
September 2003, the Company issued 1,000,000 shares of its Series F Cumulative
Redeemable Preferred Stock (“Series F Preferred Stock”) at a fixed price of
$24.664 per share, a discount from the $25.00 per share liquidation value of the
shares. The shares pay quarterly distributions at an annualized rate of
7.8125% per year of the liquidation value and are redeemable by the Company on
or after September 23, 2008. The shares were issued pursuant to the
Company’s existing shelf registration statement. The Company used the net
proceeds from this sale of Series F Preferred Stock to redeem all of the 9.125%
Series C Cumulative Redeemable Preferred Units (the “Series C Preferred Units”)
of Essex Portfolio, L.P., of which the Company is the general
partner.
In
January 2004, the Operating Partnership restructured its previously issued
$50,000, 9.30% Series D Cumulative Redeemable Preferred Units ("Series D
Units"), and its previously issued $80,000, 7.875% Series B Cumulative
Redeemable Preferred Units ("Series B Units"). The existing
distribution rate of 9.30% of the Series D Units continued until July 27, 2004 –
the end of the non-call period. Effective July 28, 2004, the
distribution rate on the Series D Units was reduced to 7.875%. The
date that the Series D Units can first be redeemed at the Company's option was
extended by six years to July 28, 2010. The date that the Series B
Units can first be redeemed at the Company's option was extended from February
6, 2003 to December 31, 2009.
During
the third quarter of 2006, the Company sold 5,980,000 shares of 4.875% Series G
Cumulative Convertible Preferred Stock for gross proceeds of $149.5
million. Holders may convert Series G Preferred Stock into shares of
the Company’s common stock subject to certain conditions. The
conversion rate will initially be .1830 shares of
common
stock per the $25 share liquidation preference, which is equivalent to an
initial conversion price of approximately $136.62 per share of common stock (the
conversion rate will be subject to adjustment upon the occurrence of specified
events). On or after July 31, 2011, the Company may, under certain
circumstances, cause some or all of the Series G Preferred Stock to be converted
into that number of shares of common stock at the then prevailing conversion
rate.
Common
Stock Offerings
During
2006, the Company issued and sold approximately 427,700 shares of common
stock for $48.3 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, redevelopment pipelines, and pay down outstanding borrowing
under the Company’s lines of credit.
During
April 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.
During
May 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.
Common
Stock Repurchases
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
the Company announced on May 16, 2001. During 2007 the Company
repurchased and retired 323,259 shares of its common stock for approximately
$32.6 million. During January 2008, the Company repurchased and
retired 137,500 shares of its common stock for approximately $13.2
million.
UpREIT
and DownREIT transactions
During
October 2006, the Company acquired Belmont Terrace, a 71-unit community located
in Belmont, California. The Company acquired the apartment community in an
UpREIT structured transaction for an agreed upon value of approximately $14.7
million. The Company issued 72,685 limited operating partnership
units to the prior owners and during the close of escrow the Company paid-off
the existing debt on the property.
During
September 2007, the Company acquired the Thomas Jefferson apartments in
Sunnyvale, California, for $28.0 million 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, and
the Company assumed $20.0 million in mortgage loans in the
transaction.
(13)
Net Income Per Common Share
Basic and
diluted income from continuing operations per share are calculated as follows
for the years ended December 31:
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
average
|
|
Common
|
|
|
|
|
average
|
|
|
|
|
|
Income
|
|
Common
Shares
|
|
Share
Amount
|
|
|
Income
|
|
Common
Shares
|
|
|
|
|
Income
|
|
Common
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
available
to common stockholders
|
|
$
|
32,490
|
|
24,548,003
|
|
$
|
1.32
|
|
$
|
27,857
|
|
23,081,682
|
|
$
|
1.21
|
|
$
|
45,420
|
|
23,038,561
|
|
$
|
1.98
|
Income
from discontinued operations
|
|
73,974
|
|
24,548,003
|
|
|
3.02
|
|
|
29,746
|
|
23,081,682
|
|
|
1.29
|
|
|
32,343
|
|
23,038,561
|
|
|
1.40
|
|
|
|
106,464
|
|
|
|
|
4.34
|
|
|
57,603
|
|
|
|
|
2.50
|
|
|
77,763
|
|
|
|
|
3.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities (1)
|
|
-
|
|
552,971
|
|
|
|
|
|
-
|
|
469,360
|
|
|
|
|
|
-
|
|
349,942
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
available
to common stockholders
|
|
32,490
|
|
25,100,974
|
|
|
1.29
|
|
|
27,857
|
|
23,551,042
|
|
|
1.18
|
|
|
45,420
|
|
23,388,503
|
|
|
1.94
|
Income
from discontinued operations
|
|
73,974
|
|
25,100,974
|
|
|
2.95
|
|
|
29,746
|
|
23,551,042
|
|
|
1.27
|
|
|
32,343
|
|
23,388,503
|
|
|
1.38
|
|
|
$
|
106,464
|
|
|
|
$
|
4.24
|
|
$
|
57,603
|
|
|
$
|
|
2.45
|
|
$
|
77,763
|
|
|
|
$
|
3.32
|
(1)
|
Weighted
convertible limited partnership units of 2,282,568, 2,294,591, and
2,305,134 for the years ended December 31, 2007, 2006, and 2005,
respectively, and Series Z incentive units of 213,126, 184,142, and
122,803, for the year ended December 31 2007, 2006 and 2005, 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 current exchange rate is $103.25 per share of Essex common
stock. The exchangeable notes will also be exchangeable prior to
November 1, 2020, but only upon the occurrence of certain specified
events. During 2007, the weighted average common stock price exceeded
the $103.25 strike price and therefore common stock issuable upon exchange of
the exchangeable notes was included in the diluted share count. The
treasury method was used to determine the shares to be added to the denominator
for the calculation of earnings per diluted share.
Stock
options of 25,326, 1,014, and 22,229 for 2007, 2006, 2005, respectively, are not
included in the diluted earnings per share calculation because the exercise
price of the options was greater than the average market price of the common
shares for the twelve months ended and, therefore, were
anti-dilutive.
5,980,000
shares of cumulative convertible preferred stock Series G has been excluded from
diluted earnings per share for 2007 and 2006 as the effect was
anti-dilutive.
(14)
Stock Based Compensation Plans
Stock
Options and Restricted Stock
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.
The Essex
Property Trust, Inc. 2004 Stock Incentive Plan provides incentives to attract
and retain officers, directors and key employees. The Stock Incentive Plan
provides for the grants of options to purchase a specified number of shares of
common stock or grants of restricted shares of common stock. Under the Stock
Incentive Plan, the total number of shares available for grant is approximately
1,200,000. The 2004 Stock Incentive Plan is administered by the
Compensation Committee of the Board of Directors. The Compensation
Committee is comprised of independent directors. The
Compensation Committee is authorized to establish the exercise price; however,
the exercise price cannot be less than 100% of the fair market value of the
common stock on the grant date. The Company’s options have a life of ten years.
Option grants for officers and employees fully vest between one year and five
years after the grant date.
Stock-based
compensation expense for options and restricted stock under the fair value
method totaled approximately $1.2 million, $1.1 million and $0.8 million, for
the years ended December 31, 2007, 2006 and 2005,
respectively. Stock-based compensation capitalized for options
totaled approximately $0.2 million, $0.2 million and none for the year ended
December 31, 2007, 2006 and 2005, respectively. The intrinsic value
of the options exercised totaled $6.3 million, $6.0 million, and $4.1 million,
for the years ended December 31, 2007, 2006, and 2005,
respectively. The
intrinsic
value of the options outstanding and fully vested totaled $9.9 million, $14.3
million, and $10.8 million, for the years ended December 31, 2007, 2006, and
2005, respectively. Total unrecognized compensation cost related to
unvested share-based compensation granted under the stock option and restricted
plans totaled $0.8 million as of December 31, 2007. The unrecognized
compensation cost is expected to be recognized over a weighted-average period of
3 to 5 years for the stock option plans.
The
average fair value of stock options granted for the years ended December 31,
2007, 2006 and 2005 was $11.58, $17.40 and $10.06 per share, respectively, and
was estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for
grants:
|
|
2007
|
|
2006
|
|
2005
|
Stock
price
|
|
$95.34-$126.73
|
|
$101.01-$132.62
|
|
$69.11-$91.88
|
Risk-free
interest rates
|
|
3.52%-4.58%
|
|
4.45%-5.15%
|
|
3.64%-4.50%
|
Expected
lives
|
|
7-9
years
|
|
4-7
years
|
|
5-6
years
|
Volatility
|
|
18.52%-20.31%
|
|
18.44%-18.54%
|
|
18.09%-18.54%
|
Dividend
yield
|
|
3.99%-5.26%
|
|
3.12%-4.29%
|
|
4.22%-5.13%
|
A summary
of the status of the Company’s stock option plans as of December 31, 2007, 2006,
and 2005 and changes during the years ended on those dates is presented
below:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
Weighted- |
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
average |
|
|
|
|
|
|
|
|
|
|
|
|
exercise
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
Shares |
|
|
|
Shares |
|
|
Outstanding
at beginning of year
|
|
570,542
|
$
|
|
|
530,375
|
$
|
|
|
463,376
|
$ |
|
Granted
|
|
29,250
|
|
119.98
|
|
170,350
|
|
106.63
|
|
188,800
|
|
78.01
|
Exercised
|
|
(86,056)
|
|
50.23
|
|
(90,633)
|
|
47.57
|
|
(103,201)
|
|
43.47
|
Forfeited
and canceled
|
|
(20,033)
|
|
94.29
|
|
(39,550)
|
|
80.85
|
|
(18,600)
|
|
76.70
|
Outstanding
at end of year
|
|
493,703
|
|
79.83
|
|
570,542
|
|
72.60
|
|
530,375
|
|
57.73
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at year end
|
|
288,889
|
|
64.69
|
|
272,074
|
|
52.42
|
|
248,015
|
|
43.77
|
The
following table summarizes information about stock options outstanding as of
December 31, 2007:
|
|
Options
outstanding
|
|
Options
exercisable
|
|
|
|
Number
|
|
Weighted-
|
|
|
|
Number
|
|
|
|
|
|
outstanding
|
|
average
|
|
Weighted-
|
|
exercisable
|
|
Weighted-
|
|
|
|
as
of
|
|
remaining
|
|
average
|
|
as
of
|
|
average
|
Range
of
|
|
December
31,
|
|
contractual
|
|
exercise
|
|
December 31,
|
|
exercise
|
exercise
prices
|
|
2007
|
|
life
|
|
price
|
|
2007
|
|
price
|
$13.26-26.52
|
|
600
|
|
0.1
years
|
$
|
19.08
|
|
600
|
$
|
19.08
|
26.52-39.79
|
|
41,547
|
|
1.4
years
|
|
32.64
|
|
41,547
|
|
32.64
|
39.78-53.05
|
|
90,027
|
|
3.8
years
|
|
49.33
|
|
87,427
|
|
49.28
|
53.05-66.31
|
|
40,680
|
|
5.7
years
|
|
59.10
|
|
38,230
|
|
59.37
|
66.31-79.57
|
|
90,775
|
|
7.2
years
|
|
75.69
|
|
52,795
|
|
76.37
|
79.57-92.83
|
|
58,704
|
|
7.5
years
|
|
83.18
|
|
25,170
|
|
82.95
|
92.83-106.10
|
|
39,620
|
|
8.3
years
|
|
101.51
|
|
7,720
|
|
102.63
|
106.10-119.36
|
|
103,500
|
|
8.4
years
|
|
107.36
|
|
34,100
|
|
107.42
|
119.36-132.62
|
|
28,250
|
|
9.3
years
|
|
125.27
|
|
1,300
|
|
128.02
|
|
|
|
493,703
|
|
6.6
years
|
|
79.83
|
|
288,889
|
|
64.69
|
During
2007, the Company issued 17,178 shares of restricted stock. The unrecognized
compensation cost is expected to be recognized straight-line over a period of 7
years less an estimate for forfeitures.
Long
Term Incentive Plan – Z Units
The Company has adopted an
incentive program involving the issuance of Series Z Incentive Units and Series
Z-1 Incentive Units (collectively referred to as “Z Units”) of limited
partnership interest in the Operating Partnership. Vesting in
the Z Units is based on performance criteria established in the
plan. The criteria can be revised at the beginning of the year by the
Board's Compensation Committee if the Committee deems that the plan's criterion
is unachievable for any given year. The sale of Z units is
contractually prohibited and cannot be converted into Operating Partnership
units until certain conditions are met or 15 years after the inception of the
plan. The estimated fair value of a Z unit is determined on the grant
date and considers the company's current stock price, the dividends that are not
paid on unvested units and a marketability discount for the 8 to 15 years of
illiquidity. Compensation expense is calculated by taking annual vesting
increases multiplied by the estimated fair value as of the grant date less its
$1.00 purchase price.
Stock-based
compensation expense for Z Units under the fair value method totaled
approximately $1.5 million, $1.3 million and $1.6 million, for the years ended
December 31, 2007, 2006 and 2005, respectively. Stock-based compensation
capitalized for Z Units totaled approximately $0.4 million, $0.3 million and
$0.2 million, for the years ended December 31, 2007, 2006 and 2005,
respectively. The intrinsic value of the Z Units subject to conversion
totaled $16.0 million as of December 31, 2007. Total unrecognized
compensation cost related Z Units subject to conversion in the future granted
under the Z Units plans totaled $8.1 million as of December 31, 2007. The
unamortized cost is expected to be recognized over the next 4 to 12 years
subject to the achievement of the stated
The
issuance of Z Units is administered by the Compensation Committee which has the
authority to select participants and determine the awards to be made up to a
maximum of 600,000 Z Units. The conversion ratchet (accounted for as
vesting) of the Z Units into common units, will increase by up to 10% (up to 20%
in certain circumstances following their initial issuance) effective January 1of
each year for each participating executive who remains employed by the Company
if the Company has met a specified “funds from operations” per share target, or
such other target as the Compensation Committee deems appropriate, for the prior
year, up to a maximum conversion ratchet of 100%. The Operating Partnership has
the option to redeem Z Units held by any executive whose employment has been
terminated with either common units of the Operating Partnership or shares of
the Company’s common stock based on the then-effective conversion ratchet.
During
2001, the Operating Partnership issued 200,000 Series Z Incentive Units of
limited partner interest to eleven senior executives of the Company in exchange
for a capital commitment of $1.00 per Series Z Incentive Unit, for an aggregate
offering price of $200. The 2001 Z Unit grant had a conversion ratchet of 45,
55, and 65 percent as of January 1, 2005, 2006, and 2007
respectively.
During
2004, the Operating Partnership issued 95,953 Series Z-1 Incentive Units of
limited partner interest to fourteen senior executives of the Company in
exchange for cash or a capital commitment of $1.00 per Series Z-1 Incentive
Unit, for an aggregate offering price of $96. The 2004 Z Unit grant had a
conversion ratchet of 20 percent upon issuance, and 30, 40, and 50 percent as of
January 1, 2005, 2006, and 2007, respectively. In 2005 an additional
27,000 Z-1 Units were granted to two senior executives pursuant to the 2004
grant terms with a 20 percent conversion ratio at issuance, and 30 and 40
percent conversion ratchet as of January 1, 2006 and 2007.
During
2005, the Operating Partnership issued 89,999 Series Z-1 Incentive Units of
limited partner interest to fourteen senior executives of the Company in
exchange for cash or a capital commitment of $1.00 per Series Z-1 Incentive
Unit, for an aggregate offering price of $90. The 2005 Z-1 Unit grant had
a conversion ratchet of 20 and 30 percent as of January 1, 2006 and
2007.
Long
Term Incentive Plan – Outperformance Plan
Stock-based
compensation expense for the Outperformance Plan, (the “OPP”) adopted in
December 2007 under the fair value method totaled approximately $0.1 million for
year ended December 31, 2007. Total unrecognized compensation cost
less an estimate for forfeitures related to the OPP totaled $5.5 million as of
December 31, 2007. The unamortized cost is expected to be recognized over
the expected service period of five years for senior officers and three years
for non-employee directors.
Under the
2007 OPP, award recipients will share in a “performance pool” if the Company’s
total return to stockholders for the period from December 4, 2007 (measured
based on the closing price of the Company’s common stock on December 4, 2007)
through December 3, 2010 exceeds a cumulative total return to stockholders of
30%. The size of the pool will be 10% of the outperformance amount in
excess of the 30% benchmark, subject to an aggregate maximum award of $25
million. The maximum award will be reduced by the amount of any forfeited
awards. In the event the potential performance pool reaches the maximum
aggregate award between June 4, 2010 and December 3, 2010 and remains at that
level or higher for 30 consecutive days, the performance period will end early
and the performance pool will be formed on the last day of such 30-day period,
but the participants will nonetheless be subject to the time-based vesting
requirements described below.
Each
participant’s award under the 2007 OPP has been designated as a specified
percentage of the aggregate performance pool. Assuming the 30% benchmark
is achieved, the pool will be allocated among the participants in accordance
with the percentage specified in each participant’s award agreement.
Individual awards were made in the form of newly created long term incentive
plan (“LTIP”) Units, which are partnership units of the Operating Partnership,
and the LTIP units are exchangeable on a one-for-one basis into common units of
the Operating Partnership to the extent the LTIP Units become vested. Such
common units are exchangeable for shares of the Company’s common stock on a
one-for-one basis. Any shares of the Company’s common stock, which are
ultimately issued in connection with the 2007 OPP, will be issued pursuant to
the Company’s 2004 Stock Incentive Plan. LTIP Units were granted prior to
the determination of the performance pool; however, they will only vest upon
satisfaction of performance and time vesting thresholds and will not be entitled
to distributions until after the benchmark is achieved. Distributions on
LTIP Units will equal the distributions payable on each common unit of the
Operating Partnership on a per unit basis.
In the
case of awards granted to senior officers, if the benchmark is achieved, the
LTIP Units will vest in three substantially equal installments on December 4,
2010 and on each of the first two anniversaries thereafter, based on the
officer’s continued employment through the applicable vesting date. In the
case of awards granted to non-employee directors, such awards will vest in full
on December 4, 2010 if the benchmark is achieved and only to the extent the
board members have continued to serve through such date.
In the
event of a change of control of the Company prior to the establishment of the
performance pool, the performance period will be shortened to end on a date
immediately prior to such event and the cumulative stockholder return benchmark
will be adjusted on a pro rata basis. The performance pool will be formed
as described above if the adjusted benchmark target is achieved, and the awards
will become fully vested at such time.
(15)
Shareholder Rights Plan
On
November 12, 1998, the Company’s Board of Directors adopted a Stockholder Rights
Plan. A dividend of one right (a Right) per share of common stock was
distributed to stockholders of record on November 21, 1998. Each Right, expiring
November 11, 2008, represents a right to buy from the Company 1/100th of a share
of Series A junior participating preferred stock at a price of $99.13 per
Right.
Generally
the Rights will not be exercisable unless a person or group acquires 15% or
more, or announces an offer that could result in acquiring 15% or more, of the
Company’s common stock unless such person is or becomes the beneficial owner of
15% or more of the Company’s outstanding common stock and had a contractual
right or the approval of the Company’s Board of Directors, provided that such
percentage shall not be greater than 19.9%. Following an acquisition of 15% or
more of the Company’s common stock, each Right holder, except the 15% or more
shareholder, has the right to receive, upon exercise, shares of common stock
valued at twice the then applicable exercise price of the Right, unless the 15%
or more shareholder has offered to acquire all of the outstanding shares of the
Company under terms that a majority of the independent directors of the Company
have determined to be fair and in the best interest of the Company and its
shareholders.
Similarly,
unless certain conditions are met, if the Company engages in a merger or other
business combination following a stock acquisition where it does not survive or
survives with a change or exchange of its common stock or if 50% or more of its
assets, earning power or cash flow is sold or transferred, the Rights will
become exercisable for shares of the acquirer’s stock having a value of twice
the exercise price.
Generally,
Rights may be redeemed for $0.01 each (in cash, common stock or other
consideration the Company deems appropriate) until the tenth day following a
public announcement that a 15% or greater position has been acquired of the
Company’s stock.
(16)
Segment Information
In
accordance with FASB No. 131, “Disclosures about Segments of an
Enterprise and Related Information” the Company defines its reportable
operating segments as the three geographical regions in which its properties are
located: Southern California, Northern California and Seattle Metro. Excluded
from segment revenues are properties outside of these regions including property
in 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 and
cash equivalents, marketable securities, 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 years ended and as of December 31,
2007, 2006, and 2005:
|
|
Years
Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Revenues:
|
Southern
California
|
$
|
215,090
|
$
|
198,929
|
$
|
181,048
|
Northern
California
|
|
99,734
|
|
75,624
|
|
67,099
|
Seattle
Metro
|
|
64,079
|
|
55,721
|
|
50,936
|
Other
Regions
|
|
4,530
|
|
4,496
|
|
4,152
|
Total
property revenues
|
$
|
383,433
|
$
|
334,770
|
$
|
303,235
|
|
|
|
|
|
|
Net
operating income:
|
|
|
|
|
|
Southern
California
|
$
|
147,340
|
$
|
135,969
|
$
|
122,551
|
Northern
California
|
|
65,143
|
|
49,907
|
|
44,528
|
Seattle
Metro
|
|
42,137
|
|
35,138
|
|
31,792
|
Other
Regions
|
|
389
|
|
(642)
|
|
(115)
|
Total
net operating income
|
|
255,009
|
|
220,372
|
|
198,756
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
Southern
California
|
|
(49,551)
|
|
(43,017)
|
|
(39,219)
|
Northern
California
|
|
(27,892)
|
|
(17,568)
|
|
(15,984)
|
Seattle
Metro
|
|
(15,491)
|
|
(13,170)
|
|
(12,343)
|
Other
Regions
|
|
(7,455)
|
|
(4,339)
|
|
(7,303)
|
|
|
(100,389)
|
|
(78,094)
|
|
(74,849)
|
Interest:
|
|
|
|
|
|
Southern
California
|
|
(31,626)
|
|
(26,432)
|
|
(27,690)
|
Northern
California
|
|
(18,741)
|
|
(18,295)
|
|
(17,201)
|
Seattle
Metro
|
|
(6,892)
|
|
(6,904)
|
|
(6,508)
|
Other
Regions
|
|
(23,736)
|
|
(21,267)
|
|
(19,385)
|
|
|
(80,995)
|
|
(72,898)
|
|
(70,784)
|
|
|
|
|
|
|
|
Amortization
of deferred financing costs
|
|
(3,071)
|
|
(2,745)
|
|
(1,947)
|
General
and administrative
|
|
(26,273)
|
|
(22,234)
|
|
(19,148)
|
Other
expenses
|
|
(800)
|
|
(1,770)
|
|
(5,827)
|
Management
and other fees from affiliates
|
|
5,090
|
|
5,030
|
|
10,951
|
Gain
on sale or real estate
|
|
-
|
|
-
|
|
6,391
|
Interest
and other income
|
|
10,310
|
|
6,176
|
|
8,524
|
Equity
income in co-investments
|
|
3,120
|
|
(1,503)
|
|
18,553
|
Minority
interests
|
|
(19,937)
|
|
(18,807)
|
|
(20,709)
|
Income
tax provision
|
|
(400)
|
|
(525)
|
|
(2,538)
|
|
|
|
|
|
|
Income
from continuing operations
|
$
|
41,664
|
$
|
33,002
|
$
|
47,373
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Southern
California
|
$
|
1,354,818
|
$
|
1,244,037
|
|
|
Northern
California
|
|
829,879
|
|
565,405
|
|
|
Pacific
Northwest
|
|
353,737
|
|
317,848
|
|
|
Other
Regions
|
|
37,338
|
|
76,882
|
|
|
Net
reportable operating segments - real estate assets
|
|
2,575,772
|
|
2,204,172
|
|
|
Real
estate - held for sale, net
|
|
-
|
|
41,221
|
|
|
Real
estate under development
|
|
233,445
|
|
107,620
|
|
|
Co-investments
|
|
64,191
|
|
56,318
|
|
|
Notes
and other receivables
|
|
50,536
|
|
19,404
|
|
|
Other
non-segment assets
|
|
56,379
|
|
57,105
|
|
|
Total
assets
|
$
|
2,980,323
|
$
|
2,485,840
|
|
|
|
|
|
|
|
|
|
(17)
401(k) Plan
The
Company has a 401(k) benefit plan (the Plan) for all full-time employees who
have completed six months of service. Employees may contribute up to 23% of
their compensation, limited by the maximum allowed under Section 401(k) of the
Internal Revenue Code. The Company matches the employee contributions for
non-highly compensated personnel, up to 50% of their contribution up to a
specified maximum. Company contributions to the Plan were approximately $267,
$226, and $98 for the years ended December 31, 2007, 2006, and
2005.
(18)
Fair Value of Financial Instruments
Management
believes that the carrying amounts of its variable rate mortgage notes payable,
lines of credit, notes receivable and other receivables from related parties,
and notes and other receivables approximate fair value as of December 31, 2007
and 2006, because interest rates, yields and other terms for these instruments
are consistent with yields and other terms currently available to the Company
for similar instruments. Management has estimated that the fair value of the
Company’s $1.25 billion of fixed rate mortgage notes payable and exchangeable
bonds at December 31, 2007 are approximately $1.30 billion based on the terms of
existing mortgage notes payable compared to those available in the
marketplace. At December 31, 2006, the Company’s fixed rate mortgage
notes payable of $1.13 billion had an approximate market value of $1.22
billion. Management believes that the carrying amounts of cash and
cash equivalents, restricted cash, marketable securities, accounts payable and
accrued liabilities, other liabilities and dividends payable approximate fair
value as of December 31, 2007 and 2006 due to the short-term maturity of these
instruments.
(19)
Commitments and Contingencies
At
December 31, 2007, the Company had five non-cancelable ground leases for certain
apartment communities and buildings that expire between 2027 and 2080. Land
lease payments are typically the greater of a stated minimum or a percentage of
gross rents generated by these apartment communities. Total minimum lease
commitments, under land leases and operating leases, are approximately $1.8
million per year for the next five years.
The
Company has a performance guarantee with a commercial bank related to the
Northwest Gateway development.
To the
extent that an environmental matter arises or is identified in the future that
has other than a remote risk, as defined in SFAS 5, of having a material impact
on the financial statements, the Company will disclose the estimated range of
possible outcomes, and, if an outcome is probable, accrue appropriate liability
for remediation and other potential liability. The Company will consider whether
such occurrence results in an impairment of value on the affected property and,
if so, accrue an appropriate reserve for impairment.
Except
with respect to three Properties, the Company has no indemnification agreements
from third parties for potential environmental clean-up costs at its Properties.
The Company has no way of determining at this time the magnitude of any
potential liability to which it may be subject arising out of unknown
environmental conditions or violations with respect to the properties formerly
owned by the Company. No assurance can be given that existing environmental
studies with respect to any of the Properties reveal all environmental
liabilities, that any prior owner or operator of a Property did not create any
material environmental condition not known to the Company, or that a material
environmental condition does not otherwise exist as to any one or more of the
Properties. The Company has limited insurance coverage for the types of
environmental liabilities described above.
The
Company may enter into transactions that could require the Company to pay the
tax liabilities of the partners in the Operating Partnership or in the DownREIT
entities. These transactions which are within the Company’s control.
Although the Company plans to hold the contributed assets or defer recognition
of gain on their sale pursuant to like-kind exchange rules under Section 1031 of
the Internal Revenue Code the Company can provide no assurance that it will be
able to do so and if such tax liabilities were incurred they may to have a
material impact on the Company’s financial position.
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 could have a material adverse
effect on the Company’s financial condition, results of operations or cash
flows.
(20)
Quarterly Results of Operations (Unaudited)
The following
is a summary of quarterly results of operations for 2007 and 2006:
|
|
Quarter
ended
|
|
Quarter
ended
|
|
Quarter
ended
|
|
Quarter
ended
|
|
|
December
31(1) |
|
September
30(1) |
|
June
30(1)
|
|
March
31(1)
|
2007:
|
|
|
|
|
|
|
|
|
Total
property revenues
|
$
|
101,138
|
$
|
97,780
|
$
|
94,508
|
$
|
90,007
|
|
|
|
|
|
|
|
|
|
Income
before discontinued operations
|
$
|
5,163
|
$
|
11,603
|
$
|
11,129
|
$
|
13,769
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
53,597
|
$
|
12,308
|
$
|
12,187
|
$
|
37,546
|
Net
income available to common |
|
|
stockholders
|
$
|
51,287
|
$
|
9,997
|
$
|
9,877
|
$
|
35,303
|
Per
share data:
|
Net
income:
|
Basic
|
$
|
2.04
|
$
|
0.40
|
$
|
0.40
|
$
|
1.51
|
|
|
|
|
|
|
|
|
|
Diluted
|
$
|
2.02
|
$
|
0.39
|
$
|
0.39
|
$
|
1.46
|
Market
price:
|
High
|
$
|
127.35
|
$
|
123.50
|
$
|
133.40
|
$
|
148.54
|
Low
|
$
|
94.08
|
$
|
102.00
|
$
|
114.19
|
$
|
124.78
|
Close
|
$
|
97.49
|
$
|
117.57
|
$
|
116.30
|
$
|
129.48
|
Dividends
declared
|
$
|
0.93
|
$
|
0.93
|
$
|
0.93
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
Total
property revenues
|
$
|
88,118
|
$
|
84,740
|
$
|
81,665
|
$
|
80,247
|
|
|
|
|
|
|
|
|
|
Income
before discontinued operations
|
$
|
9,854
|
$
|
10,648
|
$
|
5,970
|
$
|
6,530
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
17,437
|
$
|
12,477
|
$
|
22,512
|
$
|
10,322
|
Net income available to common |
|
|
stockholders
|
$
|
15,060
|
$
|
10,686
|
$
|
22,023
|
$
|
9,834
|
Per
share data:
|
Net
income:
|
Basic
|
$
|
0.64
|
$
|
0.46
|
$
|
0.96
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
Diluted
|
$
|
0.63
|
$
|
0.45
|
$
|
0.95
|
$
|
0.43
|
Market
price: |
|
|
High
|
$
|
133.99
|
$
|
128.57
|
$
|
111.90
|
$
|
111.10
|
Low
|
$
|
119.76
|
$
|
111.54
|
$
|
100.90
|
$
|
92.10
|
Close
|
$
|
129.25
|
$
|
121.40
|
$
|
111.66
|
$
|
108.73
|
Dividends
declared
|
$
|
0.84
|
$
|
0.84
|
$
|
0.84
|
$
|
0.84
|
(1)
|
Net
earnings from discontinued operations have been reclassified for all
periods presented.
|
ESSEX
PROPERTY TRUST, INC. AND SUBSIDIARIES
Financial
Statement Schedule III
Real
Estate and Accumulated Depreciation
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
cost
|
|
|
|
Gross
amount carried at close of period
|
|
|
|
|
|
|
|
|
Property
|
|
Units
|
|
Location
|
|
Encumbrance
|
|
Land
|
|
improvements
|
|
acquisition
|
|
improvements
|
|
Buildings
and
improvements
|
|
Total(1)
|
|
Accumulated
depreciation
|
|
construction
|
|
acquired
|
|
(years)
|
Encumbered
apartment communities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foothill
Commons
|
|
360
|
|
Bellevue,
WA
|
$
|
|
$
|
2,435
|
$
|
9,821
|
$
|
6,074
|
$
|
2,440
|
$
|
15,890
|
$
|
18,330
|
$
|
9,298
|
|
1978
|
|
03/90
|
|
3-30
|
Montclaire,
The (Oak Pointe)
|
390
|
|
Sunnyvale,
CA
|
|
|
|
4,842
|
|
19,776
|
|
12,774
|
|
4,847
|
|
32,545
|
|
37,392
|
|
17,967
|
|
1973
|
|
12/88
|
|
3-30
|
Palisades,
The
|
|
192
|
|
Bellevue,
WA
|
|
|
|
1,560
|
|
6,242
|
|
9,421
|
|
1,565
|
|
15,658
|
|
17,223
|
|
6,617
|
|
1969/1977(2)
|
05/90
|
|
3-30
|
Pathways
|
|
296
|
|
Long
Beach, CA
|
|
|
|
4,083
|
|
16,757
|
|
15,174
|
|
6,239
|
|
29,775
|
|
36,014
|
|
13,093
|
|
1975
|
|
02/91
|
|
3-30
|
Stevenson
Place
|
|
200
|
|
Fremont,
CA
|
|
|
|
996
|
|
5,582
|
|
7,879
|
|
1,001
|
|
13,456
|
|
14,457
|
|
8,763
|
|
1971
|
|
04/83
|
|
3-30
|
Bridgeport
(Summerhill Commons)
|
184
|
|
Newark,
CA
|
|
|
|
1,608
|
|
7,582
|
|
5,984
|
|
1,525
|
|
13,649
|
|
15,174
|
|
7,019
|
|
1987
|
|
07/87
|
|
3-30
|
Summerhill
Park
|
|
100
|
|
Sunnyvale,
CA
|
|
|
|
2,654
|
|
4,918
|
|
1,149
|
|
2,656
|
|
6,065
|
|
8,721
|
|
3,978
|
|
1988
|
|
09/88
|
|
3-30
|
Woodland
Commons
|
|
236
|
|
Bellevue,
WA
|
|
|
|
2,040
|
|
8,727
|
|
4,293
|
|
2,044
|
|
13,016
|
|
15,060
|
|
7,236
|
|
1978
|
|
03/90
|
|
3-30
|
|
|
|
|
|
|
|
90,005
|
|
20,218
|
|
79,405
|
|
62,748
|
|
22,317
|
|
140,054
|
|
162,371
|
|
73,972
|
|
|
|
|
|
|
Fountain
Court
|
|
320
|
|
Seattle,
WA
|
|
|
|
6,702
|
|
27,306
|
|
1,691
|
|
6,985
|
|
28,714
|
|
35,699
|
|
7,679
|
|
2000
|
|
03/00
|
|
3-30
|
Hillcrest
Park
|
|
608
|
|
Newbury
Park, CA
|
|
15,318
|
|
40,601
|
|
12,353
|
|
15,755
|
|
52,517
|
|
68,272
|
|
16,713
|
|
1973
|
|
03/98
|
|
3-30
|
Hillsborough
Park
|
|
235
|
|
La
Habra, CA
|
|
|
|
6,291
|
|
15,455
|
|
827
|
|
6,272
|
|
16,302
|
|
22,573
|
|
4,728
|
|
1999
|
|
09/99
|
|
3-30
|
|
|
|
|
|
|
|
76,732
|
|
28,311
|
|
83,362
|
|
14,871
|
|
29,012
|
|
97,532
|
|
126,544
|
|
29,120
|
|
|
|
|
|
|
Bel
Air
|
|
462
|
|
San
Ramon, CA
|
|
|
|
12,105
|
|
18,252
|
|
18,642
|
|
12,682
|
|
36,317
|
|
48,999
|
|
12,687
|
|
1988
|
|
01/97
|
|
3-30
|
Waterford,
The
|
|
238
|
|
San
Jose, CA
|
|
|
|
11,808
|
|
24,500
|
|
11,688
|
|
15,165
|
|
32,831
|
|
47,996
|
|
7,659
|
|
2000
|
|
06/00
|
|
3-30
|
|
|
|
|
|
|
|
58,139
|
|
23,913
|
|
42,752
|
|
30,329
|
|
27,847
|
|
69,147
|
|
96,994
|
|
20,346
|
|
|
|
|
|
|
Bonita
Cedars
|
|
120
|
|
Bonita,
CA
|
|
|
|
2,496
|
|
9,913
|
|
977
|
|
2,503
|
|
10,883
|
|
13,386
|
|
1,983
|
|
1983
|
|
12/02
|
|
3-30
|
Bristol
Commons
|
|
188
|
|
Sunnyvale,
CA
|
|
|
|
5,278
|
|
11,853
|
|
2,447
|
|
5,293
|
|
14,285
|
|
19,578
|
|
5,889
|
|
1989
|
|
01/97
|
|
3-30
|
Castle
Creek
|
|
216
|
|
Newcastle,
WA
|
|
|
|
4,149
|
|
16,028
|
|
2,020
|
|
4,833
|
|
17,364
|
|
22,197
|
|
6,593
|
|
1997
|
|
12/97
|
|
3-30
|
Forest
View
|
|
192
|
|
Renton,
WA
|
|
|
|
3,731
|
|
14,530
|
|
689
|
|
3,731
|
|
15,219
|
|
18,950
|
|
2,233
|
|
1998
|
|
10/03
|
|
3-30
|
Mira
Monte
|
|
355
|
|
Mira
Mesa, CA
|
|
|
|
7,165
|
|
28,459
|
|
6,909
|
|
7,186
|
|
35,347
|
|
42,533
|
|
6,243
|
|
1982
|
|
12/02
|
|
3-30
|
Mission
Hills
|
|
282
|
|
Oceanside,
CA
|
|
|
|
10,099
|
|
38,778
|
|
1,920
|
|
10,167
|
|
40,630
|
|
50,797
|
|
3,611
|
|
1984
|
|
7/05
|
|
3-30
|
Walnut
Heights
|
|
163
|
|
Walnut,
CA
|
|
|
|
4,858
|
|
19,168
|
|
1,140
|
|
4,887
|
|
20,280
|
|
25,166
|
|
2,927
|
|
1964
|
|
10/03
|
|
3-30
|
Windsor
Ridge
|
|
216
|
|
Sunnyvale,
CA
|
|
|
|
4,017
|
|
10,315
|
|
3,855
|
|
4,021
|
|
14,167
|
|
18,187
|
|
8,183
|
|
1989
|
|
03/89
|
|
3-30
|
|
|
|
|
|
|
|
100,000
|
|
41,793
|
|
149,044
|
|
19,959
|
|
42,621
|
|
168,174
|
|
210,796
|
|
37,662
|
|
|
|
|
|
|
Alpine
Village
|
|
306
|
|
Alpine,
CA
|
|
17,016
|
|
4,967
|
|
19,728
|
|
1,994
|
|
4,982
|
|
21,707
|
|
26,689
|
|
3,845
|
|
1971
|
|
12/02
|
|
3-30
|
Anchor
Village
|
|
301
|
|
Mukilteo,
WA
|
|
10,750
|
|
2,498
|
|
10,595
|
|
5,433
|
|
2,681
|
|
15,845
|
|
18,526
|
|
7,092
|
|
1981
|
|
01/97
|
|
3-30
|
Barkley,
The
|
|
161
|
|
Anaheim,
CA
|
|
4,883
|
|
2,272
|
|
8,520
|
|
1,705
|
|
2,353
|
|
10,144
|
|
12,497
|
|
3,253
|
|
1984
|
|
04/00
|
|
3-30
|
Bluffs
II, The
|
|
224
|
|
San
Diego, CA
|
|
12,137
|
|
3,405
|
|
7,743
|
|
5,979
|
|
3,442
|
|
13,685
|
|
17,127
|
|
3,756
|
|
1974
|
|
06/97(3)
|
3-30
|
Brentwood
(Hearthstone)
|
|
140
|
|
Santa
Ana, CA
|
|
9,333
|
|
2,833
|
|
11,303
|
|
4,341
|
|
3,502
|
|
14,975
|
|
18,477
|
|
2,798
|
|
1970
|
|
11/01
|
|
3-30
|
Brighton
Ridge
|
|
264
|
|
Renton,
WA
|
|
16,013
|
|
2,623
|
|
10,800
|
|
3,789
|
|
2,656
|
|
14,555
|
|
17,212
|
|
6,030
|
|
1986
|
|
12/96
|
|
3-30
|
Brookside
Oaks
|
|
170
|
|
Sunnyvale,
CA
|
|
14,130
|
|
7,301
|
|
16,310
|
|
16,792
|
|
10,301
|
|
30,102
|
|
40,403
|
|
5,312
|
|
1973
|
|
06/00
|
|
3-30
|
Cairns,
The
|
|
100
|
|
Seattle,
WA
|
|
11,552
|
|
6,937
|
|
20,679
|
|
62
|
|
6,939
|
|
20,739
|
|
27,678
|
|
396
|
|
2006
|
|
06/07
|
|
3-30
|
Camarillo
Oaks
|
|
564
|
|
Camarillo,
CA
|
|
53,052
|
|
10,953
|
|
25,254
|
|
5,109
|
|
11,075
|
|
30,241
|
|
41,316
|
|
13,871
|
|
1985
|
|
07/96
|
|
3-30
|
Camino
Ruiz Square
|
|
160
|
|
Camarillo,
CA
|
|
21,110
|
|
6,871
|
|
26,119
|
|
64
|
|
6,878
|
|
26,176
|
|
33,054
|
|
876
|
|
1990
|
|
12/06
|
|
3-30
|
Canyon
Point
|
|
250
|
|
Bothell,
WA
|
|
15,736
|
|
4,692
|
|
18,288
|
|
1,082
|
|
4,693
|
|
19,370
|
|
24,062
|
|
2,785
|
|
1990
|
|
10/03
|
|
3-30
|
Capri
at Sunny Hills
|
|
100
|
|
Fullerton,
CA
|
|
19,150
|
|
3,337
|
|
13,320
|
|
3,962
|
|
3,867
|
|
16,752
|
|
20,619
|
|
3,444
|
|
1961
|
|
09/01
|
|
3-30
|
Cardiff
by the Sea
|
|
300
|
|
Cardiff,
CA
|
|
42,200
|
|
13,724
|
|
57,395
|
|
439
|
|
14,224
|
|
57,881
|
|
72,105
|
|
1,355
|
|
1986
|
|
04/07
|
|
3-30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
|
ESSEX
PROPERTY TRUST, INC. AND SUBSIDIARIES
Real
Estate and Accumulated Depreciation
December
31, 2007
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
cost
|
|
|
|
Gross
amount carried at close of period
|
|
|
|
|
|
|
|
|
Property
|
|
Units
|
|
Location
|
|
Encumbrance
|
|
Land
|
|
improvements
|
|
acquisition
|
|
improvements
|
|
improvements
|
|
Total(1)
|
|
Accumulated
depreciation
|
|
construction
|
|
acquired
|
|
(years)
|
Encumbered
apartment communities (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carlyle,
The
|
|
132
|
|
San
Jose, CA
|
|
15,424
|
|
3,954
|
|
15,277
|
|
9,270
|
|
5,801
|
|
22,701
|
|
28,501
|
|
5,266
|
|
2000
|
|
04/00
|
|
3-30
|
City
View (Wimbledon Woods)
|
560
|
|
Hayward,
CA
|
|
51,600
|
|
9,883
|
|
37,670
|
|
15,069
|
|
10,350
|
|
52,272
|
|
62,622
|
|
15,861
|
|
1975
|
|
03/98
|
|
3-30
|
Coldwater
Canyon
|
|
39
|
|
Studio
City, CA
|
|
5,919
|
|
1,674
|
|
6,640
|
|
367
|
|
1,676
|
|
7,005
|
|
8,681
|
|
143
|
|
1979
|
|
05/07
|
|
3-30
|
Coral
Gardens
|
|
200
|
|
El
Cajon, CA
|
|
10,943
|
|
3,638
|
|
14,452
|
|
936
|
|
3,649
|
|
15,377
|
|
19,026
|
|
2,770
|
|
1976
|
|
12/02
|
|
3-30
|
Devonshire
|
|
276
|
|
Hemet,
CA
|
|
11,078
|
|
3,470
|
|
13,786
|
|
1,548
|
|
3,482
|
|
15,322
|
|
18,804
|
|
2,905
|
|
1988
|
|
12/02
|
|
3-30
|
Emerald
Ridge - North
|
|
180
|
|
Bellevue,
WA
|
|
10,721
|
|
3,449
|
|
7,801
|
|
3,036
|
|
3,449
|
|
10,837
|
|
14,286
|
|
5,018
|
|
1987
|
|
11/94
|
|
3-30
|
Esplanade
|
|
278
|
|
San
Jose, CA
|
|
38,956
|
|
18,170
|
|
40,086
|
|
2,946
|
|
18,425
|
|
42,777
|
|
61,202
|
|
4,635
|
|
2002
|
|
11/04
|
|
3-30
|
Evergreen
Heights
|
|
200
|
|
Kirkland,
WA
|
|
10,910
|
|
3,566
|
|
13,395
|
|
2,134
|
|
3,649
|
|
15,446
|
|
19,095
|
|
5,847
|
|
1990
|
|
06/97
|
|
3-30
|
Fairwood
Pond
|
|
194
|
|
Renton,
WA
|
|
14,514
|
|
5,296
|
|
15,564
|
|
709
|
|
5,300
|
|
16,269
|
|
21,569
|
|
1,755
|
|
1997
|
|
10/04
|
|
3-30
|
Fountain
Park
|
|
705
|
|
Playa
Vista, CA
|
|
98,665
|
|
25,073
|
|
94,980
|
|
17,327
|
|
25,208
|
|
112,173
|
|
137,380
|
|
13,407
|
|
2002
|
|
02/04
|
|
3-30
|
Harvest
Park
|
|
104
|
|
Santa
Rosa, CA
|
|
11,603
|
|
6,700
|
|
15,479
|
|
192
|
|
6,690
|
|
15,681
|
|
22,371
|
|
413
|
|
2004
|
|
03/07
|
|
3-30
|
Hidden
Valley (Parker Ranch)
|
324
|
|
Simi
Valley, CA
|
|
33,303
|
|
14,174
|
|
34,065
|
|
287
|
|
11,724
|
|
36,802
|
|
48,526
|
|
4,334
|
|
2004
|
|
12/04
|
|
3-30
|
Highridge
|
|
255
|
|
Rancho
Palos Verde, CA
|
44,807
|
|
5,419
|
|
18,347
|
|
8,220
|
|
5,841
|
|
26,145
|
|
31,986
|
|
9,376
|
|
1972
|
|
05/97
|
|
3-30
|
Huntington
Breakers
|
|
342
|
|
Huntington
Beach, CA
|
20,962
|
|
9,306
|
|
22,720
|
|
3,882
|
|
9,315
|
|
26,593
|
|
35,908
|
|
9,494
|
|
1984
|
|
10/97
|
|
3-30
|
Inglenook
Court
|
|
224
|
|
Bothell,
WA
|
|
8,300
|
|
3,467
|
|
7,881
|
|
6,502
|
|
3,474
|
|
14,375
|
|
17,850
|
|
5,757
|
|
1985
|
|
10/94
|
|
3-30
|
Kings
Road
|
|
196
|
|
Los
Angeles, CA
|
|
14,618
|
|
4,023
|
|
9,527
|
|
5,675
|
|
4,031
|
|
15,194
|
|
19,225
|
|
4,932
|
|
1979
|
|
06/97
|
|
3-30
|
Le
Pac Luxury Apartments
|
140
|
|
Santa
Clara, CA
|
|
13,713
|
|
3,090
|
|
7,421
|
|
4,768
|
|
3,092
|
|
12,187
|
|
15,279
|
|
4,889
|
|
1975
|
|
02/94
|
|
3-30
|
Marbrisa
|
|
202
|
|
Long
Beach, CA
|
|
20,923
|
|
4,700
|
|
18,605
|
|
1,323
|
|
4,760
|
|
19,869
|
|
24,628
|
|
3,806
|
|
1987
|
|
09/02
|
|
3-30
|
Mariners
Place
|
|
105
|
|
Oxnard,
CA
|
|
3,872
|
|
1,555
|
|
6,103
|
|
1,029
|
|
1,562
|
|
7,126
|
|
8,687
|
|
2,166
|
|
1987
|
|
05/00
|
|
3-30
|
Montejo
|
|
124
|
|
Garden
Grove, CA
|
5,812
|
|
1,925
|
|
7,685
|
|
1,332
|
|
2,110
|
|
8,833
|
|
10,942
|
|
1,959
|
|
1974
|
|
11/01
|
|
3-30
|
Monterey
Villas
|
|
122
|
|
Oxnard,
CA
|
|
13,802
|
|
2,349
|
|
5,579
|
|
4,395
|
|
2,424
|
|
9,900
|
|
12,323
|
|
3,206
|
|
1974
|
|
07/97
|
|
3-30
|
Monterra
del Rey
|
|
84
|
|
Pasadena,
CA
|
|
10,130
|
|
2,312
|
|
4,923
|
|
4,292
|
|
2,825
|
|
8,702
|
|
11,527
|
|
2,494
|
|
1972
|
|
04/99
|
|
3-30
|
Mt.
Sutro
|
|
99
|
|
San
Francisco, CA
|
5,725
|
|
2,334
|
|
8,507
|
|
1,850
|
|
2,810
|
|
9,881
|
|
12,691
|
|
2,942
|
|
1973
|
|
06/01
|
|
3-30
|
Park
Place/Windsor Court/Cochran
|
176
|
|
Los
Angeles, CA
|
|
21,964
|
|
4,965
|
|
11,806
|
|
5,090
|
|
5,015
|
|
16,846
|
|
21,861
|
|
5,682
|
|
1988
|
|
08/97
|
|
3-30
|
Pointe
at Cupertino, The
|
|
116
|
|
Cupertino,
CA
|
|
13,033
|
|
4,505
|
|
17,605
|
|
606
|
|
4,505
|
|
18,211
|
|
22,716
|
|
2,282
|
|
1963
|
|
08/98(4)
|
3-30
|
Sammamish
View
|
|
153
|
|
Bellevue,
WA
|
|
10,778
|
|
3,324
|
|
7,501
|
|
5,942
|
|
3,331
|
|
13,436
|
|
16,767
|
|
4,724
|
|
1986
|
|
11/94
|
|
3-30
|
San
Marcos
|
|
432
|
|
Richmond,
CA
|
|
49,225
|
|
15,563
|
|
36,204
|
|
24,269
|
|
22,866
|
|
53,170
|
|
76,036
|
|
7,372
|
|
2003
|
|
11/03
|
|
3-30
|
Stonehedge
Village
|
|
196
|
|
Bothell,
WA
|
|
13,786
|
|
3,167
|
|
12,603
|
|
3,198
|
|
3,201
|
|
15,767
|
|
18,968
|
|
5,363
|
|
1986
|
|
10/97
|
|
3-30
|
Summit
Park
|
|
300
|
|
San
Diego, CA
|
|
21,100
|
|
5,959
|
|
23,670
|
|
2,011
|
|
5,977
|
|
25,663
|
|
31,640
|
|
4,773
|
|
1972
|
|
12/02
|
|
3-30
|
Thomas
Jefferson
|
|
156
|
|
Sunnyvale,
CA
|
|
19,529
|
|
8,190
|
|
19,306
|
|
91
|
|
8,195
|
|
19,392
|
|
27,587
|
|
340
|
|
1969
|
|
09/07
|
|
3-30
|
Tierra
Vista
|
|
404
|
|
Oxnard,
CA
|
|
62,037
|
|
13,652
|
|
53,336
|
|
669
|
|
13,661
|
|
53,997
|
|
67,657
|
|
6,665
|
|
2001
|
|
01/01(4)
|
3-30
|
Treehouse
|
|
164
|
|
Santa
Ana, CA
|
|
7,825
|
|
2,626
|
|
10,485
|
|
1,440
|
|
2,843
|
|
11,708
|
|
14,551
|
|
2,706
|
|
1970
|
|
11/01
|
|
3-30
|
Boulevard
(Treetops)
|
|
172
|
|
Fremont,
CA
|
|
9,800
|
|
3,520
|
|
8,182
|
|
7,717
|
|
3,580
|
|
15,839
|
|
19,419
|
|
4,925
|
|
1978
|
|
01/96
|
|
3-30
|
Valley
Park
|
|
160
|
|
Fountain
Valley, CA
|
9,913
|
|
3,361
|
|
13,420
|
|
3,001
|
|
3,761
|
|
16,021
|
|
19,782
|
|
3,458
|
|
1969
|
|
11/01
|
|
3-30
|
Villa
Angelina
|
|
256
|
|
Placentia,
CA
|
|
13,405
|
|
4,498
|
|
17,962
|
|
2,860
|
|
4,962
|
|
20,359
|
|
25,320
|
|
4,282
|
|
1970
|
|
11/01
|
|
3-30
|
Vista
Belvedere
|
|
76
|
|
Tiburon,
CA
|
|
11,297
|
|
5,573
|
|
11,901
|
|
1,973
|
|
5,573
|
|
13,874
|
|
19,447
|
|
1,520
|
|
1963
|
|
08/04
|
|
3-30
|
Wandering
Creek
|
|
156
|
|
Kent,
WA
|
|
5,300
|
|
1,285
|
|
4,980
|
|
3,762
|
|
1,296
|
|
8,731
|
|
10,027
|
|
3,615
|
|
1986
|
|
11/95
|
|
3-30
|
Wharfside
Pointe
|
|
142
|
|
Seattle,
WA
|
|
7,827
|
|
2,245
|
|
7,020
|
|
4,180
|
|
2,256
|
|
11,189
|
|
13,445
|
|
4,645
|
|
1990
|
|
06/94
|
|
3-30
|
|
|
|
|
|
|
|
1,325,057
|
|
408,608
|
|
1,283,091
|
|
342,554
|
|
432,055
|
|
1,602,745
|
|
2,034,800
|
|
391,640
|
|
|
|
|
|
(Continued)
|
ESSEX
PROPERTY TRUST, INC. AND SUBSIDIARIES
Real
Estate and Accumulated Depreciation
December
31, 2007
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
cost
|
|
Costs
capitalized
|
|
Gross
amount carried at close of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
and
|
|
|
|
|
|
|
|
|
|
Date
|
|
Lives
|
Property |
|
Units |
|
Location
|
|
|
Encumbrance
|
|
Land |
|
improvements
|
|
acquisition
|
|
improvements |
|
improvements |
|
Total(1) |
|
depreciation |
|
construction |
|
acquired |
|
(years)
|
Unencumbered
apartment communities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alpine
Country
|
|
108
|
|
Alpine,
CA
|
|
|
|
1,741
|
|
6,914
|
|
456
|
|
1,746
|
|
7,364
|
|
9,111
|
|
1,335
|
|
1986
|
|
12/02
|
|
3-30
|
Avondale
at Warner Center
|
446
|
|
Woodland
Hills, CA
|
|
10,536
|
|
24,522
|
|
14,962
|
|
10,601
|
|
39,419
|
|
50,020
|
|
12,858
|
|
1970
|
|
01/97
|
|
3-30
|
Belmont
Terrace
|
|
71
|
|
Belmont,
CA
|
|
|
|
4,446
|
|
10,290
|
|
647
|
|
4,474
|
|
10,909
|
|
15,383
|
|
433
|
|
1974
|
|
10/06
|
|
3-30
|
Bridle
Trails
|
|
108
|
|
Kirkland,
WA
|
|
|
|
1,500
|
|
5,930
|
|
4,982
|
|
1,531
|
|
10,881
|
|
12,412
|
|
3,182
|
|
1986
|
|
10/97
|
|
3-30
|
Bunker
Hill
|
|
456
|
|
Los
Angeles, CA
|
|
|
|
11,498
|
|
27,871
|
|
3,350
|
|
11,639
|
|
31,080
|
|
42,719
|
|
11,324
|
|
1968
|
|
03/98
|
|
3-30
|
Cambridge
|
|
40
|
|
Chula
Vista, CA
|
|
|
|
497
|
|
1,973
|
|
214
|
|
498
|
|
2,186
|
|
2,684
|
|
387
|
|
1965
|
|
12/02
|
|
3-30
|
Canyon
Oaks
|
|
250
|
|
San
Ramon, CA
|
|
|
|
19,088
|
|
44,473
|
|
119
|
|
19,088
|
|
44,591
|
|
63,680
|
|
934
|
|
2005
|
|
05/07
|
|
3-30
|
Carlton
Heights
|
|
70
|
|
Santee,
CA
|
|
|
|
1,099
|
|
4,368
|
|
318
|
|
1,103
|
|
4,682
|
|
5,785
|
|
855
|
|
1979
|
|
12/02
|
|
3-30
|
CBC
Apartments
|
|
148
|
|
Goleta,
CA
|
|
|
|
6,283
|
|
24,000
|
|
96
|
|
6,288
|
|
24,091
|
|
30,379
|
|
1,587
|
|
1962
|
|
01/06
|
|
3-30
|
Cedar
Terrace
|
|
180
|
|
Bellevue,
WA
|
|
|
|
5,543
|
|
16,442
|
|
2,077
|
|
5,652
|
|
18,410
|
|
24,062
|
|
1,857
|
|
1984
|
|
01/05
|
|
3-30
|
Chimney
Sweep Apartments
|
91
|
|
Goleta,
CA
|
|
|
|
5,558
|
|
21,320
|
|
1,561
|
|
5,618
|
|
22,820
|
|
28,439
|
|
1,670
|
|
1967
|
|
01/06
|
|
3-30
|
Country
Villas
|
|
180
|
|
Oceanside,
CA
|
|
|
|
4,174
|
|
16,583
|
|
2,180
|
|
4,187
|
|
18,750
|
|
22,937
|
|
3,404
|
|
1976
|
|
12/02
|
|
3-30
|
Monterra
del Sol (Euclid)
|
|
85
|
|
Pasadena,
CA
|
|
|
|
2,202
|
|
4,794
|
|
4,364
|
|
2,824
|
|
8,536
|
|
11,360
|
|
2,274
|
|
1972
|
|
04/99
|
|
3-30
|
Fairways(6)
|
|
74
|
|
Newport
Beach, CA
|
|
-
|
|
7,850
|
|
2,876
|
|
9
|
|
10,717
|
|
10,726
|
|
3,877
|
|
1972
|
|
06/99
|
|
3-30
|
Foothill
Gardens/Twin Creeks
|
176
|
|
San
Ramon, CA
|
|
|
|
5,875
|
|
13,992
|
|
3,435
|
|
5,964
|
|
17,339
|
|
23,302
|
|
6,957
|
|
1985
|
|
02/97
|
|
3-30
|
Grand
Regency
|
|
60
|
|
Escondido,
CA
|
|
|
|
881
|
|
3,498
|
|
217
|
|
883
|
|
3,713
|
|
4,596
|
|
669
|
|
1967
|
|
12/02
|
|
3-30
|
Hampton
Park
|
|
83
|
|
Glendale,
CA
|
|
|
|
2,407
|
|
5,672
|
|
1,563
|
|
2,426
|
|
7,216
|
|
9,642
|
|
2,055
|
|
1974
|
|
06/99
|
|
3-30
|
Hampton
Place
|
|
132
|
|
Glendale,
CA
|
|
|
|
4,288
|
|
11,081
|
|
2,323
|
|
4,307
|
|
13,385
|
|
17,692
|
|
3,817
|
|
1970
|
|
06/99
|
|
3-30
|
Hillsdale
Garden Apartments
|
697
|
|
Hillsdale
Garden, CA
|
|
22,000
|
|
94,681
|
|
1,976
|
|
22,325
|
|
97,184
|
|
119,509
|
|
3,971
|
|
1948
|
|
09/06(6)
|
3-30
|
Hope
Ranch Collection
|
|
108
|
|
Santa
Barbara, CA
|
|
|
16,877
|
|
4,078
|
|
122
|
|
4,208
|
|
16,869
|
|
21,077
|
|
384
|
|
1965
|
|
03/07
|
|
3-30
|
Linden
Square
|
|
183
|
|
Seattle,
WA
|
|
|
|
4,374
|
|
11,588
|
|
931
|
|
4,202
|
|
12,691
|
|
16,893
|
|
3,464
|
|
1994
|
|
06/00
|
|
3-30
|
Pinehurst
|
|
118
|
|
Ventura,
CA
|
|
|
|
1,570
|
|
3,912
|
|
3,962
|
|
1,618
|
|
7,826
|
|
9,444
|
|
2,546
|
|
1971
|
|
06/97
|
|
3-30
|
Magnonlia
Lane(7)
|
|
32
|
|
Sunnyvale,
CA
|
|
|
|
-
|
|
5,430
|
|
8
|
|
3
|
|
5,434
|
|
5,438
|
|
98
|
|
2001
|
|
06/07
|
|
3-30
|
Maple
Leaf
|
|
48
|
|
Seattle,
WA
|
|
|
|
805
|
|
3,283
|
|
749
|
|
828
|
|
4,010
|
|
4,837
|
|
1,376
|
|
1986
|
|
10/97
|
|
3-30
|
Marbella,
The
|
|
60
|
|
Los
Angeles, CA
|
|
|
|
2,826
|
|
11,269
|
|
147
|
|
2,871
|
|
11,371
|
|
14,242
|
|
865
|
|
1991
|
|
09/05
|
|
3-30
|
Marina
City Club(8)
|
|
101
|
|
Marina
Del Rey, CA
|
|
-
|
|
28,167
|
|
2,669
|
|
-
|
|
30,836
|
|
30,836
|
|
4,070
|
|
1971
|
|
01/04
|
|
3-30
|
Marina
Cove(9)
|
|
292
|
|
Santa
Clara, CA
|
|
|
|
5,320
|
|
16,431
|
|
4,136
|
|
5,324
|
|
20,563
|
|
25,887
|
|
10,377
|
|
1974
|
|
06/94
|
|
3-30
|
Meadowood
|
|
320
|
|
Simi
Valley, CA
|
|
|
|
7,852
|
|
18,592
|
|
3,829
|
|
7,898
|
|
22,375
|
|
30,273
|
|
9,088
|
|
1986
|
|
11/96
|
|
3-30
|
Mesa
Village
|
|
133
|
|
Clairemont,
CA
|
|
|
|
1,888
|
|
7,498
|
|
494
|
|
1,894
|
|
7,986
|
|
9,880
|
|
1,382
|
|
1963
|
|
12/02
|
|
3-30
|
Mill
Creek at Windermere
|
400
|
|
San
Ramon, CA
|
|
|
|
29,551
|
|
70,430
|
|
37
|
|
29,551
|
|
69,070
|
|
98,620
|
|
671
|
|
1974
|
|
09/07
|
|
3-30
|
Mirabella
|
|
188
|
|
Marina
Del Rey, CA
|
|
6,180
|
|
26,673
|
|
10,264
|
|
6,270
|
|
36,847
|
|
43,117
|
|
7,557
|
|
2000
|
|
05/00
|
|
3-30
|
Monterra
del Mar (Windsor Terrace)
|
123
|
|
Pasadena,
CA
|
|
|
|
2,188
|
|
5,263
|
|
3,951
|
|
2,735
|
|
8,666
|
|
11,402
|
|
3,016
|
|
1972
|
|
09/97
|
|
3-30
|
Mountain
View
|
|
106
|
|
Camarillo,
CA
|
|
|
|
3,167
|
|
11,106
|
|
667
|
|
3,117
|
|
11,823
|
|
14,940
|
|
1,581
|
|
1980
|
|
01/04
|
|
3-30
|
Park
Hill at Issaquah
|
|
245
|
|
Issaquah,
CA
|
|
|
|
7,284
|
|
21,937
|
|
810
|
|
7,284
|
|
22,747
|
|
30,031
|
|
2,530
|
|
1999
|
|
02/99(10)
|
3-30
|
Pinehurst
|
|
28
|
|
Ventura,
CA
|
|
|
|
355
|
|
1,356
|
|
269
|
|
6
|
|
1,975
|
|
1,980
|
|
252
|
|
1973
|
|
12/04
|
|
3-30
|
Salmon
Run at Perry Creek
|
132
|
|
Bothell,
WA
|
|
|
|
3,717
|
|
11,483
|
|
501
|
|
3,801
|
|
11,900
|
|
15,701
|
|
2,877
|
|
2000
|
|
10/00
|
|
3-30
|
Shadow
Point
|
|
172
|
|
Spring
Valley, CA
|
|
|
2,812
|
|
11,170
|
|
1,386
|
|
2,820
|
|
12,548
|
|
15,368
|
|
2,373
|
|
1983
|
|
12/02
|
|
3-30
|
Spring
Lake
|
|
69
|
|
Seattle,
WA
|
|
|
|
838
|
|
3,399
|
|
359
|
|
859
|
|
3,737
|
|
4,596
|
|
1,441
|
|
1986
|
|
10/97
|
|
3-30
|
St.
Cloud
|
|
302
|
|
Houston,
TX
|
|
|
|
2,140
|
|
7,782
|
|
247
|
|
2,146
|
|
8,022
|
|
10,169
|
|
1,915
|
|
1968
|
|
12/02
|
|
3-30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
|
ESSEX
PROPERTY TRUST, INC. AND SUBSIDIARIES
Real
Estate and Accumulated Depreciation
December
31, 2007
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
cost
|
|
|
|
Gross
amount carried at close of period
|
|
|
|
|
|
|
|
|
Property
|
|
Units
|
|
Location
|
|
Encumbrance
|
|
Land
|
|
Buildings
and
improvements
|
|
acquisition
|
|
improvements
|
|
improvements
|
|
Total(1)
|
|
depreciation
|
|
construction
|
|
Date
acquired
|
|
(years)
|
Unencumbered
apartment communities (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Laurels
|
|
164
|
|
Mill
Creek, WA
|
|
|
|
1,559
|
|
6,430
|
|
1,916
|
|
1,595
|
|
8,309
|
|
9,905
|
|
3,435
|
|
1981
|
|
12/96
|
|
3-30
|
Tierra
del Sol/Norte
|
|
156
|
|
El
Cajon, CA
|
|
|
|
2,455
|
|
9,753
|
|
654
|
|
2,463
|
|
10,399
|
|
12,862
|
|
1,881
|
|
1969
|
|
12/02
|
|
3-30
|
Trabucco
Villas
|
|
132
|
|
Lake
Forest, CA
|
|
|
|
3,638
|
|
8,640
|
|
1,548
|
|
3,890
|
|
9,936
|
|
13,826
|
|
4,011
|
|
1985
|
|
10/97
|
|
3-30
|
Tuscana
|
|
30
|
|
Tracy,
CA
|
|
|
|
2,828
|
|
6,599
|
|
153
|
|
2,870
|
|
6,710
|
|
9,580
|
|
140
|
|
2007
|
|
02/07
|
|
3-30
|
Vista
Capri - North
|
|
106
|
|
San
Diego, CA
|
|
|
|
1,663
|
|
6,609
|
|
489
|
|
1,668
|
|
7,093
|
|
8,761
|
|
1,192
|
|
1975
|
|
12/02
|
|
3-30
|
Wilshire
Promenade
|
|
149
|
|
Fullerton,
CA
|
|
|
|
3,118
|
|
7,385
|
|
5,215
|
|
3,797
|
|
11,921
|
|
15,718
|
|
4,572
|
|
1992
|
|
01/97
|
|
3-30
|
Woodlawn
Colonial
|
|
159
|
|
Chula
Vista, CA
|
|
|
|
2,344
|
|
9,311
|
|
943
|
|
2,351
|
|
10,248
|
|
12,598
|
|
1,923
|
|
1974
|
|
12/02
|
|
3-30
|
Woodside
Village
|
|
145
|
|
Ventura,
CA
|
|
|
|
5,331
|
|
21,036
|
|
1,145
|
|
5,342
|
|
22,170
|
|
27,512
|
|
2,221
|
|
1987
|
|
12/04
|
|
3-30
|
|
|
24,393
|
|
|
|
|
1,325,057
|
|
640,904
|
|
1,985,955
|
|
437,870
|
|
654,629
|
|
2,410,099
|
|
3,064,729
|
|
532,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
cost
|
|
|
|
Gross
amount carried at close of period
|
|
|
|
|
|
|
|
|
Property
|
|
Units
|
|
Location
|
|
Encumbrance
|
|
Land
|
|
Buildings
and b
improvements
|
|
acquisition
|
|
Land
and
improvements
|
|
improvements
|
|
Total(1)
|
|
Accumulated
depreciation
|
|
construction
|
|
Date
acquired
|
|
(years)
|
Other
real estate assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
Buildings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
925
East Meadow
|
|
|
|
Palo
Alto, CA
|
|
-
|
|
1,401
|
|
3,172
|
|
1,105
|
|
1,857
|
|
3,822
|
|
5,678
|
|
2,211
|
|
1988
|
|
11/97
|
|
3-30
|
935
East Meadow(11)
|
|
|
|
Palo
Alto, CA
|
|
-
|
|
1,290
|
|
3,078
|
|
0
|
|
1,290
|
|
3,078
|
|
4,368
|
|
-
|
|
1962
|
|
12/07
|
|
3-30
|
17461
Derian
|
|
|
|
Irvine,
CA
|
|
-
|
|
3,079
|
|
12,315
|
|
5,220
|
|
3,105
|
|
17,509
|
|
20,614
|
|
4,527
|
|
1983
|
|
07/00
|
|
3-30
|
22120
Clarendon
|
|
|
|
Woodland
Hills, CA
|
-
|
|
903
|
|
3,600
|
|
1,205
|
|
1,014
|
|
4,694
|
|
5,708
|
|
1,538
|
|
1982
|
|
03/01
|
|
3-30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recreational
vehicle parks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Circle
RV
|
|
|
|
El
Cajon, CA
|
|
-
|
|
2,375
|
|
2,347
|
|
140
|
|
2,505
|
|
2,357
|
|
4,862
|
|
400
|
|
1977
|
|
12/02
|
|
3-30
|
Vacationer
|
|
|
|
El
Cajon, CA
|
|
-
|
|
1,975
|
|
1,951
|
|
138
|
|
2,100
|
|
1,964
|
|
4,064
|
|
338
|
|
1973
|
|
12/02
|
|
3-30
|
Manufactured
housing communities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Green
Valley
|
|
|
|
Vista,
CA
|
|
6,216
|
|
3,750
|
|
3,710
|
|
275
|
|
3,993
|
|
3,742
|
|
7,735
|
|
650
|
|
1973
|
|
12/02
|
|
3-30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
apartment communities and other real estate assets
|
$
|
1,331,273
|
$
|
655,677
|
$
|
2,016,128
|
$
|
445,954
|
$
|
670,494
|
$
|
2,447,265
|
$
|
3,117,759
|
$
|
541,987
|
|
|
|
|
|
(Continued)
|
ESSEX
PROPERTY TRUST, INC. AND SUBSIDIARIES
Real
Estate and Accumulated Depreciation
December
31, 2007
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
cost
|
|
|
|
Gross
amount carried at close of period
|
|
|
|
|
|
|
|
|
Property
|
|
Units
|
|
Location
|
|
Encumbrance
|
|
Land
|
|
Buildings
and
improvements
|
|
acquisition
|
|
improvements
|
|
improvements
|
|
Total(1)
|
|
depreciation
|
|
Date
of
construction
|
|
Date
acquired
|
|
(years)
|
Other
real estate assets (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development
Projects(12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Belmont
Station
|
|
275
|
|
Los
Angeles, CA
|
$
|
19,450
|
$
|
8,100
|
$
|
-
|
$
|
47,378
|
$
|
55,478
|
$
|
-
|
$
|
55,478
|
$
|
-
|
|
-
|
|
12/04
|
|
-
|
The
Grand
|
|
238
|
|
Oakland,
CA
|
|
-
|
|
4,838
|
|
-
|
|
37,211
|
|
42,049
|
|
-
|
|
42,049
|
|
-
|
|
-
|
|
08/05
|
|
-
|
Fourth
Street
|
|
171
|
|
Berkeley,
CA
|
|
-
|
|
8,772
|
|
|
|
4,601
|
|
13,373
|
|
-
|
|
13,373
|
|
-
|
|
-
|
|
12/07
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predevelopment
Projects(13)
|
1,658
|
|
various
|
|
12,150
|
|
87,845
|
|
-
|
|
9,248
|
|
97,093
|
|
-
|
|
97,093
|
|
-
|
|
-
|
|
|
|
-
|
Land
held for future development
|
434
|
|
various
|
|
-
|
|
-
|
|
-
|
|
25,452
|
|
25,452
|
|
-
|
|
25,452
|
|
-
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Development Pipeline
|
2,776
|
|
|
|
$
|
31,600
|
$
|
109,555
|
$
|
-
|
$
|
123,890
|
$
|
233,445
|
$
|
-
|
$
|
233,445
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The
aggregate cost for federal income tax purposes is approximately
$2,379,000,000 (unaudited).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) Phase
I was built in 1969 and Phase II was built in 1977.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) The
Company's initial ownership was 85%, and the remaining 15% interest was
acquired in 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) The
Company's initial ownership was 20%, and the remaining 80% interest was
acquired in 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) The
land is leased pursuant to a ground lease expiring 2027.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6) The
land was subject to a ground lease that would have expired in
2047. In the second quarter of 2007, the Company entered into a
joint venture with a third-party, and the Company contributed the
improvements for an 81.5% interest and the joint venture partner
contributed to the land for an 18.5% interest in the
partnership.
|
(7) The
land is leased pursuant to a ground lease expiring 2070.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8) The
land is leased pursuant to a ground lease expiring 2067.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9) A
portion of land is leased pursuant to a ground lease expiring in
2028.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10)
The Company's initial ownership was 45%, and the remaining 55% interest
was acquired in 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11)
The office building is currently under renovation through approximately
the third quarter of 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12)
All construction costs are reflected as real estate under development in
the Company's consolidated balance sheets until the project reaches
stabilization.
|
|
|
|
|
|
|
|
|
(13)
The 535 - 575 River Oaks and 6230 Sunset Blvd. commercial buildings are
accounted as part of predevelopment projects for the year ended December
31, 2007.
|
|
|
|
|
|
|
A
summary of activity for rental properties and accumulated depreciation is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
Rental
properties:
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
depreciation:
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
2,669,187
|
|
$
|
2,431,629
|
|
$
|
2,371,194
|
|
|
Balance
at beginning of year
|
$
|
465,015
|
|
$
|
389,040
|
|
$
|
329,652
|
Improvements
|
|
|
105,673
|
|
|
40,885
|
|
|
24,000
|
|
|
Depreciation
expense - Acquisitions
|
|
4,838
|
|
|
2,314
|
|
|
1,406
|
Acquisition
of real estate
|
|
|
397,605
|
|
|
202,459
|
|
|
90,065
|
|
|
Depreciation
expense - Development
|
|
5,540
|
|
|
-
|
|
|
-
|
Development
of real estate
|
|
|
-
|
|
|
-
|
|
|
20,460
|
|
|
Depreciation
expense - Discontinued operations
|
1,820
|
|
|
4,941
|
|
|
5,777
|
Disposition
of real estate
|
|
|
(54,706)
|
|
|
(5,786)
|
|
|
(22,473)
|
|
|
Depreciation
and amortization expense - Rental properties
|
83,274
|
|
|
73,241
|
|
|
66,909
|
Real
estate investment held for sale
|
|
-
|
|
|
-
|
|
|
(51,617)
|
|
|
Dispositions
|
|
|
|
|
(18,500)
|
|
|
(2,362)
|
|
|
(4,768)
|
Balance
at the end of year
|
|
$
|
3,117,759
|
|
$
|
2,669,187
|
|
$
|
2,431,629
|
|
|
Real
estate investment held for sale
|
|
-
|
|
|
(2,159)
|
|
|
(9,436)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at the end of year
|
|
$
|
541,987
|
|
$
|
465,015
|
|
$
|
389,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIGNATURES
Pursuant
to the requirements of Section 13 of 15(d) 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:
February 28, 2008
|
|
|
|
|
|
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
|
KNOWN ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Keith R. Guericke and Michael T. Dance, and each of
them, his attorney-in-fact, each with the power of substitution, for him in any
and all capacities, to sign any amendments to this Report on Form 10-K and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacity and on the date indicated.
Signature
|
Title
|
Date
|
/S/ KEITH R.
GUERICKE
Keith
R. Guericke
|
Chief
Executive Officer and President, Director, and
Vice
Chairman of the Board
(Principal
Executive Officer)
|
February
28, 2008
|
/S/ MICHAEL T.
DANCE
Michael
T. Dance
|
Executive
Vice President and Chief Financial Officer
(Principal
Financial Officer)
|
February
28, 2008
|
/S/ MICHAEL J.
SCHALL
Michael
J. Schall
|
Senior
Executive Vice President, Director, and Chief Operating
Officer
|
February
28, 2008
|
/S/ GEORGE M.
MARCUS
George
M. Marcus
|
Director
and Chairman of the Board
|
February
28, 2008
|
/S/ WILLIAM A.
MILLICHAP
William
A. Millichap
|
Director
|
February
28, 2008
|
/S/ DAVID W.
BRADY
David
W. Brady
|
Director
|
February
28, 2008
|
Signature
|
Title
|
Date
|
/S/ ROBERT E.
LARSON
Robert
E. Larson
|
Director
|
February
28, 2008
|
/S/ GARY P.
MARTIN
Gary
P. Martin
|
Director
|
February
28, 2008
|
/S/ ISSIE N.
RABINOVITCH
Issie
N. Rabinovitch
|
Director
|
February
28, 2008
|
/S/ THOMAS E.
RANDLETT
Thomas
E. Randlett
|
Director
|
February
28, 2008
|
/S/ WILLARD H. SMITH,
JR.
Willard
H. Smith, Jr.
|
Director
|
February
28, 2008
|
Exhibit
No.
|
Document
|
Note
|
3.1
|
Articles
of Amendment and Restatement of Essex dated June 22, 1995, attached as
Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, and incorporated herein by reference.
|
--
|
3.2
|
Articles
Supplementary of Essex Property Trust, Inc. for the 8.75% Convertible
Preferred Stock, Series 1996A, attached as Exhibit 3.1 to the Company’s
Current Report on Form 8-K, filed August 13, 1996, and incorporated herein
by reference.
|
--
|
3.3
|
First
Amendment to Articles of Amendment and Restatement of Essex Property
Trust, Inc., attached as Exhibit 3.1 to the Company’s 10-Q for the quarter
ended September 30, 1996, and incorporated herein by
reference.
|
--
|
3.4
|
Certificate
of Correction to Exhibit 3.2 dated December 20, 1996; attached as Exhibit
3.4 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference.
|
--
|
3.5
|
Amended
and Restated Bylaws of Essex Property Trust, Inc., with amendments
thereto, dated December 17, 1996 and December 4, 2007.
|
--
|
3.6
|
Articles
Supplementary reclassifying 2,000,000 shares of Common Stock as 2,000,000
shares of 7.875% Series B Cumulative Redeemable Preferred Stock, filed
with the State of Maryland on February 10, 1998, attached as Exhibit 3.1
to the Company’s Current Report on Form 8-K, filed March 3, 1998, and
incorporated herein by reference.
|
--
|
3.7
|
Articles
Supplementary reclassifying 500,000 shares of Common Stock as 500,000
shares of 9 1/8% Series C Cumulative Redeemable Preferred Stock, filed
with the State of Maryland on November 25, 1998, attached as Exhibit 3.8
to the Company’s Current Report on Form 10-K for the year ended December
31, 1998, and incorporated herein by reference.
|
--
|
3.8
|
Certificate
of Correction to Exhibit 3.2 dated February 12, 1999, attached as Exhibit
3.9 to the Company’s Current Report on Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference.
|
--
|
3.9
|
Articles
Supplementary reclassifying 6,617,822 shares of Common Stock as 6,617,822
shares of Series A Junior Participating Preferred Stock, filed with the
State of Maryland on November 13, 1998, attached as Exhibit 4.0 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1998,
and incorporated herein by reference.
|
--
|
3.10
|
Articles
Supplementary reclassifying 2,000,000 shares of Common Stock as 2,000,000
shares of 9.30% Series D Cumulative Redeemable Preferred Stock, filed with
the State of Maryland on July 30, 1999, attached as Exhibit 3.1 to the
Company’s 10-Q for the quarter ended June 30, 1999 and incorporated herein
by reference.
|
--
|
3.11
|
Articles
Supplementary reclassifying 2,200,000 shares of Common Stock as 2,200,000
shares of 9.25% Series E Cumulative Redeemable Preferred Stock, filed with
the State of Maryland on September 9, 1999, attached as Exhibit 3.1 to the
Company’s 10-Q for the quarter ended September 30, 1999 and incorporated
herein by reference.
|
--
|
3.12
|
Certificate
of Correction to Articles Supplementary reclassifying 2,000,000 shares of
Common Stock as 2,000,000 shares of 9.30% Series D Cumulative Redeemable
Preferred Stock, attached as Exhibit 3.1 to the Company’s Form 10-Q for
the quarter ended March 31, 2000, and incorporated herein by
reference.
|
--
|
3.13
|
Certificate
of Amendment of the Bylaws of Essex Property Trust, Inc. dated February
14, 2000, attached as Exhibit 3.2 to the Company’s Form 10-Q for the
quarter ended March 31, 2000, and incorporated herein by
reference.
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3.14
|
Articles
Supplementary relating to the 7.8125% Series F Cumulative Redeemable
Preferred Stock, attached as Exhibit 3.1 to the Company's Current Report
on Form 8-K, dated September 19, 2003, and incorporated herein by
reference.
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3.15
|
Articles
Supplementary reclassifying 2,000,000 shares of 7.875% Series B Cumulative
Redeemable Preferred Stock as 2,000,000 shares of Series B Cumulative
Redeemable Preferred Stock, filed with the State of Maryland on January
14, 2004, attached as Exhibit 3.16 to the Company’s Form 10-K for the year
ended December 31, 2003, and incorporated herein by
reference.
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3.16
|
Articles
Supplementary reclassifying 2,000,000 shares of 9.30% Series D Cumulative
Redeemable Preferred Stock as 2,000,000 shares of Series D Cumulative
Redeemable Preferred Stock, filed with the State of Maryland on January
14, 2004, attached as Exhibit 3.16 to the Company’s Form 10-K for the year
ended December 31, 2003, and incorporated herein by
reference.
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3.17
|
Articles
Supplementary of Essex Property Trust, Inc. reclassifying 5,980,000 shares
of Common Stock as 5,980,000 shares of 4.875% Series G Cumulative
Convertible Preferred Stock, attached as Exhibit 3.1 to the Company’s
Current Report on Form 8-K, Filed July 27, 2006, and incorporated herein
by reference.
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4.1
|
Rights
Agreement, dated as of November 11, 1998, between Essex Property Trust,
Inc., and BankBoston, N.A., as Rights Agent, including all exhibits
thereto, attached as Exhibit 1 to the Company’s Registration Statement
filed on Form 8-A dated November 12, 1998, and incorporated herein by
reference.
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4.2
|
Amendment
to Rights Agreement, dated as of December 13, 2000, attached as Exhibit
4.1 to the Company’s Form 10-Q for the quarter ended March 31, 2001 and
incorporated herein by reference.
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4.3
|
Amendment
to Rights Agreement, dated as of February 28, 2002, attached as Exhibit
4.3 to the Company’s Form 10-K for the year ended December 31, 2001 and
incorporated herein by reference.
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4.4
|
Form
of 4.875% Series G Cumulative Convertible Preferred Stock Certificate,
attached as Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed
July 27, 2006, and incorporated herein by reference.
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10.1
|
Essex
Property Trust, Inc. 1994 Stock Incentive Plan, (amended and restated),
attached as Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended
June 30, 2000 and incorporated herein by reference.*
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|
10.2
|
First
Amended and Restated Agreement of Limited Partnership of Essex Portfolio,
L.P. attached as Exhibit 10.1 to the Company’s Quarterly Report on Form
10-Q for the quarter ended September 30, 1997, and incorporated herein by
reference.
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10.3
|
First
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Essex Portfolio, L.P. dated February 6, 1998, attached as
Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed March 3,
1998, and incorporated herein by reference.
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10.4
|
Second
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Essex Portfolio, L.P. dated April 20, 1998, attached as
Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed April 23,
1998, and incorporated herein by reference.
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10.5
|
Third
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Essex Portfolio, L.P. dated November 24, 1998, attached as
Exhibit 10.5 to the Company’s Form 10-K for the year ended December 31,
2003, and incorporated herein by reference.
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10.6
|
Fourth
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Essex Portfolio, L.P., dated July 28, 1999, attached as
Exhibit 10.1 to the Company’s 10-Q for the quarter ended June 30, 1999 and
incorporated herein by reference.
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10.7
|
Fifth
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Essex Portfolio, L.P., dated September 3, 1999, attached as
Exhibit 10.1 to the Company’s 10-Q for the quarter ended September 30,
1999 and incorporated herein by reference.
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10.8
|
Form
of Essex Property Trust, Inc. 1994 Non-Employee and Director Stock
Incentive Plan, attached as Exhibit 10.3 to the Company’s Registration
Statement on Form S-11 (Registration No. 33-76578), which became effective
on June 6, 1994, and incorporated herein by reference.*
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10.9
|
Form
of Indemnification Agreement between Essex and its directors and officers,
attached as Exhibit 10.7 to the Company’s Registration Statement on Form
S-11 (Registration No. 33-76578), which became effective on June 6, 1994,
and incorporated herein by reference.
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10.10
|
First
Amendment to Investor Rights Agreement dated July 1, 1996 by and between
George M. Marcus and The Marcus & Millichap Company, attached as
Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed July 16,
1996, and incorporated herein by reference.
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10.11
|
Sixth
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Essex Portfolio, L.P. dated as of June 28, 2001, attached
as Exhibit 10.1 to the Company’s 10-Q for the quarter ended June 30, 2001
and incorporated herein by reference.*
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10.12
|
Executive
Severance Plan attached as Exhibit 10.31 to the Company’s Form 10-K for
the year ended December 31, 2001 and incorporated herein by
reference.*
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|
10.13
|
Agreement
between Essex Property Trust, Inc. and George M. Marcus dated March 27,
2003 attached as Exhibit 10.32 to the Company’s Form 10-K for the year
ended December 31, 2002 and incorporated herein by
reference.
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10.14
|
Seventh
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Essex Portfolio, L.P. dated as of June 26, 2003, attached
as Exhibit 10.1 to the Company’s 10-Q for the quarter ended June 30, 2003
and incorporated herein by reference.*
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10.15
|
Eighth
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Essex Portfolio, L.P. dated as of September 23, 2003,
attached as Exhibit 10.2 to the Company’s 10-Q for the quarter ended
September 30, 2003 and incorporated herein by reference.
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|
10.16
|
Ninth
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Essex Portfolio, L.P. dated as of January 8, 2004, attached
as Exhibit 10.36 to the Company’s 10-K for the year ended December 31,
2003, and incorporated herein by reference.
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|
10.17
|
Tenth
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Essex Portfolio, L.P. dated as of January 8, 2004, attached
as Exhibit 10.37 to the Company’s 10-K for the year ended December 31,
2003, and incorporated herein by reference.
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|
10.18
|
Eleventh
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Essex Portfolio, L.P. dated as of March 29, 2004, attached
as Exhibit 10.1 to the Company’s 10-Q for the quarter ended March 31,
2004, and incorporated herein by reference. *
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|
10.19
|
Essex
Property Trust, Inc. 2004 Stock Incentive Plan, attached as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2004, and incorporated herein by reference. *
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|
10.20
|
Indenture,
dated October 28, 2005, by and among Essex Property Trust, Inc., as
Guarantor, Essex Portfolio, L.P., as the Issuer, and Wells Fargo Bank,
N.A., attached as Exhibit 10.1 to the Company’s current report on Form
8-K, filed November 2, 2005, and incorporated herein by
reference.
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|
10.21
|
Fourth
Amended and Restated Revolving Credit Agreement, dated as of March 24,
2006, among Essex Portfolio L.P., Bank of America and other lenders as
specified therein, attached as Exhibit 10.1 to the Company’s Current
Report on Form 8-K, filed March 31, 2006, and incorporated herein by
reference.
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|
10.22
|
Twelfth
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Essex Portfolio, L.P., dated as of July 26, 2006, attached
as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed August
1, 2006, and incorporated herein by reference.
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|
10.23
|
Thirteenth
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Essex Portfolio, L.P., dated as of October 26, 2006,
attached as Exhibit 10.2 to the Company’s Current Report on Form 10-Q for
the quarter ended September 30, 2006, and incorporated herein
by reference.
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|
|
Supplemental
Indenture, dated November 1, 2006, to the Indenture, dated October 28,
2005, by and among Essex Portfolio, L.P., Essex Property Trust, Inc. and
Wells Fargo Bank, N.A.
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|
10.25
|
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, attached as Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2007, and incorporated herein by reference.
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|
10.26
|
Agreement
to Restructure Partnership Between Western-Mountain View II Investors, a
California Limited Partnership and Essex Portfolio, L.P., a California
Limited Partnership and Essex Property Trust, Inc., a Maryland Corporation
and Essex Management Corporation, a California Corporation and General
Partners of the Partnership, attached as Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2007,
and incorporated herein by reference. (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.)
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10.27
|
Fourteenth
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Essex Portfolio, L.P., dated as of December 26, 2007,
attached as Exhibit 10.2 to the Company’s Current Report on Form 8-K,
filed December 28, 2007, and incorporated herein by
reference.*
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|
10.28
|
Form
of Awards Agreement under the Essex Property Trust, Inc. 2007
Outperformance Plan, attached as Exhibit 10.1 to the Company’s Current
Report on Form 8-K, filed December 28, 2007, and incorporated herein by
reference.*
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|
12.1
|
Schedule
of Computation of Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends.
|
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|
14.1
|
Code
of Business Conduct and Ethics
|
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|
|
|
|
21.1
|
List
of Subsidiaries of Essex Property Trust, Inc.
|
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|
23.1
|
Consent
of KPMG LLP, Independent Registered Public Accounting
Firm.
|
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|
24.1
|
Power
of Attorney (see signature page)
|
--
|
31.1
|
Certification
of Keith R. Guericke, Principal Executive Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
--
|
31.2
|
Certification
of Michael T. Dance, Principal Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
--
|
32.1
|
Certification
of Keith R. Guericke, Principal Executive Officer, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
|
--
|
32.2
|
Certification
of Michael T. Dance, Principal Financial Officer, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
|
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|
*
Management contract or compensatory plan or arrangement.