ESS

Business Context and Reporting Period

Company: Essex Property Trust, Inc. (REIT)
Reporting Period: Quarter ended March 31, 2005
Portfolio Overview: As of March 31, 2005, the Company owned interests in 121 multifamily properties (25,281 units), three office buildings, three recreational vehicle parks, and one manufactured housing community. Operations are concentrated in Southern California, Northern California, and the Pacific Northwest.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total property revenues increased 16.6% ($11.0 million) year-over-year. This was driven primarily by $9.4 million in revenue from properties acquired or consolidated after December 31, 2003, and a 2.9% increase in "Same Store" property revenues.
• Profitability Surge: Net income increased significantly, largely due to a $19.6 million increase in equity income from co-investments. This spike was caused by the sale of the Company's interest in "Coronado at Newport South" (Fund I), which generated $14.4 million in equity income, plus $4.9 million in "promote distributions."
• Expense Increases: Total expenses rose 18.9% to $68.6 million. Interest expense increased 26.8% due to higher debt balances from acquisitions and increased rates on variable debt. General and administrative expenses rose 55.0%, attributed to headcount increases and Sarbanes-Oxley implementation costs.
• Discontinued Operations: Income from discontinued operations increased to $1.7 million (from $0.4 million) due to the sale of four non-core assets (RV parks and office buildings) in January 2005, resulting in a $0.7 million gain.

Guidance, Outlook, and Risks

• Regional Outlook: Management expects positive rent growth in 2005: Southern California (~3.3%), Pacific Northwest (~1.8%), and Northern California (~1.0%).
• Capital Deployment: The Company expects to incur approximately $410 per unit in non-revenue generating capital expenditures for 2005. It plans to place an additional $80 million in long-term fixed-rate debt in Q2/Q3 2005 to repay lines of credit.
• Development Pipeline: One development community (275 units) remains with $48.8 million in remaining commitments. Five redevelopment communities (1,797 units) have $14.3 million remaining to be expended.
• Interest Rate Risk: The Company holds $427.6 million in variable-rate debt. It entered into a $50 million forward-starting interest rate swap (fixed at 4.927%) to hedge future debt issuance in 2007. It also holds interest rate caps on $160.8 million of variable debt.
• Legal Contingency: A class-action lawsuit regarding unpaid wages for on-call maintenance employees is pending. No accrual has been recorded, but the outcome is uncertain.

Investor Verification Checklist

• Equity Income Sustainability: Verify the extent to which Q1 2005 earnings were driven by the one-time sale of the Coronado at Newport South interest ($14.4M equity income + $4.9M promote) versus recurring operations.
• Debt Maturity Profile: Review the $238 million in lines of credit maturing in 2007 and 2009 to assess refinancing risk and interest rate exposure.
• Development Costs: Monitor the $48.8 million remaining commitment for the San Marcos development project for potential cost overruns or delays.
• Same-Store Performance: Track the divergence in regional performance, specifically the slight revenue decline (-0.6%) in Northern California Same-Store properties versus growth in Southern California and the Pacific Northwest.
• Legal Exposure: Monitor the status of the Chace Nelson et al. v. Essex Property Trust class-action lawsuit for potential settlement costs.