ESS

Business Context and Reporting Period

Company: Essex Property Trust, Inc. (Essex)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: Essex is a self-administered and self-managed Real Estate Investment Trust (REIT) focused on the ownership, operation, acquisition, development, and redevelopment of apartment communities. As of December 31, 2007, the portfolio consisted of 134 apartment communities (27,489 units) primarily located in Southern California, Northern California, and the Seattle metropolitan area. The portfolio also includes six office buildings, two recreational vehicle parks, and one manufactured housing community.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 14.5% to $388.5 million, driven by a 6.5% increase in Same-Property revenues and a 60.7% increase in Non-Same Property revenues due to twelve communities acquired since January 1, 2006.
• Net Income Surge: Net income nearly doubled to $115.6 million, largely due to $74.0 million in income from discontinued operations (gains on sales of real estate), compared to $29.7 million in 2006.
• Acquisitions: Significant acquisitions in 2007 included Mill Creek at Windermere (400 units, $100.5 million), Canyon Oaks (250 units, $64.3 million), and Cardiff by the Sea (300 units, $72.0 million).
• Dispositions: The Company sold four communities in the Portland metropolitan area for $97.5 million (gain of $47.6 million) and the City Heights joint venture property for $120.0 million (gain of $13.7 million).
• Expense Increases: Total expenses rose 16.4% to $340.0 million. Interest expense increased 11.1% due to higher debt levels, and depreciation increased 28.5% due to new acquisitions.

Guidance, Outlook, and Risks

• 2008 Outlook: Management expects market rent growth of 1% to 3% in Southern California, 5% to 7% in Northern California, and 5% to 7% in the Seattle Metro area. New residential supply is projected to be low (0.4% to 1.2% of existing stock) across these regions.
• Dividends: On February 27, 2008, the Board approved a $0.09 per share increase to the quarterly cash dividend, raising the annualized dividend to $3.72 per share (from $3.36 in 2007).
• Development Pipeline: As of year-end, the consolidated development pipeline included 2,776 units with total estimated costs of $770.6 million, of which $537.1 million remains to be expended.
• Key Risks:
  • Debt Refinancing: Approximately $1.66 billion of indebtedness is subject to balloon payments. The Company does not expect sufficient cash flows from operations to make all balloon payments and relies on refinancing.
  • Interest Rates: The Company has $233.1 million of variable rate indebtedness. While $152.7 million is protected by interest rate caps, rising rates could increase interest expense.
  • Geographic Concentration: 81% of property revenues are generated from California, exposing the Company to local economic downturns.
  • Environmental/Legal: Ongoing exposure to mold-related lawsuits and potential environmental liabilities, though management does not expect a material adverse effect.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the sustainability of earnings by analyzing Net Income excluding the $74.0 million gain from discontinued operations (property sales).
• Debt Maturity Wall: Review the schedule of balloon payments ($125.2 million due in 2008, $185.7 million in 2009) and assess refinancing risks in a tightening credit market.
• Development Costs: Monitor the $537.1 million remaining in the development pipeline for potential cost overruns or delays in stabilization.
• Preferred Stock Obligations: Note the $174.5 million aggregate liquidation preference of Series F and Series G preferred stock, which must be paid before common dividends.
• Occupancy Trends: Track the 60 basis point decline in Same-Property financial occupancy (95.9%) to ensure it does not signal a broader market softening.