ESS

Business Context and Reporting Period

Company: Essex Property Trust, Inc. (REIT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2001
Portfolio Overview: As of June 30, 2001, the Company owned interests in 84 multifamily properties (18,914 units) and five commercial properties located in Northern California, Southern California, and the Pacific Northwest. The Company also held interests in six development communities (1,678 units) and six redevelopment communities (1,786 units).

Key Financial Metrics

Note: Total Debt includes $566,024 in mortgage notes payable and $95,158 in lines of credit outstanding as of June 30, 2001.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 20.4% ($8.6M) for the quarter and 23.4% ($19.2M) for the six months compared to the prior year periods. This growth was driven by acquisitions, development completions, and rental rate increases, partially offset by a decline in financial occupancy rates (95.6% in Q2 2001 vs. 97.1% in Q2 2000).
• Expense Increases: Total expenses rose 27.9% for the quarter and 31.3% for the six months. Interest expense increased significantly (49.0% for the quarter) due to higher debt levels from acquisitions. Utility costs also rose due to regional shortages.
• Net Income: Quarterly net income increased 12.2% to $11.5M. However, six-month net income decreased 2.0% to $22.6M, primarily due to a $4.0M gain on real estate sales recorded in the first half of 2000 that did not recur in 2001.
• FFO Performance: Funds From Operations increased 18.6% for the quarter and 21.8% for the six months, reflecting the core operational growth excluding non-cash depreciation and one-time gains.

Outlook, Risks, and Unusual Items

• New Investment Fund: On July 11, 2001, the Company's "Essex Apartment Value Fund" had its initial closing with $105 million in committed equity. The fund targets total capital commitments of $200M–$250M and will serve as the exclusive investment vehicle for new acquisitions until late 2003 or until 90% of capital is deployed.
• Acquisition Activity: The Company purchased Andover Park Apartments (240 units) and Moanalua Hillside Apartments (700 units) in Q2 2001. The Moanalua property is held for resale, though closing is not guaranteed.
• Development Commitments: The Company has remaining contractual construction commitments of approximately $89.3 million for six development communities.
• Liquidity: The Company maintains $150 million in unsecured lines of credit, with $95.2 million utilized as of June 30, 2001. Management believes cash flows are adequate to meet operating requirements and dividend obligations.
• Risks: Forward-looking statements highlight risks regarding the resale of Moanalua Hillside, potential delays in development projects, and the ability to access debt/equity markets for future funding.

Investor Verification Checklist

• Occupancy Trends: Verify the sustainability of rental rate increases given the decline in financial occupancy rates across all regions (Northern CA, Southern CA, Pacific NW).
• Debt Servicing: Review the impact of the 49% increase in quarterly interest expense on future cash flows, particularly with $120M of credit lines maturing in May 2002.
• Moanalua Resale: Confirm the status of the pending resale contract for the Moanalua Hillside Apartments, as the investment is currently carried as notes receivable/investments pending the sale.
• FFO vs. Net Income: Analyze the divergence between Net Income and FFO to understand the impact of depreciation and non-recurring gains on reported earnings.
• Development Pipeline: Assess the $89.3M remaining development commitment against current cash reserves and credit availability.