ESS

Business Context and Reporting Period

Company: Essex Property Trust, Inc. (REIT)
Reporting Period: Quarter ended March 31, 1999
Portfolio: 58 multifamily properties (12,267 units) and 5 commercial properties located in Northern California, Southern California, and the Pacific Northwest.
Operations: The Company operates through Essex Portfolio, L.P., in which it holds a 90.0% general partnership interest. Average financial occupancy for Same Store Properties was 96.1%.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 21.7% ($6.05 million). This was driven by a 20.5% increase in property revenues ($5.55 million) and a 64.8% increase in interest/other income ($508,000).
• Same Store Performance: Revenues from Same Store Properties increased 6.6% to $26.02 million, primarily due to rental rate increases and improved occupancy in Southern California (97.0%) and the Pacific Northwest (94.4%).
• Acquisitions and Dispositions: Approximately $3.93 million of the revenue increase is attributable to properties acquired or disposed of since January 1, 1998. The Company acquired five multifamily properties and disposed of one multifamily property and three retail centers.
• Expense Increases: Total expenses rose 22.1% to $22.2 million. Interest expense increased 29.9% ($1.14 million) due to net additions in mortgage debt. Property operating expenses (excluding depreciation) rose 15.2%.
• Development Activity: Cash used for real estate under development was $24.8 million in Q1 1999, compared to $2.1 million in Q1 1998, reflecting active construction on eight projects.

Guidance, Outlook, and Risks

• Development Outlook: The Company is developing eight multifamily projects (1,578 units) expected to be substantially completed in 1999. Remaining funding commitments are approximately $83.0 million.
• Liquidity Strategy: Management expects to meet short-term needs via working capital and lines of credit ($32 million outstanding). Long-term funding will rely on debt/equity issuances and property dispositions.
• Capital Expenditures: Non-revenue generating capital expenditures are expected to be approximately $315 per weighted average occupancy unit for the year ended December 31, 1999.
• Market Risk: The Company utilizes forward treasury contracts ($60 million notional) and a LIBOR swap ($12.3 million notional) to hedge interest rate exposure. As of March 31, 1999, the fair value of these contracts represented a potential payment obligation of approximately $3.4 million if settled.
• Year 2000 Compliance: Management believes Year 2000 issues are limited to IT systems and does not expect compliance costs to materially impact liquidity or operations. No compliance costs were incurred as of March 31, 1999.
• Risks: Risks include delays in development projects, potential inadequacy of future cash flows to meet REIT dividend requirements, and reliance on debt/equity markets for funding.

Investor Verification Checklist

• Debt Structure: Verify the split between fixed-rate ($293.9 million) and variable-rate debt ($90.8 million), noting the 7.2% cap on $29.2 million of tax-exempt bonds.
• Development Commitments: Confirm the $83 million remaining funding requirement for the eight development projects and the timeline for completion.
• Preferred Stock Conversions: Note the conversion of 87,500 shares of Convertible Preferred Stock to Common Stock in January 1999 and subsequent conversions post-quarter.
• Share Repurchases: Verify the April 1999 purchase of 257,000 shares of Common Stock by the Operating Partnership at a weighted average price of $27.14.
• FFO Calculation: Review the reconciliation of Net Income to Funds From Operations, specifically the adjustments for depreciation and minority interests.