ESS

Business Context and Reporting Period

Company: Essex Property Trust, Inc. (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2007
Portfolio Overview: As of September 30, 2007, the Company owned interests in 138 apartment communities (28,364 units), five commercial investments, two recreational vehicle parks, and one manufactured housing community. Primary markets include Southern California, Northern California, and the Seattle Metro area.

Key Financial Metrics

Material Changes vs. Prior Comparable Period

• Revenue Growth: Total property revenues increased 15.1% ($13.1 million) for the quarter and 14.3% ($36.0 million) for the nine months compared to the prior year. This was driven by a 5.8% increase in Same-Property revenues (due to higher scheduled rents) and a 73.3% increase in Non-Same Property revenues (due to 12 new acquisitions).
• Occupancy: Average financial occupancy for stabilized "Same-Properties" decreased 70 basis points to 96.0% for the quarter and 80 basis points to 95.8% for the nine months compared to the prior year.
• Expenses: Total expenses increased 17.6% for the quarter and 12.8% for the nine months. Depreciation increased significantly (28.7% for the quarter) due to new acquisitions and commercial building depreciation. Interest expense rose 12.7% for the quarter due to increased funding of development and acquisitions.
• Discontinued Operations: The nine-month period included a significant gain of $13.7 million (net of minority interest) from the sale of the City Heights joint venture property, compared to gains from Vista Pointe and other dispositions in the prior year.

Guidance, Outlook, and Risks

• Capital Resources: The Company maintains a BBB/Stable credit rating. It holds $10.2 million in unrestricted cash and has access to $200 million in unsecured lines of credit (with $58 million utilized) and a $100 million Freddie Mac facility (fully utilized).
• Development Pipeline: As of September 30, 2007, the consolidated pipeline included 2,716 units with total estimated costs of $849.7 million ($182.4 million incurred, $667.3 million remaining).
• Equity Activity: In August 2007, the Board authorized a $200 million stock repurchase plan. During the quarter, 12,600 shares were repurchased for $1.4 million. In May 2007, the Company sold 1.5 million shares for $191.9 million to reduce line of credit balances.
• Risks: Key risks include interest rate fluctuations (mitigated by $450 million in forward-starting swaps), construction cost overruns, and potential delays in development projects. The Company faces litigation regarding mold, though management does not expect a material adverse effect.

Investor Verification Checklist

• Occupancy Trends: Verify the cause of the 70-80 basis point decline in financial occupancy across all regions (Southern CA, Northern CA, Seattle).
• Debt Maturity Wall: Review the schedule of mortgage note maturities, noting $141.9 million due in 2008 and $322.5 million due in 2009, and assess refinancing risks.
• Development Costs: Monitor the $667.3 million remaining estimated costs for the development pipeline against actual expenditures to ensure no budget overruns.
• Discontinued Operations: Confirm that the significant gains from discontinued operations (City Heights, Peregrine Point) are non-recurring and do not distort core operating performance.
• Interest Rate Exposure: Assess the effectiveness of the $450 million in interest rate swaps in hedging against rising rates for the variable rate debt portion ($366.9 million).