ESS

Business Context and Reporting Period

Company: Essex Property Trust, Inc. (Essex)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2001
Business Overview: Essex is a self-administered equity REIT focused on the ownership, acquisition, development, and management of multifamily apartment communities. As of December 31, 2001, the portfolio consisted of 92 multifamily properties (20,762 units) and two office buildings, primarily located in Northern California, Southern California, and the Pacific Northwest. The company operates through Essex Portfolio, L.P., in which it holds an approximate 89.0% general partnership interest.

Key Financial Metrics

Operational Metrics: Average financial occupancy for the portfolio was 95% in 2001, down from 97% in 2000. The gross operating margin was 71% in 2001 compared to 72% in 2000.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 15.0% to $205.6 million, driven by a 9.4% increase in property revenues and a 102.0% increase in interest and other income (primarily from joint ventures and notes receivable).
• Acquisitions: The company acquired ownership interests in eight multifamily properties (1,684 units) for approximately $171.4 million. Notable acquisitions included Marbrisas Apartments (via the Fund) and several properties in Southern California.
• Dispositions: Sold three retail centers in Portland, Oregon, for $14.5 million, recognizing a gain of $3.8 million.
• Development: Five development communities totaling 1,274 units were under construction with total projected costs of $221.2 million. One property, Tierra Vista (404 units), reached stabilized operations.
• Debt: Total indebtedness increased to $638.7 million. The company utilized $150 million in unsecured lines of credit, with $74.5 million outstanding at year-end.

Guidance, Outlook, and Risks

Outlook and Strategy: Management expects to meet short-term liquidity requirements through working capital, operating cash flows, and lines of credit. The company plans to continue acquiring and developing multifamily properties in its target markets. The Essex Apartment Value Fund, L.P. (the "Fund") is the exclusive investment vehicle for new investments until December 31, 2003, or until 90% of its $250 million capital commitment is invested.

Risks and Contingencies:

• Economic Conditions: The national and western state economies are in a recession, leading to reduced occupancy rates and flattening rental rates. Management notes this could reduce rental revenues and operating income.
• Interest Rate Risk: Approximately $133.3 million of debt is variable rate. While some is capped, rising rates could increase interest expense and impact refinancing costs.
• Refinancing Risk: Significant balloon payments are due in 2002 ($86.8 million). The company relies on refinancing these obligations, which may not be available on favorable terms.
• Environmental Liabilities: Groundwater contamination and mold-related lawsuits pose potential liabilities, though management does not currently expect material adverse effects.
• REIT Qualification: Failure to qualify as a REIT would subject the company to corporate income taxes and disqualify it for four subsequent years.

Investor Verification Checklist

• Refinancing Capability: Verify the company's ability to refinance the $86.8 million in debt maturing in 2002, particularly given the recessionary environment.
• Occupancy Trends: Monitor the decline in financial occupancy (95% in 2001 vs. 97% in 2000) and its impact on future rental revenue growth.
• Fund Performance: Assess the performance of the Essex Apartment Value Fund, which holds a significant portion of new acquisitions and carries $46.2 million in line of credit debt.
• Development Costs: Track the $113.4 million remaining commitment for development projects to ensure costs do not exceed estimates.
• Dividend Sustainability: Confirm that cash flows remain sufficient to support the $2.80 per share dividend payout, especially given the increase in interest expense.