ESS

Business Context and Reporting Period

Company: Essex Property Trust, Inc. (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2007
Portfolio Overview: As of June 30, 2007, the Company owned interests in 136 apartment communities (27,808 units), five commercial investments, two RV parks, and one manufactured housing community. Primary markets include Southern California, Northern California, and the Seattle Metro area.

Key Financial Metrics

Debt & Liquidity: Mortgage notes payable totaled $1.20 billion. The Company held $12.6 million in unrestricted cash and $11.4 million in restricted cash. Outstanding lines of credit were $37.0 million. The Company maintains a BBB/Stable credit rating.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 14.1% year-over-year. Property revenues rose 13.8% to $188.9 million, driven by a 7.4% increase in same-property revenues (due to an 8.3% increase in scheduled rents) and a 54.2% increase in non-same-property revenues (due to acquisitions and redevelopment).
• Expense Increases: Total expenses increased 10.4% to $162.0 million. Depreciation and amortization rose 19.4% due to new acquisitions and commercial building depreciation. General and administrative costs increased 22.6% due to employee growth and Fund II development costs.
• Discontinued Operations: Net income from discontinued operations was $23.3 million for the six months ended June 30, 2007, compared to $19.2 million in the prior year. This included a $13.7 million gain on the sale of the City Heights joint venture and $0.9 million from Peregrine Point condominium sales.
• Equity Issuance: The Company sold 1.67 million shares of common stock for net proceeds of $213.7 million, significantly increasing stockholders' equity.

Guidance, Outlook, and Risks

Management Commentary:

• Occupancy: Financial occupancy for stabilized "Same-Properties" decreased 80 basis points to 95.8% for the six months ended June 30, 2007, compared to 96.6% in the prior year.
• Development Pipeline: The consolidated pipeline includes 2,720 units with total estimated costs of $851.6 million ($161.7 million incurred, $689.9 million remaining).
• Redevelopment: Fourteen major redevelopment communities (3,999 units) are underway with $92.0 million remaining to be expended.

Risks and Contingencies:

• Interest Rate Risk: The Company utilizes forward-starting interest rate swaps (notional amount $450 million) to hedge refinancing risks. A 50 basis point increase in rates would increase the fair value of these hedges by approximately $26.3 million.
• Development Risks: Projects face risks regarding construction cost overruns, entitlement delays, and occupancy/rent performance.
• Legal: The Company faces mold-related lawsuits common in the industry; however, management does not expect a material adverse effect on financial condition.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the sustainability of earnings by excluding the $23.3 million gain from discontinued operations (City Heights and Peregrine Point sales) to assess core operating performance.
• Occupancy Trends: Monitor the 80 basis point decline in financial occupancy to ensure it does not signal a broader market downturn in key regions (Southern/Northern California, Seattle).
• Debt Maturity Wall: Review the $1.2 billion mortgage portfolio maturity schedule, noting $14.2 million due in 2007 and $136.9 million in 2008, and the effectiveness of the $450 million swap hedge program.
• Development Capital Needs: Assess the $689.9 million remaining cost for the development pipeline against current cash flows and the $200 million unsecured line of credit availability.
• FFO vs. Net Income: Compare FFO ($81.9 million) to Net Income ($49.7 million) to understand the impact of depreciation and asset sales on reported earnings.