ESS

Business Context and Reporting Period

Company: Essex Property Trust, Inc. (Essex)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Filing Date: March 14, 2006

Essex is a self-administered and self-managed Real Estate Investment Trust (REIT) focused on the ownership, operation, and development of multifamily residential properties. As of December 31, 2005, the Company owned or held interests in 126 apartment communities comprising 26,587 units, primarily located in Southern California, Northern California, and the Pacific Northwest. The portfolio also includes three office buildings, three recreational vehicle parks, and one manufactured housing community.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total property revenues increased 12.7% to $316.3 million, driven by a 4.1% increase in Same-Property revenues and a 42.8% increase in revenues from properties acquired or developed since 2004.
• Expense Increases: Total expenses rose 10% to $285.9 million. Interest expense increased 17% to $73.6 million due to higher LIBOR rates and the issuance of $225 million in exchangeable senior notes in late 2005.
• Discontinued Operations: Income from discontinued operations increased significantly to $28.3 million (from $1.4 million in 2004), primarily due to a $26.6 million gain on the sale of the Eastridge Apartments property.
• Equity Income: Equity income in co-investments decreased 54% to $19.0 million, reflecting the liquidation of Fund I assets and lower promote distributions compared to the prior year.
• Capital Structure: The Company issued $225 million in 3.625% Exchangeable Senior Notes due 2025. Proceeds were used to repurchase $25 million of common stock and pay down $135 million in lines of credit.

Guidance, Outlook, and Risks

Outlook and Guidance: Management expects positive rent growth in 2006 across all major regions: approximately 3.75% in Southern California, 4.0% in Northern California, and 3.5% in the Pacific Northwest. The Company anticipates new residential supply to remain low (0.8% to 1.5% of existing stock) in these markets. Non-revenue generating capital expenditures are expected to be approximately $770 per unit in 2006.

Management Commentary: The Company maintains a conservative leverage ratio (approximately 35% debt-to-total-market-capitalization). It continues to pursue acquisitions, development, and redevelopment in supply-constrained markets. Fund I is in the process of liquidation, while Fund II remains the primary investment vehicle through October 2006.

Risks and Contingencies:

• Debt Refinancing: Approximately $1.35 billion of indebtedness is subject to balloon payments. The Company does not expect to have sufficient cash flows from operations to make these payments and relies on refinancing or asset sales.
• Interest Rate Risk: The Company has $186.7 million in variable-rate debt. While $152.7 million is hedged via interest rate caps or swaps, rising rates could increase interest expense.
• Legal Proceedings: The Company recorded a $1.5 million provision for a class-action lawsuit regarding employee wages. Additionally, the Company faces potential liabilities related to mold claims and environmental conditions, though it maintains pollution liability insurance.
• Development Risks: The Company has $96.6 million in remaining commitments for development projects, which are subject to construction cost overruns and delays.

Investor Verification Checklist

• Debt Maturity Wall: Verify the Company's ability to refinance the $82.0 million due in 2007 and $155.7 million due in 2008, given the reliance on capital markets.
• FFO vs. Net Income: Review the reconciliation of Net Income to Funds From Operations (FFO) to understand the impact of depreciation and gains on sales of real estate on reported earnings.
• Discontinued Operations: Assess the sustainability of earnings given the significant one-time gain ($26.6 million) from the sale of Eastridge Apartments included in discontinued operations.
• Development Pipeline: Monitor the $96.6 million in remaining development commitments and the stabilization timeline for the three active projects (Northwest Gateway, Moorpark, Tuscana).
• Dividend Coverage: Confirm that FFO per share continues to cover the quarterly dividend of $0.81 (increasing to $0.84 in Q1 2006) to ensure REIT compliance and shareholder returns.