ESS

Business Context and Reporting Period

Company: Essex Property Trust, Inc. (Essex), a Maryland REIT focused on multifamily residential properties in Southern California, Northern California, and the Pacific Northwest.

Reporting Period: Quarterly report (Form 10-Q) for the period ended September 30, 2002.

Portfolio Overview: As of September 30, 2002, Essex operated 90 multifamily properties (20,217 units) and two office buildings. The company manages the Essex Apartment Value Fund, L.P., a $250 million investment vehicle.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 4.8% ($2.4 million) for the quarter and 1.4% ($2.2 million) for the nine months compared to 2001. This was driven by rental rate decreases in Northern California and the Pacific Northwest, partially offset by increases in Southern California.
• Net Income Volatility: Quarterly net income dropped 28.8% to $10.6 million, primarily due to the absence of a $3.8 million gain on real estate sales recorded in Q3 2001. Conversely, nine-month net income increased 15.5% to $43.3 million, driven by an $8.1 million gain on the sale of the Moanalua Hillside Apartments in Hawaii.
• Expense Reduction: Total expenses decreased 4.8% for the quarter and 4.0% for the nine months. Interest expense declined significantly (13.9% for the quarter) due to lower interest rates and increased capitalization of interest costs for development projects.
• Occupancy Trends: Financial occupancy improved to 96.1% in Q3 2002 from 94.7% in Q3 2001, despite market rent declines in key regions.

Guidance, Outlook, and Risks

• Market Outlook: Management notes that the national and regional economies remain in a recession. Market rents in Northern California and the Pacific Northwest have decreased (estimated 6% and 7% declines respectively since late 2001), while Southern California rents remain relatively stable.
• Development Pipeline: The company has six development communities (1,521 units) with an estimated total cost of $292 million. Approximately $124.5 million remains to be expended, with $53.8 million committed by Essex. Stabilization is projected for late 2002 to mid-2003.
• Liquidity: The company maintains a $165 million unsecured line of credit ($122 million utilized) and a $125 million line for the Fund ($67.6 million utilized). Management believes current cash flows are adequate for operations and dividends but notes uncertainty regarding future access to debt and equity markets.
• Insurance Risks: Insurance costs have increased over 50% year-over-year with higher deductibles. The company notes it is not in technical compliance with some loan covenants regarding insurance but does not expect a material impact.
• Accounting Changes: The company adopted FAS 144, resulting in the classification of sold properties as "discontinued operations," which impacts the presentation of gains and losses but not the underlying results.

Investor Verification Checklist

• Regional Rent Sensitivity: Verify the extent of rental rate declines in Northern California and the Pacific Northwest and their impact on future cash flows.
• Development Costs: Monitor the $124.5 million remaining commitment for development projects against actual expenditures and potential cost overruns.
• Debt Maturity Profile: Review the maturity schedule of the $501 million fixed-rate debt and the variable-rate lines of credit to assess refinancing risks in a rising rate environment.
• Insurance Compliance: Confirm the status of discussions with lenders regarding insurance covenant non-compliance and potential remediation costs.
• Discontinued Operations: Understand the impact of the $8.1 million gain from the Hawaii property sale on the nine-month net income, as this is a non-recurring item.