ESS

Business Context and Reporting Period

Company: Essex Property Trust, Inc. (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2007
Portfolio Overview: As of March 31, 2007, the Company owned interests in 131 apartment communities (27,087 units), three office buildings, two recreational vehicle parks, and one manufactured housing community. Operations are concentrated in Southern California, Northern California, and the Seattle Metro area.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 12.2% year-over-year. Same-property revenues rose 7.5% primarily due to an 8.5% increase in scheduled rents, despite a slight decline in financial occupancy (95.6% vs. 96.4%). Non-same property revenues surged 40.5% due to new acquisitions and redevelopment.
• Profitability Surge: Net income available to common stockholders increased 259% to $35.3 million. This was driven largely by Income from Discontinued Operations, which jumped from $3.3 million to $23.0 million due to the sale of the City Heights joint venture property (gain of $13.7 million) and fees from the joint venture partner ($10.3 million).
• Operating Expenses: Total expenses increased 6.0% to $77.5 million. Depreciation and amortization rose 12.2% due to new property acquisitions and capitalization of prior year additions. General and administrative costs increased 24.4% due to staffing increases for Fund II projects and equity-based compensation.
• Debt and Liquidity: Mortgage notes payable increased to $1.09 billion. Lines of credit utilization rose to $158.4 million. Unrestricted cash and cash equivalents increased to $15.0 million.

Guidance, Outlook, and Risks

• Capital Markets Activity: On May 3, 2007 (post-period), the Company sold 1.5 million shares of common stock for net proceeds of $191.9 million to pay down debt and fund investments. The Company maintains a shelf registration for future equity and debt issuances.
• Development Pipeline: The consolidated development pipeline includes 2,726 units with total estimated costs of $842.3 million ($152.2 million incurred, $690.1 million remaining). Redevelopment commitments total $62.5 million remaining.
• Interest Rate Risk: The Company utilizes forward-starting interest rate swaps (notional amount $500 million) to hedge refinancing risks. A 50 basis point increase in rates would result in an estimated fair value change of approximately $16.5 million on derivatives.
• Risk Factors: Key risks include potential cost overruns in development/redevelopment, occupancy rates falling below projections, and exposure to interest rate fluctuations on variable-rate debt. The Company also notes ongoing litigation regarding mold claims, though these are not expected to be material.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the sustainability of earnings by excluding the $23.0 million gain from discontinued operations (City Heights sale) to assess core operating performance.
• Occupancy Trends: Monitor the 80 basis point decline in financial occupancy (95.6%) to ensure it does not signal a broader market softening in key regions (SoCal, NorCal, Seattle).
• Debt Maturity Profile: Review the $68.7 million in mortgage notes maturing in 2007 and the reliance on interest rate swaps to manage refinancing costs.
• Development Capital Needs: Assess the $690.1 million remaining cost for the development pipeline against current liquidity and access to capital markets.
• FFO vs. Net Income: Compare Funds from Operations ($45.4 million) against Net Income to evaluate the REIT's cash-generating capability independent of non-cash depreciation and one-time gains.