ESS

Business Context and Reporting Period

Company: Essex Property Trust, Inc. (Essex), a Maryland REIT focused on multifamily residential properties.

Reporting Period: Quarterly period ended March 31, 2003 (Form 10-Q).

Portfolio Overview: As of March 31, 2003, Essex owned interests in 113 multifamily properties (23,969 units), five RV parks, four office buildings, and two manufactured housing communities. Operations are concentrated in Southern California, Northern California, and the Pacific Northwest.

Key Financial Metrics

Debt Structure: Total mortgage notes payable were $658.896 million. Lines of credit totaled $153 million ($123 million on a $165M line and $30 million on a $30M line). The Fund (Essex Apartment Value Fund) held an additional $71.26 million on a $125 million line of credit.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 19.4% ($9.58 million) driven primarily by $13.1 million in revenue from properties acquired after December 31, 2001. This offset a 48.2% decline in "Interest and other income" due to note payoffs and asset sales.
• Net Income Decline: Net income decreased 9.4% ($1.07 million) despite revenue growth. This was caused by a 33.1% increase in total expenses, largely due to a 22.9% rise in interest expense ($2.01 million increase) and higher property operating expenses from new acquisitions.
• Occupancy Trends: Financial occupancy for "Quarterly Same Store" properties improved to 95.2% from 92.8% in the prior year. However, rental rate decreases in Northern California and the Pacific Northwest offset occupancy gains in those regions.
• Development Activity: One development community (The Essex on Lake Merritt) reached stabilized operations. Real estate under development decreased from $143.8 million to $80.6 million as properties were transferred to rental inventory.

Guidance, Outlook, and Risks

• Development Outlook: The Company is developing five multifamily projects (1,248 units) with remaining commitments of approximately $102.3 million. The Fund has three development projects with $78.9 million remaining to be expended.
• Liquidity: Management expects current cash flows and lines of credit to meet operating requirements and dividend obligations. The Company has shelf registration capacity for up to $342 million in equity and $250 million in debt.
• Capital Expenditures: Non-revenue generating capital expenditures are expected to be approximately $375 per weighted average occupancy unit for 2003.
• Risks and Contingencies:
  • Economic Downturn: Management notes the national and western state economies are in a downturn, posing risks to rental rates and occupancy.
  • Interest Rates: Current rates are at historic lows; rapid increases could raise interest expense on variable debt and impact refinancing.
  • Accounting Changes: The Company is evaluating the impact of FASB Interpretation No. 46 (FIN 46) regarding Variable Interest Entities (VIEs), with an estimated maximum exposure to loss of $29.2 million.
  • Arbitration: A contingent payment dispute regarding the Waterford Place acquisition resulted in an arbitration award to issue 109,875 operating partnership units; the award is not yet finalized.

Investor Verification Checklist

• Debt Maturities: Verify the schedule of mortgage maturities, noting $5.2 million due within one year and $48.1 million due in years 2-3.
• Variable Rate Exposure: Confirm the impact of rising LIBOR on the $153 million line of credit and $60.4 million in tax-exempt variable rate bonds.
• Development Costs: Monitor the $102.3 million remaining commitment for development projects against actual cash burn rates.
• FIN 46 Impact: Track the final determination of Variable Interest Entities and potential consolidation requirements.
• Same-Store Performance: Watch for continued rental rate pressure in Northern California and the Pacific Northwest despite occupancy improvements.