Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” ”accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o (Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 31,330,98032,588,240 shares of Common Stock as of November 8, 2010.May 5, 2011.
ESSEX PROPERTY TRUST, INC.
FORM 10-Q
| Page No. | ||
PART I. FINANCIAL INFORMATION | ||
| Item 1. | 3 | |
| 4 | ||
| 5 | ||
| 6 | ||
| 7 | ||
| 8 | ||
| Item 2. | ||
| Item 3. | 2 | |
| Item 4. | ||
PART II. OTHER INFORMATION | ||
| Item 1. | ||
| Item 1A. | ||
| Item 6 | ||
Part I -- Financial InformationInformation
"Essex" or the "Company" means Essex Property Trust, Inc., a real estate investment trust incorporated in the State of Maryland, or where the context otherwise requires, Essex Portfolio, L.P., a limited partnership (the "Operating Partnership") in which Essex Property Trust, Inc. is the sole general partner.
The information furnished in the accompanying unaudited condensed consolidated balance sheets, statements of operations, stockholders' equity, noncontrolling interest, and comprehensive income and cash flows of the Company reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the aforementioned condensed consolidated financial statements for the interim periods and are normal and recurring in nature, except as otherwise noted.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the notes to such unaudited condensed consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations herein. Additionally, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2009.2010.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except per share amounts)
| Assets | September 30, 2010 | December 31, 2009 | ||||||
| Real estate: | ||||||||
| Rental properties: | ||||||||
| Land and land improvements | $ | 747,125 | $ | 684,955 | ||||
| Buildings and improvements | 3,025,220 | 2,727,975 | ||||||
| 3,772,345 | 3,412,930 | |||||||
| Less accumulated depreciation | (842,484 | ) | (749,464 | ) | ||||
| 2,929,861 | 2,663,466 | |||||||
| Real estate under development | 239,910 | 274,965 | ||||||
| Co-investments | 108,894 | 70,783 | ||||||
| 3,278,665 | 3,009,214 | |||||||
| Cash and cash equivalents-unrestricted | 14,668 | 20,660 | ||||||
| Cash and cash equivalents-restricted | 21,654 | 17,274 | ||||||
| Marketable securities | 95,933 | 134,844 | ||||||
| Notes and other receivables | 55,605 | 36,305 | ||||||
| Prepaid expenses and other assets | 22,842 | 21,349 | ||||||
| Deferred charges, net | 14,386 | 14,991 | ||||||
| Total assets | $ | 3,503,753 | $ | 3,254,637 | ||||
| Liabilities and Equity | ||||||||
| Mortgage notes payable | $ | 1,711,242 | $ | 1,603,549 | ||||
| Lines of credit | 348,000 | 239,000 | ||||||
| Exchangeable bonds | 3,209 | 4,893 | ||||||
| Accounts payable and accrued liabilities | 57,274 | 38,514 | ||||||
| Construction payable | 9,613 | 10,327 | ||||||
| Dividends payable | 35,148 | 33,750 | ||||||
| Cash flow hedge liabilities | 71,671 | 30,156 | ||||||
| Other liabilities | 18,272 | 16,558 | ||||||
| Total liabilities | 2,254,429 | 1,976,747 | ||||||
| Commitments and contingencies | ||||||||
| Cumulative convertible preferred stock; $.0001 par value: | ||||||||
| 4.875% Series G - 5,980,000 issued and 178,249 outstanding | 4,349 | 4,349 | ||||||
| Stockholders' equity and noncontrolling interest: | ||||||||
| Common stock, $.0001 par value, 649,702,178 shares authorized 30,085,469 and 28,849,779 shares issued and outstanding | 3 | 3 | ||||||
| Cumulative redeemable preferred stock; $.0001 par value: | ||||||||
| 7.8125% Series F - 1,000,000 shares authorized,issued and outstanding, liquidation value | 25,000 | 25,000 | ||||||
| Additional paid-in capital | 1,379,059 | 1,275,251 | ||||||
| Distributions in excess of accumulated earnings | (285,699 | ) | (222,952 | ) | ||||
| Accumulated other comprehensive (loss) income | (79,732 | ) | (24,206 | ) | ||||
| Total stockholders' equity | 1,038,631 | 1,053,096 | ||||||
| Noncontrolling interest | 206,344 | 220,445 | ||||||
| Total stockholders' equity and noncontrolling interest | 1,244,975 | 1,273,541 | ||||||
| Total liabilities and equity | $ | 3,503,753 | $ | 3,254,637 | ||||
| March 31, | December 31, | |||||||
| Assets | 2011 | 2010 | ||||||
| Real estate: | ||||||||
| Rental properties: | ||||||||
| Land and land improvements | $ | 819,507 | $ | 802,325 | ||||
| Buildings and improvements | 3,340,600 | 3,265,014 | ||||||
| 4,160,107 | 4,067,339 | |||||||
| Less accumulated depreciation | (914,707 | ) | (878,331 | ) | ||||
| 3,245,400 | 3,189,008 | |||||||
| Real estate under development | 204,927 | 217,531 | ||||||
| Co-investments | 133,161 | 107,840 | ||||||
| 3,583,488 | 3,514,379 | |||||||
| Cash and cash equivalents-unrestricted | 97,683 | 13,753 | ||||||
| Cash and cash equivalents-restricted | 23,103 | 21,941 | ||||||
| Marketable securities | 74,779 | 92,310 | ||||||
| Notes and other receivables | 49,075 | 49,444 | ||||||
| Prepaid expenses and other assets | 22,921 | 25,188 | ||||||
| Deferred charges, net | 15,637 | 15,872 | ||||||
| Total assets | $ | 3,866,686 | $ | 3,732,887 | ||||
| Liabilities and Equity | ||||||||
| Mortgage notes payable | $ | 1,811,220 | $ | 1,832,745 | ||||
| Lines of credit | 409,000 | 426,000 | ||||||
| Unsecured bonds | 150,000 | - | ||||||
| Accounts payable and accrued liabilities | 54,221 | 44,750 | ||||||
| Construction payable | 10,452 | 9,023 | ||||||
| Dividends payable | 36,934 | 36,405 | ||||||
| Derivative liabilities | 3,351 | 5,633 | ||||||
| Other liabilities | 19,718 | 18,968 | ||||||
| Total liabilities | 2,494,896 | 2,373,524 | ||||||
| Commitments and contingencies | ||||||||
Cumulative convertible preferred stock; $.0001 par value: 4.875% Series G - 5,980,000 issued and 178,249 outstanding | 4,349 | 4,349 | ||||||
Stockholders' equity and noncontrolling interest: Common stock, $.0001 par value, 649,702,178 shares authorized 31,679,993 and 31,324,808 shares issued and outstanding | 3 | 3 | ||||||
Cumulative redeemable preferred stock; $.0001 par value: 7.8125% Series F - 1,000,000 shares authorized, issued and outstanding, liquidation value | 25,000 | 25,000 | ||||||
| Additional paid-in capital | 1,555,416 | 1,515,468 | ||||||
| Distributions in excess of accumulated earnings | (338,273 | ) | (313,308 | ) | ||||
| Accumulated other comprehensive (loss) income | (77,785 | ) | (77,217 | ) | ||||
| Total stockholders' equity | 1,164,361 | 1,149,946 | ||||||
| Noncontrolling interest | 203,080 | 205,068 | ||||||
| Total stockholders' equity and noncontrolling interest | 1,367,441 | 1,355,014 | ||||||
| Total liabilities and equity | $ | 3,866,686 | $ | 3,732,887 | ||||
See accompanying notes to the unaudited condensed consolidated financial statements.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARES
Condensed Consolidated Statements of OperationsOperations
(Unaudited)
(Dollars in thousands, except per share amounts)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Revenues: | ||||||||||||||||
| Rental and other property | $ | 103,822 | $ | 100,670 | $ | 303,142 | $ | 307,060 | ||||||||
| Management and other fees from affiliates | 959 | 1,024 | 3,458 | 3,377 | ||||||||||||
| 104,781 | 101,694 | 306,600 | 310,437 | |||||||||||||
| Expenses: | ||||||||||||||||
| Property operating, excluding real estate taxes | 27,747 | 26,893 | 77,692 | 75,818 | ||||||||||||
| Real estate taxes | 10,140 | 9,216 | 29,416 | 27,248 | ||||||||||||
| Depreciation and amortization | 31,638 | 29,843 | 93,385 | 87,711 | ||||||||||||
| General and administrative | 6,175 | 6,086 | 17,988 | 18,135 | ||||||||||||
| Impairment and other charges | 1,615 | 11,104 | 1,615 | 16,892 | ||||||||||||
| 77,315 | 83,142 | 220,096 | 225,804 | |||||||||||||
| Earnings from operations | 27,466 | 18,552 | 86,504 | 84,633 | ||||||||||||
| Interest expense | (22,202 | ) | (21,966 | ) | (64,043 | ) | (63,679 | ) | ||||||||
| Interest and other income | 5,788 | 3,471 | 20,730 | 9,521 | ||||||||||||
| Equity (loss) income in co-investments | (626 | ) | (32 | ) | (1,027 | ) | 664 | |||||||||
| (Loss) gain on early retirement of debt | - | - | (10 | ) | 6,124 | |||||||||||
| Gain on sale of real estate | - | - | - | 103 | ||||||||||||
| Income before discontinued operations | 10,426 | 25 | 42,154 | 37,366 | ||||||||||||
| Income from discontinued operations | - | 2,324 | - | 5,772 | ||||||||||||
| Net income | 10,426 | 2,349 | 42,154 | 43,138 | ||||||||||||
| Net income attributable to noncontrolling interest | (3,506 | ) | (3,588 | ) | (11,540 | ) | (12,984 | ) | ||||||||
| Net income attributable to controlling interest | 6,920 | (1,239 | ) | 30,614 | 30,154 | |||||||||||
| Dividends to preferred stockholders | (543 | ) | (902 | ) | (1,628 | ) | (4,311 | ) | ||||||||
| Excess of the carrying amount of preferred stock redeemed over the cash paid to redeem preferred stock | - | 23,880 | - | 49,575 | ||||||||||||
| Net income available to common stockholders | $ | 6,377 | $ | 21,739 | $ | 28,986 | $ | 75,418 | ||||||||
| Per common share data: | ||||||||||||||||
| Basic: | ||||||||||||||||
| Income before discontinued operations available to common stockholders | $ | 0.21 | $ | 0.71 | $ | 0.99 | $ | 2.61 | ||||||||
| Income from discontinued operations | - | 0.08 | - | 0.19 | ||||||||||||
| Net income available to common stockholders | $ | 0.21 | $ | 0.79 | $ | 0.99 | $ | 2.80 | ||||||||
| Weighted average number of common shares outstanding during the period | 29,690,910 | 27,591,341 | 29,334,359 | 26,887,537 | ||||||||||||
| Diluted: | ||||||||||||||||
| Income before discontinued operations available to common stockholders | $ | 0.21 | $ | 0.66 | $ | 0.99 | $ | 2.50 | ||||||||
| Income from discontinued operations | - | 0.08 | - | 0.19 | ||||||||||||
| Net income available to common stockholders | $ | 0.21 | $ | 0.74 | $ | 0.99 | $ | 2.69 | ||||||||
| Weighted average number of common shares outstanding during the period | 29,762,420 | 30,070,076 | 29,398,637 | 29,360,710 | ||||||||||||
| Dividend per common share | $ | 1.033 | $ | 1.030 | $ | 3.098 | $ | 3.090 | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| Revenues: | ||||||||
| Rental and other property | $ | 112,549 | $ | 99,706 | ||||
| Management and other fees from affiliates | 1,224 | 1,478 | ||||||
| 113,773 | 101,184 | |||||||
| Expenses: | ||||||||
| Property operating, excluding real estate taxes | 28,360 | 24,671 | ||||||
| Real estate taxes | 10,712 | 9,528 | ||||||
| Depreciation and amortization | 37,031 | 30,487 | ||||||
| General and administrative | 6,115 | 5,618 | ||||||
| 82,218 | 70,304 | |||||||
| Earnings from operations | 31,555 | 30,880 | ||||||
| Interest expense | (24,662 | ) | (20,836 | ) | ||||
| Interest and other income | 6,987 | 7,855 | ||||||
| Equity (loss) income in co-investments | (1,373 | ) | (41 | ) | ||||
| Net income | 12,507 | 17,858 | ||||||
| Net income attributable to noncontrolling interest | (3,546 | ) | (4,189 | ) | ||||
| Net income attributable to controlling interest | 8,961 | 13,669 | ||||||
| Dividends to preferred stockholders | (543 | ) | (542 | ) | ||||
| Net income available to common stockholders | $ | 8,418 | $ | 13,127 | ||||
| Per common share data: | ||||||||
| Basic: | ||||||||
| Net income available to common stockholders | $ | 0.27 | $ | 0.45 | ||||
Weighted average number of common shares outstanding during the period | 31,465,817 | 28,967,855 | ||||||
| Diluted: | ||||||||
| Net income available to common stockholders | $ | 0.27 | $ | 0.45 | ||||
Weighted average number of common shares outstanding during the period | 31,546,593 | 29,018,571 | ||||||
| Dividend per common share | $ | 1.040 | $ | 1.033 | ||||
See accompanying notes to the unaudited condensed consolidated financial statements.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity, Noncontrolling Interest, and
Comprehensive Income for the ninethree months ended September 30, 2010March 31, 2011
(Unaudited)
(Dollars and shares in thousands)
| Distributions | Accumulated | |||||||||||||||||||||||||||||||||||
| Series F | Additional | in excess of | other | |||||||||||||||||||||||||||||||||
| Preferred stock | Common stock | paid-in | accumulated | comprehensive | Noncontrolling | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | earnings | income (loss) | Interest | Total | ||||||||||||||||||||||||||||
| Balances at December 31, 2010 | 1,000 | $ | 25,000 | 31,325 | $ | 3 | $ | 1,515,468 | $ | (313,308 | ) | $ | (77,217 | ) | $ | 205,068 | $ | 1,355,014 | ||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | 8,961 | - | 3,546 | 12,507 | |||||||||||||||||||||||||||
| Reversal of unrealized gains upon the sale of marketable securites | - | - | - | - | - | - | (4,109 | ) | (293 | ) | (4,402 | ) | ||||||||||||||||||||||||
| Change in fair value of cash flow hedges and amortization of swap settlements | - | - | - | - | - | - | 2,461 | 175 | 2,636 | |||||||||||||||||||||||||||
| Change in fair value of marketable securities | - | - | - | - | - | - | 1,080 | 77 | 1,157 | |||||||||||||||||||||||||||
| Comprehensive income (loss) | 11,898 | |||||||||||||||||||||||||||||||||||
| Issuance of common stock under: | ||||||||||||||||||||||||||||||||||||
| Stock option and restricted stock plans | - | - | 28 | - | 1,619 | - | - | - | 1,619 | |||||||||||||||||||||||||||
| Sale of common stock | - | - | 327 | - | 38,436 | - | - | - | 38,436 | |||||||||||||||||||||||||||
| Equity based compensation costs | - | - | - | - | (107 | ) | - | - | 276 | 169 | ||||||||||||||||||||||||||
| Distributions to noncontrolling interest | - | - | - | - | - | - | - | (5,028 | ) | (5,028 | ) | |||||||||||||||||||||||||
| Dividends declared | - | - | - | - | - | (33,926 | ) | - | - | (33,926 | ) | |||||||||||||||||||||||||
| Redemptions of noncontrolling interest | - | - | - | - | - | - | - | (741 | ) | (741 | ) | |||||||||||||||||||||||||
| Balances at March 31, 2011 | 1,000 | $ | 25,000 | 31,680 | $ | 3 | $ | 1,555,416 | $ | (338,273 | ) | $ | (77,785 | ) | $ | 203,080 | $ | 1,367,441 | ||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
| Series F Preferred stock | Common stock | Additional paid-in | Distributions in excess of accumulated | Accumulated other comprehensive income | Noncontrolling | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | earnings | (loss) | Interest | Total | ||||||||||||||||||||||||||||
| Balances at December 31, 2009 | 1,000 | $ | 25,000 | 28,849 | $ | 3 | $ | 1,275,251 | $ | (222,952 | ) | $ | (24,206 | ) | $ | 220,445 | $ | 1,273,541 | ||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | 30,614 | - | 11,540 | 42,154 | |||||||||||||||||||||||||||
| Reversal of unrealized gains upon the sale of marketable securites | - | - | - | - | - | - | (7,981 | ) | (654 | ) | (8,635 | ) | ||||||||||||||||||||||||
| Change in fair value of cash flow hedges and amortization of swap settlements | - | - | - | - | - | - | (52,551 | ) | (4,161 | ) | (56,712 | ) | ||||||||||||||||||||||||
| Change in fair value of marketable securities | - | - | - | - | - | - | 5,006 | 421 | 5,427 | |||||||||||||||||||||||||||
| Comprehensive income (loss) | (17,766 | ) | ||||||||||||||||||||||||||||||||||
| Issuance of common stock under: | ||||||||||||||||||||||||||||||||||||
| Stock option and restricted stock plans | - | - | 98 | - | 3,828 | - | - | - | 3,828 | |||||||||||||||||||||||||||
| Sale of common stock | - | - | 1,138 | - | 116,641 | - | - | - | 116,641 | |||||||||||||||||||||||||||
| Equity based compensation costs | - | - | - | - | (219 | ) | - | - | 1,861 | 1,642 | ||||||||||||||||||||||||||
| Retirement of exchangeable bonds | - | - | - | - | (95 | ) | - | - | - | (95 | ) | |||||||||||||||||||||||||
| Contributions from noncontrolling interest | - | - | - | - | - | - | - | 3,990 | 3,990 | |||||||||||||||||||||||||||
| Distributions to noncontrolling interest | - | - | - | - | - | - | - | (19,700 | ) | (19,700 | ) | |||||||||||||||||||||||||
| Dividends declared | - | - | - | - | - | (93,361 | ) | - | - | (93,361 | ) | |||||||||||||||||||||||||
| Redemptions of noncontrolling interest | - | - | - | - | (16,347 | ) | - | - | (7,398 | ) | (23,745 | ) | ||||||||||||||||||||||||
| Balances at September 30, 2010 | 1,000 | $ | 25,000 | 30,085 | $ | 3 | $ | 1,379,059 | $ | (285,699 | ) | $ | (79,732 | ) | $ | 206,344 | $ | 1,244,975 | ||||||||||||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| Net cash provided by operating activities | $ | 57,307 | $ | 52,975 | ||||
| Cash flows used in investing activities: | ||||||||
| Additions to real estate: | ||||||||
| Acquisitions | (31,400 | ) | - | |||||
| Improvements to recent acquisitions | (8,881 | ) | (348 | ) | ||||
| Redevelopment expenditures | (6,347 | ) | (2,636 | ) | ||||
| Revenue generating capital expenditures | - | (37 | ) | |||||
| Non-revenue generating capital expenditures | (2,933 | ) | (3,867 | ) | ||||
| Additions to real estate under development | (29,171 | ) | (27,466 | ) | ||||
| Changes in restricted cash and refundable deposits | 1,136 | (760 | ) | |||||
| Purchases of marketable securities | (6,805 | ) | (18,256 | ) | ||||
| Sales and maturities of marketable securities | 26,798 | 42,241 | ||||||
| Purchases of and advances under notes and other receivables | - | (17 | ) | |||||
| Collections of notes and other receivables | 184 | 149 | ||||||
| Contributions to co-investments | (26,767 | ) | (66,498 | ) | ||||
| Net cash used in investing activities | (84,186 | ) | (77,495 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Borrowings under mortgage notes payable, lines of credit and bonds | 304,187 | 162,592 | ||||||
| Repayment under mortgage notes payable, lines of credit and bonds | (191,542 | ) | (122,417 | ) | ||||
| Additions to deferred charges | (474 | ) | (395 | ) | ||||
| Settlement of forward-starting swaps | (2,395 | ) | - | |||||
| Net proceeds from stock options exercised | 1,361 | 1,094 | ||||||
| Net proceeds from issuance of common stock | 38,436 | 17,309 | ||||||
| Contributions from noncontrolling interest | - | 3,990 | ||||||
| Distributions to noncontrolling interest | (5,028 | ) | (5,339 | ) | ||||
| Redemptions of noncontrolling interest | (741 | ) | (637 | ) | ||||
| Common and preferred stock dividends paid | (32,995 | ) | (30,025 | ) | ||||
| Net cash provided by financing activities | 110,809 | 26,172 | ||||||
| Net increase in cash and cash equivalents | 83,930 | 1,652 | ||||||
| Cash and cash equivalents at beginning of period | 13,753 | 20,660 | ||||||
| Cash and cash equivalents at end of period | $ | 97,683 | $ | 22,312 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest, net of $7.3 million and $8.4 million capitalized in 2010 and 2009, respectively | $ | 24,161 | $ | 19,761 | ||||
| Supplemental disclosure of noncash investing and financing activities: | ||||||||
| Change in accrual of dividends | $ | 530 | $ | 595 | ||||
| Change in value of derivative liabilities | $ | 61 | $ | 8,462 | ||||
| Change in unrealized gain of marketable securities | $ | 1,157 | $ | 2,631 | ||||
| Change in construction payable | $ | 1,429 | $ | 2,053 | ||||
| Transfer of real estate under development to rental properties | $ | 41,730 | $ | - | ||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2010 | 2009 | |||||||
| Net cash provided by operating activities | $ | 148,284 | $ | 147,662 | ||||
| Cash flows used in investing activities: | ||||||||
| Additions to real estate: | ||||||||
| Acquisitions | (96,596 | ) | - | |||||
| Improvements to recent acquisitions | (2,266 | ) | (2,560 | ) | ||||
| Redevelopment expenditures | (8,966 | ) | (20,345 | ) | ||||
| Revenue generating capital expenditures | (788 | ) | (190 | ) | ||||
| Non-revenue generating capital expenditures | (19,169 | ) | (14,989 | ) | ||||
| Additions to real estate under development | (110,972 | ) | (68,763 | ) | ||||
| Dispositions of real estate | - | 31,998 | ||||||
| Changes in restricted cash and refundable deposits | (3,046 | ) | 17,702 | |||||
| Purchases of marketable securities | (18,294 | ) | (106,444 | ) | ||||
| Sales and maturities of marketable securities | 65,889 | 15,200 | ||||||
| Proceeds from tax credit investor | - | 3,762 | ||||||
| Purchases of and advances under notes and other receivables | (21,026 | ) | (1,566 | ) | ||||
| Collections of notes and other receivables | 1,832 | 2,960 | ||||||
| Contributions from co-investments | (78,513 | ) | (270 | ) | ||||
| Distributions to co-investments | 40,397 | - | ||||||
| Net cash used in investing activities | (251,518 | ) | (143,505 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Borrowings under mortgage and other notes payable and lines of credit | 616,385 | 304,563 | ||||||
| Repayment of mortgage and other notes payable and lines of credit | (487,152 | ) | (134,943 | ) | ||||
| Additions to deferred charges | (1,832 | ) | (1,982 | ) | ||||
| Retirement of exchangeable bonds | (1,842 | ) | (66,460 | ) | ||||
| Settlement of forward-starting swaps | (16,667 | ) | - | |||||
| Retirement of common stock | - | (20,271 | ) | |||||
| Retirement of preferred stock, Series G | - | (90,614 | ) | |||||
| Net proceeds from stock options exercised | 3,108 | 704 | ||||||
| Net proceeds from issuance of common stock | 116,641 | 159,987 | ||||||
| Contributions from noncontrolling interest | 3,990 | - | ||||||
| Distributions to noncontrolling interest | (19,694 | ) | (16,782 | ) | ||||
| Redemptions of noncontrolling interest | (23,745 | ) | (11,061 | ) | ||||
| Common and preferred stock dividends paid | (91,950 | ) | (87,265 | ) | ||||
| Net cash provided by financing activities | 97,242 | 35,876 | ||||||
| Net (decrease) increase in cash and cash equivalents | (5,992 | ) | 40,033 | |||||
| Cash and cash equivalents at beginning of period | 20,660 | 41,909 | ||||||
| Cash and cash equivalents at end of period | $ | 14,668 | $ | 81,942 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest, net of $7.3 million and $8.4 million capitalized in 2010 and 2009, respectively | $ | 61,595 | $ | 59,350 | ||||
| Supplemental disclosure of noncash investing and financing activities: | ||||||||
| Change in accrual of dividends | $ | 1,397 | $ | 1,626 | ||||
| Change in value of cash flow hedge liabilities | $ | 24,945 | $ | 27,164 | ||||
| Change in unrealized gain of marketable securities | $ | 3,208 | $ | 12,900 | ||||
| Mortgage notes assumed in connection with purchase of real estate including the loan premiums recorded | $ | 87,540 | $ | - | ||||
| Change in construction payable | $ | 714 | $ | 9,167 | ||||
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
(Unaudited)
(1) Organization and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements present the accounts of Essex Property Trust, Inc. (the "Company"), which include the accounts of the Company and Essex Portfolio, L.P. (the "Operating Partnership," which holds the operating assets of the Company) and are prepared in accordance with U.S. generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q. In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included and are normal and recurring in nature, except as otherwise noted. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2009.2010.
All significant intercompany balances and transactions have been eliminated in the condensed consolidated financial statements.
The unaudited condensed consolidated financial statements for the three and nine months ended September 30,March 31, 2011 and 2010 and 2009 include the accounts of the Company and Essex Portfolio, L.P. (the "Operating Partnership", which holds the operating assets of the Company). The Company is the sole general partner in the Operating Partnership, with a 93.2%93.4% general partnership interest as of September 30, 2010.March 31, 2011. Total Operating Partnership units outstanding were 2,200,9072,234,510 and 2,398,4792,200,907 as of September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $240.9$277.1 million and $200.6$251.4 million, as of September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively.
As of September 30, 2010,March 31, 2011, the Company owned or had ownership interests in 139149 apartment communities, (aggregating 28,702 units)aggregating 30,343 units, excluding the Company’s ownership in preferred interest co-investments, (collectively, the “Communities”, and individually, a “Community”), five office and commercial buildings and four active development projects (collectively, the “Portfolio”). The Communities are located in Southern California (Los Angeles, Orange, Riverside, Santa Barbara, San Diego, and Ventura counties), Northern California (the San Francisco Bay Area) and the Seattle metropolitan area.
Fund Activities
Essex Apartment Value Fund II, L.P. (“Fund II”) is an investment fund formed by the Company to add value through rental growth and asset appreciation, utilizing the Company’s development, redevelopment and asset management capabilities. Fund II has eight institutional investors, and the Company, with combined partner equity contributions of $265.9 million. The Company contributed $75.0 million to Fund II, which represents a 28.2% interest as general partner and limited partner. Fund II utilized leverage equal to approximately 55% upon the initial acquisition of the underlying real estate. Fund II invested in apartment communities in the Company’s targeted West Coast markets and, as of September 30, 2010,March 31, 2011, owned 14 apartment communities. The Company records reven uerevenue for its asset management, property management, development and redevelopment services when earned, and promote income when realized if Fund II exceeds certain financial return benchmarks.
Marketable Securities
The Company reports its available for sale securities at fair value, based on quoted market prices (Level 2 for the unsecured bonds and Level 1 for the common stock and investment funds, as defined by the Financial Accounting Standards Board (��FASB”) standard entitled “Fair Value Measurements and Disclosures”), and any unrealized gain or loss is recorded as other comprehensive income (loss). There were no impairment charges for the three months ended March 31, 2011 and 2010, respectively. Realized gains and losses and interest income are included in interest and other income on the condensed consolidated statement of operations. Amortization of unearned discounts is included in interest income.
As of September 30, 2010,March 31, 2011, marketable securities consisted primarily of investment-grade unsecured bonds, acommon stock and investments in mortgage backed securitysecurities and investment funds that invest in U.S. treasury or agency securities. As of September 30, 2010,March 31, 2011, the Company classified its investmentinvestments in the mortgage backed security,securities, which maturesmature in November 2019 and September 2020, as held to maturity, and accordingly, this security isthese securities are stated at itstheir amortized cost of $18.2$43.2 million. The estimated fair valevalues of the mortgage backed security (a levelsecurities (Level 2 security) issecurities) are approximately equal to the carrying value. values.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2011 and 2010
(Unaudited)
As of September 30, 2010March 31, 2011 the Company classified the following marketable securities as available for sale (dollars in thousands):
| September 30, 2010 | ||||||||||||
| Amortized Cost | Gross Unrealized Gain/(Loss) | Fair Value | ||||||||||
| Investment-grade unsecured bonds | $ | 53,671 | $ | 7,831 | $ | 61,502 | ||||||
| Investment funds - US treasuries | 15,683 | 511 | 16,194 | |||||||||
| Total | $ | 69,354 | $ | 8,342 | $ | 77,696 | ||||||
| December 31, 2009 | ||||||||||||
| Amortized Cost | Gross Unrealized Gain/(Loss) | Fair Value | ||||||||||
| Investment-grade unsecured bonds | $ | 110,338 | $ | 12,718 | $ | 123,056 | ||||||
| Investment funds - US treasuries | 12,040 | (252 | ) | 11,788 | ||||||||
| Total | $ | 122,378 | $ | 12,466 | $ | 134,844 | ||||||
| March 31, 2011 | ||||||||||||
| Gross | ||||||||||||
| Amortized | Unrealized | |||||||||||
| Cost | Gain/(Loss) | Fair Value | ||||||||||
| Investment-grade unsecured bonds | $ | 3,605 | $ | 358 | $ | 3,963 | ||||||
| Investment funds - US treasuries | 11,816 | 103 | 11,919 | |||||||||
| Common stock | 14,513 | 1,233 | 15,746 | |||||||||
| Total | $ | 29,934 | $ | 1,694 | $ | 31,628 | ||||||
| December 31, 2010 | ||||||||||||
| Gross | ||||||||||||
| Amortized | Unrealized | |||||||||||
| Cost | Gain/(Loss) | Fair Value | ||||||||||
| Investment-grade unsecured bonds | $ | 22,243 | $ | 4,403 | $ | 26,646 | ||||||
| Investment funds - US treasuries | 14,345 | 582 | 14,927 | |||||||||
| Common stock | 8,638 | 112 | 8,750 | |||||||||
| Total | $ | 45,226 | $ | 5,097 | $ | 50,323 | ||||||
The Company uses the specific identification method to determine the cost basis of a security sold and to reclassify amounts from accumulated other comprehensive income for securities sold. For the ninethree months ended September 30,March 31, 2011 and 2010, and 2009, the proceeds from sales of available for sale securities totaled $64.7$26.8 million and $12.7$42.2 million, respectively. These sales all resulted in gains, which totaled $9.0$4.5 million and $1.0$5.0 million for the ninethree months ended September 30,March 31, 2011 and 2010, and 2009, respectively.
Contractual maturities of the marketable debt securities classified as available for sale as of September 30, 2010March 31, 2011 were as follows:
| Amount | ||||
| Due in 1-5 years | $ | 47,198 | ||
| Due in 5-10 years | 30,498 | |||
| Total | $ | 77,696 | ||
| Amount | ||||
| Due in 1-5 years | $ | 11,919 | ||
| Due in 5-10 years | 3,963 | |||
| Total | $ | 15,882 | ||
Variable Interest Entities
The Company consolidates 19 DownREIT limited partnerships (comprising twelve communities), an office building that is subject to loans made by the Company (the Company obtained the deed to the property in satisfaction of the outstanding loans during the third quarter 2010), and 55 low income housing units since the Company is the primary beneficiary of these variable interest entities (“VIEs”). Total DownREIT units outstanding were 1,100,8991,091,116 and 1,129,2051,096,871 as of September 30, 2010March 31, 2011 and December 31, 20092010 respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $120.5$135.3 million and $94.5$125.3 million, as of September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively. The consolidated total assets and liabilities related to these VIEs, net of intercompany eliminations, were approximately $215.9$217.0 million and $165.9$169.0 million, respectively, as of September 30, 2010March 31, 2011 and $237.9$217.3 million and $164.4$168.0 million, respectively, as of December 31, 2009.2010. Interest holders in VIEs consolidated by the Company are allocated net income equal to the cash payments made to those interest holders or distributions from cash flow. The remaining results of operations are generally allocated to the Company. As of September 30, 2010March 31, 2011 and December 31, 2009,2010, the Company did not have any VIE’s offor which it was not deemed to be the primary beneficiary.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
(Unaudited)
Stock-Based Compensation
The Company accounts for share based compensation using the fair value method of accounting. The estimated fair value of stock options granted by the Company is being amortized over the vesting period of the stock options. The estimated grant date fair values of the long term incentive plan units (discussed in Note 13, “Stock Based Compensation Plans,” in the Company’s Form 10-K for the year ended December 31, 2009)2010) are being amortized over the expected service periods.
Stock-based compensation expense for options and restricted stock totaled $0.3 million and $0.2 million for the three months ended September 30,March 31, 2011 and 2010, and 2009, respectively, and $0.7 million for the nine months ended September 30, 2010 and 2009, respectively. The intrinsic value of the stock options exercised during the three months ended September 30,March 31, 2011 and 2010 and 2009 totaled $0.4 million and $0.1 million, and $1.9 million and $0.5 million for the nine months ended September 30, 2010 and 2009, respectively.$1.0 million. As of September 30, 2010,March 31, 2011, the intrinsic value of the stock options outstanding and fully vested totaled $7.7$9.0 million. As of September 30, 2010,March 31, 2011, total unrecognized compensation cost related to unvested share-based compensation granted under the stock option and restricted stock plans totaled $3.4$3.6 million.& #160; The cost is expected to be recognized over a weighted-average period of 1 to 36 years for the stock option plans and is expected to be recognized straight-line over 7 years for the restricted stock awards.
The Company has adopted an incentive program involving the issuance of Series Z and Series Z-1 Incentive Units (collectively referred to as “Z Units”) of limited partnership interest in the Operating Partnership. Stock-based compensation expense for Z-1 Units totaled $0.3 million and Z and Z-1 Units totaled $0.4 million for the three months ended September 30,March 31, 2011 and 2010, and 2009, respectively, and $1.8 million and $1.1 million for the nine months ended September 30, 2010 and 2009, respectively.
Stock-based compensation for Z-1 units capitalized totaled $0.1 million for the three months ended September 30, 2010March 31, 2011 and 2009, respectively,for Z and $0.6 million and $0.3 millionZ-1 units for the nine months ended September 30, 2010 and 2009, respectively.same period in 2010. As of September 30, 2010,March 31, 2011, the intrinsic value of the ZZ-1 Units subject to future vesting totaled $16.7$17.0 million. As of September 30, 2010,March 31, 2011, total unrecognized compensation cost related to ZZ-1 Units subject to future vesting totaled $7.8$7.0 million. The unamortized cost is expected to be recognized over the next year to fifteen years subject to the achievement of the stated performance criteria.
Fair Value of Financial Instruments
The Company values its financial instruments based on the fair value hierarchy of valuation techniques described in the FASB statement entitled “Fair Value Measurements and Disclosures”. Level 1 inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability. The Company uses Level 1 inputs for the fair values of its cash equivalents and its marketable securities except for unsecured bonds and mortgage backed securities. The Comp anyCompany uses Level 2 inputs for its investments in unsecured bonds, mortgage backed securities, notes receivable, notes payable, and cash flow hedges.derivative liabilities. These inputs include interest rates for similar financial instruments. The Company’s valuation methodology for cash flow hedges and the swap related to multifamily refunding bond for the 101 San Fernando apartment community, is described in more detail in Note 8. The Company does not use Level 3 inputs to estimate fair values of any of its financial instruments. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Management believes that the carrying amounts of its amounts outstanding under lines of credit, notes receivable and other receivables from related parties, and notes and other receivables approximate fair value as of September 30, 2010March 31, 2011 and December 31, 2009,2010, because interest rates, yields and other terms for these instruments are consistent with yields and other terms currently available for similar instruments. Management has estimated that the fair value of the Company’s $1.45$1.71 billion of fixed rate debt, including unsecured bonds, at September 30, 2010March 31, 2011 is approximately $1.54$1.80 billion and the fair value of the Company’s $265.0$254.8 million of variable rate debt, excluding borrowings under the lines of credit, at September 30, 2010March 31, 2011 is $242.6$232.4 million based on the terms of existing mortgage notes payable, unsecured bonds and variable rate demand notes compared to tho sethose available in the marketplace. Management believes that the carrying amounts of cash and cash equivalents, restricted cash, mortgage backed securities, accounts payable and accrued liabilities, construction payables, other liabilities and dividends payable approximate fair value as of September 30, 2010March 31, 2011 due to the short-term maturity of these instruments. Marketable securities cash flow hedge liabilities,held available for sale and both the note payable and the swap related to multifamily refunding bond for the 101 San Fernando apartment community, are carried at fair value as of September 30, 2010,March 31, 2011, as discussed further above and in Note 8.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2011 and 2010
(Unaudited)
Accounting Estimates and Reclassifications
The preparation of condensed consolidated financial statements, in accordance with U.S. generally accepted accounting principles, requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to acquiring, developing and assessing the carrying values of its real estate properties, its investments in and advances to joint ventures and affiliates, its notes receivables and its qualification as a Real Estate Investment Trust (“REIT”). The Company bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances. Actual re sultsresults may vary from those estimates and those estimates could be different under different assumptions or conditions.
(2) Significant Transactions During the ThirdFirst Quarter of 2010 and Subsequent Events2011
In July,March, the Company acquired 101 San Fernando,Santee Village, a 323-unit73-unit adaptive re-use condominium community located in downtown Los Angeles for $17.0 million. This community is adjacent to the Santee Court apartments acquired in 2010. Estimated remaining costs for the investment to be available for rent are $4.5 million, and initial occupancy is expected for June 2011.
In late March, the Company purchased Family Tree Apartments, a 121-unit garden-style community located in Santa Clara, California for $31.4 million. The property consists of ten 2-story buildings with 9,200a mix of one, two and three bedroom units. The estimated cost of the planned renovations in $2.0 million.
Development
The Company entered into a development joint venture with a partner that contributed a fee simple interest that is entitled for 275-units and 17,000 square feet of ground-floor retail development located in the Lower Queen Anne district of downtown Seattle, Washington in exchange for a 50 percent interest in the venture. Demolition at the site began in April with initial occupancy expected in April 2013.
The Company also completed the entitlement process for its Cadence site, a three-phase development consisting of 761 units located in San Jose, CaliforniaCalifornia.
Common Stock
During the quarter, the Company sold 326,642 shares of common stock for $64.1$38.4 million, net of commissions at an average price of $119.04, and during April the Company sold 157,711 shares of common stock for $19.5 million, net of commissions at an average price of $125.20.
Unsecured Bonds
During the quarter, the Company issued $150 million of unsecured bonds at 4.36% through a private placement, with a maturity date is March 2016. The Commons,proceeds from the bond offering were used primarily to repay a 264-unit community located in Campbell, California for $42.5portion of the $275 million unsecured line of credit and repay the Joule construction loan of $48.5 million.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
(Unaudited)
Mortgage Notes Payable
In September,February, the Company acquired Bella Villagio,entered into a 231-unit community located in San Jose, California for $54.0 million. The Company also acquired Muse, a 152-unit community under development located in10-year $32.0 million loan secured by the North Hollywood Arts District of Los Angeles, California for $39.1 million.
(3) Co-investments
The Company has joint venture investments in co-investments, which are accounted for under the equity method. The joint ventures own, operate and develop apartment communities. In August 2010,February 2011, the Company invested $12.0$9.7 million as preferred equity investments in two apartment communities located in downtown Los Angeles. The investments are for ten years with a preferred equityreturn of 9% for five years, increasing to a minimum of 10% and a maximum of 12.5% thereafter. In March 2011, the Company entered into a development joint venture with a partner who contributed a land parcel development in return for a 50% interest investment in a related party entity that owns a 768-unitthe venture. The 275-unit apartment community is located in Anaheim, California. Seattle, Washington.
The following table details the Company's co-investments (dollars in thousands):
September 30, 2010 | December 31, 2009 | |||||||
| Investments in joint ventures accounted for under the equity method of accounting: | ||||||||
| Limited partnership interest of 27.2% and general partner interest of 1% in Essex Apartment Value Fund II, L.P ("Fund II") | $ | 67,167 | $ | 70,283 | ||||
| Membership interest in a limited liability company that owns | ||||||||
| Essex Skyline at MacArthur Place | 29,212 | - | ||||||
| Preferred interest in a related limited liability company that owns Madison Park at Anaheim | 12,015 | - | ||||||
| 108,394 | 70,283 | |||||||
| Investments accounted for under the cost method of accounting: | ||||||||
| Series A Preferred Stock interest in Multifamily Technology Solutions, Inc. | 500 | 500 | ||||||
| Total co-investments | $ | 108,894 | $ | 70,783 | ||||
| March 31, | December 31, | |||||||
| 2011 | 2010 | |||||||
Investments in joint ventures accounted for under the equity method of accounting: | ||||||||
| Limited partnership interest of 27.2% and general partner interest of 1% in Essex Apartment Value Fund II, L.P ("Fund II") | $ | 66,045 | $ | 66,000 | ||||
| Membership interest in a limited liability company that owns Essex Skyline at MacArthur Place | 28,004 | 29,187 | ||||||
| Membership interest in a limited liability company that owns and is developing Queen Anne | 17,211 | - | ||||||
| Preferred interest in a related limited liability company that owns Madison Park at Anaheim | 11,586 | 12,014 | ||||||
| Preferred interests in limited liability companies that own apartment communities in downtown Los Angeles | 9,676 | - | ||||||
| 132,522 | 107,201 | |||||||
| Investments accounted for under the cost method of accounting: | ||||||||
| Series A Preferred Stock interest in Multifamily Technology Solutions, Inc.. | 639 | 639 | ||||||
| Total co-investments | $ | 133,161 | $ | 107,840 | ||||
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2011 and 2010
(Unaudited)
The combined summarized balance sheet and statements of operations for co-investments, which are accounted for under the equity method, are as follows (dollars in thousands).
September 30, 2010 | December 31, 2009 | |||||||
| Balance sheets: | ||||||||
| Rental properties and real estate under development | $ | 755,300 | $ | 489,352 | ||||
| Other assets | 19,660 | 30,458 | ||||||
| Total assets | $ | 774,960 | $ | 519,810 | ||||
| Mortgage notes | $ | 451,806 | $ | 312,859 | ||||
| Other liabilities | 19,051 | 6,645 | ||||||
| Equity | 304,103 | 200,306 | ||||||
| Total liabilities and equity | $ | 774,960 | $ | 519,810 | ||||
| Company's share of equity | $ | 108,394 | $ | 70,283 | ||||
| March 31, | December 31, | |||||||
| 2011 | 2010 | |||||||
| Balance sheets: | ||||||||
| Rental properties and real estate under development | $ | 833,095 | $ | 750,808 | ||||
| Other assets | 36,290 | 15,864 | ||||||
| Total assets | $ | 869,385 | $ | 766,672 | ||||
| Mortgage notes | $ | 525,684 | $ | 450,693 | ||||
| Other liabilities | 12,685 | 7,076 | ||||||
| Equity | 331,016 | 308,903 | ||||||
| Total liabilities and equity | $ | 869,385 | $ | 766,672 | ||||
| Company's share of equity | $ | 132,522 | $ | 107,201 | ||||
| Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | March 31, | ||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2011 | 2010 | |||||||||||||||||||
| Statements of operations: | ||||||||||||||||||||||||
| Property revenues | $ | 13,824 | $ | 11,684 | $ | 38,634 | $ | 35,395 | $ | 18,512 | $ | 12,328 | ||||||||||||
| Property operating expenses | (6,513 | ) | (4,882 | ) | (17,176 | ) | (13,878 | ) | (7,976 | ) | (5,007 | ) | ||||||||||||
| Net property operating income | 6,765 | 6,802 | 20,913 | 21,517 | 10,536 | 7,321 | ||||||||||||||||||
| Interest expense | (3,262 | ) | (2,878 | ) | (9,174 | ) | (7,723 | ) | (4,861 | ) | (2,962 | ) | ||||||||||||
| General and administrative | (984 | ) | - | |||||||||||||||||||||
| Depreciation and amortization | (5,419 | ) | (4,066 | ) | (14,628 | ) | (11,447 | ) | (8,063 | ) | (4,453 | ) | ||||||||||||
| Total net (loss) income | $ | (1,370 | ) | $ | (142 | ) | $ | (2,344 | ) | $ | 2,347 | |||||||||||||
| Total net loss | $ | (3,372 | ) | $ | (94 | ) | ||||||||||||||||||
| Company's share of net (loss) income | $ | (626 | ) | $ | (32 | ) | $ | (1,027 | ) | $ | 664 | |||||||||||||
| Company's share of net (loss) | $ | (1,373 | ) | $ | (41 | ) | ||||||||||||||||||
(4) Notes and Other Receivables
Notes receivable secured by real estate, and other receivables consist of the following as of September 30, 2010March 31, 2011 and December 31, 20092010 (dollars in thousands):
September 30, 2010 | December 31, 2009 | |||||||
| Note receivable, secured, bearing interest at 4.95%, due October 2010 | $ | 24,568 | $ | - | ||||
| Note receivable, secured, bearing interest at LIBOR + 4.75%, due March 2011 | 7,390 | 7,317 | ||||||
| Note receivable, secured, bearing interest at LIBOR + 3.69%, due June 2011 | 6,506 | 6,742 | ||||||
| Note receivable, secured, bearing interest at 6.5%, due August 2011 | 3,221 | 3,199 | ||||||
| Note receivable, secured, bearing interest at 8.0%, due November 2011 | 971 | 971 | ||||||
| Note receivable, secured, bearing interest at LIBOR + 3.25%, due December 2012 | 10,923 | 12,551 | ||||||
| Other receivables | 2,026 | 5,525 | ||||||
| $ | 55,605 | $ | 36,305 | |||||
| March 31, | December 31, | |||||||
| 2011 | 2010 | |||||||
| Note receivable, secured, bearing interest at 6.5%, due August 2011 | $ | 3,221 | $ | 3,221 | ||||
| Note receivable, secured, bearing interest at 8.0%, due November 2011 | 971 | 971 | ||||||
| Note receivable, secured, bearing interest at LIBOR + 4.8%, due March 2012 | 7,392 | 7,331 | ||||||
| Note receivable, secured, bearing interest at LIBOR + 3.8%, due December 2012 | 10,927 | 10,930 | ||||||
| Note receivable, secured, bearing interest at LIBOR + 8.0%, due December 2012 | 6,487 | 6,513 | ||||||
| Note receivable, secured, bearing interest at 6.3%, due February 2014 | 16,875 | 16,708 | ||||||
| Other receivables | 3,202 | 3,770 | ||||||
| $ | 49,075 | $ | 49,444 | |||||
In May,the fourth quarter 2010, the Company purchased a loanmortgage note receivable at a discount to par value for $16.6 million secured by theReserve Lofts, a 78-unit condominium community knownoperated as “Santee Court”a rental property, located in Los Angeles, California. Amounts outstanding under the terms of the loan totaled $19.2 million. This $25.7 million loannote was purchasedamended during the first quarter of 2011 to accelerate the maturity date to February 2014 with an 18 month extension option at a discount for $21.0 million. The loan bearsstated interest at 4.95%rate of 6.3%; however interest income is recorded based onwhich resulted in a change in the effective yield which is substantially higher as a result of the discounted purchase price. In late October,to the Company purchased the property for $31.1 million in a multiple bid process.from 8.4% to 9.6%.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2011 and 2010
(Unaudited)
(5) Related Party Transactions
Management and other fees from affiliates include management, development and redevelopment fees from Fund IIco-investments of $1.2 million and $1.0 million for the three months ended September 30,March 31, 2011 and 2010, and 2009, and $3.0 million and $3.4 million for the nine months ended September 30, 2010 and 2009 respectively, and a property acquisition fee of $0.5 million from the limited liability company that owns Skyline at MacArthur Place for the ninethree months ended September 30,March 31, 2010. All of these fees are net of intercompany amounts eliminated by the Company.
An Executive Vice President of the Company invested $4.0 million for a 6% limited partnership interest in a partnership with the Company that acquired a 50% interest in a limited liability company that acquired Essex Skyline at MacArthur Place. The Executive Vice President’s investment is equal to a pro-rata share of the contributions, and distributions resulting from distributable cash generated by Essex Skyline at MacArthur Place will be calculated in the same manner as the calculation of distributions to the third party investor. The Executive Vice President does not participate in any promote interest or fees paid to the Company by the Essex Skyline at MacArthur Place joint venture.
(6) Segment Information
The Company defines its reportable operating segments as the three geographical regions in which its apartment communities are located: Southern California, Northern California and Seattle Metro. Excluded from segment revenues are properties classified in discontinued operations, management and other fees from affiliates, and interest and other income. Non-segment revenues and net operating income included in the following schedule also consist of revenue generated from commercial properties which are primarily office buildings. Other non-segment assets include co-investments, real estate under development, cash and cash equivalents, marketable securities, notes receivable, other assets and deferred charges. The revenues, net operating income, and assets for each of the reportable operating segm entssegments are summarized as follows for the three months ended September 30,March 31, 2011 and 2010 and 2009 (dollars in thousands):
| Three Months Ended | ||||||||
| September 30, | ||||||||
| 2010 | 2009 | |||||||
| Revenues: | ||||||||
| Southern California | $ | 51,119 | $ | 51,104 | ||||
| Northern California | 32,770 | 30,126 | ||||||
| Seattle Metro | 17,932 | 17,345 | ||||||
| Other real estate assets | 2,001 | 2,095 | ||||||
| Total property revenues | $ | 103,822 | $ | 100,670 | ||||
| Net operating income: | ||||||||
| Southern California | $ | 33,015 | $ | 33,627 | ||||
| Northern California | 20,922 | 19,244 | ||||||
| Seattle Metro | 10,882 | 10,435 | ||||||
| Other real estate assets | 1,116 | 1,255 | ||||||
| Total net operating income | 65,935 | 64,561 | ||||||
| Depreciation and amortization | (31,638 | ) | (29,843 | ) | ||||
| Interest expense | (22,202 | ) | (21,966 | ) | ||||
| Interest and other income | 5,788 | 3,471 | ||||||
| General and administrative | (6,175 | ) | (6,086 | ) | ||||
| Management and other fees from affiliates | 959 | 1,024 | ||||||
| Equity (loss) income from co-investments | (626 | ) | (32 | ) | ||||
| Impairment and other charges | (1,615 | ) | (11,104 | ) | ||||
| Income before discontinued operations | $ | 10,426 | $ | 25 | ||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| Revenues: | ||||||||
| Southern California | $ | 55,084 | $ | 50,926 | ||||
| Northern California | 35,317 | 29,987 | ||||||
| Seattle Metro | 19,756 | 16,727 | ||||||
| Other real estate assets | 2,392 | 2,066 | ||||||
| Total property revenues | $ | 112,549 | $ | 99,706 | ||||
| Net operating income: | ||||||||
| Southern California | $ | 36,116 | $ | 34,013 | ||||
| Northern California | 23,339 | 19,799 | ||||||
| Seattle Metro | 12,557 | 10,573 | ||||||
| Other real estate assets | 1,465 | 1,122 | ||||||
| Total net operating income | 73,477 | 65,507 | ||||||
| Depreciation and amortization | (37,031 | ) | (30,487 | ) | ||||
| Interest expense | (24,662 | ) | (20,836 | ) | ||||
| Interest and other income | 6,987 | 7,855 | ||||||
| General and administrative | (6,115 | ) | (5,618 | ) | ||||
| Management and other fees from affiliates | 1,224 | 1,478 | ||||||
| Equity (loss) from co-investments | (1,373 | ) | (41 | ) | ||||
| Income before discontinued operations | $ | 12,507 | $ | 17,858 | ||||
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
(Unaudited)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2010 | 2009 | |||||||
| Revenues: | ||||||||
| Southern California | $ | 152,999 | $ | 155,064 | ||||
| Northern California | 92,731 | 91,465 | ||||||
| Seattle Metro | 51,377 | 54,146 | ||||||
| Other real estate assets | 6,035 | 6,385 | ||||||
| Total property revenues | $ | 303,142 | $ | 307,060 | ||||
| Net operating income: | ||||||||
| Southern California | $ | 100,986 | $ | 104,386 | ||||
| Northern California | 59,966 | 60,982 | ||||||
| Seattle Metro | 31,581 | 34,461 | ||||||
| Other real estate assets | 3,501 | 4,165 | ||||||
| Total net operating income | 196,034 | 203,994 | ||||||
| Depreciation and amortization | (93,385 | ) | (87,711 | ) | ||||
| Interest expense | (64,043 | ) | (63,679 | ) | ||||
| General and administrative | (17,988 | ) | (18,135 | ) | ||||
| Impairment and other charges | (1,615 | ) | (16,892 | ) | ||||
| Management and other fees from affiliates | 3,458 | 3,377 | ||||||
| (Loss) gain on early retirement of debt | (10 | ) | 6,124 | |||||
| Interest and other income | 20,730 | 9,521 | ||||||
| Equity (loss) income from co-investments | (1,027 | ) | 664 | |||||
| Gain on sale of real estate | - | 103 | ||||||
| Income before discontinued operations | $ | 42,154 | $ | 37,366 | ||||
Total assets for each of the reportable operating segments are summarized as follows as of September 30, 2010March 31, 2011 and December 31, 2009:2010:
September 30, 2010 | December 31, 2009 | |||||||
| Assets: | ||||||||
| Southern California | $ | 1,213,759 | $ | 1,239,657 | ||||
| Northern California | 1,125,757 | 923,103 | ||||||
| Seattle Metro | 509,206 | 417,708 | ||||||
| Other real estate assets | 81,139 | 82,998 | ||||||
| Net reportable operating segments - real estate assets | 2,929,861 | 2,663,466 | ||||||
| Real estate under development | 239,910 | 274,965 | ||||||
| Cash and cash equivalents | 36,322 | 37,934 | ||||||
| Marketable securities | 95,933 | 134,844 | ||||||
| Co-investments | 108,894 | 70,783 | ||||||
| Notes and other receivables | 55,605 | 36,305 | ||||||
| Other non-segment assets | 37,228 | 36,340 | ||||||
| Total assets | $ | 3,503,753 | $ | 3,254,637 | ||||
| March 31, | December 31, | |||||||
| 2011 | 2010 | |||||||
| Assets: | ||||||||
| Southern California | $ | 1,464,823 | $ | 1,428,264 | ||||
| Northern California | 1,143,793 | 1,119,555 | ||||||
| Seattle Metro | 556,239 | 560,463 | ||||||
| Other real estate assets | 80,545 | 80,726 | ||||||
Net reportable operating segments - real estate assets | 3,245,400 | 3,189,008 | ||||||
| Real estate under development | 204,927 | 217,531 | ||||||
| Cash and cash equivalents | 120,786 | 35,694 | ||||||
| Marketable securities | 74,779 | 92,310 | ||||||
| Co-investments | 133,161 | 107,840 | ||||||
| Notes and other receivables | 49,075 | 49,444 | ||||||
| Other non-segment assets | 38,558 | 41,060 | ||||||
| Total assets | $ | 3,866,686 | $ | 3,732,887 | ||||
(7) Net Income Per Common Share
| (Amounts in thousands, except per share and unit data) |
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||
| September 30, 2010 | September 30, 2009 | |||||||||||||||||||||||
| Income | Weighted-average Common Shares | Per Common Share Amount | Income | Weighted-average Common Shares | Per Common Share Amount | |||||||||||||||||||
| Basic: | ||||||||||||||||||||||||
| Income from continuing operations available to common stockholders | $ | 6,377 | 29,691 | $ | 0.21 | $ | 19,654 | 27,591 | $ | 0.71 | ||||||||||||||
| Income (loss) from discontinued operations available to common stockholders | - | 29,691 | - | 2,085 | 27,591 | 0.08 | ||||||||||||||||||
| 6,377 | $ | 0.21 | 21,739 | $ | 0.79 | |||||||||||||||||||
| Effect of Dilutive Securities (1)(2) | - | 72 | 506 | 2,479 | ||||||||||||||||||||
| Diluted: | ||||||||||||||||||||||||
| Income from continuing operations available to common stockholders | $ | 6,377 | $ | 19,654 | ||||||||||||||||||||
| Add: noncontrolling interests OP unitholders | - | 267 | ||||||||||||||||||||||
| Adjusted income from continuing operations available to common stockholders (1) | 6,377 | 29,763 | $ | 0.21 | 19,921 | 30,070 | $ | 0.66 | ||||||||||||||||
| Income from discontinued operations available to common stockholders | - | 2,085 | ||||||||||||||||||||||
| Add: noncontrolling interests OP unitholders | - | 239 | ||||||||||||||||||||||
| Adjusted income from discontinued operations available to common stockholders | - | 29,763 | - | 2,324 | 30,070 | 0.08 | ||||||||||||||||||
| $ | 6,377 | $ | 0.21 | $ | 22,245 | $ | 0.74 | |||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||
| March 31, 2011 | March 31, 2010 | |||||||||||||||||||||||
| Weighted- | Per | Weighted- | Per | |||||||||||||||||||||
| average | Common | average | Common | |||||||||||||||||||||
| Common | Share | Common | Share | |||||||||||||||||||||
| Income | Shares | Amount | Income | Shares | Amount | |||||||||||||||||||
| Basic: | ||||||||||||||||||||||||
Income from operations available to common stockholders | $ | 8,418 | 31,466 | $ | 0.27 | $ | 13,127 | 28,968 | $ | 0.45 | ||||||||||||||
| Effect of Dilutive Securities (1)(2) | - | 81 | - | 51 | ||||||||||||||||||||
| Diluted: | ||||||||||||||||||||||||
| Income from continuing operations available to common stockholders | 8,418 | 31,547 | $ | 0.27 | 13,127 | 29,019 | $ | 0.45 | ||||||||||||||||
| Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||
| September 30, 2010 | September 30, 2009 | |||||||||||||||||||||||
| Income | Weighted Average Common Shares | Per Common Share Amount | Income | Weighted Average Common Shares | Per Common Share Amount | |||||||||||||||||||
| Basic: | ||||||||||||||||||||||||
| Income before discontinued operations available to common stockholders | $ | 28,986 | 29,334 | $ | 0.99 | $ | 70,115 | 26,888 | $ | 2.61 | ||||||||||||||
| Income (loss) from discontinued operations available to common stockholders | - | 29,334 | - | 5,303 | 26,888 | 0.19 | ||||||||||||||||||
| 28,986 | $ | 0.99 | 75,418 | $ | 2.80 | |||||||||||||||||||
| Effect of Dilutive Securities (1)(2) | - | 64 | 3,638 | 2,473 | ||||||||||||||||||||
| Diluted: | ||||||||||||||||||||||||
| Income from continuing operations available to common stockholders (1) | $ | 28,986 | $ | $ | 70,115 | $ | ||||||||||||||||||
| Add: noncontrolling interests OP unitholders | - | 3,169 | ||||||||||||||||||||||
| Adjusted income from continuing operations available to common stockholders (1) | 28,986 | 29,398 | 0.99 | $ | 73,284 | 29,361 | 2.50 | |||||||||||||||||
| Income (loss) from discontinued operations available to common stockholders | - | 5,303 | ||||||||||||||||||||||
| Add: noncontrolling interests OP unitholders | - | 469 | ||||||||||||||||||||||
| Adjusted income from discontinued operations available to common stockholders | - | 29,398 | - | 5,772 | 29,361 | 0.19 | ||||||||||||||||||
| $ | 28,986 | $ | 0.99 | $ | 79,056 | $ | 2.69 | |||||||||||||||||
| (1) | Weighted average convertible limited partnership units of |
Stock options of 116,74736,750 and 243,313145,136 for the three months ended September 30,March 31, 2011 and 2010, and 2009, respectively, and 133,432 and 257,857 for the nine months ended September 30, 2010 and 2009, respectively, were not included in the diluted earnings per share calculation because the exercise price of the options were greater than the average market price of the common shares for the three and nine months ended and, therefore, were anti-dilutive. Stock options of 69,992 and 29,031 for the three months ended September 30, 2010 and 2009, respectively, and 64,278 and 25,003 for the nine months ended September 30, 2010 and 2009, respectively, were included in the determination of diluted EPS.
All shares of cumulative convertible preferred stock Series G have been excluded from diluted earnings per share for the three and nine months ended September 30,March 31, 2011 and 2010, and 2009, as the effect of the approximately 33 thousand shares that would be issued upon conversion werewas anti-dilutive.
| (2) |
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2011 and 2010
(Unaudited)
(8) Derivative Instruments and Hedging Activities
Currently, the Company uses interest rate swaps and interest rate cap contracts to manage certain interest rate risks and previously the Company also used forward starting swaps to manage interest rate risks. As of March 31, 2011, there are no outstanding forward starting interest rate swaps. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
During July 2010, the Company entered into a swap transaction (the "swap"“swap”) with respect to $38.0 million of multifamily revenue refunding bonds for the 101 San Fernando apartment community (the “Bonds”) with Citibank, N.A. (“Citibank”). This swap is not designated as a hedge; accordingly the change in fair value of the swap is recorded as a gain or loss in the Company’s consolidated statement of operations. Under the terms of the Swap, the Company pays a variable amount equal to the SIFMA Index plus a fixed spread on a notional amount that starts at $35.2 million and over the three-year term of the swap increases ratably to $38.0 million. In return, Citibank pays an amount equal to the coupon on the Bonds multiplied by the outstanding par value of the bonds, $38.0 million. 0; The Swap has a termination date of July 12, 2013 and may be terminated by the Company at anytime commencing in one yearafter July 2012 and by Citibank if certain events occur. Upon termination of the swap, whether early or on the stated termination date, a payment based on the change in value of the Bonds will occur. Should the Bonds decline in value from the $35.2 million estimated value of the Bonds at the inception of the swap, the Company will be obligated to make a payment equal to 100% of the price depreciation. Should the Bonds increase in value, Citibank will be obligated to make a payment equal to approximately 85% of the price appreciation. As of September 30, 2010,March 31, 2011, the fair value of the swap was a liability of approximately $0.$3.5 million.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Rental revenues | $ | - | $ | 218 | $ | - | $ | 1,871 | ||||||||
| Property operating expenses | - | (79 | ) | - | (728 | ) | ||||||||||
| Depreciation and amortization | - | (52 | ) | - | (462 | ) | ||||||||||
| Income from real estate sold | - | 87 | - | 681 | ||||||||||||
| Gain on sale | - | 2,467 | - | 5,708 | ||||||||||||
Internal disposition costs (1) | - | (230 | ) | - | (617 | ) | ||||||||||
| 2,237 | - | |||||||||||||||
| Income from discontinued operations | $ | - | $ | 2,324 | $ | - | $ | 5,772 | ||||||||
The Company is subject to various lawsuits in the normal course of its business operations. Such lawsuits could, but are not expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
Preferred Stock and Preferred Units
During April, the Company entered into a 10-year $207.2issued 2,950,000 shares of 7.125% Series H Cumulative Redeemable Preferred Stock (“Series H”) $25.00 par value per share for net proceeds of $71.4 million, credit facility with Fannie Mae encumberednet of fees and commissions. The Series H has no maturity date and generally may not be called by seven communities at a fixed rate of 4.3%. Communities may be substituted or outright releasedthe Company before April 13, 2016. Net proceeds from the facility based on certain loanSeries H offering were used to value and debt service coverage ratios, as defined in the credit facility agreement. Tworedeem all of the loans are expected to be funded in November 2010 totaling $104.5 million including City View for $65.3 million and Hillsborough Park for $39.2 million, and the existing City View mortgage loan for $49.1 million at7.875% Series B Cumulative Redeemable Preferred Units of Essex Portfolio, L.P. with a fixed ratepar value of 6.8% was paid-off. The remaining loans are expected to be funded in late November 2010 and five existing mortgage loans totaling $49.9 mi llion at an average interest rate of 7.0% will be paid-off. In conjunction with the new credit facility,$80.0 million.
Also during April, the Company settled $225.0 millionsent notice to the holders of forward-starting swaps for $60.5 million in payments to counterparties. The settlementthe 7.8125% Series F Cumulative Redeemable Preferred Stock that on May 30, 2011 the Company will redeem all 1,000,000 shares at the redemption value of $100.0 million of forward-starting swaps in July and $225.0 million of forward-starting swaps in November increased the effective interest rate on the Hillcrest and Bel Air mortgage loans totaling $130.1 million with a fixed rate of 4.6% funded in July 2010 to an effective interest rate of 6.4%, and increased the effective interest rate on the Fannie Mae credit facility to 7.1%.
$25.0 million.ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2011 and 2010
(Unaudited)
Acquisition
In May, the Company entered into a joint venture with an institutional investor that acquired Arbors Parc Rose, a 373-unit apartment community located in Oxnard, California for $92.0 million. The property is adjacent to Essex’s Tierra Vista Apartments, a 404-unit apartment community. The Company acquired a 50% interest in the joint venture and accounts for this co-investment on the equity method. The Company will receive asset and property management fees from the joint venture.
Disposition
In April, the Company sold Woodlawn Colonial, a 159-unit apartment community located in Chula Vista, California for $16.0 million.
The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and accompanying Notes thereto included elsewhere herein and with our 20092010 Annual Report on Form 10-K for the year ended December 31, 20092010 and our Current Report on Form 10-Q for the quarter ended September 30, 2010.March 31, 2011.
The Company is a fully integrated Real Estate Investment Trust (“REIT”), and its property revenues are generated primarily from apartment community operations. OurThe Company’s investment strategy has two components: constant monitoring of existing markets, and evaluation of new markets to identify areas with the characteristics that underlie rental growth. OurThe Company’s strong financial condition supports ourits investment strategy by enhancing ourits ability to quickly shift ourthe Company’s acquisition, development, and disposition activities to markets that will optimize the performance of the portfolio.
As of September 30, 2010, weMarch 31, 2011, the Company had ownership interests in 139149 apartment communities, comprising 28,70230,343 apartment units. Ourunits, excluding the Company’s ownership in preferred interest co-investments. The Company’s apartment communities are located in the following major West Coast regions:
Southern California (Los Angeles, Orange, Riverside, Santa Barbara, San Diego and Ventura counties)
Northern California (the San Francisco Bay Area)
Seattle Metro (Seattle metropolitan area)
As of September 30, 2010, weMarch 31, 2011, the Company also had ownership interests in five office and commercial buildings (with approximately 215,840 square feet).
As of September 30, 2010, ourMarch 31, 2011, the Company's consolidated development pipeline was comprised of three development projects, twothree predevelopment projects, and four land parcels held for future development or sale aggregating 2,2772,012 units, with total incurred costs of $239.9$205.0 million. The estimated remaining project costs are $68.4$120.5 million and the total active development project costs are $308.3$325.5 million.
The Company has one unconsolidated joint venture development project, Essex Skyline at MacArthur Place,Queen Anne, a 349-unit high rise275-unit condominium project. As of September 30, 2010March 31, 2011 total costs incurred are $132.4$19.3 million, with estimated remaining project costs of $2.3$59.8 million for total estimated costs of $134.7$79.1 million.
The Company’s consolidated apartment communities are as follows:
| As of September 30, 2010 | As of September 30, 2009 | |||||||||||||||
| Apartment Units | % | Apartment Units | % | |||||||||||||
| Southern California | 12,449 | 48 | % | 12,264 | 50 | % | ||||||||||
| Northern California | 7,684 | 30 | % | 6,695 | 28 | % | ||||||||||
| Seattle Metro | 5,701 | 22 | % | 5,297 | 22 | % | ||||||||||
| Total | 25,834 | 100 | % | 24,256 | 100 | % | ||||||||||
| As of March 31, 2011 | As of March 31, 2010 | ||||
| Apartment Units | % | Apartment Units | % | ||
| Southern California | 13,227 | 49% | 12,334 | 51% | |
| Northern California | 7,817 | 29% | 6,695 | 27% | |
| Seattle Metro | 5,979 | 22% | 5,249 | 22% | |
| Total | 27,023 | 100% | 24,278 | 100% | |
Co-investments including Fund II communities, and communities included in discontinued operationsEssex Skyline at MacArthur Place, are not included in the table above for both years presented above.
Comparison of the Three Months Ended September 30, 2010March 31, 2011 to the Three Months Ended September 30, 2009March 31, 2010
Market rates are determined using a variety of factors such as effective rental rates at the property based on recently signed leases and asking rates for comparable properties in the market. The recently signed effective rates at the property are used as the starting point in the determination of the market rates of vacant units. The Company then increases or decreases these rates based on the supply and demand in the apartment community’s market. The Company will check the reasonableness of these rents based on its position within the market and compare the rents against the asking rents by comparable properties in the market. Financial occupancy may not completely reflect short-term trends in physical occupancy and financial occupancy rates as disclosed by other REITs may not be compara blecomparable to ourthe Company’s calculation of financial occupancy.
The Company does not take into account delinquency and concessions to calculate actual rent for occupied units and market rents for vacant units. The calculation of financial occupancy compares contractual rates for occupied units to estimated market rents for unoccupied units, thus the calculation compares the gross value of all apartment units excluding delinquency and concessions. For apartment communities that are development properties in lease-up without stabilized occupancy figures, the Company believes the physical occupancy rate is the appropriate performance metric. While an apartment community is in the lease-up phase, the Company’s primary motivation is to stabilize the property which may entail the use of rent concessions and other incentives, and thus financial occupancy which is based on contract ualcontractual revenue is not considered the best metric to quantify occupancy.
The regional breakdown of the Company’s Quarterly Same-Property portfolio for financial occupancy for the quarter ended September 30,March 31, 2011 and 2010 and 2009 is as follows:
| Three months ended | |||||
| September 30, | |||||
| 2010 | 2009 | ||||
| Southern California | 96.5% | 96.7% | |||
| Northern California | 97.2% | 97.6% | |||
| Seattle Metro | 96.7% | 97.0% | |||
| Three months ended | |||||
| March 31, | |||||
| 2011 | 2010 | ||||
| Southern California | 96.5% | 97.0% | |||
| Northern California | 97.1% | 98.1% | |||
| Seattle Metro | 97.1% | 97.9% | |||
The following table provides a breakdown of revenue amounts, including revenues attributable to the Quarterly Same-Property portfolio:
| Three Months Ended | ||||||||||||||||||||
| Number of | September 30, | Dollar | Percentage | |||||||||||||||||
| Properties | 2010 | 2009 | Change | Change | ||||||||||||||||
Property Revenues (dollars in thousands) | ||||||||||||||||||||
| Quarterly Same-Property: | ||||||||||||||||||||
| Southern California | 59 | $ | 49,259 | $ | 49,701 | $ | (442 | ) | (0.9 | )% | ||||||||||
| Northern California | 28 | 28,602 | 29,179 | (577 | ) | (2.0 | ) | |||||||||||||
| Seattle Metro | 23 | 14,759 | 15,534 | (775 | ) | (5.0 | ) | |||||||||||||
| Total Quarterly Same-Property revenues | 110 | 92,620 | 94,414 | (1,794 | ) | (1.9 | ) | |||||||||||||
| Quarterly Non-Same Property Revenues (1) | 11,202 | 6,256 | 4,946 | 79.1 | ||||||||||||||||
| Total property revenues | $ | 103,822 | $ | 100,670 | $ | 3,152 | 3.1 | % | ||||||||||||
| Three Months Ended | ||||||||||||||||||||
| Number of | March 31, | Dollar | Percentage | |||||||||||||||||
| Properties | 2011 | 2010 | Change | Change | ||||||||||||||||
Property Revenues (dollars in thousands) | ||||||||||||||||||||
| Quarterly Same-Property: | ||||||||||||||||||||
| Southern California | 59 | $ | 51,595 | $ | 50,811 | $ | 784 | 1.5 | % | |||||||||||
| Northern California | 28 | 30,694 | 29,987 | 707 | 2.4 | |||||||||||||||
| Seattle Metro | 23 | 14,996 | 14,912 | 84 | 0.6 | |||||||||||||||
| Total Quarterly Same-Property revenues | 110 | 97,285 | 95,710 | 1,575 | 1.6 | |||||||||||||||
| Quarterly Non-Same Property Revenues (1) | 15,264 | 3,996 | 11,268 | 282.0 | ||||||||||||||||
| Total property revenues | $ | 112,549 | $ | 99,706 | $ | 12,843 | 12.9 | % | ||||||||||||
| (1) | Includes |
Quarterly Same-Property Revenues decreasedincreased by $1.8$1.6 million or 1.9%1.6% to $92.6$97.3 million in the thirdfirst quarter of 20102011 from $94.4$95.7 million in the thirdfirst quarter of 2009.2010. The decreaseincrease was primarily attributable to a decreasean increase in scheduled rents of $2.4$1.7 million as reflected in a decreasean increase of 2.6%1.8% in average rental rates from $1,338$1,305 per unit in the thirdfirst quarter of 20092010 to $1,303$1,329 per unit in the thirdfirst quarter of 2010.2011. Scheduled rents decreasedincreased in all regions by 1.9%1.4%, 2.3%2.9%, and 5.5%0.9% in Southern California, Northern California, and Seattle Metro, respectively. Also, utility billings income increased $0.2 million and bad debt expense decreased $0.2 million compared to the first quarter of 2010. The Company has experiencedincreases related to gross income were partially offset by a decrease in scheduled rents due toQuarterly Same-Property occupancy of 70 basis points or $0.7 million, from 97.5% for the slowdown in the economy coupled with job losses during 2009. During 2009 through the thirdfirst quarter of 2010 to 96.8% for the Company experien ced a decrease in gross revenue in comparison to the prior year in the Company’s markets from the reduction in rents from leases entered during those periods.first quarter of 2011. On a sequential basis the Company experienced quarterly same-property revenue growth from the second to the thirdfourth quarter of 2010 of 0.3%, which isto the first sequential quarterly same-property revenue growth since the fourth quarter of 2008. The2011 of 1.4%, and the Company experienced sequential revenue growth in all regions during the third quarter of 2010 compared to the second quarter of 2010. Quarterly same-property revenues also decreased due to a decrease in occupancy of 30 basis points or $0.2 million, from 97.0% for the third quarter of 2009 to 96.7% for the third quarter of 2010. The decrease related to schedule rents and occupancy was offset by a decrease in bad debt expense of $0.2 million, a decrease in rent concessions of $0.3 million, and increase in ratio utility billing system (“RUBS”) income of $0.2 milli on. The Company expects sequential total Quarterly Same-Property revenue growth for the fourth quarter of 2010 compared to the third quarter of 2010 and total Quarterly Same-Property revenues for the fourth quarter 2010 to be consistent with the fourth quarter of 2009.regions.
Quarterly Non-Same Property Revenues increased by $4.9$11.3 million or 79.1%282% to $11.2$15.3 million in the thirdfirst quarter of 20102011 from $6.3$4.0 million in the thirdfirst quarter of 2009.2010. The increase was primarily due to revenue generated from five development communities consisting of Joule, Fourth & U, Axis 2300, The Grand,Allegro, and Belmont StationMuse, and fiveten communities acquired since JulyApril 1, 20092010 consisting of Regency at Encino,Elevation (formerly Eagle Rim,Rim), 101 San Fernando, The Commons, Bella Villagio, Family Tree, 416 on Broadway, Anavia, Santee Court, Corbella at Juanita Bay, and Bella Villagio.Courtyard off Main.
Property operating expenses, excluding real estate taxes increased $3.7 million or 15.0% to $28.3 million in the first quarter of 2011 from $24.7 million in the first quarter of 2010, primarily due to the acquisition of ten communities, and the completion of five development properties. Same-Property operating expenses excluding real estate taxes increased slightly by $0.5 million or 2.2% for the first quarter of 2011 compared to the first quarter of 2010.
Real Estate taxes expense increased by $0.9$1.2 million or 10.0%12.4% for the thirdfirst quarter of 2011 compared to the first quarter of 2010 compared to the third quarter of 2009 due mainlyprimarily to the acquisition of fiveten communities which resulted in an increase in property taxes of $0.4$1.0 million and the completion of development communities which resulted in an increase in property taxes of $0.3$0.4 million compared to the thirdfirst quarter of 2009.2010.
Depreciation expense increased by $1.8$6.5 million or 6.0%21.5% for the thirdfirst quarter of 20102011 compared to the thirdfirst quarter of 2009,2010, due to the acquisition of fiveten communities, the completion of five development properties, and the capitalization of approximately $33.1$18.4 million in additions to rental properties for the ninethree months ended September 30, 2010March 31, 2011 and the capitalization of approximately $55.6$52.7 million in additions to rental properties during 2010, including $26.7$16.3 million spent on redevelopment and revenue generating capital expenditures during 2009.expenditures.
Interest expense increased by $3.8 million in expense recorded byfor the Companyfirst quarter of 2011 compared to the first quarter of 2010, primarily due to the ineffectiveness of certain forward-starting swaps. For the third quarter of 2009 the Company incurred $11.1 millionincrease in impairment and other charges due to the write-off of development costs totaling $6.7 million related to two land parcels that will no longer be developedaverage outstanding debt partially offset by the Company, the write-off of $3.8 million in unamortized costs related to the cancellation of the Outperformance Plan, and $0.6 million recorded for additional loan loss reserves related to a note receivable secured by an apartment communitydecrease in the Portland Metropolitan Area.Company’s weighted average interest rate. The Company’s weighted average interest rate was 4.7% as of March 31, 2011 compared to 4.9% as of March 31, 2010.
Interest and other income increaseddecreased by $2.3$0.9 million for the thirdfirst quarter of 20102011 primarily due to increasesdecrease of $3.4$1.6 million of interest income earned on the Santee Court note receivable that was purchased at a 20% discountinvestment grade unsecured bonds due to the outstanding principal on this loan during the second quartersales of 2010 and recorded $0.5these investments. This was partially offset by $0.8 million in income from an investmentinvestments in mortgage backed securities madeacquired during the first quarter of 2010. Those increases in interest and other income were offset partially by a decrease of $1.5 million in earnings from marketable securities compared to the third quarter of 2009 due to the fact the Company sold a total of $42.2 million of marketable securities during the firstfourth quarter of 2010.
Equity (Loss) income in co-investments decreasedincreased by $0.6$1.3 million for the thirdfirst quarter of 20102011 compared to the third quarter of 2009, primarily because the Company recorded a loss from operations of $0.6 million related to the Company’s investment in Essex Skyline at MacArthur Place which was acquired in the first quarter of 2010, and is a development community in lease-up.
| Nine Months Ended | |||||
| September 30, | |||||
| 2010 | 2009 | ||||
| Southern California | 96.9% | 96.5% | |||
| Northern California | 97.6% | 97.7% | |||
| Seattle Metro | 97.3% | 97.0% | |||
| Nine Months Ended | ||||||||||||||||||||
| Number of | September 30, | Dollar | Percentage | |||||||||||||||||
| Properties | 2010 | 2009 | Change | Change | ||||||||||||||||
Property Revenues (dollars in thousands) | ||||||||||||||||||||
| 2010/2009 Same-Properties: | ||||||||||||||||||||
| Southern California | 59 | $ | 147,556 | $ | 151,482 | $ | (3,926 | ) | (2.6 | )% | ||||||||||
| Northern California | 28 | 85,591 | 90,041 | (4,450 | ) | (4.9 | ) | |||||||||||||
| Seattle Metro | 23 | 44,393 | 48,495 | (4,102 | ) | (8.5 | ) | |||||||||||||
| Total 2010/2009 Same-Property revenues | 110 | 277,540 | 290,018 | (12,478 | ) | (4.3 | ) | |||||||||||||
| 2010/2009 Non-Same Property Revenues (1) | 25,602 | 17,042 | 8,560 | 50.2 | ||||||||||||||||
| Total property revenues | $ | 303,142 | $ | 307,060 | $ | (3,918 | ) | (1.3 | )% | |||||||||||
Liquidity and Capital Resources
The Company has two outstandingthree lines of credit in the aggregate of $450.0aggregating $540.0 million committed as of September 30, 2010.March 31, 2011. The Company had a $200.0$275.0 million unsecured line of credit which was amended in October 2010 to $275 million with an accordion option to $350 million. As of September 30, 2010March 31, 2011 there was a $98.0$159.0 million balance on this unsecured line at an average interest rate of 3.4%3.1%. The underlying interest rate on the $200.0$275.0 million line is based on a tiered rate structure tied to anFitch and S&P ratingratings on the credit facility atand the rate was LIBOR plus 3.0%. The amendment in October adjusted the interest rate to LIBOR plus 2.4%2.1%. This facility matures in December 2011 with two one-year extensions, exercisable by the Company. The Company also has a $250.0 million credit facility from Freddie Mac, which matures in December 2013. This line is secured by eleven apartment communities. As of September 30, 2010,March 31, 2011, the Company had $250.0 million outstanding under this line of credit at an average interest rate of 1.4%1.3%. The underlying interest rate on this line is between 99 and 150 basis points over the Freddie Mac Reference Rate and the interest rate is subject to change by the lender in November 2011. During the first quarter the Company entered into a new line of credit agreement for $15 million. As of March 31, 2011 there was no outstanding balance on this unsecured line. The underlying interest rate on the $15.0 million line is based on a tiered rate structure tied to Fitch and S&P ratings on the credit facility of LIBOR plus 2.1%. This facility matures in January 2012 with one one-year extension, exercisable by the Company.
The Company’s unsecured line of credit agreements contain debt covenants related to limitations on indebtedness and liabilities and maintenance of minimum levels of consolidated earnings before depreciation, interest and amortization. The Company was in compliance with the line of credit covenants as of September 30, 2010 and DecemberMarch 31, 2009.2011.
During March 2010, the Company filed a new shelf registration statement with the SEC, allowing the Company to sell an undetermined number or amount of certain equity and debt securities as defined in the prospectus.
Also during April, the Company sent notice to the holders of the 7.8125% Series GF Cumulative Redeemable Preferred Stock into shares of the Company’s common stock subject to certain conditions. During 2009,that on May 30, 2011 the Company repurchased $145.0 million in liquidationwill redeem all 1,000,000 shares at the redemption value of its Series G Preferred Stock at a discount to carrying value, and the excess of the carrying value over the cash paid to redeem the Series G Preferred Stock totaled $50.0$25.0 million. As of September 30, 2010, the carrying value of the Series G Preferred Stock outstanding totaled $4.3 million. The Company may continue to repurchase Series G Preferred Stock.
As of September 30, 2010,March 31, 2011, the Company’s mortgage notes payable totaled $1.7$1.8 billion which consisted of $1.4$1.6 billion in fixed rate debt with interest rates varying from 1.79%3.7% to 8.29%7.3% and maturity dates ranging from 20102011 to 20202021 and $265.0$255.0 million of variable rate debt with a weighted average interest rate of 1.6%2.1% ($213.5213.1 million of the variable debt is tax-exempt variable rate demand notes). The tax-exempt variable rate demand notes have maturity dates ranging from 2025 to 2039, and $191.9 million are subject to interest rate caps.
The Company pays quarterly dividends from cash available for distribution. Until it is distributed, cash available for distribution is invested by the Company primarily in investment grade securities held available for sale or is used by the Company to reduce balances outstanding under its line of credit.
The Company’s current financing activities have been impacted by the instability and tightening in the credit markets which has led to an increase in spreads and pricing of secured and unsecured debt. Our strong balance sheet, the established relationships with our unsecured linelines of credit bank group, the secured line of credit with Freddie Mac and access to Fannie Mae and Freddie Mac secured debt financing have provided some insulation to us from the turmoil being experienced by many other real estate companies. The Company has benefited from borrowing from Fannie Mae and Freddie Mac, and there are no assurances that these entities will lend to the Company in the future. The Company has experienced more restrictive loan to value and debt service coverage ratio limits and an expansion in credit sprea ds.spreads. Continued turmoil in the capital markets could negatively impact the Company’s ability to make acquisitions, develop communities, obtain new financing, and refinance existing borrowing at attractive rates.
Derivative Activity
During July 2010, the Company entered into a swap transaction (the "swap"“swap”) with respect to $38.0 million of multifamily revenue refunding bonds for the 101 San Fernando apartment community (the “Bonds”) with Citibank, N.A. (“Citibank”). This swap is nonot designated as a hedge; accordingly the change in fair value of the swap is recorded as a gain or loss in the Company’s consolidated statement of operations. Under the terms of the Swap, the Company pays a variable amount equal to the SIFMA Index plus a fixed spread on a notional amount that starts at $35.2 million and over the three-year term of the swap increases ratably to $38.0 million. In return, Citibank pays an amount equal to the coupon on the Bonds multiplied by the outstanding par value of the bonds, $38.0 million. ; The Swap has a termination date of July 12, 2013 and may be terminated by the Company at anytime commencing in one year and by Citibank if certain events occur. Upon termination of the swap, whether early or on the stated termination date, a payment based on the change in value of the Bonds will occur. Should the Bonds decline in value from the $35.2 million value of the Bonds at the inception of the swap, the Company will be obligated to make a payment equal to 100% of the price depreciation. Should the Bonds increase in value, Citibank will be obligated to make a payment equal to a portionapproximately 85% of the price appreciation. As of September 30, 2010,March 31, 2011, the fair value of the swap was a liability of approximately $0.$3.5 million.
As of March 31, 2011 the Company had twelve interest rate cap contracts totaling a notional amount of $191.9 million that qualify for hedge accounting as they effectively limit the Company’s exposure to interest rate risk by providing a ceiling on the underlying variable interest rate for the Company’s $213.1 million of tax exempt variable rate debt. The aggregate carrying value of the interest rate cap contracts was an asset of $0.2 million. The overall fair value of the interest rate caps changed by $0.1 million during the three months ended March 31, 2011
During the first quarter of 2011, the Company settled its remaining $20.0 million of forward starting swap for a $2.3 million payment to the counterparty. The changes in the fair values of the derivatives are reflected in other comprehensive (loss) income in the Company’s condensed consolidated financial statements.
Development and Predevelopment Pipeline
The Company defines development activities as new properties that are being constructed, or are newly constructed and, in the case of development communities, are in a phase of lease-up and have not yet reached stabilized operations. As of September 30, 2010,March 31, 2011, the Company had three consolidated and one unconsolidated joint venture development projects aggregating 900912 units for an estimated cost of $344.4$319.2 million, of which $70.7$180.3 million remains to be expended.
The Company defines the predevelopment pipeline as new properties in negotiation or in the entitlement process with a high likelihood of becoming development activities. As of September 30, 2010,March 31, 2011, the Company had twothree development communities aggregating 3571,076 units that were classified as predevelopment projects. The estimated total cost of the predevelopment pipeline at September 30, 2010March 31, 2011 was $32.3$40.8 million. The Company may also from time to time acquire land for future development or sale. The Company owned four land parcels held for future development or sale aggregating an estimated 1,020299 units as of September 30, 2010.March 31, 2011. The aggregate carrying value for these four land parcels was $66.3$44.5 million as of September 30, 2010.March 31, 2011. The Company expects to fund the development and predevelopment pipeline by using a combination of some or all of the following sources: its working capital, amounts available on its lines of credit, net proceeds from public and private equity and debt issuances, and proceeds from the disposition of properties, if any.
Redevelopment
The Company defines redevelopment activities as existing properties owned or recently acquired, which have been targeted for additional investment by the Company with the expectation of increased financial returns through property improvement. The Company’s redevelopment strategy strives to improve the financial and physical aspects of the Company’s redevelopment apartment communities and to target at least an 8 to 10 percent return on the incremental renovation investment. Many of the Company’s properties are older and in excellent neighborhoods, providing lower density with large floor plans that represent attractive redevelopment opportunities. During redevelopment, apartment units may not be available for rent and, as a result, may have less than stabilized operations. As o f September 30, 2010,of March 31, 2011, the Company had fourfive redevelopment communities aggregating 1,0321,188 apartment units with estimated redevelopment costs of $64.2$75.0 million, of which approximately $33.1$40.3 million remains to be expended.
Alternative Capital Sources
Fund II has eight institutional investors, and the Company, with combined partner equity contributions of $265.9 million that were fully contributed as of 2008. The Company contributed $75.0 million to Fund II, which represents a 28.2% interest as general partner and limited partner. Fund II utilized leverage equal to approximately 55% upon the initial acquisition of the underlying real estate. Fund II invested in apartment communities in the Company’s targeted West Coast markets and, as of September 30, 2010,March 31, 2011, owned fourteen apartment communities. The Company records revenue for its asset management, property management, development and redevelopment services when earned, and promote income when realized if Fund II exceeds certain financial return benchmarks.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements, in accordance with U.S. generally accepted accounting principles requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. We define critical accounting policies as those accounting policies that require our management to exercise their most difficult, subjective and complex judgments. Our critical accounting policies relate principally to the following key areas: (i) consolidation under applicable accounting standards for entities that are not wholly owned; (ii) assessing the carrying values of our real estate properties and investments in and advances to joint ventures and affiliates; (iii) internal cost capitalization; and (iv) qualification as a RE IT.REIT. The Company bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from those estimates made by management.
The Company’s critical accounting policies and estimates have not changed materially from information reported in Note 2, “Summary of Critical and Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.2010.
Forward Looking Statements
Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this quarterly report on Form 10-Q which are not historical facts may be considered forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Company's expectations, hopes, intentions, beliefs and strategies regarding the future. Forward looking statements include statements regarding the Company’s expectations as to the total projected costs of predevelopment, development and redevelopment projects, expectations that scheduled rents will continue to decreaseincrease from the same period in 2009,2010, expectation that the Company may continue to purchase Series G P referredPreferred Stock and bonds, the Company’s reduced risk of loss from mold cases, beliefs as to our ability to meet our cash needs during 20102011 and to provide for dividend payments in accordance with REIT requirements, expectations as to the sources for funding the Company’s development and redevelopment pipeline and statements regarding the Company's financing activities.
Such forward-looking statements involve known and unknown risks, uncertainties and other factors including, but not limited to, that the Company will fail to achieve its business objectives, that the total projected costs of current predevelopment, development and redevelopment projects exceed expectations, that such development and redevelopment projects will not be completed, that development and redevelopment projects and acquisitions will fail to meet expectations, that estimates of future income from an acquired property may prove to be inaccurate, that future cash flows will be inadequate to meet operating requirements and/or will be insufficient to provide for dividend payments in accordance with REIT requirements, that there may be a downturn in the markets in which the Company's properties are located, that the terms of any refin ancingrefinancing may not be as favorable as the terms of existing indebtedness, and that mold lawsuits will be more costly than anticipated, as well as those risks, special considerations, and other factors referred to in Item 1A, “Risk Factors,” in Part II “Other Information” in this current report on Form 10-Q for the quarter ended September 30, 2010March 31, 2011 and those referred to in Item 1A, “Risk Factors,” of the Company's Annual Report on Form 10-K for the year ended December 31, 2009,2010, and those risk factors and special considerations set forth in the Company's other filings with the Securities and Exchange Commission (the “SEC”) which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. All forward-looking statements are made as of the date hereof, and the Company assumes no obligation to update this informat ion.information.
Funds from Operations (“FFO”)
FFO is a financial measure that is commonly used in the REIT industry. The Company presents funds from operations as a supplemental performance measure. FFO is not used by the Company as, nor should it be considered to be, an alternative to net earnings computed under GAAP as an indicator of the Company’s operating performance or as an alternative to cash from operating activities computed under GAAP as an indicator of the Company’s ability to fund its cash needs.
FFO is not meant to represent a comprehensive system of financial reporting and does not present, nor does it intend to present, a complete picture of the Company's financial condition and operating performance. The Company believes that net earnings computed under GAAP remain the primary measure of performance and that FFO is only meaningful when it is used in conjunction with net earnings. Further, the Company believes that its consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of its financial condition and its operating performance.
In calculating FFO, the Company follows the definition for this measure published by the National Association of REITs (“NAREIT”), which is a REIT trade association. The Company believes that, under the NAREIT FFO definition, the two most significant adjustments made to net income are (i) the exclusion of historical cost depreciation and (ii) the exclusion of gains and losses from the sale of previously depreciated properties. The Company agrees that these two NAREIT adjustments are useful to investors for the following reasons:
| (a) historical cost accounting for real estate assets in accordance with GAAP assumes, through depreciation charges, that the value of real estate assets diminishes predictably over time. NAREIT stated in its White Paper on Funds from Operations “since real estate asset values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves.” Consequently, NAREIT’s definition of FFO reflects the fact that real estate, as an asset class, generally appreciates over time and depreciation charges required by GAAP do not reflect the underlying economic realities. |
| (b) REITs were created as a legal form of organization in order to encourage public ownership of real estate as an asset class through investment in firms that were in the business of long-term ownership and management of real estate. The exclusion, in NAREIT’s definition of FFO, of gains and losses from the sales of previously depreciated operating real estate assets allows investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT’s activity and assists in comparing those operating results between periods. |
Management believes that it has consistently applied the NAREIT definition of FFO to all periods presented. However, there is judgment involved and other REITs’ calculation of FFO may vary from the NAREIT definition for this measure, and thus their disclosure of FFO may not be comparable to the Company’s calculation.
The following table sets forth the Company’s calculation of FFO for the three and nine months ended September 30,March 31, 2011 and 2010 and 2009 (in thousands except for per share data):
| Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | March 31, | ||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2011 | 2010 | |||||||||||||||||||
| Net income available to common stockholders | $ | 6,377 | $ | 21,739 | $ | 28,986 | $ | 75,418 | $ | 8,418 | $ | 13,127 | ||||||||||||
| Adjustments: | ||||||||||||||||||||||||
| Depreciation and amortization | 31,638 | 29,895 | 93,385 | 88,173 | 37,031 | 30,487 | ||||||||||||||||||
Gains not included in FFO, net of disposition costs (1) | - | (2,237 | ) | - | (5,091 | ) | ||||||||||||||||||
Noncontrolling interest and co-investments (2) | 1,914 | 1,394 | 5,954 | 6,097 | ||||||||||||||||||||
Noncontrolling interest and co-investments (1) | 3,070 | 2,129 | ||||||||||||||||||||||
| Funds from operations | $ | 39,929 | $ | 50,791 | $ | 128,325 | $ | 164,597 | $ | 48,519 | $ | 45,743 | ||||||||||||
| Funds from operations per share - diluted | $ | 1.25 | $ | 1.69 | $ | 4.05 | $ | 5.61 | $ | 1.44 | $ | 1.46 | ||||||||||||
Weighted average number shares outstanding diluted (3) | 31,963,327 | 30,070,076 | 31,723,857 | 29,360,710 | ||||||||||||||||||||
Weighted average number shares outstanding diluted (2) | 33,787,232 | 31,438,408 | ||||||||||||||||||||||
| (1) |
| Amount includes the following: (i) noncontrolling interest related to Operating Partnership units, and (ii) add back of depreciation expense from unconsolidated co-investments and less depreciation attributable to third-party ownership of consolidated co-investments. |
| Assumes conversion of all dilutive outstanding operating partnership interests in the Operating Partnership. |
Item 3: Quantitative and Qualitative Disclosures About Market Market Risks
Interest Rate Hedging Activities
The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. As of September 30, 2010, we had entered into five forward-starting swap contracts to mitigate the risk of changes in the interest-related cash outflows on forecasted issuance of long-term debt. The forward-starting swaps are cash flow hedges of the variability in ten years of forecasted interest payments associated with the future financings of debt between 2010 and 2011. The Company had twelve interest rate cap contracts totaling a notional amount of $191.9 million that qualify for hedge accounting as they effectively limit the Company’s exposure to interest rate risk by providing a ceiling on the underlying variable interest rate for the Company’s $213.5$213.1 million of tax exempt variable rate debt. The forward starting swaps and interest rate caps are designated as cash flow hedges, and the Company does not have any fair value hedges as of September 30, 2010.March 31, 2011.
| Carrying and | Estimated Carrying Value | |||||||||||||||||||
| Notional | Maturity | Estimate | + 50 | - 50 | ||||||||||||||||
| (Dollars in thousands) | Amount | Date Range | Fair Value | Basis Points | Basis Points | |||||||||||||||
| Cash flow hedges: | ||||||||||||||||||||
| Interest rate forward-starting swaps | $ | 275,000 | 2010-2011 | $ | (71,829 | ) | (58,117 | ) | (86,648 | ) | ||||||||||
| Interest rate caps | 191,943 | 2011-2015 | 158 | 409 | 44 | |||||||||||||||
| Total cash flow hedges | $ | 466,943 | 2010-2015 | $ | (71,671 | ) | $ | (57,708 | ) | $ | (86,604 | ) | ||||||||
Interest Rate Sensitive Liabilities
The Company is exposed to interest rate changes primarily as a result of its lines of credit and long-term tax exempt variable rate debt. The Company’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives the Company borrows primarily at fixed rates and may enter into derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate its interest rate risk on a related financial instrument. The Company does not enter into derivative or interest rate transactions for speculative purposes.
The Company’s interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows.
| For the Years Ended | 2010(1) | 2011(2) | 2012 | 2013 | 2014 | Thereafter | Total | Fair value | |||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||
| Fixed rate debt | $ | 3,209 | 146,035 | 30,944 | 221,145 | 79,715 | 968,368 | $ | 1,449,416 | $ | 1,540,000 | ||||||||||||||||||||
| Average interest rate | 6.2 | % | 6.4 | % | 5.4 | % | 5.2 | % | 5.4 | % | 5.6 | % | 5.6 | % | |||||||||||||||||
| Variable rate debt | $ | - | 139,715 | 9,775 | 250,000 | - | 213,545 | (3) | $ | 613,035 | $ | 590,000 | |||||||||||||||||||
| Average interest | 0.0 | % | 3.6 | % | 4.1 | % | 1.5 | % | 0.0 | % | 2.0 | % | 2.2 | % | |||||||||||||||||
| For the Years Ended | 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | Fair value | |||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||
| Fixed rate debt | $ | 46,508 | 30,688 | 183,613 | 78,934 | 71,286 | 1,295,363 | $ | 1,706,392 | $ | 1,800,000 | ||||||||||||||||||||||
| Average interest rate | 5.3 | % | 5.4 | % | 5.6 | % | 5.1 | % | 5.2 | % | 5.8 | % | 5.8 | % | |||||||||||||||||||
| Variable rate debt | $ | 159,000 | 9,775 | 281,925 | - | - | 213,128 | (1) | $ | 663,828 | $ | 641,400 | |||||||||||||||||||||
| Average interest rate | 3.1 | % | 4.0 | % | 1.4 | % | 0.0 | % | 0.0 | % | 2.0 | % | 2.0 | % | |||||||||||||||||||
The table incorporates only those exposures that exist as of September 30, 2010;March 31, 2011; it does not consider those exposures or positions that could arise after that date. As a result, our ultimate realized gain or loss, with respect to interest rate fluctuations and hedging strategies, would depend on the exposures that arise prior to settlement.
As of September 30, 2010,March 31, 2011, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2010,March 31, 2011, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such disclosure controls and procedures were also effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
There were no changes in the Company's internal control over financial reporting, that occurred during the quarter ended September 30, 2010,March 31, 2011, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Part II -- Other InformationInformation
Recently there has been an increasing number of lawsuits against owners and managers of apartment communities alleging personal injury and property damage caused by the presence of mold in residential real estate. Some of these lawsuits have resulted in substantial monetary judgments or settlements. The Company has been sued for mold related matters and has settled some, but not all, of such matters. Insurance carriers have reacted to mold related liability awards by excluding mold related claims from standard policies and pricing mold endorsements at prohibitively high rates.
The Company has, however, purchased pollution liability insurance, which includes some coverage for mold. The Company has adopted policies for promptly addressing and resolving reports of mold when it is detecte d,detected, and to minimize any impact mold might have on residents of the property. The Company believes its mold policies and proactive response to address any known existence, reduces its risk of loss from these cases. There can be no assurances that the Company has identified and responded to all mold occurrences, but the Company promptly addresses all known reports of mold. Liabilities resulting from such mold related matters are not expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows. As of September 30, 2010,March 31, 2011, no potential liabilities for mold and other environmental liabilities are quantifiable and an estimate of possible loss cannot be made.
The Company carries comprehensive liability, fire, extended coverage and rental loss insurance for each of the Company’s communities. Insured risks for comprehensive liability covers claims in excess of $25,000 per incident, and property insurance covers losses in excess of a $5.0 million deductible per incident. There are, however, certain types of extraordinary losses, such as, for example, losses for terrorism and earthquake, for which the Company does not have insurance. Substantially all of the Properties are located in areas that are subject to earthquakes.
The Company is subject to various other lawsuits in the normal course of its business operations. Such lawsuits could, but are not expected to, have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
Item 1A: RiskIt Factorsem IA: Risk Factors
There were no material changes to the Risk Factors disclosed in Item IA of the Company’s Annual Report on Form 10-K for the year ended December 31, 20092010 as filed with the SEC and available at www.sec.gov.
| A. | Exhibits |
| Ratio of Earnings to Fixed Charges. |
| Certification of |
| Certification of Michael T. Dance, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Certification of |
| Certification of Michael T. Dance, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101 | XBRL (Extensible Business Reporting Language). The following materials from Essex Property Trust, Inc.’s Quarterly Report on form 10-Q for the period ended |
SIGNATSIUREGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ESSEX PROPERTY TRUST, INC. | ||
| (Registrant) | ||
| Date: | ||
| By: /S/ BRYAN G. HUNT | ||
| Bryan G. Hunt | ||
| First Vice President, Chief Accounting Officer | ||
| By: /S/ MICHAEL T. DANCE | ||
| Michael T. Dance | ||
| Executive Vice President, Chief Financial Officer | ||
| (Authorized Officer, Principal Financial Officer) | ||
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