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Essex Property Trust 10-Q 2005
Form 10-Q
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to _________

Commission file number 001-13106 

ESSEX PROPERTY TRUST, INC. 
(Exact name of Registrant as Specified in its Charter)

Maryland
 
77-0369576
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification Number)

925 East Meadow Drive
Palo Alto, California 94303
(Address of Principal Executive Offices including Zip Code)

(650) 494-3700
(Registrant's Telephone Number, Including Area Code)


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 is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). 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:

22,854,403 shares of Common Stock as of November 4, 2005


1
Logo
 
ESSEX PROPERTY TRUST, INC.
FORM 10-Q
INDEX

   
Page No.
PART I. FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements (Unaudited):
     
 
Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004
     
 
Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2004
     
 
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the nine months ended September 30, 2005
     
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004
     
 
Notes to Consolidated Financial Statements
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
29
     
Item 4.
Controls and Procedures
     
PART II. OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
30
     
Item 6.
Exhibits
     
Signature
32

2


Part I -- Financial Information


"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 consolidated unaudited balance sheets, statements of operations, stockholders' equity and cash flows of the Company reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the aforementioned consolidated financial statements for the interim periods.

The accompanying unaudited consolidated financial statements should be read in conjunction with the notes to such consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations herein. Additionally, these unaudited 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, 2004.











 


3

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except per share amounts)
   
 September 30,
 
 December 31,
 
   
 2005
 
 2004
 
Assets
 
 
 
 
 
Real estate:
           
Rental properties:
           
Land and land improvements
 
$
554,028
 
$
536,600
 
Buildings and improvements
   
1,935,543
   
1,834,594
 
           
     
2,489,571
   
2,371,194
 
  Less accumulated depreciation
   
(380,772
)
 
(329,652
)
           
     
2,108,799
   
2,041,542
 
  Real estate investments held for sale, net of accumulated
             
  depreciation of $496 as of December 31, 2004
   
-
   
14,445
 
Investments
   
27,637
   
49,712
 
Real estate under development
   
34,834
   
38,320
 
           
     
2,171,270
   
2,144,019
 
Cash and cash equivalents-unrestricted
   
19,365
   
10,644
 
Cash and cash equivalents-restricted
   
15,027
   
21,255
 
Notes and other receivables from related parties
   
1,202
   
1,435
 
Notes and other receivables
   
8,069
   
9,535
 
Prepaid expenses and other assets
   
20,968
   
19,591
 
Deferred charges, net
   
10,424
   
10,738
 
    Total assets
 
$
2,246,325
 
$
2,217,217
 
           
Liabilities and Stockholders' Equity
             
Mortgage notes payable
 
$
1,164,504
 
$
1,067,449
 
Lines of credit
   
149,735
   
249,535
 
Accounts payable and accrued liabilities
   
45,024
   
29,997
 
Dividends payable
   
22,700
   
21,976
 
Other liabilities
   
12,522
   
11,853
 
Deferred gain
   
2,193
   
5,000
 
Total liabilities
   
1,396,678
   
1,385,810
 
Minority interests
   
231,177
   
240,130
 
Stockholders' equity:
             
Common stock, $.0001 par value, 655,682,178
             
authorized, 23,085,153 and
             
23,139,876 issued and outstanding
   
2
   
2
 
Cumulative redeemable preferred stock; $.0001 par value:
             
No shares issued and outstanding:
             
7.875% Series B 2,000,000 shares authorized
   
-
   
-
 
7.875% Series D 2,000,000 shares authorized
   
-
   
-
 
   7.8125% Series F 1,000,000 shares authorized,
             
1,000,000 and 1,000,000 shares issued and outstanding,
         
liquidation value
   
25,000
   
25,000
 
Excess stock, $.0001 par value, 330,000,000 shares
             
authorized and no shares issued and outstanding
   
-
   
-
 
Additional paid-in capital
   
656,915
   
646,744
 
Distributions in excess of accumulated earnings
   
(63,538
)
 
(80,469
)
Accumulated other comprehensive income
   
91
   
-
 
Total stockholders' equity
   
618,470
   
591,277
 
Commitments and contingencies
         
Total liabilities and stockholders' equity
 
$
2,246,325
 
$
2,217,217
 
See accompanying notes to the unaudited consolidated financial statements.
 
4

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amount)
 
   
 Three Months Ended
 
 Nine Months Ended
 
   
 September 30,
 
 September 30,
 
   
 2005
 
2004
 
 2005
 
2004
 
Revenues:
 
 
 
 
 
 
 
 
 
Rental and other property
 
$
80,219
 
$
71,733
 
$
234,851
 
$
206,991
 
Management and other fees from affiliates
   
1,601
   
15,701
   
9,108
   
18,318
 
     
81,820
   
87,434
   
243,959
   
225,309
 
Expenses:
                 
Property operating, excluding real estate taxes
   
19,592
   
18,673
   
57,198
   
52,494
 
Real estate taxes
   
7,066
   
6,253
   
20,517
   
17,821
 
Depreciation and amortization
   
20,323
   
18,061
   
59,945
   
53,428
 
Interest
   
18,566
   
16,394
   
54,866
   
45,785
 
Amortization of deferred financing costs
   
451
   
449
   
1,490
   
1,179
 
General and administrative
   
4,560
   
7,639
   
13,574
   
13,985
 
Other expenses
   
1,400
   
-
   
2,900
   
-
 
     
71,958
   
67,469
   
210,490
   
184,692
 
                           
Gain on sale of real estate
   
-
   
7,909
   
6,391
   
7,909
 
Interest and other income
   
4,978
   
836
   
7,932
   
2,095
 
Equity income in co-investments
   
21
   
15,365
   
17,575
   
16,460
 
Minority interests
   
(4,929
)
 
(9,509
)
 
(16,752
)
 
(20,588
)
Income from continuing operations before income
                 
  tax provision
   
9,932
   
34,566
   
48,615
   
46,493
 
Income tax provision
   
(1,185
)
 
(122
)
 
(2,386
)
 
(208
)
Income from continuing operations
   
8,747
   
34,444
   
46,229
   
46,285
 
                   
Discontinued operations (net of minority interests)
                         
Operating income from real estate sold
   
-
   
586
   
1,693
   
895
 
Gain on sale of real estate
   
-
   
-
   
26,581
   
-
 
Income from discontinued operations
   
-
   
586
   
28,274
   
895
 
Net income
   
8,747
   
35,030
   
74,503
   
47,180
 
Dividends to preferred stockholders - Series F
   
(488
)
 
(488
)
 
(1,465
)
 
(1,464
)
Net income available to common stockholders
 
$
8,259
 
$
34,542
 
$
73,038
 
$
45,716
 
                   
Per common share data:
                         
Basic:
                         
Income from continuing operations available to
                         
common stockholders
 
$
0.36
 
$
1.48
 
$
1.94
 
$
1.96
 
Income from discontinued operations
   
-
   
0.03
   
1.23
   
0.04
 
Net income available to common stockholders
 
$
0.36
 
$
1.51
 
$
3.17
 
$
2.00
 
Weighted average number of common shares
                 
outstanding during the period
   
23,106,569
   
22,940,419
   
23,073,650
   
22,897,161
 
                   
Diluted:
                         
Income from continuing operations available to
                         
common stockholders
 
$
0.35
 
$
1.46
 
$
1.92
 
$
1.93
 
Income from discontinued operations
   
-
   
0.03
   
1.21
   
0.04
 
Net income available to common stockholders
 
$
0.35
 
$
1.49
 
$
3.13
 
$
1.97
 
Weighted average number of common shares
                 
outstanding during the period
   
23,411,959
   
23,205,958
   
23,364,039
   
23,130,148
 
                   
Dividend per common share
 
$
0.81
 
$
0.79
 
$
2.43
 
$
2.37
 
                   
See accompanying notes to the unaudited consolidated financial statements.
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the nine months ended
September 30, 2005
(Unaudited)
(Dollars and shares in thousands)

                                     
Distributions
     
   
Series F
             
Additional
   
Accumulated other
   
in excess of
     
   
Preferred stock
 
Common stock
   
paid-in
   
comprehensive
   
accumulated
     
   
Shares
 
 
Amount
 
Shares
 
 
Amount
   
capital
   
income
   
earnings
   
Total
Balances at December 31, 2004
 
1,000
   
25,000
 
23,034
   
2
   
646,744
   
-
   
(80,469)
 
591,277
Issuance of common stock under
                                           
stock-based compensation plans
 
-
   
-
 
105
   
-
   
4,662
   
-
   
-
   
4,662
Reallocation of minority interest (1)
 
-
   
-
 
-
   
-
   
5,509
   
-
   
-
   
5,509
Comprehensive income:
                                           
    Net income
 
-
   
-
 
-
   
-
   
-
   
-
   
74,503
   
74,503
  Change in fair value of cash flow hedges
 
-
   
-
 
-
   
-
   
-
   
91
   
-
   
91
Comprehensive income
                                         
74,594
Common and preferred stock dividends declared
 
-
   
-
 
-
   
-
   
-
   
-
   
(57,572)
   
(57,572)
Balances at September 30, 2005
 
1,000
 
$
25,000
 
23,139
 
$
2
 
$
656,915
 
$
91
 
$
(63,538)
 
$
618,470
   
 
   
 
 
 
   
 
   
 
         
 
   
 
(1) During the nine months ended September 30, 2005, the Company recorded a true-up of the reallocation of minority interest as of December 31, 2004. This true-up was not material to stockholders’ equity at either September 30, 2005 or December 31, 2004.


See accompanying notes to the unaudited consolidated financial statements.

Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
 
 Nine Months Ended
 
   
 September 30,
 
   
 2005
 
2004
 
Net cash provided by operating activities
 
$
106,652
 
$
87,867
 
           
Cash flows from investing activities:
             
Additions to real estate:
             
Acquisitions and improvements to recent acquisitions
   
(30,968
)
 
(129,464
)
Capital expenditures and redevelopment
   
(23,510
)
 
(11,557
)
Additions to real estate under development
   
(22,540
)
 
(11,696
)
Dispositions of real estate and investments
   
6,585
   
91,735
 
Change in restricted cash
   
6,228
   
(8,688
)
Additions to notes receivable from related parties and other receivables
   
(3,278
)
 
(5,234
)
Repayment of notes receivable from related parties and other receivables
   
4,925
   
1,373
 
Net distributions from (contributions to) limited partnerships
   
43,341
   
17,356
 
Net cash used in investing activities
   
(19,217
)
 
(56,175
)
           
Cash flows from financing activities:
             
Proceeds from mortgage notes payable and lines of credit
   
152,971
   
321,702
 
Repayment of mortgage notes payable and lines of credit
   
(154,813
)
 
(215,051
)
Additions to deferred charges
   
(1,167
)
 
(4,032
)
Net proceeds from stock options exercised
   
4,143
   
4,022
 
Distributions to minority interest partners
   
(17,353
)
 
(21,299
)
Redemption of minority interest limited partnership units
   
(5,463
)
 
(5,624
)
Redemption of minority interest series E preferred units
   
-
   
(55,000
)
Common and preferred stock dividends paid
   
(57,032
)
 
(54,954
)
Net cash used in financing activities
   
(78,714
)
 
(30,236
)
           
Net increase in cash and cash equivalents
   
8,721
   
1,456
 
Cash and cash equivalents at beginning of period
   
10,644
   
14,768
 
Cash and cash equivalents at end of period
 
$
19,365
 
$
16,224
 
           
Supplemental disclosure of cash flow information:
             
Cash paid for interest, net of $647 and $3,108 capitalized
             
in 2005 and 2004, respectively
 
$
54,245
 
$
44,352
 
Assumption of mortgage loans payable in conjunction with the purchases of real estate
 
$
-
 
$
167,635
 
Common stock issued pursuant to phantom stock plan
 
$
362
 
$
39
 
Issuance of Operating Partnership Units in connection with the purchase of real estate
 
$
-
 
$
6,479
 
Transfer of real estate under development to rental properties
 
$
23,102
 
$
-
 
Proceeds from disposition of real estate held by exchange facilitator
 
$
62,000
 
$
9,536
 
               
See accompanying notes to the unaudited consolidated financial statements.
7

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(Unaudited)

(1)
Organization and Basis of Presentation 
 
The unaudited consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America 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. These unaudited 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, 2004.
 
All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. Certain prior year balances have been reclassified to conform to the current year presentation.
 
The unaudited consolidated financial statements for the nine months ended September 30, 2005 and 2004 include the accounts of the Company and Essex Portfolio, L.P. (the "Operating Partnership", which holds the operating assets of the Company). See below for a description of entities consolidated by the Operating Partnership for all periods presented pursuant to its adoption of FIN 46 Revised. The Company is the sole general partner in the Operating Partnership, with a 90.5% and 90.3% general partnership interest as of September 30, 2005 and December 31, 2004, respectively.
 
As of September 30, 2005, the Company has ownership interests in 125 multifamily properties (containing 25,950 units), three office buildings (with approximately 166,340 square feet), three recreational vehicle parks (comprising 562 spaces) and one manufactured housing community (containing 157 sites), (collectively, the "Properties"). The Properties are located in Southern California (Los Angeles, Ventura, Orange, Riverside and San Diego counties), Northern California (the San Francisco Bay Area), the Pacific Northwest (the Seattle, Washington and Portland, Oregon metropolitan areas) and other areas (Houston, Texas).
 
Fund Activities
 
Essex Apartment Value Fund, L.P. ("Fund I"), is an investment fund organized by the Company in 2001 to add value through rental growth and asset appreciation, utilizing the Company's development, redevelopment and asset management capabilities. An affiliate of the Company, Essex VFGP, L.P. ("VFGP"), is a 1% general partner and is a 20.4% limited partner. The Operating Partnership owns a 99% limited partnership interest in VFGP.
 
On September 27, 2004 the Company announced the final closing of partner equity commitments for Essex Apartment Value Fund II (“Fund II”). Fund II has eight institutional investors, including the Company, with combined partner equity commitments of $265.9 million. Essex has committed $75.0 million to Fund II, which represents a 28.2% interest as general partner and limited partner. Fund II expects to utilize leverage equal to approximately 65% of the estimated value of the underlying real estate. Fund II will invest in multifamily properties in the Company’s targeted West Coast markets with an emphasis on investment opportunities in Seattle and the San Francisco Bay Area. Subject to certain exceptions, Fund II will be Essex’s exclusive investment vehicle until October 31, 2006, or when Fund II’s committed capital has been invested, whichever occurs first. Consistent with Fund I, Essex will record revenue for its asset management, property management, development and redevelopment services, and promote distributions should Fund II exceed certain financial return benchmarks.
8

    Variable Interest Entities
 
In accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46 Revised (FIN 46R), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”, the Company consolidates Essex Management Corporation (EMC), Essex Fidelity I Corporation (EFC), 17 Down REIT limited partnerships (comprising ten properties), an office building that is subject to loans made by the Company, and the multifamily improvements owned by a third party in which the Company owns the land underlying these improvements and from which the Company receives fees, including land lease, subordination and property management fees, and a joint venture to develop a building in Los Angeles, California. The Company consolidated these entities because it is deemed the primary beneficiary under FIN 46R. The Company's total assets and liabilities related to these variable interest entities (VIEs), net of intercompany eliminations, were approximately $232.2 million and $156.0 million, respectively, at September 30, 2005 and $238.1 million and $155.1 million, respectively, at December 31, 2004.
 
Interest holders in VIEs consolidated by the Company are allocated net income equal to the cash payments made to those interest holders for services rendered or distributions from cash flow. The remaining results of operations are generally allocated to the Company.
 
Properties consolidated in accordance with FIN 46R were encumbered by third party, non-recourse loans totaling $150.3 million and $151.3 million as of September 30, 2005 and December 31, 2004, respectively.
 
As of September 30, 2005 the Company is involved with four VIEs, of which it is not deemed to be the primary beneficiary. Total assets and liabilities of these entities as of September 30, 2005 were approximately $97.8 million and $74.2 million, respectively. The Company does not have a significant exposure to loss resulting from its involvement with these unconsolidated VIEs.

    Stock-Based Compensation
 
Stock-based compensation expense under the fair value method was $308,000 and $169,000 for the three months ended September 30, 2005 and 2004, respectively and $679,000 and $496,000 for the nine months ended September 30, 2005 and 2004, respectively. There were 6,000 stock options granted during the three months ended September 30, 2005 and no options granted for the three months ended September 30, 2004. There were 143,800 and 20,000 options granted for the nine months ended September 30, 2005 and 2004, respectively. The average fair value of stock options granted was $12.07 for the three months ended September 30, 2005, and $9.60 and $7.11 per share for the nine months ended September 30, 2005 and 2004, respectively. The fair value was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2005
 
2004
 
2005
 
2004
Stock price
$89.33 - $89.98
 
$62.34
 
$69.11 - $89.98
 
$62.34
Risk-free interest rates
3.94% - 4.06%
 
3.94%
 
3.64% - 4.30%
 
3.94%
Expected lives
6 years
 
5 years
 
5-6 years
 
5 years
Volatility
18.54%
 
19.07%
 
18.09% -18.54%
 
19.07%
Dividend yield
4.22% - 4.24%
 
5.07%
 
4.22% - 5.13%
 
5.07%
 
Accounting Changes

(A) Depreciation 
 
Beginning in 2003, the Company implemented an upgrade to its subsidiary ledger for accounting for fixed assets. The Company completed this system upgrade in the first quarter of 2004. In conjunction with this system upgrade, the Company determined that cumulative depreciation expense generated by consolidated or equity method rental properties was understated by approximately $2.1 million through December 31, 2003 and this amount was recorded during the quarter ended March 31, 2004.
9

The Company does not believe that the correction is material to any previously reported financial statements and is not material to any consolidated earnings trends.
 
(B) New Accounting Pronouncements Issued But Not Yet Adopted
 
In June 2005, the FASB ratified the Emerging Issues Task Force (EITF) consensus on Issue No. 04-5 “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partner Have Certain Rights.”This consensus establishes the presumption that general partners in a limited partnership control that limited partnership regardless of the extent of the general partners’ ownership interest in the limited partnership. The consensus further establishes that the rights of the limited partners can overcome the presumption of control by the general partners, if the limited partners have either (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause or (b) substantive participating rights. Whether the presumption of control is overcome is a matter of judgment based on the facts and circumstances, for which the consensus provides additional guidance. This consensus is currently applicable to the Company for new or modified partnerships, and will otherwise be applicable to existing partnerships in 2006. This consensus applies to limited partnerships or similar entities, such as limited liability companies that have governing provisions that are the functional equivalent of a limited partnership. The Company is currently evaluating the effect of this consensus on its consolidation policies.
 
In December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 123 revised, “Share-Based Payment”. This statement is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB No. 25, “Accounting for Stock Issued to Employees”. The Statement requires companies to recognize in the income statement the grant-date fair value of stock options and other equity based compensation issued to employees. This Statement is effective for fiscal years beginning after June 15, 2005. We are in the process of evaluating the impact of this Statement on our future results of operations.
 
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets an amendment of APB No. 29”. This Statement amends APB Opinion No. 29, “Accounting for Non-monetary Transactions” to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. That exception required that some non-monetary exchanges be recorded on a carryover basis versus this Statement, which requires that an entity record a non-monetary exchange at fair value and recognize any gain or loss if the transaction has commercial substance. This Statement is effective for fiscal years beginning after June 15, 2005. We do not believe that the adoption of SFAS No. 153 will have a material impact on our financial position, net earnings or cash flows.

Reclassifications
 
Certain other reclassifications have been made to prior periods in order to conform them to the current period presentation. Such reclassifications have no impact on reported earnings, total assets or total liabilities.
 
(2)   Significant Transactions for the Quarter Ended September 30, 2005
 
    (A) Acquisitions    
 
On September 28, 2005, the Company acquired Marbella Apartments, a 60-unit apartment community, located in Los Angeles, California, for approximately $13.6 million. The community is in proximity to other existing properties.
   
     (B) Development Communities
The Company defines development communities as new apartment properties that are being constructed or are newly constructed, which are in a phase of lease-up and have not yet reached stabilized operations. As of
10

September 30, 2005, the Company had ownership interests in three development communities (excluding development projects owned by the Essex Apartment Value Fund, L.P. described below), aggregating 505 multifamily units. The estimated total cost of the three development communities is $122.8 million with $98.8 million remaining to be expended.
 
(C) Redevelopment Communities
 
The Company defines redevelopment communities as existing properties owned or recently acquired, which have been targeted for investment by the Company with the expectation of increased financial returns through property improvement. Redevelopment communities typically have some apartment units that are not available for rent and, as a result, may have less than stabilized operations. At September 30, 2005, the Company had ownership interests in six redevelopment communities, aggregating 1,905 multifamily units with estimated redevelopment costs of $33.9 million, of which approximately $19.3 million remains to be expended.
 
(D) Debt

On July 14, 2005, the Company obtained a non-recourse mortgage loan on previously unencumbered property in the aggregate amount of $40.3 million with a fixed interest rate of 4.935% for a 10-year term that matures on August 1, 2015.

(E) Equity
 
On September 21, 2005, the Company’s Board of Directors declared a quarterly distribution of $0.48828 per share, which represents an annual distribution of $1.9531 per share on its 7.8125% Series F Cumulative Redeemable Preferred Shares. Distributions are or will be payable on December 1, 2005 to shareholders of record as of November 16, 2005.
 
On September 21, 2005, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.81 per common share, which was payable on October 15, 2005 to shareholders of record as of September 30, 2005. On an annualized basis, the dividend represents a distribution of $3.24 per common share.
 
      (F) Interest and Other Income
 
During 2005, the Company received from the developer at The Essex at Lake Merritt property approximately $4.3 million and $6.1 million of participating interest for the three and nine months ended September 30, 2005, respectively.
 
 
(G)
The Essex Apartment Value Fund ("Fund I")

Fund I has sold all of its apartment communities, aggregating 4,646 units, which were provided for in the purchase and sale agreement with United Dominion Realty Trust, Inc. (UDR) for the agreed upon contract price of approximately $756 million. The UDR sales included River Terrace, a newly developed 250-unit apartment community located in Santa Clara, California, which was sold on August 3, 2005 for approximately $63.0 million.

Subsequent to the quarter, Fund I sold its remaining asset Kelvin Avenue, a land parcel, which is permitted for the development of a 132-unit multifamily community, located in Irvine, California, for a contract price of $10.5 million. Fund I has guaranteed to refund $500,000 to the buyer, if necessary entitlements are not obtained pursuant to the requirements of the purchase and sale agreement.

(H) The Essex Apartment Value Fund II (“Fund II”)
 
On September 1, 2005, Fund II acquired Echo Ridge Apartments, a 120-unit apartment community, located in Snoqualmie, Washington, for approximately $17.9 million. Echo Ridge is comprised of 21, 2-story apartment buildings, within a 1,300-acre master planned community.
 
11

On September 30, 2005, Fund II acquired Morning Run Apartments, a 222-unit apartment community, located in Monroe, Washington, for approximately $19.75 million. Morning Run consists of 20, two- and three-story buildings, located on 11 acres.

 
(3)
Investments

The following table details the Company's investments (dollars in thousands):
 
September 30,
 
December 31,
 
 
 
2005
 
2004
 
 
 
 
 
 
 
Investments in joint ventures accounted for under the equity
 
 
 
 
 
      method of accounting:
 
 
 
 
 
 
 
 
 
 
 
Direct and indirect LLC member interests of approximately 49.9%
 
 
 
 
 
  in Newport Beach South, LLC
 
$
-
 
$
11,524
 
Limited partnership interest of 20.4% and general partner
         
 interest of 1% in Essex Apartment Value Fund, L.P (Fund I)
   
2,570
   
14,140
 
Limited partnership interest of 27.2% and general partner
         
 interest of 1% in Essex Apartment Value Fund II, L.P (Fund II)
   
17,761
   
17,242
 
Preferred limited partnership interests in Mountain Vista
         
 Apartments (A)
   
6,806
   
6,806
 
 
   
27,137
   
49,712
 
Investments accounted for under the cost method of accounting:
         
 
         
Series A Preferred Stock interest in Multifamily Technology
         
 Solutions, Inc.
   
500
   
-
 
 Total investments
 
$
27,637
 
$
49,712
 
 
(A)  
The investment is held in an entity that includes an affiliate of The Marcus & Millichap Company (“TMMC”). TMMC’s Chairman is also the Chairman of the Company.
 
12

The combined summarized financial information of investments, which are accounted for under the equity method, are as follows (dollars in thousands).
 
 
 
 
 
 
 
 
 
 
 
September 30,
 
December 31,
 
 
 
 
 
 
 
2005
 
2004
 
 
 
 
 
Balance sheets:
 
 
 
 
 
 
 
 
 
  Real estate and real estate under development
 
$
292,400
 
$
322,233
         
Other assets
   
22,941
   
36,709
         
 
                 
Total assets
 
$
315,341
 
$
358,942
         
 
                 
Mortgage notes payable
 
$
185,841
 
$
203,171
         
Other liabilities
   
42,982
   
21,276
         
Partners' equity
   
86,518
   
134,495
         
 
                 
Total liabilities and partners' equity
 
$
315,341
 
$
358,942
         
 
                 
Company's share of equity
 
$
27,137
 
$
49,712
         
 
                 
 
 
Three Months Ended  
Nine Months Ended
 
 
September 30,  
September 30,
 
   
2005
 
 
2004
 
 
2005
 
 
2004
 
Statements of operations:
                 
Total property revenues
 
$
12,458
 
$
15,502
 
$
26,314
 
$
48,856
 
Total gain on the sales of real estate
   
5,889
   
91,089
   
38,897
   
91,089
 
Total expenses
   
7,044
   
13,203
   
21,432
   
46,119
 
 
                 
Total net income
 
$
11,303
 
$
93,388
 
$
43,779
 
$
93,826
 
 
                 
Company's share of net income
 
$
21
 
$
15,365
 
$
17,575
 
$
16,460
 
 
(4)
Related Party Transactions
 
Notes and other receivables from related parties as of September 30, 2005 and December 31, 2004 consist of the following (dollars in thousands):
 
 
 
 
 
 
 
 
September 30,
 
December 31,
 
 
 
2005
 
2004
 
Related party receivables, unsecured:
 
 
 
 
 
Loans to officers made prior to July 31, 2002, secured,
 
 
 
 
 
bearing interest at 8%, due beginning April 2006
 
$
625
 
$
625
 
Related party receivables, substantially due on demand
   
577
   
810
 
Total notes and other receivable from related parties
 
$
1,202
 
$
1,435
 
 
Related party receivables consist primarily of accrued interest income on notes receivable from joint venture investees and loans to officers, and advances and accrued management fees from joint venture investees.
 
Management and other fees from affiliates includes property management, asset management, development and redevelopment fees from the Company’s investees of $705,000 and $1,206,000 for the three months ended September 30, 2005 and 2004, respectively, and $3,098,000 and $3,823,000 for the nine months ended September 30, 2005 and 2004, respectively, and promote income from the Company’s investees of $896,000 and $14,495,000 for the three months ended September 30, 2005 and 2004, respectively, and $6,010,000 and $14,495,000 for the nine months ended September 30, 2005 and 2004, respectively.
13

(5)
Segment Information

The Company defines its reportable operating segments as the three geographical regions in which its properties are located: Southern California, Northern California and the Pacific Northwest. Excluded from segment revenues are properties outside of these regions, 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, recreational vehicle parks, and manufactured housing communities. Other non-segment assets include investments, real estate under development, cash, notes receivable, other assets and deferred charges. The revenues, net operating income, and assets for each of the reportable operating segments are summarized as follows for the periods presented (dollars in thousands).
 
Three Months Ended
 
 
 
September 30,
 
 
 
2005
 
2004
 
Revenues:
 
 
 
 
 
Southern California
 
$
48,171
 
$
43,607
 
Northern California
   
16,505
   
15,123
 
Pacific Northwest
   
14,491
   
12,310
 
Other non-segment areas
   
1,052
   
693
 
Total property revenues
 
$
80,219
 
$
71,733
 
 
         
Net operating income:
         
Southern California
 
$
33,193
 
$
29,137
 
Northern California
   
11,032
   
9,991
 
Pacific Northwest
   
9,243
   
7,855
 
Other non-segment areas
   
93
   
(176
)
Total net operating income
   
53,561
   
46,807
 
 
         
Depreciation and amortization:
         
Southern California
   
(10,619
)
 
(9,724
)
Northern California
   
(4,023
)
 
(3,571
)
Pacific Northwest
   
(3,708
)
 
(3,193
)
Other non-segment areas
   
(1,973
)
 
(1,573
)
 
   
(20,323
)
 
(18,061
)
Interest expense:
         
Southern California
   
(7,750
)
 
(6,911
)
Northern California
   
(4,251
)
 
(3,749
)
Pacific Northwest
   
(1,964
)
 
(1,572
)
Other non-segment areas
   
(4,601
)
 
(4,162
)
 
   
(18,566
)
 
(16,394
)
Amortization of deferred financing costs
   
(451
)
 
(449
)
General and administrative
   
(4,560
)
 
(7,639
)
Other expenses
   
(1,400
)
 
-
 
Management and other fees from affiliates
   
1,601
   
15,701
 
Gain on sale of real estate
   
-
   
7,909
 
Interest and other income
   
4,978
   
836
 
Equity income in co-investments
   
21
   
15,365
 
Minority interests
   
(4,929
)
 
(9,509
)
Income tax provision
   
(1,185
)
 
(122
)
Income from continuing operations
 
$
8,747
 
$
34,444
 
14

(5)  Segment Information (continued) 

 
Nine Months Ended
 
 
 
September 30,
 
 
 
2005
 
2004
 
Revenues:
 
 
 
 
 
Southern California
 
$
139,869
 
$
122,558
 
Northern California
   
49,286
   
45,767
 
Pacific Northwest
   
42,733
   
36,697
 
Other non-segment areas
   
2,963
   
1,969
 
Total property revenues
 
$
234,851
 
$
206,991
 
 
         
Net operating income:
         
Southern California
 
$
95,209
 
$
82,111
 
Northern California
   
33,370
   
30,782
 
Pacific Northwest
   
27,503
   
23,498
 
Other non-segment areas
   
1,054
   
285
 
Total net operating income
   
157,136
   
136,676
 
 
         
Depreciation and amortization:
         
Southern California
   
(31,115
)
 
(29,427
)
Northern California
   
(11,938
)
 
(11,908
)
Pacific Northwest
   
(11,042
)
 
(7,553
)
Other non-segment areas
   
(5,850
)
 
(4,540
)
 
   
(59,945
)
 
(53,428
)
Interest expense:
         
Southern California
   
(22,912
)
 
(19,809
)
Northern California
   
(11,818
)
 
(10,143
)
Pacific Northwest
   
(5,302
)
 
(4,841
)
Other non-segment areas
   
(14,834
)
 
(10,992
)
 
   
(54,866
)
 
(45,785
)
 
           
Amortization of deferred financing costs
   
(1,490
)
 
(1,179
)
General and administrative
   
(13,574
)
 
(13,985
)
Other expenses
   
(2,900
)
 
-
 
Management and other fees from affiliates
   
9,108
   
18,318
 
Gain on sale of real estate
   
6,391
   
7,909
 
Interest and other income
   
7,932
   
2,095
 
Equity income in co-investments
   
17,575
   
16,460
 
Minority interests
   
(16,752
)
 
(20,588
)
Income tax provision
   
(2,386
)
 
(208
)
 
         
Income from continuing operations
 
$
46,229
 
$
46,285
 

 
September 30,
 
December 31,
 
 
 
2005
 
2004
 
Assets:
 
 
 
 
 
Net real estate assets:
 
 
 
 
 
    Southern California
 
$
1,292,846
 
$
1,162,803
 
    Northern California
   
397,880
   
458,199
 
    Pacific Northwest
   
375,508
   
358,219
 
Other non-segment areas
   
42,565
   
62,321
 
Total net real estate assets
   
2,108,799
   
2,041,542
 
Other non-segment assets
   
137,526
   
175,675
 
Total assets
 
$
2,246,325
 
$
2,217,217
 
15

(6)
Net Income Per Common Share 
 
(Amounts in thousands, except per share data)

 
Three Months Ended
 
Three Months Ended
 
 
 
September 30, 2005
 
September 30, 2004
 
 
 
 
 
Weighted
 
Per
 
 
 
Weighted
 
Per
 
 
 
 
 
Average
 
Common
 
 
 
Average
 
Common
 
 
 
 
 
Common
 
Share
 
 
 
Common
 
Share
 
 
 
Income
 
Shares
 
Amount
 
Income
 
Shares
 
Amount
 
Basic:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Income from continuing operations available
 
 
 
 
 
 
 
 
 
 
 
 
 
to common stockholders
 
$
8,259
   
23,107
 
$
0.36
 
$
33,956
   
22,940
 
$
1.48
 
  Income from discontinued operations
   
-
   
23,107
   
-
   
586
   
22,940
   
0.03
 
 
   
8,259
     
$
0.36
   
34,542
     
$
1.51
 
 
                         
Effect of Dilutive Securities:
                         
  Convertible limited partnership
                         
      Units (1)
   
--
   
--
       
--
   
--
     
      Stock options (2)
   
--
   
185
       
--
   
176
     
      Vested series Z incentive units
   
--
   
120
       
--
   
90
     
-
         
305
       
-
   
266
     
 
                         
Diluted:
                         
Income from continuing operations available
                         
to common stockholders
   
8,259
   
23,412
 
$
0.35
   
33,956
   
23,206
 
$
1.46
 
Income from discontinued operations
   
-
   
23,412
   
-
   
586
   
23,206
   
0.03
 
 
 
$
8,259
     
$
0.35
 
$
34,542
     
$
1.49
 
 
                         
 
 
Nine Months Ended  
Nine Months Ended
 
 
September 30, 2005  
September 30, 2004
 
 
 
 
 
Weighted  
 
 
Per
 
 
 
 
Weighted
 
 
Per
 
 
 
 
 
 
Average  
 
 
Common
 
 
 
 
Average
 
 
Common
 
 
 
 
 
 
Common  
 
 
Share
 
 
 
 
Common
 
 
Share
 
 
 
 
Income  
 
 
Shares
 
 
Amount
 
 
Income
 
 
Shares
 
 
Amount
 
Basic:
 
 
 
 
 
 
 
 
         
  Income from continuing operations available
                         
to common stockholders
 
$
44,764
   
23,074
 
$
1.94