form10q.htm


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 June 30, 2011

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 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:  33,817,096 shares of Common Stock as of August 4, 2011.
 


 
 

 

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ESSEX PROPERTY TRUST, INC.
FORM 10-Q
INDEX

   
Page No.
PART I. FINANCIAL INFORMATION
 
     
Item 1.
3
     
 
4
     
 
5
     
 
6
     
 
7
     
 
8
     
Item 2.
19
     
Item 3.
28
     
Item 4.
29
     
PART II. OTHER INFORMATION
 
     
Item 1.
29
     
Item 1A.
29
     
Item 6
29
     
31

 
2


Part I -- Financial Information

Item 1: Condensed Financial Statements (Unaudited)

"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, 2010.
 
 
3


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except per share amounts)
 
Assets
 
June 30,
2011
   
December 31,
2010
 
Real estate:
           
Rental properties:
           
Land and land improvements
  $ 823,629     $ 802,325  
Buildings and improvements
    3,259,095       3,265,014  
      4,082,724       4,067,339  
Less accumulated depreciation
    (845,566 )     (878,331 )
      3,237,158       3,189,008  
Real estate under development
    191,620       217,531  
Co-investments
    197,364       107,840  
      3,626,142       3,514,379  
Cash and cash equivalents-unrestricted
    8,809       13,753  
Cash and cash equivalents-restricted
    24,038       21,941  
Marketable securities
    75,673       92,310  
Notes and other receivables
    49,956       49,444  
Prepaid expenses and other assets
    25,444       25,188  
Deferred charges, net
    15,793       15,872  
Total assets
  $ 3,825,855     $ 3,732,887  
                 
Liabilities and  Equity
               
Mortgage notes payable
  $ 1,779,461     $ 1,832,745  
Lines of credit
    210,000       426,000  
Unsecured bonds
    265,000       -  
Accounts payable and accrued liabilities
    49,577       44,750  
Construction payable
    11,064       9,023  
Dividends payable
    37,975       36,405  
Derivative liabilities
    1,506       5,633  
Other liabilities
    20,171       18,968  
Total liabilities
    2,374,754       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, 641,702,178 shares authorized 32,724,235 and 31,324,808 shares issued and outstanding
   
3
      3  
    Cumulative redeemable preferred stock; $.0001 par value:                
7.125% Series H - 8,000,000 shares authorized, 2,950,000 and 0 issued and outstanding, liquidation value
   
73,750
      -  
    Cumulative redeemable preferred stock;                
 $.0001 par value:7.8125% Series F - 1,000,000 shares authorized, 0 and 1,000,000 issued and outstanding, liquidation value
    -       25,000  
Additional paid-in capital
    1,687,691       1,515,468  
Distributions in excess of accumulated earnings
    (359,662 )     (313,308 )
Accumulated other comprehensive (loss) income
    (74,918 )     (77,217 )
Total stockholders' equity
    1,326,864       1,149,946  
Noncontrolling interest
    119,888       205,068  
Total stockholders' equity and noncontrolling interest
    1,446,752       1,355,014  
Total liabilities and equity
  $ 3,825,855     $ 3,732,887  
 
See accompanying notes to the unaudited condensed consolidated financial statements.

 
4


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARES
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Revenues:
                       
Rental and other property
  $ 115,778     $ 99,163     $ 227,866       198,436  
Management and other fees from affiliates
    1,420       1,022       2,645       2,500  
      117,198       100,185       230,511       200,936  
Expenses:
                               
Property operating, excluding real estate taxes
    29,354       25,101       57,569       49,624  
Real estate taxes
    10,916       9,716       21,595       19,210  
Depreciation
    37,510       31,156       74,426       61,539  
General and administrative
    6,371       6,219       12,486       11,837  
      84,151       72,192       166,076       142,210  
Earnings from operations
    33,047       27,993       64,435       58,726  
                                 
Interest expense before amortization
    (22,710 )     (20,161 )     (44,518 )     (39,758 )
Amortization expense
    (2,736 )     (843 )     (5,590 )     (2,083 )
Interest and other income
    2,628       7,085       9,616       14,941  
Equity income (loss) in co-investments
    726       (360 )     (647 )     (401 )
Loss on early retirement of debt
    (253 )     (10 )     (253 )     (10 )
Income before discontinued operations
    10,702       13,704       23,043       31,415  
Income from discontinued operations
    5,351       165       5,517       313  
Net income
    16,053       13,869       28,560       31,728  
Net income attributable to noncontrolling interest
    (2,304 )     (3,844 )     (5,851 )     (8,034 )
Net income attributable to controlling interest
    13,749       10,025       22,709       23,694  
Dividends to preferred stockholders
    (1,475 )     (543 )     (2,017 )     (1,085 )
Excess of cash paid to redeem preferred stock and units over the carrying value
    (1,949 )     -       (1,949 )     -  
Net income available to common stockholders
  $ 10,325     $ 9,482     $ 18,743       22,609  
                                 
Per common share data:
                               
Basic:
                               
Income available to common stockholders
  $ 0.17     $ 0.32     $ 0.43     $ 0.77  
Income from discontinued operations
    0.15       -       0.16       0.01  
Net income available to common stockholders
  $ 0.32     $ 0.32     $ 0.59       0.78  
Weighted average number of common shares outstanding during the period
    32,040,904       29,329,273       31,754,949       29,149,562  
                                 
Diluted:
                               
Income before discontinued operations available to common stockholders
  $ 0.17     $ 0.32     $ 0.43     $ 0.76  
Income from discontinued operations
    0.15       -       0.16       0.01  
Net income available to common stockholders
  $ 0.32     $ 0.32     $ 0.59     $ 0.77  
Weighted average number of common shares  outstanding during the period
    32,135,064       29,402,635       31,844,002       29,213,613  
                                 
Dividend per common share
  $ 1.040     $ 1.033     $ 2.080       2.066  
 
See accompanying notes to the unaudited condensed consolidated financial statements.

 
5


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity, Noncontrolling Interest, and
Comprehensive Income for the six months ended June 30, 2011
(Unaudited)
(Dollars and shares in thousands)

   
Series F
Preferred stock
   
Series H
Preferred stock
   
Common stock
     
Additional
 paid-in
     Distributions in excess of accumulated      Accumulated other comprehensive      Noncontrolling        
   
Shares
   
Amount
   
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
    -       -       -       -       -       -       -       22,709       -       5,851       28,560  
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
    -       -       -       -       -       -       -       -       4,431       312       4,743  
Change in fair value of marketable securities
    -       -       -       -       -       -       -       -       1,977       142       2,119  
Comprehensive income (loss)
                                                                                    31,020  
Issuance of common stock under:
                                                                                       
Stock option and restricted stock plans
    -       -       -       -       87       -       6,540       -       -       -       6,540  
Sale of common stock
    -       -       -       -       1,312       -       168,592       -       -       -       168,592  
Equity based compensation costs
    -       -       -       -       -       -       -       -       -       560       560  
Equity related issuance costs
    -       -       -       -       -       -       (652 )     -       -       -       (652 )
Issuance of Series H Preferred
    -       -       2,950       73,750       -       -       (2,323 )     -       -       -       71,427  
Redemption of Series F Preferred
    (1,000 )     (25,000 )     -       -       -       -       -       -       -       -       (25,000 )
Contributions from noncontrolling interest
    -       -       -       -                       -       -       -       800       800  
Distributions to noncontrolling interest
    -       -       -       -       -       -       -       -       -       (9,667 )     (9,667 )
Dividends declared
    -       -       -       -       -       -       -       (69,063 )     -       -       (69,063 )
Redemption of Series B Preferred
    -       -       -       -       -       -       1,200       -       -       (80,000 )     (78,800 )
Redemptions of noncontrolling interest
    -       -       -       -       -       -       (1,134 )     -       -       (2,885 )     (4,019 )
Balances at June 30, 2011
    -     $ -       2,950     $ 73,750       32,724     $ 3     $ 1,687,691     $ (359,662 )   $ (74,918 )   $ 119,888     $ 1,446,752  

See accompanying notes to the unaudited condensed consolidated financial statements.

 
6


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
 
   
Six Months Ended
June 30,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net Income
  $ 28,560     $ 31,728  
                 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Gain on sale of real estate
    (5,853 )     -  
Gain on sale of marketable securities
    (4,543 )     (9,041 )
Loss (gain) on early retirement of debt
    253       10  
Equity income in co-investments excluding gain on sales of real estate
    2,120       401  
Amortization of discount on exchangeable bonds
    -       41  
Amortization of discount on marketable securities
    (2,297 )     (1,916 )
Amortization of deferred interest from settlement of swaps     4,349       97  
Amortization of discount on notes receivables
    (878 )     (363 )
Depreciation
    74,541       61,748  
Amortization of deferred financing costs
    1,443       1,628  
Stock-based compensation
    1,056       1,739  
Prepaid expenses and other assets
    (697 )     (621 )
Accounts payable and accrued liabilities
    5,097       2,973  
Other liabilities
    1,200       990  
Net cash provided by Operating activities
    104,351       89,414  
Cash flows from investing activities:
               
Additions to real estate:
               
Acquisitions
    (38,958 )     (6,757 )
Improvements to recent acquisitions
    (11,804 )     (725 )
Redevelopment expenditures
    (16,296 )     (6,951 )
Revenue generating capital expenditures
    (1,220 )     (358 )
Non-revenue generating capital expenditures
    (7,711 )     (10,962 )
Dispositions of real estate
    15,972       -  
Additions to real estate under development
    (65,695 )     (53,414 )
Changes in restricted cash and refundable deposits     (3,210     (5,733
Purchases of marketable securities
    (6,805 )     (18,276 )
Sales and maturities of marketable securities
    27,997       65,919  
Purchases of and advances under notes and other receivables
    -       (21,227 )
Collections of notes and other receivables
    368       1,826  
Contributions to co-investments
    (43,207 )     (66,498 )
Distributions from co-investments
    450       -  
Net cash used in investing activities
    (150,119 )     (123,156 )
                 
Cash flows from financing activities:
               
Borrowings under mortgage notes payable, lines of credit and bonds
    645,419       212,764  
Repayment under mortgage notes payable, lines of credit and bonds
    (661,193 )     (163,817 )
Additions to deferred charges
    (1,441 )     (623 )
Retirement of exchangeable bonds
    -       (1,842 )
Settlement of forward-starting swaps
    (2,395 )     -  
Net proceeds from stock options exercised
    5,983       2,212  
Net proceeds from issuance of Series H preferred stock
    71,427       -  
Redemption of Series F preferred stock
    (25,000 )     -  
Retirement of Series B preferred units
    (78,800 )     -  
Net proceeds from issuance of common stock
    168,592       63,003  
Equity related issuance costs
    (591 )     -  
Contributions from noncontrolling interest
    -       3,990  
Distributions to noncontrolling interest
    (9,667 )     (12,337 )
Redemptions of noncontrolling interest
    (4,019 )     (21,065 )
Common and preferred stock dividends paid
    (67,491 )     (60,836 )
Net cash provided by financing activities
    40,824       21,449  
                 
Net decrease in cash and cash equivalents
    (4,944 )     (12,293 )
Cash and cash equivalents at beginning of period
    13,753       20,660  
Cash and cash equivalents at end of period
  $ 8,809     $ 8,367  
 
 
7

 
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
(continued)
 
Supplemental disclosure of cash flow information:
               
Cash paid for interest, net of $4.5 million and $5.8 million capitalized in 2011 and 2010, respectively
  $ 43,594     $ 40,048  
Supplemental disclosure of noncash investing and financing activities:
               
Change in accrual of dividends
  $ 1,570     $ 874  
Change in value of derivative liabilities
  $ 1,836     $ 42,040  
Change in unrealized gain of marketable securities
  $ 2,283     $ 5,650  
Mortgage notes assumed in connection with purchase of real estate including the loan premiums recorded
  $ 10,500     $ 12,444  
Non-cash contribution from noncontrolling interest
  $ 800       -  
Change in construction payable
  $ 2,041     $ 3,746  
Transfer of real estate under development to rental properties
  $ 40,784     $ -  
Transfer of real estate under development to co-investments
  $ 48,886     $ -  
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
 
8

 
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2011 and 2010
(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, 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 six months ended June 30, 2011 and 2010 include the accounts of the Company and the Operating Partnership.  The Company is the sole general partner in the Operating Partnership, with a 93.6% general partnership interest as of June 30, 2011.  Total Operating Partnership units outstanding were 2,228,730 and 2,200,907 as of June 30, 2011 and December 31, 2010, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $301.5 million and $251.4 million, as of June 30, 2011 and December 31, 2010, respectively.

As of June 30, 2011, the Company owned or had ownership interests in 149 apartment communities, aggregating 30,557 units, excluding the Company’s ownership in preferred interest co-investments,  (collectively, the “Communities”, and individually, a “Community”), six commercial buildings and six 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 June 30, 2011, owned 14 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.

In 2011, the Company entered into a 50/50 programmatic joint venture, Wesco I, LLC (“Wesco”), with an institutional partner for a total equity commitment of $200 million.  Each partner’s equity commitment is $100 million, and Wesco will utilize leverage equal to approximately 50% to 60%.  Investments must meet certain criteria to qualify for inclusion in the joint venture and both partners must approve any new acquisitions. The joint venture has an investment period of up to two years.  The Company will receive asset and property management fees, and may earn a promoted interest.  The Company accounts for this joint venture on the equity method.  As discussed below under “Co-investments”, Wesco purchased apartment communities in May and July 2011.

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 and six months ended June 30, 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 purchase discounts are included in interest income.
 
 
9

 
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2011 and 2010
(Unaudited)
 
As of June 30, 2011, marketable securities consisted primarily of common stock and investments in mortgage backed securities and investment funds that invest in U.S. treasury or agency securities.  As of June 30, 2011, the Company classified its investments in mortgage backed securities, which mature in November 2019 and September 2020, as held to maturity, and accordingly, these securities are stated at their amortized cost of $44.3 million.  The estimated fair values of the mortgage backed securities (Level 2 securities) are approximately equal to the carrying values.

As of June 30, 2011 the Company classified the following marketable securities as available for sale (dollars in thousands):
 
   
June 30, 2011
 
   
Amortized
Cost
   
Gross
 Unrealized
Gain/(Loss)
   
Fair
Value
 
Investment-grade unsecured bonds
  $ 3,608     $ 427     $ 4,035  
Investment funds - US treasuries
    10,549       164       10,713  
Common stock
    14,513       2,096       16,609  
Total
  $ 28,670     $ 2,687     $ 31,357  
                         
   
December 31, 2010
 
   
Amortized
Cost
   
Gross
 Unrealized
 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 three months ended June 30, 2010, the proceeds from sales of available for sale securities totaled $22.5 million, and for the six months ended June 30, 2011and 2010, the proceeds from sales of available for sale securities totaled $26.8 million and $64.7 million, respectively.  These sales all resulted in gains, which totaled $4.0 million for the three months ended June 30, 2010, and $4.5 million and $9.0 million for the six months ended June 30, 2011 and 2010, respectively.

Variable Interest Entities

The Company consolidates 19 DownREIT limited partnerships (comprising twelve communities) since the Company is the primary beneficiary of these variable interest entities (“VIEs”).  Total DownREIT units outstanding were 1,072,161 and 1,096,871 as of June 30, 2011 and December 31, 2010, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $145.1 million and $125.3 million, as of June 30, 2011 and December 31, 2010, respectively.  The consolidated total assets and liabilities related to these VIEs, net of intercompany eliminations, were approximately $214.6 million and $170.0 million, respectively, as of June 30, 2011 and $217.3 million and $168.0 million, respectively, as of December 31, 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 June 30, 2011 and December 31, 2010, the Company did not have any VIE’s for which it was not deemed to be the primary beneficiary.

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, 2010) are being amortized over the expected service periods. Stock-based compensation expense for options and restricted stock totaled $0.4 million and $0.3 million for the three months ended June 30, 2011 and 2010, respectively and $0.7 million and $0.5 million for the six months ended June 30, 2011 and 2010, respectively.  The intrinsic value of the stock options exercised during the three months ended June 30, 2011 and 2010 totaled $2.0 million and $0.5 million and $3.0 million and $1.5 million for the six months ended June 30, 2011 and 2010, respectively.  As of June 30, 2011, the intrinsic value of the stock options outstanding totaled $10.9 million.  As of June 30, 2011, total unrecognized compensation cost related to unvested share-based compensation granted under the stock option and restricted stock plans totaled $4.1 million.  The cost is expected to be recognized over a weighted-average period of 1 to 6 years for the stock option plans and is expected to be recognized straight-line over 7 years for the restricted stock awards.

 
10

 
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2011 and 2010
(Unaudited)
 
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 Units totaled $0.3 million and $0.8 million for the three months ended June 30, 2011 and 2010, respectively, and $0.5 million and $1.4 million for the six months ended June 30, 2011 and 2010, respectively.  On January 1, 2011, 131,409 Series Z Units were converted into common units of the Operating Partnership.

Stock-based compensation for Z units capitalized totaled $0.1 million and $0.2 million for the three months ended June 30, 2011, and 2010, respectively, and $0.2 million and $0.4 million for the six months ended June 30, 2011 and 2010, respectively.  As of June 30, 2011, the intrinsic value of the Z-1 Units subject to future vesting totaled $17.6 million.  As of June 30, 2011, total unrecognized compensation cost related to Z-1 Units subject to future vesting totaled $6.5 million.  The unamortized cost is expected to be recognized over the next year to fourteen 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 Company uses Level 2 inputs for its investments in unsecured bonds, mortgage backed securities, notes receivable, notes payable, and derivative liabilities.  These inputs include interest rates for similar financial instruments.  The Company’s valuation methodology for the swap related to the 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 notes and other receivables approximate fair value as of June 30, 2011 and December 31, 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 $1.79 billion of fixed rate debt, including unsecured bonds, at June 30, 2011 is approximately $1.83 billion and the fair value of the Company’s $256.8 million of variable rate debt, excluding borrowings under the lines of credit, at June 30, 2011 is $234.5 million based on the terms of existing mortgage notes payable, unsecured bonds and variable rate demand notes compared to those available in the marketplace.  Management believes that the carrying amounts of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities, construction payables, other liabilities and dividends payable approximate fair value as of June 30, 2011 due to the short-term maturity of these instruments. The fair values of the Company’s investments in mortgage backed securities are approximately equal to amortized cost carrying value of these securities.  Marketable securities, 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 June 30, 2011, as discussed above and in Note 8.

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 results may vary from those estimates and those estimates could be different under different assumptions or conditions.  
 
Reclassifications for discontinued operations have been made to prior year statements of operations balances in order to conform to current year presentation.  Such reclassifications have no impact on reported earnings, cash flows, total assets or total liabilities.

 
11

 
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2011 and 2010
(Unaudited)
 
 
(2)  Significant Transactions During the Second Quarter of 2011 and Subsequent Events

Acquisition

In June, the Company acquired Bellerive, a completed 63-unit vacant condominium project that will be operated as a rental community located in West Los Angeles for $27.0 million.  Initial occupancy is expected to occur in the third quarter 2011, and stabilization is expected by the end of the year.  This property is included in real estate under development as of June 30, 2011 since the units were not yet available for lease.

Disposition

In April, the Company disposed of Woodlawn Colonial, a 159-unit community located in Chula Vista, California for $16.0 million for a gain of $5.3 million net of internal disposition costs.  The property was purchased in 2002 as part of the John M. Sachs, Inc. merger.

Development

The Company entered into a development joint venture with the land owner of a retail site in Santa Clara.  The Company invested $9.3 million in this joint venture and the property subject to a $10.5 million mortgage loan due in April 2014 at an interest rate that is currently at 5.0%.  The Company has an option to purchase the joint venture partner’s interest for $0.8 million during 2011. The plans for this project are to entitle a portion of the site for 494 apartment units.  The joint venture partner has an option to purchase the retail parcel upon obtaining entitlements.  The site is currently improved with retail space that is 100% leased.  The Company consolidates this joint venture and will account for the property as a rental property during the period that is being operated as a retail site.
 
In July, the Company began development on its West Dublin, California land site which was purchased in late 2009 for $5.0 million.  The 309-unit development will consist of a five-story building over two levels of parking and will feature a mix of one and two bedroom units and lofts.

Co-investments

In June 2011, the Company completed a $13.0 million preferred equity investment in an entity owning an apartment community located in downtown Los Angeles.  The Company’s preferred return is 10% and the Company’s investment has a five-year term.

In 2011, the Company entered into a 50/50 programmatic joint venture, Wesco, I LLC (“Wesco”), with an institutional partner for a total equity commitment of $200 million.  In May 2011, Wesco acquired Arbors Parc Rose, a 373-unit community located in Oxnard, California for $92.0 million.  In July 2011, Wesco acquired Reveal, a 438-unit community located in the Woodland Hills, California for $132.9 million.  Wesco obtained a $100.0 million line of credit at a rate of LIBOR + 2.3%, and Wesco obtained secured mortgage loans totaling $59.9 million at 4.7% secured by Arbors Parc Rose for 10 years in June, and $78.7 million at LIBOR + 1.9% secured by Reveal with a maturity of two years with two one year extensions.

In June, the Company entered into a joint venture with the Canada Pension Plan Investment Board (“CPPIB”) to develop its Cadence site located in San Jose, California which recently began site demolition.  The Company contributed the land to the joint venture, and the Company will account for this joint venture using the equity method.  The Company will hold a 55% interest in the joint venture and will earn development, asset, and property management fees.  The Company may also earn a promoted interest.
 
 
12

 
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2011 and 2010
(Unaudited)
 
Common Stock, Preferred Stock and Preferred Units
 
During the quarter, the Company sold 984,982 shares of common stock for $130.2 million, net of commissions, at an average price per share of $133.76. In July, the Company sold 350,112 shares of common stock for $48.3 million, net of commissions, at an average price of $139.64.  Year to date through July, the Company sold 1,661,736 shares of common stock for $216.9 million, net of commissions, at an average price of $132.11.
 
In April, the Company issued 2,950,000 shares of 7.125% Series H Cumulative Redeemable Preferred Stock (“Series H”) at a price of $25.00 per share for net proceeds of $71.4 million, net of costs and original issuance discounts.  The Series H has no maturity date and generally may not be called by the Company before April 13, 2016.  Net proceeds from the Series H offering were used to redeem all of the 7.875% Series B Cumulative Redeemable Preferred Units of Essex Portfolio, L.P. (“Series B”) with a liquidation value of $80.0 million, which resulted in excess of cash paid of $1.0 million over the carrying value of Series B due to deferred offering costs and original issuance discounts.
 
In June, the Company redeemed its 7.8125% Series F Preferred Stock (“Series F”) at liquidation value for $25.0 million which resulted in excess of cash paid of $0.9 million over the carrying value of Series F due to deferred offering costs and original issuance discounts.
 
Mortgage Notes Payable and Construction Loans
 
During the quarter, the Company paid off the Cairns mortgage loan for $11.3 million at an interest rate of 3.7% and during June and early July two San Marcos mortgage loans totaling $46.5 million at a blended rate of 5.3%.
 
Unsecured Bonds
 
During the second quarter, the Company issued $115 million of unsecured bond through private placements, $40.0 million at 4.5% for 6.25 years, and $75.0 million at 4.92% for 8.5 years.  The proceeds from the bond offering were used primarily to repay outstanding mortgages, redeem the Series F Preferred Stock, and pay down the Company’s lines of credit.
 
(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.
 
The following table details the Company's co-investments (dollars in thousands):

   
June 30,
2011
   
December 31,
2010
 
             
Investments in joint ventures accounted for under the equity method of accounting:
           
Partnership interest in Essex Apartment Value Fund II, L.P ("Fund II")
  $ 65,532     $ 66,000  
Membership interest in a limited liability company that owns and is developing Cadence
    52,407       -  
Membership interest in a limited liability company that owns Essex Skyline at MacArthur Place
    26,758       29,187  
Preferred interests in limited liability companies that own apartment communities in downtown Los Angeles
    22,767       -  
Membership interest in a limited liability company that owns and is developing Queen Anne
    17,000       -  
Preferred interest in a related limited liability company that owns Madison Park at Anaheim
    12,348       12,014  
Membership interest in Wesco I, LLC ("Wesco")
    (87 )     -  
      196,725       107,201  
Investments accounted for under the cost method of accounting:
   
 
         
Series A and B-2 Preferred Stock interests in Multifamily Technology Solutions, Inc.
    639       639  
Total co-investments
  $ 197,364     $ 107,840  
 
 
13

 
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 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).
 
   
June 30,
2011
   
December 31,
2010
 
Balance sheets:
           
Rental properties and real estate under development
  $ 993,258     $ 750,808  
Other assets
    36,419       15,864  
                 
Total assets
  $ 1,029,677     $ 766,672  
                 
Mortgage notes
  $ 598,435     $ 450,693  
Other liabilities
    20,773       7,076  
Equity
    410,469       308,903  
                 
Total liabilities and equity
  $ 1,029,677     $ 766,672  
                 
Company's share of equity
  $ 196,725     $ 107,201  
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Statements of operations:
                       
Property revenues
  $ 24,084     $ 12,482     $ 42,596     $ 24,810  
Property operating expenses
    (9,719 )     (5,533 )     (17,695 )     (10,662 )
Net property operating income
    14,365       6,949       24,901       14,148  
                                 
Interest expense
    (10,549 )     (2,950 )     (15,410 )     (5,911 )
General and administrative
    (38 )     -       (1,022 )     -  
Depreciation and amortization
    (9,943 )     (4,756 )     (18,006 )     (9,209 )
                                 
Net loss
  $ (6,165 )   $ (757 )   $ (9,537 )   $ (972 )
                                 
Company's share of net income (loss)
  $ 726     $ (360 )   $ (647 )   $ (401 )

(4) Notes and Other Receivables
 
Notes receivable secured by real estate, and other receivables consist of the following as of June 30, 2011 and December 31, 2010 (dollars in thousands):
 
   
June 30,
2011
   
December 31,
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 9.8%, due March 2012
    7,331       7,331  
Note receivable, secured, bearing interest at 8.8%, due December 2012
    10,928       10,930  
Note receivable, secured, bearing interest at LIBOR + 8.0%, due December 2012
    6,463       6,513  
Note receivable, secured, bearing interest at 6.3%, due February 2014
    17,261       16,708  
Other receivables
    3,781       3,770  
    $ 49,956     $ 49,444  
 
(5) Related Party Transactions
 
Management and other fees from affiliates include management, development and redevelopment fees from co-investments of $1.4 million and $1.0 million for the three months ended June 30, 2011 and 2010, respectively, and $2.6 million and $2.0 million for the six months ended June 30, 2011 and 2010, respectively, and  a property acquisition fee of $0.5 million from the limited liability company that owns Skyline at MacArthur Place for the six months ended June 30, 2010.  All of these fees are net of intercompany amounts eliminated by the Company.

 
14

 
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2011 and 2010
(Unaudited)
 
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.  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 segments are summarized as follows for the three ended June 30, 2011 and 2010 (dollars in thousands):
 
 
   
Three Months Ended June 30,
 
   
2011
   
2010
 
Revenues:
           
Southern California
  $ 56,081     $ 50,503  
Northern California
    36,548       29,973  
Seattle Metro
    20,210       16,717  
Other real estate assets
    2,939       1,970  
Total property revenues
  $ 115,778     $ 99,163  
                 
Net operating income:
               
Southern California
  $ 36,590     $ 33,688  
Northern California
    24,097       19,243  
Seattle Metro
    12,774       10,124  
Other real estate assets
    2,047       1,291  
Total net operating income
    75,508       64,346  
                 
Depreciation
    (37,510 )     (31,156 )
Interest expense before amortization
    (22,710 )     (20,161 )
Amortization expense
    (2,736 )     (843 )
Interest and other income
    2,628       7,085  
General and administrative
    (6,371 )     (6,219 )
Management and other fees from affiliates
    1,420       1,022  
Equity income (loss) from co-investments
    726       (360 )
Loss on early retirement of debt
    (253 )     (10 )
Income before discontinued operations
  $ 10,702     $ 13,704  
 
 
15

 
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2011 and 2010
(Unaudited)

The revenues, net operating income, and assets for each of the reportable operating segments are summarized as follows for the six ended June 30, 2011 and 2010 (dollars in thousands):
 
   
Six Months Ended
June 30,
 
   
2011
   
2010
 
Revenues:
           
Southern California
  $ 110,704     $ 100,996  
Northern California
    71,865       59,961  
Seattle Metro
    39,966       33,445  
Other real estate assets
    5,331       4,034  
Total property revenues
  $ 227,866     $ 198,436  
                 
Net operating income:
               
Southern California
  $ 72,425     $ 67,449  
Northern California
    47,436       39,043  
Seattle Metro
    25,331       20,698  
Other real estate assets
    3,510       2,412  
Total net operating income
    148,702       129,602  
                 
Depreciation
    (74,426 )     (61,539 )
Interest expense before amortization
    (44,518 )     (39,758 )
Amortization expense
    (5,590 )     (2,083 )
General and administrative
    (12,486 )     (11,837 )
Management and other fees from affiliates
    2,645       2,500  
Loss on early retirement of debt
    (253 )     (10 )
Interest and other income
    9,616       14,941  
Equity (loss) from co-investments
    (647 )     (401 )
Income before discontinued operations
  $ 23,043     $ 31,415  
 
Total assets for each of the reportable operating segments are summarized as follows as of June 30, 2011 and December 31, 2010:
 
   
June 30,2011
   
December 31,2010
 
Assets:
           
Southern California
  $ 1,445,006     $ 1,428,264  
Northern California
    1,140,907       1,119,555  
Seattle Metro
    552,372       560,463  
Other real estate assets
    98,873       80,726  
Net reportable operating segments  - real estate assets
    3,237,158       3,189,008  
Real estate under development
    191,620       217,531  
Cash and cash equivalents
    32,847       35,694  
Marketable securities
    75,673       92,310  
Co-investments
    197,364       107,840  
Notes and other receivables
    49,956       49,444  
Other non-segment assets
    41,237       41,060  
Total assets
  $ 3,825,855     $ 3,732,887  
 
 
16

 
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2011 and 2010
(Unaudited)
 
 
(7)  Net Income Per Common Share
 
(Amounts in thousands, except per share and unit data)

   
Three Months Ended
June 30, 2011
   
Three Months Ended
June 30, 2010
 
   
Income
   
Weighted-
average
Common
Shares
   
Per
Common
 Share
 Amount
   
Income
   
Weighted
-average
Common
Shares
   
Per
Common
Share
Amount
 
Basic:
                                   
 
                                   
Income from operations available to common stockholders
  $ 5,337       32,041     $ 0.17     $ 9,329       29,329     $ 0.32  
    Income from discontinued operations available to common stockholders
    4,988       32,041       0.15       153       29,329       -  
      10,325             $ 0.32       9,482             $ 0.32  
Effect of Dilutive Securities (1)(2)
    -       94               -       73          
                                                 
Diluted:
                                               
Income from continuing operations available to common stockholders
    5,337       32,135     $ 0.17       9,329       29,402     $ 0.32  
    Income from discontinued operations available to common stockholders
    4,988       32,135       0.15       153       29,402       -  
    $ 10,325             $ 0.32     $ 9,482             $ 0.32  
   
 
   
 
 
   
Six Months Ended
June 30, 2011
   
Six Months Ended
June 30, 2010
 
   
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
  $ 13,589       31,755     $ 0.43     $ 22,320       29,150     $ 0.77  
    Income from discontinued operations available to common stockholders
    5,154       31,755       0.16       289       29,150       0.01  
      18,743             $ 0.59       22,609             $ 0.78  
                                                 
Effect of Dilutive Securities (1)(2)
    -       89               -       64          
                                                 
Diluted:
                                               
 
                                               
Income from continuing operations available to common stockholders (1)
    13,589       31,844       0.43     $ 22,320       29,214       0.76  
    Income from discontinued operations available to common stockholders
    5,154       31,844       0.16       289       29,214       0.01  
    $ 18,743             $ 0.59     $ 22,609             $ 0.77  
 
 
(1)
Weighted average convertible limited partnership units of 2,230,354 and 2,235,468, which includes vested Series Z incentive units, for the three and six months ended June 30, 2011 and weighted convertible limited partnership units of 2,357,321 and 2,388,406 which includes vested Series Z incentive units, for the three and six months ended June 30, 2010, respectively, were not included in the determination of diluted EPS because they were anti-dilutive.  The Company has the ability to redeem DownREIT limited partnership units for cash and does not consider them to be potentially dilutive securities.

Stock options of 29,500 and 131,664 for the three months ended June 30, 2011 and 2010, respectively, and 41,250 and 147,690 for the six months ended June 30, 2011 and 2010, 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 six months ended and, therefore, were anti-dilutive.

All shares of cumulative convertible preferred stock Series G have been excluded from diluted earnings per share for the three and six months ended June 30, 2011 and 2010, as the effect was anti-dilutive.

 
(2)
Net income allocated to convertible limited partnership units, which includes vested Series Z units, aggregating $1.0 million and $0.8 million for the three months ended June 30, 2011 and 2010 respectively, and $1.6 million and $1.9 million for the six months ended June 30, 2011 and 2010, respectively, have been excluded from income available to common stock holders for the calculation of net income per common share since these units are excluded from the diluted weighted average common shares for the period as the effect was anti-dilutive.
 
 
17

 
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2011 and 2010
(Unaudited)
 
(8)  Derivative Instruments and Hedging Activities
 
Currently, the Company uses 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 June 30, 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.

During July 2010, the Company entered into a swap transaction (the “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.  The Swap has a termination date of July 12, 2013 and may be terminated by the Company at anytime commencing after 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 June 30, 2011, the fair value of the swap was a liability of approximately $1.6 million.

As of June 30, 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 $213.0 million of tax exempt variable rate debt.  The aggregate carrying value of the interest rate cap contracts was an asset of $0.1 million.  During the first quarter of 2011, the Company settled its remaining $20.0 million of forward starting swaps for a $2.3 million payment to the counterparty.  The changes in the fair values of the cash flow hedges are reflected in other comprehensive (loss) income in the Company’s condensed consolidated financial statements.  The overall fair value of the Company’s derivatives changed by $4.1 million during the six months ended June 30, 2011 to a net liability of $1.5 million as of June 30, 2011.

(9)  Discontinued Operations

In the normal course of business, the Company will receive offers for sale of its communities, either solicited or unsolicited. For those offers that are accepted, the prospective buyer will usually require a due diligence period before consummation of the transaction.  It is not unusual for matters to arise that result in the withdrawal or rejection of the offer during this process.  The Company classifies real estate as "held for sale" when the sale is considered to be probable.

The Company sold Woodlawn Colonial, a 159-unit community located in Chula Vista, California for $16.0 million for a gain of $5.3 million net of internal disposition costs.  The property was purchased in 2002 as part of the John M. Sachs, Inc. merger.

 
18


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2011 and 2010
(Unaudited)
 
The components of discontinued operations are outlined below and include the results of operations for the respective periods that the Company owned such assets, as described above (dollars in thousands).

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Rental revenues
  $ 134     $ 450     $ 595     $ 884  
Property operating expenses
    (48 )     (180 )     (228 )     (362 )
Depreciation and amortization
    -       (105 )     (115 )     (209 )
Income from real estate sold
    86       165       252       313  
Gain on sale
    5,854       -       5,854       -  
Internal disposition costs
    (589 )     -       (589 )     -  
Income from discontinued operations
  $ 5,351     $ 165     $ 5,517     $ 313  

(10)  Commitments and Contingencies
 
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.

Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and accompanying Notes thereto included elsewhere herein and with the Company’s 2010 Annual Report on Form 10-K for the year ended December 31, 2010.
 
The Company is a fully integrated Real Estate Investment Trust (“REIT”), and its property revenues are generated primarily from apartment community operations.  The 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.  The Company’s strong financial condition supports its investment strategy by enhancing its ability to quickly shift the Company’s acquisition, development, and disposition activities to markets that will optimize the performance of the portfolio.
 
As of June 30, 2011, the Company had ownership interests in 149 apartment communities, comprising 30,557 apartment units, 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 June 30, 2011, the Company also had ownership interests in six commercial buildings with approximately 354,800 square feet.

As of June 30, 2011, the Company's consolidated development pipeline was comprised of four consolidated development projects and four land parcels held for future development or sale aggregating 1,051 units, with total incurred costs of $191.6 million.  The estimated remaining project costs are $110.6 million and the total active development project costs are $302.2 million.

The Company has two unconsolidated joint venture development projects, Queen Anne, a 275-unit condominium project, and Cadence.  Development is underway for the first of three phases for Cadence.  Phase one is a 280-unit project.  As of June 30, 2011 total costs incurred are $76.2 million, with estimated remaining project costs of $138.4 million for total estimated costs of $177.7 million.

 
19

 
The Company’s consolidated apartment communities are as follows:
 
   
As of June 30, 2011
   
As of June 30, 2010
 
   
Apartment Units
   
%
   
Apartment Units
   
%
 
Southern California
    13,068       49 %     12,334       51 %
Northern California
    7,817       29 %     6,695       28 %
Seattle Metro
    5,979       22 %     5,249       21 %
Total
    26,864       100 %     24,278       100 %
 
Co-investments accounted for using the equity method including Fund II, Wesco communities, Essex Skyline at MacArthur Place, and preferred equity co-investments communities are not included in the table above for both years presented above.

Comparison of the Three Months Ended June 30, 2011 to the Three Months Ended June 30, 2010

The average financial occupancies for the Company’s stabilized apartment communities or “Quarterly Same-Property” (stabilized properties consolidated by the Company for the quarters ended June 30, 2011 and 2010) decreased 30 basis points to 96.9% as of June 30, 2011 from 97.2% as of June 30, 2010.  Financial occupancy is defined as the percentage resulting from dividing actual rental revenue by total possible rental revenue. Actual rental revenue represents contractual rental revenue pursuant to leases without considering delinquency and concessions.  Total possible rental revenue represents the value of all apartment units, with occupied units valued at contractual rental rates pursuant to leases and vacant units valued at estimated market rents.  We believe that financial occupancy is a meaningful measure of occupancy because it considers the value of each vacant unit at its estimated market rate.
 
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 comparable to the 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 contractual 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 June 30, 2011 and 2010 is as follows:
 
   
Three months ended
June 30,
 
   
2011
   
2010
 
Southern California
    96.8 %     97.0 %
Northern California
    97.2 %     97.5 %
Seattle Metro
    96.9 %     97.3 %
 
 
20


The following table provides a breakdown of revenue amounts, including revenues attributable to the Quarterly Same-Property portfolio:

   
Number of
   
Three Months Ended
 June 30,
   
Dollar
   
Percentage
 
   
Properties
   
2011
   
2010
   
Change
   
Change
 
Property Revenues (dollars in thousands)
                       
Quarterly Same-Property:
                             
Southern California
    58     $ 51,780     $ 50,503     $ 1,277       2.5 %
Northern California
    28       31,254       29,898       1,356       4.5  
Seattle Metro
    23       15,314       14,723       591       4.0  
Total Quarterly Same-Property revenues
    109       98,348       95,124       3,224       3.4  
Quarterly Non-Same Property Revenues (1)
            17,430       4,039       13,391       331.5  
Total property revenues
          $ 115,778     $ 99,163     $ 16,615       16.8 %
 
 
(1)
Includes ten communities acquired after April 1, 2010, two redevelopment communities, five development communities, and four commercial buildings.

Quarterly Same-Property Revenues increased by $3.2 million or 3.4% to $98.3 million in the second quarter of 2011 from $95.1 million in the second quarter of 2010.  The increase was primarily attributable to an increase in scheduled rents of $3.2 million as reflected in an increase of 3.4% in average rental rates from $1,307 per unit in the second quarter of 2010 to $1,352 per unit in the second quarter of 2011.  Scheduled rents increased in all regions by 2.5%, 4.9%, and 3.7% in Southern California, Northern California, and Seattle Metro, respectively.  Also, utility billings income increased $0.3 million and other income increased $0.2 million compared to the second quarter of 2010. The increases related to gross income were partially offset by a decrease in Quarterly Same-Property occupancy of 30 basis points or $0.4 million, from 97.2% for the second quarter of 2010 to 96.9% for the second quarter of 2011.  On a sequential basis the Company experienced quarterly same-property revenue growth from the first quarter of 2011 to the second quarter of 2011 of 1.5%, and the Company experienced sequential revenue growth in all regions.

Quarterly Non-Same Property Revenues increased by $13.4 million or 332% to $17.4 million in the second quarter of 2011 from $4.0 million in the second quarter of 2010.  The increase was primarily due to revenue generated from five development communities consisting of Joule, Fourth & U, Axis 2300, Allegro, and Muse, ten communities acquired since April 1, 2010 consisting of Elevation, 101 San Fernando, The Commons, Bella Villagio, Family Tree, 416 on Broadway, Anavia, Santee Court, Corbella at Juanita Bay, and Courtyard off Main, and the acquisition of the Santa Clara retail center.

Property operating expenses, excluding real estate taxes increased $4.3 million or 16.9% to $29.4 million in the second quarter of 2011 from $25.1 million in the second quarter of 2010, primarily due to the acquisition of ten communities and one retail center, and the completion of five development properties.  Same-Property operating expenses excluding real estate taxes increased by $1.3 million or 5.5% for the second quarter of 2011 compared to the second quarter of 2010, due primarily to an increase of $0.7 million in the timing of maintenance and repair costs and an increase of $0.4 million in administrative costs due mainly to an increase in payroll costs.

Real Estate taxes expense increased by $1.2 million or 12.4% for the second quarter of 2011 compared to the second quarter of 2010 due primarily to the acquisition of ten communities and one retail center, and the completion of development communities which resulted in an increase in property taxes of $1.5 million.  Same-Property real estate taxes decreased by $0.3 million for the second quarter of 2011 compared to the second quarter of 2010 due to a reduction in property valuations for select communities located in California, and a decrease in valuations for select properties in the Seattle Metro.

Depreciation expense increased by $6.4 million or 20.4% for the second quarter of 2011 compared to the second quarter of 2010, due to the acquisition of  ten communities and one retail center, the completion of five development properties, and the capitalization of approximately $31.0 million in additions to rental properties for the six months ended June 30, 2011 and the capitalization of approximately $52.0 million in additions to rental properties during 2010, including $16.3 million spent on redevelopment and revenue generating capital expenditures.

General and administrative expense increased by $.2 million or 2.4% for the second quarter of 2011 compared to the second quarter of 2010, due primarily to the $0.3 million incurred for organizational costs related to the creation of the Wesco and Cadence joint ventures.

 
21

 
Interest expense before amortization increased by $2.5 million or 12.6% for the second quarter of 2011 compared to the second quarter of 2010, primarily due to the increase in average outstanding debt partially offset by a decrease in the Company’s weighted average interest rate. The Company’s weighted average interest rate was 4.2% as of June 30, 2011 compared to 4.6% as of June 30, 2010.

Amortization expense increased by $1.9 million for the second quarter of 2011 compared to the second quarter of 2010, primarily due to the amortization of forward swaps that were settled during primarily during the third and fourth quarter of 2010 that were applied to new 10-year secured mortgage loans.

Interest and other income decreased by $4.5 million for the second quarter of 2011 primarily due to decrease of $1.1 million of interest income earned on the marketable securities composed of investment grade unsecured bonds due to the sales of these investments during 2010, and during the second quarter of 2010 the Company sold marketable securities for a gain of $4.0 million compared to no sales of securities in the second quarter of 2011.

Equity income (loss) in co-investments increased by $1.1 million for the second quarter of 2011 compared to the second quarter of 2010, due primarily to the Company’s investment of $34.7 million in preferred equity investments in communities located in Southern California that yield between 9% to 13%.

Discontinued operations increased by $5.2 million for the second quarter of 2011 due to the sale of Woodlawn Colonial for $16 million at a gain of $5.3 million, net of internal disposition costs.

Comparison of the Six Months Ended June 30, 2011 to the Six Months Ended June 30, 2010

Our average financial occupancies for the Company’s stabilized apartment communities or “2011/2010 Same-Properties” (stabilized properties consolidated by the Company for the six months ended June 30, 2011 and 2010) increased 50 basis points to 96.9% for the six months ended June 30, 2011 from 97.4% for the six months ended June 30, 2010.  The regional breakdown of the Company’s 2011/2010 Same-Property portfolio for financial occupancy for the six months ended June 30, 2011 and 2010 is as follows:

     
Six Months Ended
June 30,
     
2011
 
2010
Southern California
   
96.7%
 
97.1%
Northern California
   
97.1%
 
97.8%
Seattle Metro
   
97.0%
 
97.6%
 
The following table illustrates a breakdown of revenue amounts, including revenues attributable to 2011/2010 Same-Properties.

   
Number of
   
Six Months Ended
June 30,
   
Dollar
   
Percentage
 
   
Properties
   
2011
   
2010
   
Change
   
Change
 
Property Revenues (dollars in thousands)
                       
2011/2010 Same-Properties: