Edgar Filing: ESSEX PROPERTY TRUST INC

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 September 30, 2011

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 

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: 34,124,039 shares of Common Stock as of November 3, 2011.

ESSEX PROPERTY TRUST, INC.

FORM 10-Q

INDEX

		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Condensed Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010	4

	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010	5

	Condensed Consolidated Statements of Stockholders’ Equity, Noncontrolling Interest, and Comprehensive Income for the nine months ended September 30, 2011	6

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010	7

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risks	30

Item 4.	Controls and Procedures	30

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	31

Item 6	Exhibits	31

Signatures		32

Index

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.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except per share amounts)

	September 30,			December 31,
Assets	2011			2010
Real estate:
Rental properties:
Land and land improvements	$	836,134		$	802,325
Buildings and improvements		3,331,463			3,265,014
		4,167,597			4,067,339
Less accumulated depreciation		(883,024	)		(878,331	)

		3,284,573			3,189,008
Real estate under development		145,226			217,531
Co-investments		275,410			107,840
		3,705,209			3,514,379
Cash and cash equivalents-unrestricted		9,020			13,753
Cash and cash equivalents-restricted		23,997			21,941
Marketable securities		75,624			92,310
Notes and other receivables		51,599			49,444
Prepaid expenses and other assets		22,225			25,188
Deferred charges, net		17,491			15,872
Total assets	$	3,905,165		$	3,732,887

Liabilities and Equity
Mortgage notes payable	$	1,750,439		$	1,832,745
Lines of credit		244,775			426,000
Unsecured bonds		265,000			-
Accounts payable and accrued liabilities		63,006			44,750
Construction payable		10,589			9,023
Dividends payable		39,015			36,405
Derivative liabilities		1,634			5,633
Other liabilities		20,135			18,968
Total liabilities		2,394,593			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 33,381,506 and 31,324,808 shares issued and outstanding		3			3
Cumulative redeemable preferred stock at liquidation value		73,750			25,000
Additional paid-in capital		1,776,546			1,515,468
Distributions in excess of accumulated earnings		(386,752	)		(313,308	)
Accumulated other comprehensive (loss) income		(75,237	)		(77,217	)
Total stockholders' equity		1,388,310			1,149,946
Noncontrolling interest		117,913			205,068
Total stockholders' equity and noncontrolling interest		1,506,223			1,355,014
Total liabilities and equity	$	3,905,165		$	3,732,887

See accompanying notes to the unaudited condensed consolidated financial statements.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARES

Condensed Consolidated Statements of Operations

(Unaudited)

(Dollars in thousands, except per share amounts)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Revenues:
Rental and other property	$	118,118		$	103,368		$	345,984		$	301,804
Management and other fees from affiliates		1,940			959			4,585			3,458
		120,058			104,327			350,569			305,262
Expenses:
Property operating, excluding real estate taxes		30,048			27,600			87,616			77,259
Real estate taxes		11,301			10,106			32,896			29,306
Depreciation		38,137			31,531			112,563			93,068
General and administrative		6,066			6,175			18,551			17,988
Impairment and other charges		-			1,615			-			1,615
		85,552			77,027			251,626			219,236

Earnings from operations		34,506			27,300			98,943			86,026

Interest expense before amortization		(22,096	)		(21,025	)		(66,612	)		(61,085	)
Amortization expense		(2,936	)		(1,177	)		(8,527	)		(2,958	)
Interest and other income		2,741			5,788			12,357			20,730
Equity income (loss) in co-investments		317			(626	)		(330	)		(1,027	)
Loss on early retirement of debt		(567	)		-			(820	)		(10	)
Income before discontinued operations		11,965			10,260			35,011			41,676
Income (loss) from discontinued operations		(880	)		166			4,637			478
Net income		11,085			10,426			39,648			42,154
Net income attributable to noncontrolling interest		(2,031	)		(3,506	)		(7,882	)		(11,540	)
Net income attributable to controlling interest		9,054			6,920			31,766			30,614
Dividends to preferred stockholders		(1,367	)		(543	)		(3,385	)		(1,628	)
Excess of cash paid to redeem preferred stock and units over the carrying value		-			-			(1,949	)		-
Net income available to common stockholders	$	7,687		$	6,377		$	26,432		$	28,986

Per common share data:
Basic:
Income available to common stockholders	$	0.26		$	0.21		$	0.69		$	0.97
(Loss) income from discontinued operations		(0.03	)		-			0.13			0.02
Net income available to common stockholders	$	0.23		$	0.21		$	0.82		$	0.99
Weighted average number of common shares outstanding during the period		33,121,728			29,690,910			32,215,549			29,334,359

Diluted:

Income before discontinued operations available to common stockholders	$	0.26		$	0.21		$	0.69		$	0.97
(Loss) income from discontinued operations		(0.03	)		-			0.13			0.02
Net income available to common stockholders	$	0.23		$	0.21		$	0.82		$	0.99
Weighted average number of common shares outstanding during the period		33,209,289			29,762,420			32,304,686			29,398,637

Dividend per common share	$	1.040		$	1.033		$	3.120		$	3.098

See accompanying notes to the unaudited condensed consolidated financial statements.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity, Noncontrolling Interest, and

Comprehensive Income for the nine months ended September 30, 2011

(Unaudited)

(Dollars and shares in thousands)

																		Distributions			Accumulated
	Series F						Series H								Additional			in excess of			other
	Preferred stock						Preferred stock				Common stock				paid-in			accumulated			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		-			-			-		-		-		-		-			31,766			-			7,882			39,648
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		-			-			-		-		-		-		-			-			6,469			448			6,917
Change in fair value of marketable securities		-			-			-		-		-		-		-			-			(380	)		(18	)		(398	)
Comprehensive income (loss)																												41,765
Issuance of common stock under:
Stock option and restricted stock plans		-			-			-		-		97		-		7,591			-			-			-			7,591
Sale of common stock		-			-			-		-		1,960		-		256,790			-			-			-			256,790
Equity based compensation costs		-			-			-		-		-		-		-			-			-			804			804
Equity related issuance costs		-			-			-		-		-		-		(828	)		-			-			-			(828	)
Issuance of Series H Preferred		-			-			2,950		73,750		-		-		(2,541	)		-			-			-			71,209
Redemption of Series F Preferred		(1,000	)		(25,000	)		-		-		-		-		-			-			-			-			(25,000	)
Contributions from noncontrolling interest		-			-			-		-						-			-			-			800			800
Distributions to noncontrolling interest		-			-			-		-		-		-		-			-			-			(13,268	)		(13,268	)
Dividends declared		-			-			-		-		-		-		-			(105,210	)		-			-			(105,210	)
Redemption of Series B Preferred		-			-			-		-		-		-		1,200			-			-			(80,000	)		(78,800	)
Redemptions of noncontrolling interest		-			-			-		-		-		-		(1,134	)		-			-			(3,510	)		(4,644	)
Balances at September 30, 2011		-		$	-			2,950	$	73,750		33,382	$	3	$	1,776,546		$	(386,752	)	$	(75,237	)	$	117,913		$	1,506,223

See accompanying notes to the unaudited condensed consolidated financial statements.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

	Nine Months Ended
	September 30,
	2011			2010
Cash flows from operating activities:
Net Income	$	39,648		$	42,154
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of real estate		(5,051	)		-
Gain on sale of marketable securities		(4,543	)		(9,041	)
Loss on early retirement of debt		820			10
Equity in co-investments		3,963			1,027
Amortization of discount on exchangeable bonds		-			58
Amortization of discount on marketable securities		(3,492	)		(2,853	)
Amortization of deferred interest from settlement of swaps		6,517			-
Amortization of discount on notes receivables		(1,316	)		(3,435	)
Depreciation		112,678			93,385
Amortization of deferred financing costs		2,201			2,437
Stock-based compensation		1,618			2,360
Changes in operating assets and liabilities:
Prepaid expenses and other assets		(1,720	)		1,450
Accounts payable and accrued liabilities		18,205			19,018
Other liabilities		1,166			1,714
Net cash provided by operating activities		170,694			148,284
Cash flows from investing activities:
Additions to real estate:
Acquisitions		(43,328	)		(96,596	)
Improvements to recent acquisitions		(14,768	)		(2,266	)
Redevelopment expenditures		(26,929	)		(8,966	)
Revenue generating capital expenditures		(4,706	)		(788	)
Non-revenue generating capital expenditures		(13,946	)		(19,169	)
Proceeds from dispositions of real estate		15,972			-
Additions to real estate under development		(72,816	)		(110,972	)
Changes in restricted cash and refundable deposits		(1,165	)		(3,046	)
Purchases of marketable securities		(8,048	)		(18,294	)
Sales and maturities of marketable securities		27,997			65,889
Purchases of and advances under notes and other receivables		-			(21,026	)
Collections of notes and other receivables		643			1,832
Contributions to co-investments		(121,450	)		(78,513	)
Distributions from co-investments		4,032			40,397
Net cash used in investing activities		(258,512	)		(251,518	)
Cash flows from financing activities:
Borrowings under mortgage notes payable, lines of credit and bonds		872,041			616,385
Repayment under mortgage notes payable, lines of credit and bonds		(891,734	)		(487,152	)
Additions to deferred charges		(4,464	)		(1,832	)
Retirement of exchangeable bonds		-			(1,842	)
Settlement of forward-starting swaps		(2,395	)		(16,667	)
Net proceeds from stock options exercised		6,714			3,108
Net proceeds from issuance of Series H preferred stock		71,209			-
Redemption of Series F preferred stock		(25,000	)		-
Retirement of Series B preferred units		(78,800	)		-
Net proceeds from issuance of common stock		257,008			116,641
Equity related issuance costs		(765	)		-
Contributions from noncontrolling interest		-			3,990
Distributions to noncontrolling interest		(13,295	)		(19,694	)
Redemptions of noncontrolling interest		(4,644	)		(23,745	)
Common and preferred stock dividends paid		(102,790	)		(91,950	)
Net cash provided by financing activities		83,085			97,242

Net decrease in cash and cash equivalents		(4,733	)		(5,992	)
Cash and cash equivalents at beginning of period		13,753			20,660
Cash and cash equivalents at end of period	$	9,020		$	14,668

(Continued)

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

Supplemental disclosure of cash flow information:
Cash paid for interest, net of $6.9 million and $7.3 million capitalized in 2011 and 2010, respectively	$	66,629	$	61,595
Supplemental disclosure of noncash investing and financing activities:
Change in accrual of dividends	$	2,610	$	1,397
Change in value of derivative liabilities	$	1,760	$	24,945
Change in unrealized gain of marketable securities	$	398	$	3,208
Mortgage notes assumed in connection with purchase of real estate
including the loan premiums recorded	$	20,927	$	87,540
Non-cash contribution from noncontrolling interest	$	800		-
Change in construction payable	$	1,566	$	714
Transfer of real estate under development to rental properties	$	86,995	$	-
Transfer of real estate under development to co-investments	$	54,472	$	-

See accompanying notes to the unaudited condensed consolidated financial statements

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 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 nine months ended September 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 93.7% general partnership interest as of September 30, 2011. Total Operating Partnership units outstanding were 2,227,730 and 2,200,907 as of September 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 $267.4 million and $251.4 million, as of September 30, 2011 and December 31, 2010, respectively.

As of September 30, 2011, the Company owned or had ownership interests in 155 apartment communities, aggregating 32,076 units, excluding the Company’s ownership in preferred interest co-investments, (collectively, the “Communities”, and individually, a “Community”), six commercial buildings and five active development projects (collectively, the “Portfolio”). The Communities are located in Southern California (Los Angeles, Orange, Riverside, Santa Barbara, San Diego, and Ventura counties), Northern California (the San Francisco Bay Area) and the Seattle metropolitan area.

Fund Activities

Essex Apartment Value Fund II, L.P. (“Fund II”) is an investment fund formed by the Company to add value through rental growth and asset appreciation, utilizing the Company’s development, redevelopment and asset management capabilities. Fund II has eight institutional investors, and the Company, with combined partner equity contributions of $265.9 million. The Company contributed $75.0 million to Fund II, which represents a 28.2% interest as general partner and limited partner. Fund II utilized leverage equal to approximately 55% upon the initial acquisition of the underlying real estate. Fund II invested in apartment communities in the Company’s targeted West Coast markets and, as of September 30, 2011, owned 14 apartment communities and 2,971 units. 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%. The Company has contributed $56.8 million to Wesco, and as of September 30, 2011, Wesco owned 4 apartment communities with 1,693 units. Investments must meet certain criteria to qualify for inclusion in the joint venture and both partners must approve any new acquisitions and material dispositions. 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.

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 nine months ended September 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.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2011 and 2010

(Unaudited)

As of September 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 September 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 $45.5 million. The estimated fair values of the mortgage backed securities (Level 2 securities) are approximately equal to the carrying values.

As of September 30, 2011 the Company classified the following marketable securities as available for sale (dollars in thousands):

	September 30, 2011
			Gross
	Amortized		Unrealized
	Cost		Gain/(Loss)			Fair Value
Investment-grade unsecured bonds	$	3,611	$	373		$	3,984
Investment funds - US treasuries		11,789		145			11,934
Common stock		14,513		(319	)		14,194
Total	$	29,913	$	199		$	30,112

	December 31, 2010
			Gross
	Amortized		Unrealized
	Cost		Gain		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 nine months ended September 30, 2011 and 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 $4.5 million and $9.0 million for the nine months ended September 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 1,068,693 and 1,096,871 as of September 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 $128.3 million and $125.3 million, as of September 30, 2011 and December 31, 2010, respectively. The consolidated total assets and liabilities related to these VIEs, net of intercompany eliminations, were approximately $215.9 million and $172.4 million, respectively, as of September 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 September 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 $0.3 million for the three months ended September 30, 2011 and 2010, and $1.0 million and $0.7 million for the nine months ended September 30, 2011 and 2010, respectively. The intrinsic value of the stock options exercised during the three months ended September 30, 2011 and 2010 totaled $0.6 million and $0.4 million and $3.6 million and $1.9 million for the nine months ended September 30, 2011 and 2010, respectively. As of September 30, 2011, the intrinsic value of the stock options outstanding totaled $6.9 million. As of September 30, 2011, total unrecognized compensation cost related to unvested share-based compensation granted under the stock option and restricted stock plans totaled $3.7 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.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 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 $0.2 million and $0.4 million for the three months ended September 30, 2011 and 2010, respectively, and $0.7 million and $1.8 million for the nine months ended September 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 for the three months ended September 30, 2011, and 2010, and $0.3 million and $0.6 million for the nine months ended September 30, 2011 and 2010, respectively. As of September 30, 2011, the intrinsic value of the Z-1 Units subject to future vesting totaled $15.6 million. As of September 30, 2011, total unrecognized compensation cost related to Z-1 Units subject to future vesting totaled $6.3 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 revenue refunding bonds 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 September 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 $1.77 billion of fixed rate debt, including unsecured bonds, at September 30, 2011 is approximately $1.88 billion and the fair value of the Company’s $242.2 million of variable rate debt, excluding borrowings under the lines of credit, at September 30, 2011 is $224.9 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 September 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 the amortized cost carrying value of these securities. Marketable securities and both the note payable and the swap related to multifamily revenue refunding bonds for the 101 San Fernando apartment community, are carried at fair value as of September 30, 2011, as discussed above and in Note 8.

Preferred Equity Transactions

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.

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.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2011 and 2010

(Unaudited)

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.

(2) Significant Transactions During the Third Quarter of 2011 and Subsequent Events

Acquisition

In September, the Company acquired the Bernard, a 63-unit community located in the Lower Queen Anne district of Seattle, Washington for $13.8 million. As part of the transaction, the Company assumed a $9.4 million loan secured by the property at a fixed rate of 6.0% which matures in January 2019. The interest rate was unfavorable compared to currently available market rates for mortgage loans, and thus the Company recorded a $1.1 million loan premium to reflect the debt at fair value along with a corresponding increase to the carrying value of the property. This results in an effective interest rate for this loan of 4.0%.

Dispositions

During the quarter, the Company sold its preferred stock investment in Multifamily Technology Solutions, Inc, which owns MyNewPlace.com, a real estate technology company, for net proceeds of $1.6 million and a realized gain of $0.9 million.

Also, during the quarter, the Company also sold the View Pointe land parcel located in Newcastle, Washington for net proceeds of $1.4 million and a realized gain of $0.2 million.

Development

In September, the Company entered into a development joint venture with a regional developer for the construction of Fountain at La Brea, a 187-unit community with approximately 18,200 square feet of retail located in West Hollywood, California. The regional developer contributed the land and the Company contributed approximately $9.0 million in cash for a 50% interest in the venture. The joint venture acquired bond financing for the project in the amount of $54.5 million with a maturity date of October 2046 and entered into an interest rate swap transaction with respect to the bonds that terminates in September 2016 at a rate of SIFMA + 1.50. As of September 30, 2011, $13.5 million of the bonds were outstanding. The Company does not consolidate this joint venture and will account for it under the equity method of accounting.

During the quarter, the Company entered into a joint venture with the Canada Pension Plan Investment Board (“CPPIB”) to develop its 309-unit community located in West Dublin, California. The Company contributed the land to the joint venture, and the Company will account for this joint venture on the equity method. The Company will hold a 55% interest in the venture and will earn development, asset and property management fees, and may earn a promoted interest.

In October, the Company acquired the remaining 15% interest of a development joint venture for $0.8 million with the former land owner of a 12.6 acre operating retail site located in Santa Clara, California. The Company previously purchased an 85% interest in the venture in April, and the Company plans to entitle the 7.6 acre mixed-use site for 494 units, and an adjacent 5 acre parcel for retail. The former joint venture partner has an option to purchase the retail parcel.

Co-investments

In July, the Company acquired Reveal (formerly Millennium at Warner Center), a 438-unit community located in the Canoga Park area of Los Angeles through the Wesco joint venture. The property, which was completed in 2010, was acquired for $132.9 million. Wesco obtained a mortgage loan for $78.7 million at LIBOR + 1.9% secured by Reveal with a maturity of two years with two 1-year extensions.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2011 and 2010

(Unaudited)

In September, the Company acquired Redmond Hill, a group of four communities built between 1985 and 2003 consisting of 882-units in Redmond, Washington. The properties, which will be operated as two separate communities, were acquired for $151.3 million through the Company’s previously announced programmatic joint venture, Wesco. The Company intends to renovate portions of each property, beginning with building exteriors and community amenities, to be followed by apartment interior upgrades for a total cost of approximately $11.7 million. In conjunction with the acquisition, Wesco obtained two 10-year loans totaling $97.1 million secured by Redmond Hill at a fixed rate of 4.06%.

Common Stock, Preferred Stock and Preferred Units

During the quarter, the Company sold 647,787 shares of common stock for $88.2 million, net of commissions, at an average per share price of $137.83. Year to date through September, the Company has sold 1,959,411 shares of common stock for $256.8 million, net of commissions, at an average price of $132.65, and no stock has been sold to date in the fourth quarter. The Company may sell an additional 1,066,889 shares under the current equity distribution program.

Bonds

During the quarter, the Company repaid tax-exempt bonds for $9.8 million associated with the Boulevard community, and in conjunction with this repayment of the bonds 35 apartment units were released from an affordable rent bond program. The Company wrote-off $0.2 million of unamortized deferred charges related to the bonds.

Line of Credit

In August, the Company gave notice to terminate the $250 million secured line of credit facility with Freddie Mac which matures in December 2013. As of September 30, 2011, $174.0 million is outstanding under this line of credit and the Company intends to repay this using proceeds form other borrowings. The 11 properties that are the security for this secured facility will be unencumbered upon termination of the secured facility. Due to the early termination of the credit facility the Company has accelerated the amortization of the deferred facility charges, and the result is that an additional $0.3 million in amortization of deferred charges was recorded in the third quarter and another $0.3 million will be recorded in the fourth quarter of 2011.

In September, the Company amended the existing unsecured line of credit facility to increase the capacity to $425 million from $275 million with an accordion feature to expand the facility to $500 million. The borrowing rate is LIBOR + 1.25% and an annual facility fee of 0.25%. Interest on the credit facility floats at a margin over LIBOR plus a facility fee, which are tied to the Company’s senior unsecured credit ratings. The term of the amended facility is three years and provides for two, 1-year extension options.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2011 and 2010

(Unaudited)

(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):


	September 30,		December 31,
	2011		2010


Investments in joint ventures accounted for under the equity method of accounting:

Partnership interest in Fund II	$	64,505	$	66,000
Membership interest in Wesco		55,444		-
Membership interest in a limited liability company that owns Essex Skyline at MacArthur Place		25,781		29,187
Total operating co-investments		145,730		95,187
Membership interest in a limited liability company that owns and is developing Cadence and West Dublin		68,368		-
Membership interest in a limited liability company that owns and is developing Queen Anne		17,000		-
Membership interest in a limited liability company that owns and is developing Fountain at La Brea		9,186		-
Total development co-investments		94,554		-

Preferred interests in limited liability companies that own apartment communities in downtown Los Angeles with preferred returns of 9% and 10%		22,792		-
Preferred interest in a related limited liability company that owns Madison Park at Anaheim with a preferred return of 13%		12,334		12,014
Total preferred interest investments		35,126		12,014

Investments accounted for under the cost method of accounting:
Series A and B-2 Preferred Stock interests in Multifamily Technology Solutions, Inc.		-		639
Total co-investments	$	275,410	$	107,840

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 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).

	September 30,		December 31,
	2011		2010
Balance sheets:
Rental properties and real estate under development	$	1,405,295	$	750,808
Other assets		58,806		15,864

Total assets	$	1,464,101	$	766,672

Debt	$	886,632	$	450,693
Other liabilities		56,050		7,076
Equity		521,419		308,903

Total liabilities and equity	$	1,464,101	$	766,672

Company's share of equity	$	275,410	$	107,201

`	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Statements of operations:
Property revenues	$	28,286		$	13,824		$	70,882		$	38,634
Property operating expenses		(11,699	)		(6,513	)		(29,394	)		(17,176	)
Net property operating income		16,587			7,311			41,488			21,458

Interest expense		(7,354	)		(3,262	)		(22,764	)		(9,174	)
General and administrative		(82	)		-			(1,104	)		-
Depreciation and amortization		(11,957	)		(5,419	)		(29,963	)		(14,628	)

Net loss	$	(2,806	)	$	(1,370	)	$	(12,343	)	$	(2,344	)

Company's share of operating income (loss)		(602	)		(626	)		(1,249	)		(1,027	)
Company's preferred interest/gain - Multifamily Technology Solutions, Inc.		919			-			919			-
Company's share of net income (loss)	$	317		$	(626	)	$	(330	)	$	(1,027	)

(4) Notes and Other Receivables

Notes receivable secured by real estate, and other receivables consist of the following as of September 30, 2011 and December 31, 2010 (dollars in thousands):

	September 30,		December 31,
	2011		2010

Note receivable, secured, bearing interest at 6.3%, due February 2014	$	17,446	$	16,708
Note receivable, secured, bearing interest at 8.8%, due December 2012		10,930		10,930
Note receivable, secured, bearing interest at 9.8%, due March 2012		7,390		7,331
Note receivable, secured, bearing interest at LIBOR + 8.0%, due December 2012		6,443		6,513
Note receivable, secured, bearing interest at 6.5%, due November 2011		3,199		3,221
Note receivable, secured, bearing interest at 8.0%, due November 2011		971		971
Other receivables		5,220		3,770
	$	51,599	$	49,444

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2011 and 2010

(Unaudited)

(5) Related Party Transactions

Management and other fees from affiliates include management, development and redevelopment fees from co-investments of $1.9 million and $1.0 million for the three months ended September 30, 2011 and 2010, respectively, and $4.6 million and $3.0 million for the nine months ended September 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 nine months ended September 30, 2010. All of these fees are net of intercompany amounts eliminated by the Company.

An Executive Vice President of the Company invested $4.0 million for a 6% limited partnership interest in a partnership with the Company that acquired a 50% interest in a limited liability company that acquired Essex Skyline at MacArthur Place. The Executive Vice President’s investment is equal to a pro-rata share of the contributions, and distributions resulting from distributable cash generated by Essex Skyline at MacArthur Place will be calculated in the same manner as the calculation of distributions to the third party investor. The Executive Vice President does not participate in any promote interest or fees paid to the Company by the Essex Skyline at MacArthur Place joint venture.

(6) Segment Information

The Company defines its reportable operating segments as the three geographical regions in which its apartment communities are located: Southern California, Northern California and Seattle Metro. Excluded from segment revenues are properties classified in discontinued operations, management and other fees from affiliates, and interest and other income. Non-segment revenues and net operating income included in the following schedule also consist of revenue generated from commercial properties. 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 and nine months ended September 30, 2011 and 2010 (dollars in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Revenues:
Southern California	$	56,945		$	50,666		$	167,649		$	151,662
Northern California		37,757			32,770			109,624			92,731
Seattle Metro		20,530			17,932			60,495			51,377
Other real estate assets		2,886			2,000			8,216			6,034
Total property revenues	$	118,118		$	103,368		$	345,984		$	301,804

Net operating income:
Southern California	$	36,780		$	32,742		$	109,105		$	100,191
Northern California		24,790			20,922			72,129			59,966
Seattle Metro		12,964			10,882			38,294			31,581
Other real estate assets		2,235			1,116			5,944			3,501
Total net operating income		76,769			65,662			225,472			195,239

Depreciation		(38,137	)		(31,531	)		(112,563	)		(93,068	)
Interest expense before amortization		(22,096	)		(21,025	)		(66,612	)		(61,085	)
Amortization expense		(2,936	)		(1,177	)		(8,527	)		(2,958	)
Interest and other income		2,741			5,788			12,357			20,730
General and administrative		(6,066	)		(6,175	)		(18,551	)		(17,988	)
Impairment and other charges		-			(1,615	)		-			(1,615	)
Management and other fees from affiliates		1,940			959			4,585			3,458
Equity income (loss) from co-investments		317			(626	)		(330	)		(1,027	)
Loss on early retirement of debt		(567	)		-			(820	)		(10	)
Income before discontinued operations	$	11,965		$	10,260		$	35,011		$	41,676

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2011 and 2010

(Unaudited)

Total assets for each of the reportable operating segments are summarized as follows as of September 30, 2011 and December 31, 2010:

	September 30,		December 31,
	2011		2010
Assets:
Southern California	$	1,482,611	$	1,428,264
Northern California		1,137,647		1,119,555
Seattle Metro		566,506		560,463
Other real estate assets		97,809		80,726
Net reportable operating segments - real estate assets		3,284,573		3,189,008
Real estate under development		145,226		217,531
Cash and cash equivalents		33,017		35,694
Marketable securities		75,624		92,310
Co-investments		275,410		107,840
Notes and other receivables		51,599		49,444
Other non-segment assets		39,716		41,060
Total assets	$	3,905,165	$	3,732,887

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2011 and 2010

(Unaudited)

(7) Net Income Per Common Share

(Amounts in thousands, except per share and unit data)

	Three Months Ended								Three Months Ended
	September 30, 2011								September 30, 2010
				Weighted-		Per					Weighted-		Per
				average		Common					average		Common
				Common		Share					Common		Share
	Income			Shares		Amount			Income		Shares		Amount
Basic:
Income from operations available to common stockholders	$	8,505			33,122	$	0.26		$	6,224		29,691	$	0.21

Income from discontinued operations available to common stockholders		(818	)		33,122		(0.03	)		153		29,691		-
		7,687				$	0.23			6,377			$	0.21

Effect of Dilutive Securities (1)(2)		-			87					-		71

Diluted:
Income from continuing operations available to common stockholders		8,505			33,209	$	0.26			6,224		29,762	$	0.21
Income from discontinued operations available to common stockholders		(818	)		33,209		(0.03	)		153		29,762		-
	$	7,687				$	0.23		$	6,377			$	0.21

	Nine Months Ended						Nine Months Ended
	September 30, 2011						September 30, 2010
			Weighted		Per				Weighted		Per
			Average		Common				Average		Common
			Common		Share				Common		Share
	Income		Shares		Amount		Income		Shares		Amount

Basic:
Income before discontinued operations available to common stockholders	$	22,096		32,216	$	0.69	$	28,555		29,334	$	0.97
Income from discontinued operations available to common stockholders		4,336		32,216		0.13		431		29,334		0.02
		26,432			$	0.82		28,986			$	0.99

Effect of Dilutive Securities (1)(2)		-		89				-		65

Diluted:
Income from continuing operations available to common stockholders (1)		22,096		32,305		0.69	$	28,555		29,399		0.97
Income from discontinued operations available to common stockholders		4,336		32,305		0.13		431		29,399		0.02
	$	26,432			$	0.82	$	28,986			$	0.99

(1)

Weighted average convertible limited partnership units of 2,228,404 and 2,233,088, which includes vested Series Z incentive units, for the three and nine months ended September 30, 2011, respectively, and weighted average convertible limited partnership units of 2,200,907 and 2,325,220 which includes vested Series Z incentive units, for the three and nine months ended September 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 22,000 and 116,747 for the three months ended September 30, 2011 and 2010, respectively, and 29,500 and 133,432 for the nine months ended September 30, 2011 and 2010, respectively, were not included in the diluted earnings per share calculation because the exercise prices 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 nine months ended September 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 $0.6 million and $0.5 million for the three months ended September 30, 2011 and 2010 respectively, and $2.2 million and $2.4 million for the nine months ended September 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.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 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 September 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 September 30, 2011, the fair value of the swap was a liability of approximately $1.6 million.

As of September 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 $202.9 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 amortization of the forward starting swap settlement amounts along with the changes in the fair value of the interest rate cap contracts 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 $4.0 million during the nine months ended September 30, 2011 to a net liability of $1.6 million as of September 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 $4.4 million net of internal disposition costs and California state taxes of $0.9 million. The property was purchased in 2002 as part of the John M. Sachs, Inc. merger.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 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						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010

Rental revenues	$	-		$	453		$	595		$	1,337
Property operating expenses		-			(180	)		(228	)		(542	)
Depreciation and amortization		-			(107	)		(115	)		(317	)
Income from real estate sold		-			166			252			478
Gain on sale		-			-			5,854			-
Internal disposition costs and taxes		(880	)		-			(1,469	)		-
Income (loss) from discontinued operations	$	(880	)	$	166		$	4,637		$	478

(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.

The Company provided a loan and construction completion guarantee to the lender in order to fulfill the lender’s standard financing requirements related to the construction of the Queen Anne community. The outstanding balance for the construction loan is included in the debt line item in the balance sheet of the co-investments included in Note 3. The construction completion guarantee is for the life of the loan, which is scheduled to mature on July 1, 2014, with two, one-year extension options at the Queen Anne joint venture’s option. As of September 30, 2011, the Company was in compliance with all terms of the construction loan and the construction of the community is expected to be completed on time and within budget. The maximum exposure of the guarantee as of September 30, 2011 was $79.1 million based on the construction costs that were budgeted to be incurred to complete the construction.

The Company provided a payment guarantee to the counterparty in relation to the total return swap entered into by the joint venture responsible for the development of the Fountain at La Brea community. Further the Company has guaranteed completion of development and debt service for Fountain at La Brea. The outstanding balance for the loan is included in the debt line item in the balance sheet of the co-investments included in Note 3. The payment guarantee is for the payment of the amounts due to the counterparty related total return swap which is scheduled to mature on September 27, 2016. The maximum exposure of the guarantee as of September 30, 2011 was $13.5 million based on the current outstanding debt amount.

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 in the Company’s current three geographical regions 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 September 30, 2011, the Company had ownership interests in 155 apartment communities, comprising 32,076 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 September 30, 2011, the Company also had ownership interests in six commercial buildings with approximately 354,800 square feet.

As of September 30, 2011, the Company's consolidated development pipeline was comprised of one consolidated development project and three land parcels held for future development or sale aggregating 582 units, with total incurred costs of $145.2 million. The estimated remaining project costs are $10.8 million and the total active development project costs are $156.0 million.

Index

The Company has four unconsolidated joint venture development projects, Queen Anne, a 275 unit condominium project, West Dublin, a 309 unit project, Fountain at La Brea, a 187 unit project and Cadence a three-phase project with 280 units in phase 1. Development is underway for the first of three phases for Cadence which is comprised of 280 units. As of September 30, 2011, total costs incurred are $132.6 million, with estimated remaining project costs of $251.8 million for total estimated costs of $346.9 million.

The Company’s consolidated apartment communities are as follows:

	As of September 30, 2011					As of September 30, 2010
	Apartment Units		%			Apartment Units		%
Southern California		13,204		49	%		12,334		48	%
Northern California		7,817		29	%		7,696		30	%
Seattle Metro		6,042		22	%		5,701		22	%
Total		27,063		100	%		25,731		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, totaling 7,915 units, are not included in the table above for both years presented above.

Comparison of the Three Months Ended September 30, 2011 to the Three Months Ended September 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 September 30, 2011 and 2010) decreased 130 basis points to 95.4% as of September 30, 2011 from 96.7% as of September 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.

Index

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 September 30, 2011 and 2010 is as follows:

	Three months ended
	September 30,
	2011			2010
Southern California		95.4	%		96.5	%
Northern California		95.6	%		97.1	%
Seattle Metro