Edgar Filing: ESSEX PROPERTY TRUST INC

body_10-q.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, 2007

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

For the transition period from ________to _________

Commission file number 001-13106

ESSEX PROPERTY TRUST, INC.

(Exact name of Registrant as Specified in its Charter)

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

925 East Meadow Drive

Palo Alto, California 94303

(Address of Principal Executive Offices including Zip Code)

(650) 494-3700

(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

Indicate by check mark whether the registrant is a large accelerated filer an accelerated file, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer o Non-accelerated filer o

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:

25,160,844 shares of Common Stock as of August 3, 2007

ESSEX PROPERTY TRUST, INC.

FORM 10-Q

INDEX

		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):	3

	Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006	4

	Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006	5

	Consolidated Statements of Stockholders' Equity and Comprehensive Income for the six months ended June 30, 2007	6

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	27

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	27

Item 4.	Submissions of Matters to a Vote of Security Holders	27

Item 6.	Exhibits	28

Signatures		28

Part I -- Financial Information

Item 1: 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 consolidated balance sheets, statements of operations, stockholders' equity 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 consolidated financial statements for the interim periods.

The accompanying unaudited consolidated financial statements should be read in conjunction with the notes to such consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations herein. Additionally, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2006.

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except per share amounts)

		June 30,		December 31,
		2007		2006
Assets
Real estate:
Rental properties:
Land and land improvements	$	641,951	$	560,880
Buildings and improvements		2,326,267		2,108,307
		2,968,218		2,669,187
Less accumulated depreciation		(508,681)		(465,015)
		2,459,537		2,204,172
Real estate - held for sale, net		-		41,221
Real estate under development		161,655		103,487
Investments		69,851		60,451
		2,691,043		2,409,331
Cash and cash equivalents-unrestricted		12,587		9,662
Cash and cash equivalents-restricted		11,367		13,948
Marketable securities		3,815		-
Notes and other receivables from related parties		1,019		1,209
Notes and other receivables		26,614		18,195
Prepaid expenses and other assets		34,063		20,632
Deferred charges, net		12,967		12,863
Total assets	$	2,793,475	$	2,485,840

Liabilities and Stockholders' Equity
Mortgage notes payable	$	1,202,122	$	1,060,704
Mortgage notes payable - held for sale		-		32,850
Exchangeable bonds		225,000		225,000
Lines of credit		37,000		93,000
Accounts payable and accrued liabilities		38,493		38,614
Dividends payable		28,813		24,910
Other liabilities		15,503		14,328
Deferred gain		2,193		2,193
Total liabilities		1,549,124		1,491,599
Commitments and contingencies
Minority interests		251,965		236,120
Cumulative convertible preferred stock; $.0001 par value:
4.875% Series G - 5,980,000 issued and outstanding		145,912		145,912
Stockholders' equity:
Common stock, $.0001 par value, 649,702,178 shares authorized
25,152,364 and 23,416,295 shares issued and outstanding		2		2
Cumulative redeemable preferred stock; $.0001 par value:
7.8125% Series F - 1,000,000 shares authorized,
issued and outstanding, liquidation value		25,000		25,000
Excess stock, $.0001 par value, 330,000,000 shares
authorized and no shares issued and outstanding		-		-
Additional paid-in capital		904,876		686,937
Distributions in excess of accumulated earnings		(97,500)		(97,457)
Accumulated other comprehensive income (loss)		14,096		(2,273)
Total stockholders' equity		846,474		612,209
Total liabilities and stockholders' equity	$	2,793,475	$	2,485,840

See accompanying notes to the unaudited consolidated financial statements.

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARES

Consolidated Statements of Operations

(Unaudited)

(Dollars in thousands, except per share amounts)

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2007		2006		2007		2006
Revenues:
Rental and other property	$	96,707	$	83,717	$	188,861	$	165,951
Management and other fees from affiliates		1,354		830		2,394		1,654
		98,061		84,547		191,255		167,605
Expenses:
Property operating, excluding real estate taxes		23,932		21,246		47,052		42,906
Real estate taxes		8,143		7,161		15,855		14,331
Depreciation and amortization		25,166		19,907		46,843		39,227
Interest		20,491		18,919		38,757		37,330
Amortization of deferred financing costs		678		497		1,355		1,192
General and administrative		6,008		4,980		12,104		9,879
Other expenses		-		800		-		1,770
		84,418		73,510		161,966		146,635
Earnings from operations		13,643		11,037		29,289		20,970

Interest and other income		2,865		648		5,047		3,042
Equity income (loss) in co-investments		463		(374)		2,445		(816)
Minority interests		(5,069)		(4,555)		(10,376)		(9,365)
Income before discontinued operations and
tax provision		11,902		6,756		26,405		13,831
Income tax provision		-		(138)		-		(175)
Income before discontinued operations		11,902		6,618		26,405		13,656
Income from discontinued operations (net of
minority interests)		285		15,894		23,328		19,178
Net income		12,187		22,512		49,733		32,834
Dividends to preferred stockholders		(2,310)		(489)		(4,553)		(977)
Net income available to common stockholders	$	9,877	$	22,023	$	45,180	$	31,857

Per common share data:
Basic:
Income before discontinued operations available to
common stockholders	$	0.39	$	0.27	$	0.91	$	0.55
Income from discontinued operations		0.01		0.69		0.98		0.84
Net income available to common stockholders	$	0.40	$	0.96	$	1.89	$	1.39
Weighted average number of common shares
outstanding during the period		24,493,816		22,950,172		23,966,049		22,911,202

Diluted:
Income before discontinued operations available to
common stockholders	$	0.38	$	0.26	$	0.89	$	0.55
Income from discontinued operations		0.01		0.69		0.94		0.83
Net income available to common stockholders	$	0.39	$	0.95	$	1.83	$	1.38
Weighted average number of common shares
outstanding during the period		25,104,021		23,226,466		24,688,005		23,154,818

Dividend per common share	$	0.93	$	0.84	$	1.86	$	1.68

See accompanying notes to the unaudited consolidated financial statements.

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity and

Comprehensive Income for the six months ended June 30, 2007

(Unaudited)

(Dollars and shares in thousands)

												Distributions
								Additional		Accumulated other		in excess of
	Preferred stock			Common stock				paid-in		comprehensive		accumulated
	Shares		Amount	Shares		Amount		capital		income (loss)		earnings		Total
Balances at December 31, 2006	1,000		25,000	23,416		2		686,937		(2,273)		(97,457)		612,209
Comprehensive income:
Net income	-		-	-		-		-		-		49,733		49,733
Change in fair value of cash flow hedges	-		-	-		-		-		16,369		-		16,369
Comprehensive income														66,102
Issuance of common stock under:
Stock-based compensation plans	-		-	38		-		2,365		-		-		2,365
Sale of common stock	-		-	1,671		-		213,672		-		-		213,672
Conversion/Reallocation of minority interest	-		-	27		-		1,902		-		-		1,902
Dividends declared	-		-	-		-		-		-		(49,776)		(49,776)
Balances at June 30, 2007	1,000	$	25,000	25,152	$	2	$	904,876	$	14,096	$	(97,500)	$	846,474

See accompanying notes to the unaudited consolidated financial statements.

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

		Six Months Ended
		June 30,
		2007		2006
Net cash provided by operating activities	$	99,652	$	70,513
Cash flows used in investing activities:
Additions to real estate:
Acquisitions and improvements to recent acquisitions		(219,237)		(60,115)
Capital expenditures and redevelopment		(28,245)		(20,032)
Additions to real estate under development		(75,502)		(21,606)
Dispositions of real estate and investments		123,029		8,349
Changes in restricted cash and refundable deposits		2,270		6,271
Purchases of marketable securities		(3,815)		-
Additions to notes and other receivables		(9,104)		(8,284)
Collections of notes and other receivables		477		456
Contributions to limited partnerships		(21,215)		(17,849)
Distributions from limited partnerships		15,131		9,588
Net cash used in investing activities		(216,211)		(103,222)
Cash flows from financing activities:
Proceeds from mortgage notes payable and lines of credit		445,595		159,429
Repayment of mortgage notes payable and lines of credit		(416,038)		(93,030)
Payments of loans fees and related costs		(1,463)		(456)
Proceeds from settlement of forward-starting swap		1,311		-
Net proceeds from stock options exercised		1,765		2,113
Net proceeds from sale of common stock		213,672		14,813
Distributions to minority interest partners		(70,891)		(11,679)
Redemption of minority interest limited partnership units		(8,288)		(5,073)
Common and preferred stock dividends paid		(46,179)		(38,723)
Net cash provided by financing activities		119,484		27,394
Net increase (decrease) in cash and cash equivalents		2,925		(5,315)
Cash and cash equivalents at beginning of period		9,662		14,337
Cash and cash equivalents at end of period	$	12,587	$	9,022
Supplemental disclosure of cash flow information:
Cash paid for interest, net of $2,317 and $1,260 capitalized
in 2007 and 2006, respectively	$	36,162	$	36,858

Supplemental disclosure of noncash investing and financing activities:
Mortgage notes assumed in connection with purchases
of real estate	$	23,920		-
Land contributed by a partner in a consolidated joint venture	$	22,200		-

See accompanying notes to the unaudited consolidated financial statements.

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

(Unaudited)

(1) Organization and Basis of Presentation

The unaudited consolidated financial statements of the Company 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. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2006.

All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. Certain prior year balances have been reclassified to conform to the current year presentation.

The unaudited consolidated financial statements for the six months ended June 30, 2007 and 2006 include the accounts of the Company and Essex Portfolio, L.P. (the "Operating Partnership", which holds the operating assets of the Company). See below for a description of entities consolidated by the Operating Partnership. The Company is the sole general partner in the Operating Partnership, with a 91.0% and 90.4% general partnership interest as of June 30, 2007 and December 31, 2006, respectively.

As of June 30, 2007, the Company has ownership interests in 136 apartment communities (containing 27,808 units), five commercial investments (with approximately 463,840 square feet), two recreational vehicle parks (comprising 338 spaces) and one manufactured housing community (containing 157 sites), (collectively, the "Properties"). The Properties are located in Southern California (Ventura, Los Angeles, Santa Barbara, Orange, Riverside and San Diego counties), Northern California (the San Francisco Bay Area), Seattle, Washington and other regions (Portland, Oregon metropolitan area and Houston, Texas).

Fund Activities

Essex Apartment Value Fund, L.P. ("Fund I" and “Fund II”), are investment funds formed by the Company to add value through rental growth and asset appreciation, utilizing the Company's development, redevelopment and asset management capabilities. All of the assets in Fund I have been sold, and Fund I is in the final stages of liquidation.

Fund II has eight institutional investors, including the Company, with combined partner equity commitments of $265.9 million. Essex has committed $75.0 million to Fund II, which represents a 28.2% interest as general partner and limited partner. Fund II utilizes leverage equal to approximately 60% of the estimated value of the underlying real estate. Fund II invested in apartment communities in the Company’s targeted West Coast markets and, as of June 30, 2007, owned 11 apartment communities and three development projects. Essex records revenue for its asset management, property management, development and redevelopment services when earned, and promote income if Fund II exceeds certain financial return benchmarks.

Variable Interest Entities

In accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46 Revised (FIN 46R), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”, the Company consolidates 17 Down REIT limited partnerships (comprising eleven properties), and an office building that is subject to loans made by the Company. The Company consolidates these entities because it is deemed the primary beneficiary under FIN 46R. The total assets and liabilities related to these variable interest entities (VIEs), net of intercompany eliminations, were approximately $189.6 million and $136.5 million as of June 30, 2007 and $178.3 million and $110.9 million as of December 31, 2006, respectively.

Interest holders in VIEs consolidated by the Company are allocated net income equal to the cash payments made to those interest holders for services rendered or distributions from cash flow. The remaining results of operations are generally allocated to the Company. As of June 30, 2007 and December 31, 2006 the Company was involved with two VIEs, of which it is not deemed to be the primary beneficiary. Total assets and liabilities of these entities were approximately $71.7 million and $58.3 million, respectively, at June 30, 2007, and $78.5 million and $58.4 million, respectively, at December 31, 2006. The Company does not have a significant exposure to loss from its involvement with these unconsolidated VIEs.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123 Revised (“SFAS No. 123(R)”), “Share-Based Payment”, a revision of SFAS No. 123 using the modified prospective approach. SFAS No. 123(R) requires companies to recognize in the income statement the grant-date fair value of stock options and other equity based compensation issued to employees.

Stock-based compensation expense for stock options and restricted stock awards under the fair value method totaled $0.3 million and $0.5 million for the three months ended June 30, 2007 and 2006, respectively, and $0.6 million for the six months ended June 30, 2007 and 2006, respectively. The intrinsic value of the stock options exercised during the three months ended June 30, 2007 and 2006 totaled $0.8 million and $0.9 million, respectively, and $2.7 million for the six months ended June 30, 2007 and 2006, respectively. As of June 30, 2007, the intrinsic value of the stock options outstanding and fully vested totaled $21.8 million and $17.2 million, respectively. As of June 30, 2007, total unrecognized compensation cost related to unvested share-based compensation granted under the stock option plans and the restricted stock awards totaled $1.8 million. The cost is expected to be recognized over 3 to 5 years for the stock option plans and 7 years for the restricted stock awards.

Stock-based compensation expense for Z and Z-1 Units (collectively, “Z Units”) under the fair value method totaled $0.4 million and $0.2 million for the three months ended June 30, 2007 and 2006, respectively. Stock-based compensation capitalized for stock options, restricted stock awards, and the Z Units totaled $0.2 million for the three months ended June 30, 2007 and 2006, respectively. As of June 30, 2007 the intrinsic value of the Z Units subject to conversion totaled $16.0 million. As of June 30, 2007, total unrecognized compensation cost related to Z Units subject to conversion in the future granted under the Z Units totaled $8.1 million. The cost is expected to be recognized over 5 to 15 years for the Z Units.

The Company’s stock-based compensation policies have not changed materially from information reported in Note 2(k), “Stock-Based Compensation,” and Note 14, “Stock-Based Compensation Plans,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Accounting Estimates and Reclassifications

The preparation of consolidated financial statements, in accordance with U.S. generally accepted accounting principles, requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. 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. Certain reclassifications have been made to prior year balances in order to conform to the current year presentation. Such reclassifications have no impact on reported earnings, cash flows, total assets, or total liabilities.

New Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109.” FIN 48 establishes new evaluation and measurement processes for all income tax positions taken, and requires expanded disclosures of income tax matters. The adoption of this FIN did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. This statement clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. SFAS No. 157 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data. This statement is effective in fiscal years beginning after November 15, 2007. The Company believes that the adoption of this standard will not have a material effect on its consolidated financial statements.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 expands opportunities to use fair value measurement in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. This Statement is effective for fiscal years beginning after November 15, 2007. The Company has not decided if it will choose to measure any eligible financial assets and liabilities at fair value upon the adoption of this standard on January 1, 2008.

(2) Significant Transactions

(a) Acquisitions

In April 2007, the Company acquired Cardiff by the Sea Apartments located in Cardiff, California for approximately $72 million. The community, which is in Northern San Diego County, consists of 300 units and was built in 1986.

In May 2007, the Company acquired Canyon Oaks apartments, built in 2005, consisting of 250 units, located in San Ramon, California for approximately $64.3 million. The Company also acquired Coldwater Canyon apartments for $8.3 million. Built in 1979, the property consists of 39 unit located in Studio City, California.

In June 2007, the Company acquired The Cairns, a 100-unit property built in 2005 and located in the Lake Union area of Seattle, for $28.1 million.

In June 2007, the Company entered into agreements to acquire ownership interests in two limited partnerships (one of the existing general partners is a related party) which collectively own the Thomas Jefferson Apartments. Thomas Jefferson, built in 1963, is a 156-unit community located in Sunnyvale, California. This transaction is expected to close in the third quarter of 2007. In June, the Company acquired Magnolia Lane, built in 2001, for $5.4 million from a third-party. The property is a 32-unit community subject to a ground lease that expires in 64 years and is adjacent to Thomas Jefferson.

(b) Dispositions

The Company sold six condominium units at Peregrine Point during the second quarter of 2007, and the two remaining units were sold in July of 2007.

(c) Joint Ventures

In the second quarter of 2007, the Company recorded a promote fee of $0.3 million and equity income of $0.3 million from its investment in Fund I. Fund I is in the final stages of liquidation and no additional income is expected to be recorded in future periods.

In May 2007, the Company entered into a joint venture with the land owner of Hillsdale Garden Apartments, a 697-unit community located on a 30-acre land parcel in San Mateo, California. The Company contributed its leasehold interest in the property for an 81.5% interest and the land owner contributed its fee interest for an 18.5% interest in the joint venture.

(d) Debt and Financing Activities

During April 2007, the Company refinanced a mortgage loan for $35.7 million secured by the Tierra Vista community in the amount of $62.5 million, with a fixed interest rate of 5.47%, which matures in April 2017. In conjunction with this transaction the Company settled its first $50 million forward-starting swap and received $1.3 million from the counterparty. The swap settlement reduced the effective interest rate on the new Tierra Vista mortgage loan to 5.19%.

In June 2007, the Company originated a mortgage loan secured by the Cardiff by the Sea community purchased in April 2007 in the amount of $42.2 million. The loan has a fixed interest rate of 5.71% and matures in June 2017. The Company assumed a mortgage loan in conjunction with the acquisition of The Cairns community in the amount of $12.0 million, with a fixed interest rate of 5.5%, which matures in May 2014. Finally, the Company refinanced $18.6 million of debt secured by the Highridge community with a $44.8 million fixed interest rate loan of 6.05%, which matures in June 2017.

(e) Equity

During the quarter, the Company sold 1,670,500 shares of its common stock for proceeds of $213.7 million, net of underwriting fees and expenses. The Company used the net proceeds from the stock offerings to pay down outstanding borrowings under the Company’s lines of credit and to fund acquisition and development projects.

(f) Development

The River Oaks and Hollywood predevelopment projects generated lease income totaling $1.3 million during the second quarter of 2007, which was recorded as lease income and included in interest and other income in the accompanying consolidated statements of operations. Interest expense will be not capitalized on these projects while they are leased, and depreciation expense will be recorded on these properties until the leases expire. Accumulated depreciation totaled $1.4 million for these projects as of June 30, 2007.

(3) Investments

The Company has investments in a number of joint ventures, which are accounted for under the equity method. The joint ventures own and operate apartment communities. The following table details the Company's investments (dollars in thousands):

		June 30,		December 31,
		2007		2006

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

Limited partnership interest of 27.2% and general partner
interest of 1% in Essex Apartment Value Fund II, L.P (Fund II)	$	59,298	$	45,598
Preferred limited partnership interests in Mountain Vista
Apartments, LLC (A)		1,182		6,806
Development joint ventures		8,871		7,547
		69,351		59,951
Investments accounted for under the cost method of accounting:

Series A Preferred Stock interest in Multifamily Technology
Solutions, Inc.		500		500

Total investments	$	69,851	$	60,451

(A)	The investment is held in an entity that includes an affiliate of The Marcus & Millichap Company (“TMMC”). TMMC’s Chairman is also the Chairman of the Company.

The combined summarized financial information of investments, which are accounted for under the equity method, is as follows (dollars in thousands).


		June 30,		December 31,
		2007		2006
Balance sheets:
Real estate and real estate under development	$	578,075	$	576,134
Other assets		24,792		20,681

Total assets	$	602,867	$	596,815

Mortgage notes payable	$	316,960	$	301,665
Other liabilities		15,999		74,793
Partners' equity		269,908		220,357

Total liabilities and partners' equity	$	602,867	$	596,815

Company's share of equity	$	69,351	$	59,951

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2007		2006		2007		2006
Statements of operations:
Property revenues	$	10,697	$	10,231	$	22,835	$	19,741
Property operating expenses		(4,503)		(4,353)		(9,470)		(8,508)
Net operating income		6,194		5,878		13,365		11,233
Interest expense		(3,236)		(4,407)		(7,254)		(8,562)
Depreciation and amortization		(3,473)		(2,937)		(6,945)		(5,822)
Total net (loss) income	$	(515)	$	(1,466)	$	(834)	$	(3,151)
Company's share of operating net income (loss)		159		(374)		94		(816)
Company's equity in gain on sale and gain on partial sale of the Company's interest		304		-		2,351		-
Company's equity income (loss) in con-investments	$	463	$	(374)	$	2,445	$	(816)

During the first quarter of 2007, the Company made a $1.1 million contribution to a development with a joint venture partner, and as of June 30, 2007 the Company has made contributions to three developments held by joint venture entities totaling $8.9 million. Two of the developments are located in the San Francisco Bay Area and one of the developments is located in Southern California. As of June 30, 2007, these developments are still in the predevelopment stage.

During March 2007, the Mountain Vista Apartments, LLC, a joint venture that owns the Waterstone at Fremont apartments in Fremont, California, was recapitalized with the inclusion of a new joint venture partner, and as part of this transaction the Company received $7.7 million in net distributions from the joint venture. The Company accounted for this transaction as a partial sale of the Company’s investment and recorded a gain of $2.0 million which is included in equity income in co-investments as a result of this transaction. As of June 30, 2007, the Company’s carrying value of its remaining investment in the amended and restated Mountain Vista Apartments, LLC joint venture was $1.2 million.

The Company has an agreement to distribute to the general contractor of Mirabella apartments, 20% of the property’s cash flow after the Company receives a 9% cumulative preferred return on its investment from operating cash flow and a 12% preferred return on its investment from capital transactions cash flow. To date no distribution has been made to the general contractor under this agreement.

(4) Notes Receivable and Other Receivables from Related Parties

Notes receivable and other receivables from related parties consist of the following as of June 30, 2007 and December 31, 2006 (dollars in thousands):

		June 30,		December 31,
		2007		2006
Related party receivables, unsecured:
Loans to officers made prior to July 31, 2002, secured,
bearing interest at 8% (repaid in March 2007)	$	-	$	375
Other related party receivables, substantially due on demand		1,019		834
Total notes and other receivable from related parties	$	1,019	$	1,209

Other related party receivables consist primarily of receivables from Fund I totaling $0.6 million as of June 30, 2007 and accrued management fees from Fund II totaling $0.4 million as of December 31, 2006.

(5) Notes and Other Receivables

Notes receivables secured by real estate, and other receivables consist of the following as of June 30, 2007 and December 31, 2006 (dollars in thousands):

		June 30,		December 31,
		2007		2006

Note receivable, secured, bearing interest at 12%, due June 2008	$	2,193	$	2,193
Note receivable, secured, bearing interest at LIBOR + 3.69%, due June 2009		7,349		7,309
Note receivable, secured, bearing interest at LIBOR + 4.65%, due November 2008		9,183		7,807
Note receivable, secured, bearing interest at LIBOR + 4.75%, due March 2012		7,002		-
Other receivables		887		886
Total notes and other receivables	$	26,614	$	18,195

(6) Related Party Transactions

Management and other fees from affiliates includes property management, asset management, development and redevelopment fees from related parties of $1.4 million and $0.8 million for the three months ended June 30, 2007 and 2006, respectively, and $2.4 and $1.7 million for the six months ended June 30, 2007 and 2006, respectively.

The Company’s Chairman, George Marcus, is also the Chairman of TMMC, which is a real estate brokerage firm. The Company paid brokerage commissions on the sale of real estate totaling $0 and $0.8 million during the three months ended June 30, 2007 and 2006, respectively, and $1.3 million and $0.8 million, respectively, during the six months ended June 30, 2007 and 2006, respectively.

(7) Segment Information

The Company defines its reportable operating segments as the three geographical regions in which its properties are located: Southern California, Northern California and Seattle Metro. Excluded from segment revenues are properties outside of these regions including properties in Portland, Oregon and Houston, Texas, management and other fees from affiliates, and interest and other income. Non-segment revenues and net operating income included in the following schedule also consist of revenue generated from commercial properties, recreational vehicle parks, and manufactured housing communities. Other non-segment assets include investments, real estate under development, cash, notes receivable, other assets and deferred charges. The revenues, net operating income, and assets for each of the reportable operating segments are summarized as follows for the three months ended June 30, 2007 and 2006 (dollars in thousands):

		Three Months Ended
		June 30,
		2007		2006
Revenues:
Southern California	$	53,781	$	48,867
Northern California		23,788		18,056
Seattle Metro		15,850		13,621
Other Regions		3,288		3,173
Total property revenues	$	96,707	$	83,717

Net operating income:
Southern California	$	36,946	$	33,244
Northern California		15,521		12,233
Seattle Metro		10,413		8,634
Other Regions		1,752		1,199
Total net operating income		64,632		55,310

Depreciation and amortization:
Southern California		(12,328)		(10,850)
Northern California		(6,306)		(4,160)
Seattle Metro		(3,604)		(3,294)
Other Regions		(2,928)		(1,603)
		(25,166)		(19,907)
Interest expense:
Southern California		(7,492)		(6,768)
Northern California		(4,631)		(4,541)
Seattle Metro		(1,721)		(1,867)
Other Regions		(6,647)		(5,743)
		(20,491)		(18,919)

Amortization of deferred financing costs		(678)		(497)
General and administrative		(6,008)		(4,980)
Other expenses		-		(800)
Management and other fees from affiliates		1,354		830
Interest and other income		2,865		648
Equity income (loss) in co-investments		463		(374)
Minority interests		(5,069)		(4,555)
Income tax provision		-		(138)

Income before discontinued operations	$	11,902	$	6,618

The revenues, net operating income, and assets for each of the reportable operating segments are summarized as follows for the six months ended June 30, 2007 and 2006 (dollars in thousands):

	Six Months Ended
		June 30,
		2007		2006
Revenues:
Southern California	$	105,744	$	97,230
Northern California		45,656		35,500
Seattle Metro		30,894		26,892
Other Regions		6,567		6,329
Total property revenues	$	188,861	$	165,951

Net operating income:
Southern California	$	72,817	$	66,089
Northern California		30,162		23,760
Seattle Metro		20,354		16,891
Other Regions		2,621		1,974
Total net operating income		125,954		108,714

Depreciation and amortization:
Southern California		(23,673)		(21,257)
Northern California		(12,481)		(8,236)
Seattle Metro		(7,073)		(6,445)
Other Regions		(3,616)		(3,289)
		(46,843)		(39,227)
Interest expense:
Southern California		(14,081)		(13,123)
Northern California		(9,133)		(9,201)
Seattle Metro		(3,445)		(3,421)
Other Regions		(12,098)		(11,585)
		(38,757)		(37,330)

Amortization of deferred financing costs		(1,355)		(1,192)
General and administrative		(12,104)		(9,879)
Other expenses		-		(1,770)
Management and other fees from affiliates		2,394		1,654
Interest and other income		5,047		3,042
Equity income (loss) in co-investments		2,445		(816)
Minority interests		(10,376)		(9,365)
Income tax provision		-		(175)
Income before discontinued operations	$	26,405	$	13,656

		June 30,		December 31,
		2007		2006
Assets:
Southern California	$	1,335,370	$	1,244,037
Northern California		698,956		565,405
Seattle Metro		346,691		317,848
Other Regions		78,520		76,882
Net real estate assets		2,459,537		2,204,172
Non-segment assets		333,938		281,668
Total assets	$	2,793,475	$	2,485,840

(8) Net Income Per Common Share

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

		Three Months Ended					Three Months Ended
		June 30, 2007					June 30, 2006
			Weighted-		Per			Weighted-		Per
			average		Common			average		Common
			Common		Share			Common		Share
		Income	Shares		Amount		Income	Shares		Amount
Basic:
Income from continuing operations
available to common shareholders	$	9,592	24,494	$	0.39	$	6,129	22,950	$	0.27
Income from discontinued operations		285	24,494		0.01		15,894	22,950		0.69
		9,877		$	0.40		22,023		$	0.96


Effect of Dilutive Securities (1)		-	610				-	276

Diluted:
Income from continuing operations
available to common shareholders		9,592	25,104	$	0.38		6,129	23,226	$	0.26
Income from discontinued operations		285	25,104		0.01		15,894	23,226		0.69
	$	9,877		$	0.39	$	22,023		$	0.95


		Six Months Ended					Six Months Ended
		June 30, 2007					June 30, 2006
			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	$	21,852	23,966	$	0.91	$	12,679	22,911	$	0.55
Income from discontinued operations		23,328	23,966		0.98		19,178	22,911		0.84
		45,180		$	1.89		31,857		$	1.39

Effect of Dilutive Securities (1)		-	722				-	244

Diluted:
Income before discontinued operations available
to common stockholders		21,852	24,688	$	0.89		12,679	23,155	$	0.55
Income from discontinued operations		23,328	24,688		0.94		19,178	23,155		0.83
	$	45,180		$	1.83	$	31,857		$	1.38

(1)

Weighted convertible limited partnership units of 2,275,750 and 2,286,291 for the three months ended June 30, 2007 and 2006, respectively, and 2,291,412 and 2,290,113 for the six months ended June 30, 2007 and 2006, respectively, and Series Z incentive units of 213,205 and 183,771 for the three months ended June 30, 2007 and 2006, respectively, and 213,045 and 183,771 for the six months ended June 30, 2007 and 2006, respectively, were not included in the determination of diluted EPS because they were anti-dilutive. The Company has the ability and intent to redeem Down REIT Limited Partnership units for cash and does not consider them to be common stock equivalents.

On or after November 1, 2020, the holders of the $225 million exchangeable notes may exchange, at the then applicable exchange rate, the notes for cash and, at Essex’s option, a portion of the notes may be exchanged for Essex common stock; the original exchange rate was $103.25 per share of Essex common stock. The exchangeable notes will also be exchangeable prior to November 1, 2020, but only upon the occurrence of certain specified events. During the six months ended June 30, 2007 the weighted average common stock price exceeded the current strike price and therefore common stock issuable upon exchange of the exchangeable notes was included in the diluted share count. The treasury method was used to determine the shares to be added to the denominator for the calculation of earnings per diluted share.

Stock options of 4,000 and 19,148 for the three months ended June 30, 2007 and 2006, respectively, and 2,500 and 10,704 for the six months ended June 30, 2007 and 2006, 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.

The 5,980,000 shares of Series G cumulative convertible preferred stock have been excluded from diluted earnings per share for the three and six months ended June 30, 2007 as the effect was anti-dilutive.

(9) Derivative Instruments and Hedging Activities

As of June 30, 2007 the Company had entered into nine forward-starting interest rate swaps totaling a notional amount of $450 million with interest rates ranging from 4.9% to 5.9% and settlements dates ranging from April 2008 to October 2011. These derivatives qualify for hedge accounting and will economically hedge the cash flows associated with the refinancing of debt that matures between April 2008 and October 2011. The fair value of the derivatives increased $15.1 million during the six months ended June 30, 2007 to a value of $12.8 million as of June 30, 2007, and the derivative asset was recorded in prepaid and other assets in the Company’s consolidated financial statements. The changes in the fair values of the derivatives are reflected in accumulated other comprehensive income (loss) in the Company’s consolidated financial statements. No hedge ineffectiveness on cash flow hedges was recognized during the six months ended June 30, 2007 and 2006.

During April 2007, the Company refinanced a mortgage loan for $35.7 million secured by the Tierra Vista property in the amount of $62.5 million, with a fixed interest rate of 5.47%, which matures in April 2017. In conjunction with this transaction the Company settled its first $50 million forward-starting swap and received $1.3 million from the counterparty. The settlement of the swap was deemed effective and reduces the effective interest rate on the new Tierra Vista mortgage loan to 5.19% through the periodic amortization of the realized gain from accumulated other comprehensive income to interest expense.

(10)

Discontinued Operations

In the normal course of business, the Company will receive offers for sale of its properties, 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. Essex classifies real estate as "held for sale" when all criteria under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (“SFAS 144”) have been met.

In January 2006, the Company sold Vista Capri East and Casa Tierra apartment communities for approximately $7.0 million and in March 2006, the Company sold Diamond Valley, a Recreational Vehicle Park, for approximately $1.3 million. The total combined gain was $3.1 million. The Company has recorded the gain on sale and operations for the three properties as part of discontinued operations in the accompanying consolidated statements of operations.

In June 2006, the unconsolidated joint venture property, Vista Pointe, a 286-unit apartment community located in Anaheim, California, was sold for approximately $46 million. The Company’s share of the proceeds from the transaction totaled $19.3 million, resulting in an $8.8 million gain on the sale, and an additional $8.2 million for fees and a promote distribution. The Company has recorded the ground lease income and all related gains and fees from the Vista Pointe joint venture as part of discontinued operations in the accompanying consolidated statements of operations.

During the first and second quarter of 2007, the Company sold 13 and 6 condominium units at the Peregrine Point property and recorded a gain of approximately $0.6 million and $0.3 million net of taxes and expenses, respectively. Starting in the third quarter of 2006, the Company has been selling condominiums at Peregrine Point, and the 2 unsold units as of June 30, 2007 were sold in July 2007. The Company has recorded the gain on sale of condominiums and operations for Peregrine Point apartments as part of discontinued operations in the accompanying consolidated statements of operations.

As of December 31, 2006, City Heights Apartments, a 687-unit community located in Los Angeles was classified as held for sale, and during February 2007 the property was sold to a third-party for $120 million. The Company’s share of the proceeds from the sale totaled $33.9 million, resulting in a $13.7 million gain on sale to the Company, and an additional $10.3 million for fees from the City Heights joint venture partner are included in discontinued operations in the accompanying consolidated statements of operations.

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.

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2007		2006		2007		2006

Rental revenues	$	-	$	2,939	$	1,355	$	5,968
Interest and other income		-		6		290		6
Revenues		-		2,945		1,645		5,974
Property operating expenses		-		(1,083)		(535)		(2,282)
Interest expense		-		(579)		(416)		(1,158)
Depreciation and amortization		-		(768)		(41)		(1,539)
Minority interests		-		(222)		(57)		(313)
Expenses		-		(2,652)		(1,049)		(5,292)
Gain on sale of real estate		303		8,800		79,222		11,862
Equity income co-investments		-		119		-		238
Promote interest and fees		-		8,221		10,290		8,221
Minority interests - OP units		(18)		(1,539)		(2,156)		(1,825)
Minority interests - City Heights		-		-		(64,624)		-
Net gain on sale of real estate		285		15,601		22,732		18,496

Income from discontinued operations	$	285	$	15,894	$	23,328	$	19,178

(11) Commitments and Contingencies

The Company is subject to various lawsuits in the normal course of its business operations. Such lawsuits 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 our Consolidated Condensed Financial Statements and accompanying Notes thereto included elsewhere herein and with our 2006 Annual Report on Form 10-K for the year ended December 31, 2006 and our Current Report on Form 10-Q for the quarter ended June 30, 2007.

Essex is a fully integrated Real Estate Investment Trust (REIT), and its property revenues are generated primarily from apartment community operations. Our 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. Our strong financial condition supports our investment strategy by enhancing our ability to quickly shift our acquisition, development, and disposition activities to markets that will optimize the performance of the portfolio.

As of June 30, 2007, we had ownership interests in 136 apartment communities, comprising 27,808 apartment units. Our apartment communities are located in the following major West Coast regions:

Southern California (Ventura, Los Angeles, Santa Barbara, Orange, Riverside and San Diego counties)

Northern California (the San Francisco Bay Area)

SeattleMetro (Seattle metropolitan area)

Other Regions (Portland metropolitan area, and Houston, Texas)

As of June 30, 2007, we also had ownership interests in five commercial investments (with approximately 463,840 square feet), two recreational vehicle parks (comprising 338 spaces) and one manufactured housing community (containing 157 sites).

As of June 30, 2007, our consolidated development pipeline was comprised of three development projects, seven predevelopment projects, and three Taxable REIT Subsidiary (TRS) projects, aggregating 2,720 units, with total incurred costs of $161.7 million, and estimated remaining project costs of approximately $689.9 million for total estimated project costs of $851.6 million.

The Company’s consolidated apartment communities are as follows:

	As of June 30, 2007		As of June 30, 2006
	Apartment Homes	%	Apartment Homes	%
Southern California	12,725	52%	12,270	54%
Northern California	5,805	23%	4,621	20%
Seattle Metro	5,005	20%	4,905	21%
Other Regions	1,177	5%	1,177	5%
Total	24,712	100%	22,973	100%

Comparison of the Three Months Ended June 30, 2007 to the Three Months Ended June 30, 2006

Our average financial occupancies for the Company’s stabilized apartment communities or “Quarterly Same-Properties” (stabilized properties consolidated by the Company for the three months ended June 30, 2007 and 2006) decreased 90 basis points to 95.9% as of June 30, 2007 from 96.8% as of June 30, 2006 for the Quarterly Same-Properties. 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. 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 our calculation of financial occupancy.

The regional breakdown of the Company’s Quarterly Same-Property portfolio for financial occupancy for the quarter ended June 30, 2007 and 2006 is as follows:

	Three months ended
	June 30,
	2007	2006
Southern California	95.4%	96.1%
Northern California	97.0%	98.2%
Seattle Metro	96.6%	97.6%
Other Regions	95.4%	96.6%

The following table illustrates a breakdown of these revenue amounts, including revenues attributable to the Quarterly Same-Properties.

			Three Months Ended
	Number of		March 31,				Dollar	Percentage
	Properties		2007		2006		Change	Change
Property Revenues (dollars in thousands)
Same-Properties:
Southern California	56	$	46,027	$	43,592	$	2,435	5.6	%
Northern California	16		14,862		13,660		1,202	8.8
Seattle Metro	22		13,944		12,471		1,473	11.8
Other Regions	5		2,686		2,550		136	5.3
Total Same-Property revenues	99		77,519		72,273		5,246	7.3
Non-Same Property Revenues (1)			19,188		11,444		7,744	67.7
Total property revenues		$	96,707	$	83,717	$	12,990	15.5	%

(1) Includes properties acquired after April 1, 2006, eleven redevelopment communities, three office buildings and one development community.

Quarterly Same-Property Revenues increased by $5.2 million or 7.3% to $77.5 million in the second quarter of 2007 from $72.3 million in the second quarter of 2006. The increase in the second quarter of 2007 was primarily attributable to an increase in scheduled rents of $5.7 million or 8.0% compared to the second quarter of 2006. Average rental rates for

Quarterly Same-Property communities were $1,280 per unit in the second quarter of 2007 compared to $1,187 per unit in the second quarter of 2006. The decline in occupancy decreased revenues by $0.8 million. Other income increased $0.5 million quarter over quarter. Delinquency and rent concessions were consistent between quarters.

Quarterly Non-Same Property Revenues increased by $7.8 million or 67.7% to $19.2 million in the second quarter of 2007 from $11.4 million in the second quarter of 2006. The increase was primarily due to ten communities acquired since April 1, 2006 and eleven communities that are in redevelopment.

Total Expenses increased $10.9 million or 14.8% to $84.4 million in the second quarter of 2007 from $73.5 million in the second quarter of 2006. Property operating expenses increased by $3.7 million or 12.9% for the quarter, which is primarily due to the acquisition of ten communities since April 1, 2006 and annual increases in property salaries and real estate taxes. Depreciation expense increased by $5.3 million or 26.4% for the second quarter of 2007, due to the acquisition of ten properties since April 2006 and recording depreciation expense for the River Oaks and Hollywood commercial buildings. General and administrative costs increased $1.0 million primarily due to an increase in costs related to employees working on Fund II development and redevelopment projects that can not be capitalized by the Company of approximately $0.4 million, a 7% increase the in number of employees, and annual increases in salaries.

Other expenses of $0.8 million for the second quarter of 2006 related to an impairment charge resulting from a write-down of a property in Houston, Texas.

Interest and other income increased by $2.2 million in the second quarter of 2007 due to an increase in interest income of $0.8 million resulting mainly from an increase in outstanding structured finance loans, and an increase in lease income of $1.3 million resulting from the income generated from the River Oaks and Hollywood commercial buildings.

Equity income (loss) in co-investments increased by $0.8 million during the second quarter of 2007 due primarily to the recording of $0.3 million of equity income from Fund I, and $0.2 million in preferred interest received from the Mountain Vista, LLC joint venture. The Company recorded a loss of $0.4 million on its investment in Fund II during the second quarter of 2006, and net income from Fund II for the second quarter ended 2007 was approximately breakeven.

Income from discontinued operations for the second quarter of 2007 includes the net gain on sale of 6 condominiums at Peregrine Point condominiums for $0.3 million. During the second quarter of 2006, the Company recorded a gain of $8.8 million from the sale of the Vista Pointe joint venture property and $8.2 million in fees.

Comparison of the Six Months Ended June 30, 2007 to the Six Months Ended June 30, 2006

Our average financial occupancies for the Company’s stabilized apartment communities or “2007/2006 Same-Properties” (stabilized properties consolidated by the Company for the six months ended June 30, 2007 and 2006) decreased 80 basis points to 95.8% as of June 30, 2007 from 96.6% as of June 30, 2006.

The regional breakdown of the Company’s 2007/2006 Same-Property portfolio for financial occupancy for the six months ended June 30, 2007 and 2006 is as follows:

	Six Months Ended
	June 30,
	2007	2006
Southern California	95.6%	96.2%
Northern California	96.2%	97.4%
Seattle Metro	96.2%	97.1%
Other Regions	95.2%	96.1%

The following table illustrates a breakdown of these revenue amounts, including revenues attributable to the six-month 2007/2006 Same-Properties.

			Six Months Ended
	Number of		June 30,				Dollar	Percentage
	Properties		2007		2006		Change	Change
Property Revenues (dollars in thousands)
2007/2006 Same-Properties:
Southern California	56	$	91,828	$	86,770	$	5,058	5.8	%
Northern California	16		29,233		26,851		2,382	8.9
Seattle Metro	22		27,449		24,589		2,860	11.6
Other Regions	5		5,325		5,022		303	6.0
Total 2007/2006 Same-Property revenues	99		153,835		143,232		10,603	7.4
2007/2006 Non-Same Property Revenues (1)			35,026		22,719		12,307	54.2
Total property revenues		$	188,861	$	165,951	$	22,910