form10-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 September 30, 2008

OR

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

For the transition period from ________to _________

Commission file number 001-13106

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

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

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

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



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

Indicate by check mark whether the registrant is a large accelerated filer an accelerated file, 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:

26,795,274 shares of Common Stock as of October 30, 2008
 


 

 
 
 
ESSEX PROPERTY TRUST, INC.
FORM 10-Q
INDEX

   
Page No.
PART I. FINANCIAL INFORMATION
 
     
3
     
 
4
   
 
 
5
     
 
6
     
 
7
     
 
8
     
17
     
25
     
26
     
PART II. OTHER INFORMATION
 
     
26
     
27
   
 
28
     
28

2


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 condensed 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 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, 2007.

3


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except per share amounts)

   
September 30,
   
December 31,
 
   
2008
   
2007
 
Assets
           
Real estate:
           
Rental properties:
           
Land and land improvements
  $ 669,322     $ 670,494  
Buildings and improvements
    2,485,788       2,447,265  
                 
      3,155,110       3,117,759  
Less accumulated depreciation
    (612,249 )     (541,987 )
                 
      2,542,861       2,575,772  
Real estate - held for sale, net
    15,983       -  
Real estate under development
    347,979       233,445  
Co-investments
    66,363       64,191  
                 
      2,973,186       2,873,408  
Cash and cash equivalents-unrestricted
    33,404       9,956  
Cash and cash equivalents-restricted
    12,552       12,527  
Marketable securities
    58,614       2,017  
Receivables from related parties
    967       904  
Notes and other receivables
    45,782       49,632  
Prepaid expenses and other assets
    23,474       20,286  
Deferred charges, net
    11,347       11,593  
                 
Total assets
  $ 3,159,326     $ 2,980,323  
                 
Liabilities and Stockholders' Equity
               
Mortgage notes payable
  $ 1,341,327     $ 1,262,873  
Mortgage notes payable - held for sale
    10,799       -  
Exchangeable bonds
    225,000       225,000  
Lines of credit
    153,000       169,818  
Accounts payable and accrued liabilities
    64,759       52,783  
Construction payable
    20,089       5,365  
Dividends payable
    32,037       28,521  
Other liabilities
    16,672       17,773  
                 
Total liabilities
    1,863,683       1,762,133  
Commitments and contingencies
               
Minority interests
    279,930       281,960  
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 24,943,675 and 24,876,737 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
    982,754       857,109  
Distributions in excess of accumulated earnings
    (122,044 )     (82,805 )
Accumulated other comprehensive income (loss)
    (15,911 )     (8,988 )
                 
Total stockholders' equity
    869,801       790,318  
                 
Total liabilities and stockholders' equity
  $ 3,159,326     $ 2,980,323  
 
See accompanying notes to the unaudited condensed consolidated financial statements.

4


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

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
Revenues:
                       
Rental and other property
  $ 102,907     $ 95,012     $ 302,898     $ 275,747  
Management and other fees from affiliates
    1,311       1,268       3,965       3,662  
      104,218       96,280       306,863       279,409  
Expenses:
                               
Property operating, excluding real estate taxes
    25,719       22,949       74,625       66,707  
Real estate taxes
    8,630       8,185       24,904       23,298  
Depreciation and amortization
    27,952       24,169       82,564       69,036  
Interest
    19,399       19,459       57,835       57,688  
Amortization of deferred financing costs
    686       701       2,109       2,054  
General and administrative
    6,524       6,415       19,600       18,519  
      88,910       81,878       261,637       237,302  
                                 
Earnings from operations
    15,308       14,402       45,226       42,107  
                                 
Gain on sale of real estate
    2,446       -       2,446       -  
Interest and other income
    2,847       2,407       8,048       7,454  
Equity income in co-investments
    335       322       7,325       2,767  
Minority interests
    (5,666 )     (5,088 )     (16,929 )     (15,459 )
Income before discontinued operations
    15,270       12,043       46,116       36,869  
Income (loss) from discontinued operations (net of minority interests)
    (584 )     265       (1,417 )     25,172  
Net income
    14,686       12,308       44,699       62,041  
Dividends to preferred stockholders
    (2,310 )     (2,311 )     (6,931 )     (6,864 )
Net income available to common stockholders
  $ 12,376     $ 9,997     $ 37,768     $ 55,177  
                                 
Per common share data:
                               
Basic:
                               
Income before discontinued operations available to common stockholders
  $ 0.52     $ 0.39     $ 1.58     $ 1.23  
Income (loss) from discontinued operations
    (0.02 )     0.01       (0.06 )     1.03  
Net income available to common stockholders
  $ 0.50     $ 0.40     $ 1.52     $ 2.26  
Weighted average number of common shares outstanding during the period
    25,110,710       25,165,276       24,876,611       24,370,184  
                                 
Diluted:
                               
Income before discontinued operations available to common stockholders
  $ 0.51     $ 0.38     $ 1.56     $ 1.20  
Income (loss) from discontinued operations
    (0.02 )     0.01       (0.06 )     1.01  
Net income available to common stockholders
  $ 0.49     $ 0.39     $ 1.50     $ 2.21  
Weighted average number of common shares outstanding during the period
    25,474,924       25,555,928       25,182,107       24,983,765  
                                 
Dividend per common share
  $ 1.02     $ 0.93     $ 3.06     $ 2.79  


See accompanying notes to the unaudited condensed consolidated financial statements.

5


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the nine months ended September 30, 2008
(Unaudited)
(Dollars and shares in thousands)

                                 
Distributions
             
   
Series F
               
Additional
   
in excess of
   
Accumulated other
       
   
Preferred stock
   
Common stock
   
paid-in
   
accumulated
   
comprehensive
       
   
Shares
   
Amount
   
Shares
   
Amount
   
capital
   
earnings
   
income (loss)
   
Total
 
Balances at December 31, 2007
    1,000     $ 25,000       24,877     $ 2     $ 857,109     $ (82,805 )   $ (8,988 )   $ 790,318  
Comprehensive income:
                                                               
Net income
    -       -       -       -       -       44,699       -       44,699  
Change in fair value of cash flow hedges and amortization of swap settlements
    -       -       -       -       -       -       (6,923 )     (6,923 )
Comprehensive income
                                                            37,776  
Issuance of common stock under:
                                                               
Stock-based compensation plans
    -       -       79       -       5,714       -       -       5,714  
Issuance of common stock
    -       -       1,131       -       133,654       -       -       133,654  
Retirement of common stock
    -       -       (143 )     -       (13,723 )     -       -       (13,723 )
Dividends declared
    -       -       -       -       -       (83,938 )     -       (83,938 )
Balances at September 30, 2008
    1,000     $ 25,000       25,944     $ 2     $ 982,754     $ (122,044 )   $ (15,911 )   $ 869,801  

See accompanying notes to the unaudited condensed consolidated financial statements.

6


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)

   
Nine Months Ended
 
   
September 30,
 
   
2008
   
2007
 
Net cash provided by operating activities
  $ 143,048     $ 158,148  
                 
Cash flows used in investing activities:
               
Additions to real estate:
               
Acquisitions and improvements to recent acquisitions
    (93,906 )     (333,110 )
Capital expenditures and redevelopment
    (52,420 )     (52,124 )
Additions to real estate under development
    (92,497 )     (96,236 )
Dispositions of real estate and investments
    44,980       124,103  
Changes in restricted cash and refundable deposits
    (2,791 )     1,979  
Purchases of marketable securities
    (62,522 )     (5,843 )
Sales and maturities of marketable securities
    5,925       -  
Advances under notes and other receivables
    (1,958 )     (19,192 )
Collections of notes and other receivables
    5,980       1,472  
Contributions to co-investments
    (4,183 )     (22,164 )
Distributions from co-investments
    9,423       15,330  
Net cash used in investing activities
    (243,969 )     (385,785 )
                 
Cash flows from financing activities:
               
Borrowings under mortgage and other notes payable and lines of credit
    565,096       665,709  
Repayment of mortgage and other notes payable and lines of credit
    (450,485 )     (494,331 )
Additions to deferred charges
    (2,105 )     (1,516 )
Settlement of forward-starting swaps
    (1,840 )     1,311  
Net proceeds from stock options exercised
    4,841       3,786  
Net proceeds from sale of common stock
    133,654       213,672  
Repurchase of common stock
    (13,723 )     (1,409 )
Distributions to minority interest partners
    (18,128 )     (77,145 )
Redemption of minority interest limited partnership units
    (12,304 )     (9,983 )
Common and preferred stock dividends paid
    (80,637 )     (71,880 )
Net cash provided by financing activities
    124,369       228,214  
                 
Net increase in cash and cash equivalents
    23,448       577  
Cash and cash equivalents at beginning of period
    9,956       9,662  
Cash and cash equivalents at end of period
  $ 33,404     $ 10,239  
                 
Supplemental disclosure of cash flow information:
               
                 
Cash paid for interest, net of $8.2 million and $3.6 million capitalized in 2008 and 2007, respectively
  $ 46,929     $ 52,443  
                 
Supplemental disclosure of noncash investing and financing activities:
               
Mortgage note assumed by buyer in connection with sale of property
  $ 42,200     $ -  
Mortgage note assumed in connection with land contribution
  $ -     $ 43,839  
Mortgage note issued to buyer in connection with sale of property
  $ 4,070     $ -  
Land contributed by a partner in a consolidated joint venture
  $ 10,500     $ 22,200  
Change in value of cash flow hedges and amortization of swap settlements
  $ 6,923     $ 6,602  
Change in construction payable
  $ 14,724     $ 5,576  
Issuance of DownREIT units in connection with purchase of real estate
  $ -     $ 7,067  
Property received in satisfaction of note receivable
  $ 1,500     $ -  


See accompanying notes to the unaudited condensed consolidated financial statements.

7


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2008 and 2007
(Unaudited)

(1)  Organization and Basis of Presentation

The unaudited condensed 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, 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, 2007.
 
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, 2008 and 2007 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 91.4% general partnership interest as of September 30, 2008.
 
As of September 30, 2008, the Company owned or had ownership interests in 133 apartment communities, (aggregating 26,790 units), six office buildings, and one manufactured housing community (containing 157 sites) (collectively, the “Properties”). The Properties 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 commitments of $265.9 million. The Company has committed $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, 2008, owned eleven apartment communities and three development projects.  Essex 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.
 
Marketable Securities
 
Marketable securities consist primarily of U.S. treasury or agency securities and tax-exempt variable rate demand notes with original maturities of more than three months when purchased.  The Company has classified U.S. treasury and agency securities as held-to-maturity securities, and the Company reports these securities at amortized cost.  The Company has classified the tax-exempt variable rate demand notes as available for sale and the Company reports these securities at fair value and any unrealized gain or loss is recorded as other comprehensive income (loss).   Realized gains and losses and interest income are included in interest and other income on the condensed consolidated statement of operations.
 
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 a joint venture development project, 19 DownREIT limited partnerships (comprising twelve properties), an office building that is subject to loans made by the Company, and prior to the sale of the property during 2007, the buildings and improvements that were owned by a third-party subject to a ground lease on land that was owned by the Company.  The Company consolidates these entities because it is deemed the primary beneficiary under FIN 46R.  The consolidated total assets and liabilities related to these variable interest entities (“VIEs”), net of intercompany eliminations, were approximately $247.7 million and $168.4 million, respectively, as of September 30, 2008 and $222.7 million and $163.9 million, respectively, as of December 31, 2007.  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 December 31, 2007, the Company had two VIE’s of which it was not deemed to be the primary beneficiary.  Total assets and liabilities of these entities were $71.7 million and $58.3 million, as of December 31, 2007.  As of September 30, 2008, the Company did not have any VIE’s of which it was not deemed to be the primary beneficiary.

8


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 14, “Stock-Based Compensation Plans,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007) are being amortized over the expected service periods.
 
Stock-based compensation expense for options and restricted stock totaled $0.4 million for the three months ended September 30, 2008 and 2007, respectively, and $0.9 million and $1.0 million for the nine months ended September 30, 2008 and 2007, respectively.  The intrinsic value of the stock options exercised during the three months ended September 30, 2008 and 2007 totaled $1.4 million and $2.2 million, respectively, and $4.1 million and $4.9 for the nine months ended September 30, 2008 and 2007.  As of September 30, 2008, the intrinsic value of the stock options outstanding and fully vested totaled $15.1 million. As of September 30, 2008, total unrecognized compensation cost related to unvested share-based compensation granted under the stock option and restricted stock plans totaled $4.7 million.  The cost is expected to be recognized over a weighted-average period of 3 to 5 years for the stock option plans and 7 years for the restricted stock awards.
 
The Company 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 $0.4 million for the three months ended September 30, 2008 and 2007, and $1.1 million for the nine months ended September 30, 2008 and 2007, respectively.
 
Stock-based compensation capitalized for stock options, restricted stock awards, and the Z Units totaled $0.2 million and $0.6 million for the three and nine months ended September 30, 2008 and 2007, respectively.  As of September 30, 2008 the intrinsic value of the Z Units subject to conversion totaled $18.6 million.  As of September 30, 2008, total unrecognized compensation cost related to Z Units subject to conversion in the future granted under the Z Units totaled $6.6 million.  The unamortized cost is expected to be recognized over the next 3 to 11 years subject to the achievement of the stated performance criteria.
 
Stock-based compensation expense for the Outperformance Plan, (the “OPP”) adopted in December 2007 totaled approximately $0.3 million and $0.9 million for three and nine months ended September 30, 2008, respectively.   Total unrecognized compensation cost less an estimate for forfeitures related to the OPP totaled $4.4 million as of September 30, 2008.  The unamortized cost is expected to be recognized over the expected service period of five years for senior officers and three years for non-employee directors.
 
The Company’s stock-based compensation assumptions have not changed materially from information reported in Note 2(l), “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, 2007.

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 receivable 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.
 
New Accounting Pronouncements
 
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“FAS 157”).  FAS 157 provides guidance for using fair value to measure assets and liabilities.  FAS 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 adoption of this standard on January 1, 2008 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

9


In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS No. 159”).  FAS 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.  Through September 30, 2008, The Company has not elected to measure any eligible financial assets and liabilities at fair value.
 
In December 2007, the FASB issued revised FAS No. 141, “Business Combinations” (“FAS 141(R)”).  FAS141(R) establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree;  recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  FAS 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  Management is currently evaluating the impact FAS 141(R) will have on the Company’s accounting for future business combinations.  
 
In December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“FAS 160”). FAS 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated balance sheet within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently; when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value; and entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners.  FAS 160 is effective for fiscal years beginning on or after December 15, 2008. Management is currently evaluating the impact FAS 160 will have on the Company’s condensed consolidated financial statements.
 
In May 2008, the FASB issued FASB staff position APB 14-1, “Accounting for Convertible Debt Instruments That May be Settled in cash upon Conversion (Including Partial Cash Settlement)” (“APB 14-1”).  APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) upon conversion separately account for the liability (debt) and equity (conversion option) components of the instruments in a manner that reflects the issuer’s nonconvertible debt borrowing rate.  APB 14-1 requires the initial debt proceeds from the sale of a company’s convertible debt instrument to be allocated between the liability component and the equity component.  The resulting debt discount will be amortized over the period during which the debt is expected to be outstanding (i.e., through the first optional redemption dates) as additional non-cash interest expense.  APB 14-1 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  Earlier adoption is prohibited and retroactive application is required for all periods presented.  The interest expense from the Company’s $225.0 million exchangeable senior notes (the “Notes”) with a coupon rate of 3.625% due November 2025, which were issued in the fourth quarter of 2005, will be impacted by APB 14-1.  Based on the Company's understanding of the application of APB 14-1, this will result in an additional non-cash interest expense of additional interest of approximately $4.0 million for 2008 and 2009, respectively.  The Company will adopt APB 14-1 as of January 1, 2009, and the Company will present prior period comparative results reflecting the impact of APB 14-1.

(2)  Significant Transactions

(a)  Acquisitions

In July 2008, the Company acquired Chestnut Street Apartments, a 96-unit apartment community located in Santa Cruz, California, for $22.1 million. The property was built in 2002 and includes approximately 9,000 square feet of commercial and retail space.  Also, during July the Company received seven condominium units with an estimated fair value of $1.5 million in full satisfaction of its participating loan made in 2005 to the buyer of Eastridge Apartments and, as a result, recognized $1.5 million of the previously deferred $2.2 million gain on sale of Eastridge Apartments.
 
In August 2008, the Company acquired The Highlands at Wynhaven, a 333-unit apartment community located in Issaquah, Washington for $66.3 million.
 
(b)  Dispositions
 
During the third quarter of 2008, the Company sold Cardiff by the Sea Apartments, located in Cardiff, California for $71.0 million and St. Cloud Apartments, located in Houston, Texas for $8.8 million resulting in a combined gain of $46,000.  The Company also sold the Circle recreational vehicle park for $5.4 million resulting in a gain of $0.9 million, and the Company sold the Vacationer recreational vehicle park for $4.6 million.  The gain on sale of $0.8 million resulting from the sale of Vacationer was deferred due to the fact the Company loaned $4.1 million to the buyer at a fixed rate of 6.5% due in August 2011.

10


The Company is in contract to sell Coral Gardens, a 200-unit apartment community located in El Cajon, California in the fourth quarter of 2008 for $19.8 million.  This community is classified as held for sale as of September 30, 2008.
 
(c) Equity Transactions

During the third quarter of 2008, the Company issued 1,130,750 shares of common stock and during October 2008, the Company issued 78,300 shares at an average share price of $120.17.  Since July 2008, the Company issued 1,209,050 shares of common stock for $142.8 million, net of fees and commissions.  The Company will use the net proceeds to pay down debt, to fund the development pipeline and for future investments.
 
(d) Debt and Financing Activities
 
During July 2008, the Company paid-off an $89.0 million cross-collateralized mortgage loan at a fixed rate of 6.62%.
 
During August 2008, the Company obtained a mortgage loan in the amount of $53.0 million secured by Mill Creek, with a fixed rate of 5.77% which matures in August 2018.  In conjunction with the sale of Cardiff by the Sea, the buyer assumed the mortgage loan totaling $42.2 million at a fixed rate of 5.71%.
 
During September 2008, the Company obtained mortgage loans in the amount of $23.0 million at a fixed rate of 5.79% and $22.5 million at a fixed rate of 5.81%, secured by the Palisades and Bridgeport communities, respectively.  Both mortgage loans mature in September 2018.
 
During October 2008, the Company repurchased and retired $29.7 million of the Company’s $225 million exchangeable senior notes (“Notes”).  The Company repurchased these Notes at a discount to par value and expects to report a gain of approximately $1.1 million from the extinguishment of debt in the fourth quarter of 2008.
 
The Company has signed a letter of commitment to enter into a new five-year secured line of credit facility with Freddie Mac to replace the existing secured line of credit facility that matures in January 2009.  The new secured facility will expand the existing secured facility from $100 million to $150 million, and the new facility will be expandable to $250 million.  The Company anticipates that the closing date for the new secured facility will occur by the end of the fourth quarter of 2008.

(3) Co-investments

The Company has joint venture investments (“co-investments”), which are accounted for under the equity method.  The co-investments own development projects and operating apartment communities.  The following table details the Company's co-investments (dollars in thousands):
 
   
September 30,
   
December 31,
 
   
2008
   
2007
 
             
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")
  $ 60,866     $ 58,419  
Preferred limited partnership interest in Mountain Vista Apartments, LLC (A)
    -       1,182  
Development joint venture
    4,997       4,090  
      65,863       63,691  
Investments accounted for under the cost method of accounting:
               
Series A Preferred Stock interest in Multifamily Technology Solutions, Inc
    500       500  
Total co-investments
  $ 66,363     $ 64,191  

(A)
The investment was held in an entity that included an affiliate of The Marcus & Millichap Company (“TMMC”), and is the general partner.  TMMC’s Chairman is also the Chairman of the Company.

11


The combined summarized balance sheet for co-investments, which are accounted for under the equity method, is as follows (dollars in thousands).
 
   
September 30,
   
December 31,
 
   
2008
   
2007
 
Balance sheets:
           
Real estate and real estate under development
  $ 519,921     $ 614,266  
Other assets
    7,672       16,184  
                 
Total assets
  $ 527,593     $ 630,450  
                 
Mortgage notes payable
  $ 298,442     $ 322,615  
Other liabilities
    12,733       24,014  
Partners' equity
    216,418       283,821  
                 
Total liabilities and partners' equity
  $ 527,593     $ 630,450  
                 
Company's share of equity
  $ 65,863     $ 63,691  

The combined summarized statement of operations for co-investments, which are accounted for under the equity method, is as follows (dollars in thousands).

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
Statements of operations:
                       
Property revenues
  $ 11,906     $ 11,761     $ 34,232     $ 34,596  
Operating expenses
    (4,565 )     (4,335 )     (13,180 )     (13,805 )
Interest expense
    (2,876 )     (3,369 )     (8,205 )     (10,623 )
Depreciation and amortization
    (3,308 )     (3,485 )     (9,979 )     (10,431 )
                                 
Total net income (loss)
  $ 1,157     $ 572     $ 2,868     $ (263 )
                                 
Company's share of operating net income
    335       322       1,007       421  
Company's preferred interest/gain - Mt. Vista
    -       -       6,318       2,346  
Company's share of net income
  $ 335     $ 322     $ 7,325     $ 2,767  

Through September 30, 2008, the Company has made contributions to a joint venture totaling $5.0 million related to a development project located in Southern California, which was still in the predevelopment stage as of September 30, 2008.
 
In January 2008, the Company received $7.5 million and recognized $6.3 million of preferred income which is included in equity income in co-investments from the repayment of its investment in Mountain Vista Apartments, LLC.
 
(4) Notes and Other Receivables
 
Notes receivables secured by real estate, and other receivables consist of the following as of September 30, 2008 and December 31, 2007 (dollars in thousands):
 
   
September 30,
   
December 31,
 
   
2008
   
2007
 
             
Note receivable, secured, bearing interest at LIBOR + 4.65%, due July 2008
  $ -     $ 5,448  
Note receivable, secured, bearing interest at LIBOR + 3.38%, due February 2009
    12,863       10,999  
Note receivable, secured, bearing interest at LIBOR + 2.95%, due April 2009
    14,000       14,010  
Note receivable, secured, bearing interest at LIBOR + 3.69%, due June 2009
    7,328       7,346  
Note receivable, secured, bearing interest at LIBOR + 4.75%, due March 2011
    7,260       7,128  
Other receivables
    4,331       4,701  
    $ 45,782     $ 49,632  

In September 2007, the Company originated a loan to the owners of an apartment community under development in Vancouver, Washington, with a maturity date of February 2009.  The proceeds from the loan refinanced the property and are providing funding for the completion of the 146-unit apartment community.  In July 2008, the Company ceased recording interest income and issued a notice of monetary default to the borrower, and the borrower filed for bankruptcy.  The Company expects the note will be settled through the foreclosure or sale of the property for full payment of the note.

12


(5) Related Party Transactions
 
Other related party receivables consist primarily of accrued payroll costs and management fees due from Fund II totaling $1.0 million and $0.9 million as of September 30, 2008 and December 31, 2007, respectively.  Management and other fees from affiliates include property management, asset management, development and redevelopment fees from related parties of $1.3 million for the quarters ended September 30, 2008 and 2007, and $4.0 million and $3.7 million for the nine months ended September 30, 2008 and 2007, respectively.  The Company’s Chairman, George Marcus, is also the Chairman of TMMC, which is a real estate brokerage firm. The Company paid $0.2 million and $0 brokerage commissions on the sale of real estate during the three months ended September 30, 2008 and 2007, respectively, and $0.2 million and $1.3 million during the nine months ended September 30, 2008 and 2007, respectively.
 
As discussed in Note 3, in January 2008, the Company received $7.5 million from an investment held in an affiliate of TMMC and recognized $6.3 million of preferred income which is included in equity income from co-investments.
 
(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, recreational vehicle parks, and manufactured housing communities.  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 months ended September 30, 2008 and 2007 (dollars in thousands):
 
   
Three Months Ended
 
   
September 30,
 
   
2008
   
2007
 
Revenues:
           
Southern California
  $ 53,442     $ 52,429  
Northern California
    30,516       25,608  
Seattle Metro
    18,269       16,355  
Other real estate assets
    680       620  
Total property revenues
  $ 102,907     $ 95,012  
                 
Net operating income:
               
Southern California
  $ 36,282     $ 35,979  
Northern California
    19,877       16,919  
Seattle Metro
    12,037       10,680  
Other real estate assets
    362       300  
Total net operating income
    68,558       63,878  
                 
Depreciation and amortization
    (27,952 )     (24,169 )
Interest expense
    (19,399 )     (19,459 )
Amortization of deferred financing costs
    (686 )     (701 )
General and administrative
    (6,524 )     (6,415 )
Management and other fees from affiliates
    1,311       1,268  
Gain on sale or real estate
    2,446       -  
Interest and other income
    2,847       2,407  
Equity income in co-investments
    335       322  
Minority interests
    (5,666 )     (5,088 )
Income before discontinued operations
  $ 15,270     $ 12,043  

13


The revenues, net operating income, and assets for each of the reportable operating segments are summarized as follows for the nine months ended September 30, 2008 and 2007 (dollars in thousands):
 
   
Nine Months Ended
 
   
September 30,
 
   
2008
   
2007
 
Revenues:
           
Southern California
  $ 159,725     $ 155,632  
Northern California
    88,782       71,122  
Seattle Metro
    52,355       47,144  
Other real estate assets
    2,036       1,849  
Total property revenues
  $ 302,898     $ 275,747  
                 
Net operating income:
               
Southern California
  $ 109,582     $ 107,608  
Northern California
    58,002       47,081  
Seattle Metro
    34,925       31,035  
Other real estate assets
    860       18  
Total net operating income
    203,369       185,742  
                 
Depreciation and amortization
    (82,564 )     (69,036 )
Interest expense
    (57,835 )     (57,688 )
Amortization of deferred financing costs
    (2,109 )     (2,054 )
General and administrative
    (19,600 )     (18,519 )
Management and other fees from affiliates
    3,965       3,662  
Gain on sale of real estate
    2,446       -  
Interest and other income
    8,048       7,454  
Equity income in co-investments
    7,325       2,767  
Minority interests
    (16,929 )     (15,459 )
Income before discontinued operations
  $ 46,116     $ 36,869  
 
   
September 30,
   
December 31,
 
   
2008
   
2007
 
Assets:
           
Southern California
  $ 1,218,392     $ 1,354,818  
Northern California
    852,061       829,879  
Seattle Metro
    420,411       353,737  
Other real estate assets
    51,997       37,338  
Net rental properties
    2,542,861       2,575,772  
                 
Real estate - held for sale, net
    15,983       -  
Real estate under development
    347,979       233,445  
Co-investments
    66,363       64,191  
Cash and cash equivalents
    45,956       22,483  
Marketable securities
    58,614       2,017  
Notes and other receivables
    46,749       50,536  
Other non-segment assets
    34,821       31,879  
Total assets
  $ 3,159,326     $ 2,980,323  

14

 
(7)
Net Income Per Common Share
 
(Amounts in thousands, except per share and unit data)

   
Three Months Ended
   
Three Months Ended
 
   
September 30, 2008
   
September 30, 2007
 
         
Weighted-
   
Per
         
Weighted-
   
Per
 
         
average
   
Common
         
average
   
Common
 
         
Common
   
Share
         
Common
   
Share
 
   
Income
   
Shares
   
Amount
   
Income
   
Shares
   
Amount
 
Basic:
                                   
Income from continuing operations available to common stockholders
  $ 12,960       25,111     $ 0.52     $ 9,732       25,165     $ 0.39  
Income (loss) from discontinued operations
    (584 )     25,111       (0.02 )     265       25,165       0.01  
      12,376             $ 0.50       9,997             $ 0.40  
                                                 
Effect of Dilutive Securities (1)
    -       364               -       391          
                                                 
Diluted:
                                               
Income from continuing operations available to common stockholders
    12,960       25,475     $ 0.51       9,732       25,556     $ 0.38  
Income (loss) from discontinued operations
    (584 )     25,475       (0.02 )     265       25,556       0.01  
    $ 12,376             $ 0.49     $ 9,997             $ 0.39  
                                                 
                                                 
   
Nine Months Ended
   
Nine Months Ended
 
   
September 30, 2008
   
September 30, 2007
 
           
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
  $ 39,185       24,877     $ 1.58     $ 30,005       24,370     $ 1.23  
Income (loss) from discontinued operations
    (1,417 )     24,877       (0.06 )     25,172       24,370       1.03  
      37,768             $ 1.52       55,177             $ 2.26  
                                                 
Effect of Dilutive Securities (1)
    -       305               -       614          
                                                 
Diluted:
                                               
Income before discontinued operations available to common stockholders
    39,185       25,182     $ 1.56       30,005       24,984     $ 1.20  
Income (loss) from discontinued operations
    (1,417 )     25,182       (0.06 )     25,172       24,984       1.01  
    $ 37,768             $ 1.50     $ 55,177             $ 2.21  

(1)
Weighted convertible limited partnership units of 2,184,446 and 2,273,992 for the three months ended September 30, 2008 and 2007, respectively, and 2,224,828 and 2,285,541 for the nine months ended September 30, 2008 and 2007, respectively, and Series Z incentive units of 250,927 and 213,205 for the three months ended September 30, 2008 and 2007, respectively, and  250,514 and 213,045 for the nine months ended September 30, 2008 and 2007, respectively, were not included in the determination of diluted EPS because they were anti-dilutive.  The Company has the ability and intent to redeem DownREIT 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 three and nine months ended September 30, 2008 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 28,250 and 45,004 for the three months ended September 30, 2008 and 2007, respectively, and 75,111 and 19,753 for the nine months ended September 30, 2008 and 2007, respectively, were not included in the diluted earnings per share calculation because the exercise price of the options were greater than the average market price of the common shares for the three and nine months ended and, therefore, were anti-dilutive.

The 5,980,000 shares of Series G cumulative convertible preferred stock have been excluded from diluted earnings per share for the three and nine months ended September 30, 2008 and 2007 as the effect was anti-dilutive.

15


(8)  Derivative Instruments and Hedging Activities
 
As discussed in Note 1, the Company adopted FAS 157 as of January 1, 2008.  The Company values forward-starting interest rate swaps at fair value, and based on the fair value hierarchy of valuation techniques, the Company has elected to use fair values determined by Level 2.  Level 2 valuation methodology is determined based on inputs other than quoted prices in active markets for identical assets or liabilities the Company has the ability to access as included in Level 1 valuation methodology that are observable for the asset or liability, either directly or indirectly.  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, such as interest rates and yield curves observable at commonly quoted intervals.  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.  As of September 30, 2008, forward-starting interest rates swaps are the only assets and liabilities that the Company measured at fair value based on the FAS 157 fair valuation methodology.
 
As of September 30, 2008 the Company had eight forward-starting interest rate swaps totaling a notional amount of $400 million with interest rates ranging from 5.1% to 5.9% and settlements dates ranging from December 2008 to October 2011.  These derivatives qualify for hedge accounting as they are expected to economically hedge the cash flows associated with the refinancing of debt that matures December 2008 through October 2011.  The fair value of the derivatives decreased $5.1 million during the nine months ended September 30, 2008 to a liability value of $15.4 million as of September 30, 2008, and the derivative liability was recorded in other liabilities in the Company’s condensed consolidated financial statements.  The changes in the fair values of the derivatives are reflected in accumulated other comprehensive (loss) income in the Company’s condensed consolidated financial statements.  No hedge ineffectiveness on cash flow hedges was recognized during the quarter ended September 30, 2008 and 2007.
 
During the second quarter 2008, the Company settled one forward-starting interest rate swaps for a total of $1.8 million in payments to counterparties.  The $1.8 million loss on settlement will be amortized over the life of the 10-year secured mortgage loans.
 
(9)  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 FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (“FAS 144”) have been met.
 
During February 2007, City Heights Apartments, a 687-unit community located in Los Angeles 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 condensed consolidated statements of operations.
 
In December 2007, the Company sold four communities (875-units) in the Portland metropolitan area and, as a result, has classified the results of operations for these communities as discontinued operations for the three and nine months ended September 30, 2007.
 
In July 2007, the Company sold the final 2 condominium units at the Peregrine Point property for a gain of $0.1 million net of taxes and expenses.  For the nine months ended September 30, 2007, the Company sold 21 condominium units at the Peregrine Point property and recorded a gain of $1.0 million net of taxes and expenses.  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.
 
During the third quarter of 2008, the Company sold Cardiff by the Sea, a 300-unit community located in Cardiff, California for $71.0 million and St. Cloud Apartments, a 302-unit community located in Houston, Texas for $8.8 million resulting in a combined gain of $46,000.  The Company has recorded the gain on sale operations for these two apartment communities as part of discontinued operations in the accompanying consolidated statements of operations.
 
The Company is in contract to sell Coral Gardens, a 200-unit apartment community located in El Cajon, California in the fourth quarter of 2008 for $19.8 million.  This community is classified as held for sale as of September 30, 2008, and as a result, has classified the results of operations for Coral Gardens as discontinued operations.

16


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
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
                         
Rental revenues
  $ 1,677     $ 4,594     $ 6,528     $ 13,416  
Interest and other income
    -       -       -       290  
Revenues
    1,677       4,594       6,528       13,706  
Property operating expenses
    (1,183 )     (2,142 )     (3,594 )     (5,899 )
Interest expense
    (545 )     (783 )     (2,087 )     (1,729 )
Depreciation and amortization
    (629 )     (1,443 )     (2,434 )     (3,460 )
Minority interests
    54       (20 )     128       (226 )
Expenses
    (2,303 )     (4,388 )     (7,987 )     (11,314 )
Gain on sale of real estate
    46       64       46       79,275  
Subordination fees
    -       -       -       10,290  
Minority interests - OP units
    (4 )     (5 )     (4 )     (2,156 )
Minority interests - City Heights
    -       -       -       (64,629 )
Net gain on sale of real estate
    42       59       42       22,780  
                      -          
Income from discontinued operations
  $ (584 )   $ 265     $ (1,417 )   $ 25,172  

(10)  Commitments and Contingencies
 
The Company is subject to various lawsuits in the normal course of its business operations.  Such lawsuits could 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 Condensed Consolidated Financial Statements and accompanying Notes thereto included elsewhere herein and with our 2007 Annual Report on Form 10-K for the year ended December 31, 2007 and our Current Report on Form 10-Q for the quarter ended September 30, 2008.
 
The Company 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 September 30, 2008, we had ownership interests in 133 apartment communities, comprising 26,790 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)
Seattle Metro (Seattle metropolitan area)

As of September 30, 2008, the Company also had ownership interests in nine office buildings and one manufactured housing community (containing 157 sites).
 
As of September 30, 2008, the Company’s consolidated development pipeline, excluding development projects owned by Fund II, was comprised of five development projects, three predevelopment projects, and five land parcels held for future development aggregating 2,715 units, with total incurred costs of $348.0 million, and estimated remaining project costs of approximately $483.6 million for total estimated project costs of $831.6 million.

17


The Company’s consolidated apartment communities are as follows:

   
As of September 30, 2008
   
As of September 30, 2007
 
   
Apartment Homes
   
%
   
Apartment Homes
   
%
 
Southern California
    12,225       51 %     12,225       52 %
Northern California
    6,457       27 %     6,361       27 %
Seattle Metro
    5,338       22 %     5,005       21 %
Total
    24,020       100 %     23,591       100 %

Co-investments including Fund II properties and properties included in discontinued operations are not included in the table presented above for both periods presented.

Comparison of the Three Months Ended September 30, 2008 to the Three Months Ended September 30, 2007

Our average financial occupancies for the Company’s stabilized apartment communities or “Quarterly Same-Properties” (stabilized properties consolidated by the Company for the quarters ended September 30, 2008 and 2007) increased 40 basis points to 96.3% as of September 30, 2008 from 95.9% as of September 30, 2007.  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 September 30, 2008 and 2007 is as follows:
   
Three months ended
 
   
September 30,
 
   
2008
   
2007
 
Southern California
    95.4 %     95.5 %
Northern California
    97.8 %     96.8 %
Seattle Metro
    96.8 %     95.9 %

The table below illustrates a breakdown of revenues, including revenues attributable to the Quarterly Same-Properties.

         
Three Months Ended
             
   
Number of
   
September 30,
   
Dollar
   
Percentage
 
   
Properties
   
2008
   
2007
   
Change
   
Change
 
Property Revenues (dollars in thousands)
                       
Same-Properties:
                             
Southern California
    57     $ 48,237     $ 47,701     $ 536       1.1 %
Northern California
    18       20,080       18,527       1,553       8.4  
Seattle Metro
    24       16,493       15,349       1,144       7.5  
Total Same-Property revenues
    99       84,810       81,577       3,233       4.0  
Non-Same Property Revenues (1)
            18,097       13,435       4,662       34.7  
Total property revenues
          $ 102,907     $ 95,012     $ 7,895       8.3 %

(1) Includes properties acquired since January 1, 2007, eight redevelopment communities, three office buildings and two development communities.

Quarterly Same-Property Revenues increased by $3.2 million or 4.0% to $84.8 million in the third quarter of 2008 from $81.6 million in the third quarter of 2007.  The increase in the third quarter of 2008 was primarily attributable to the increase in scheduled rents from the Quarterly Same-Properties which increased $2.7 million or 3.4% compared to the third quarter of 2007.  Average rental rates for Quarterly Same-Property communities were $1,404 per unit in the third quarter of 2008 compared to $1,359 per unit in the third quarter of 2007.  Occupancy increased quarter over quarter by 40 basis points or $0.2 million, and delinquency and rent concessions decreased slightly by a combined $0.2 million, and other income was consistent between quarters.

18


Quarterly Non-Same Property Revenues increased by $4.7 million or 34.7% to $18.1 million in the third quarter of 2008 from $13.4 million in the third quarter of 2007.  The increase was attributable to ten apartment communities acquired since January 1, 2007 totaling a $3.5 million increase in revenue compared to third quarter of 2007, eight communities that were in redevelopment totaling a $1.1 million increase in revenue compared to the third quarter of 2007, and two development properties totaling a $0.1 million increase in revenue compared to the third quarter of 2007.
 
Total Expenses increased $7.0 million or 8.6% to $88.9 million in the third quarter of 2008 from $82.1 million in the third quarter of 2007.  Property operating expenses including real estate taxes increased by $3.2 million or 10.3% for the quarter, which is primarily due to the acquisition of ten operating properties, leasing at two development properties since January 1, 2007, and annual increases in salaries and real estate taxes.  Depreciation expense increased by $3.8 million or 15.7% for the third quarter 2008 compared to the third quarter of 2007, primarily due to the acquisition of ten operating properties since January 1, 2007.
 
Gain on sale of real estate for the third quarter of 2008 totaling $2.4 million relates to the sale of the Circle RV park for $5.4 million resulting in a gain of $0.9 million, and $1.5 million of the gain that was previously deferred on the 2005 sale of Eastridge Apartments.  The $1.5 million gain recognized is equal to the estimated fair value of seven condominium units received in satisfaction of the note receivable issue