ESSEX PROPERTY TRUST INC (Form: 10-Q, Received: 08/06/2012 06:01:56)

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, 2012

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

For the transition period from ________to _________

Commission file number 001-13106

ESSEX PROPERTY TRUST, INC.

(Exact name of Registrant as Specified in its Charter)

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

925 East Meadow Drive

Palo Alto, California 94303

(Address of Principal Executive Offices including Zip Code)

(650) 494-3700

(Registrant's Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO 

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

Large accelerated filer x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 36,414,318 shares of Common Stock as of August 2, 2012.

ESSEX PROPERTY TRUST, INC.

FORM 10-Q

INDE X

		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Condensed Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011	4

	Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2012 and 2011	5

	Condensed Consolidated Statement of Equity for the six months ended June 30, 2012	6

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011	7

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risks	33

Item 4.	Controls and Procedures	34

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	35

Item 6	Exhibits	35

Signatures		36

Index

Part I -- Financial Information

Item 1: Condensed Financial Statements (Unaudited)

"Essex" or the "Company" means Essex Property Trust, Inc., a real estate investment trust incorporated in the State of Maryland, or where the context otherwise requires, Essex Portfolio, L.P., a limited partnership (the "Operating Partnership") in which Essex Property Trust, Inc. is the sole general partner.

The information furnished in the accompanying unaudited condensed consolidated balance sheets, statements of operations and comprehensive income, equity, and cash flows of the Company reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the aforementioned 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, 2011.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except per share amounts)

	June 30,			December 31,
Assets	2012			2011
Real estate:
Rental properties:
Land and land improvements	$	901,942		$	860,661
Buildings and improvements		3,702,631			3,452,403
		4,604,573			4,313,064
Less accumulated depreciation		(995,311	)		(920,026	)
		3,609,262			3,393,038
Real estate under development		55,343			44,280
Co-investments		436,230			383,412
		4,100,835			3,820,730
Cash and cash equivalents-unrestricted		4,132			12,889
Cash and cash equivalents-restricted		23,678			22,574
Marketable securities		114,166			74,275
Notes and other receivables		50,895			66,369
Prepaid expenses and other assets		26,859			22,682
Deferred charges, net		18,551			17,445
Total assets	$	4,339,116		$	4,036,964
Liabilities and Equity
Mortgage notes payable	$	1,615,645		$	1,745,858
Unsecured debt		615,000			465,000
Lines of credit		257,102			150,000
Accounts payable and accrued liabilities		62,636			48,324
Construction payable		3,575			6,505
Dividends payable		43,708			39,611
Derivative liabilities		6,022			3,061
Other liabilities		20,724			20,528
Total liabilities		2,624,412			2,478,887
Commitments and contingencies
Cumulative convertible Series G preferred stock		4,349			4,349
Equity:
Cumulative redeemable Series H preferred stock at liquidation value		73,750			73,750
Common stock, $.0001 par value, 656,020,000 shares authorized 35,070,620 and 33,888,082 shares issued and outstanding		3			3
Additional paid-in capital		2,017,445			1,844,611
Distributions in excess of accumulated earnings		(425,058	)		(408,066	)
Accumulated other comprehensive loss, net		(72,915	)		(72,771	)
Total stockholders' equity		1,593,225			1,437,527
Noncontrolling interest		117,130			116,201
Total equity		1,710,355			1,553,728
Total liabilities and equity	$	4,339,116		$	4,036,964

See accompanying notes to the unaudited condensed consolidated financial statements.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARES

Condensed Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

(Dollars in thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Revenues:
Rental and other property	$	129,765		$	114,906		$	255,238		$	226,114
Management and other fees		2,796			1,420			5,240			2,645
		132,561			116,326			260,478			228,759
Expenses:
Property operating, excluding real estate taxes		30,718			28,946			59,470			56,783
Real estate taxes		11,699			10,825			23,112			21,412
Depreciation		41,801			37,250			82,535			73,908
General and administrative		5,764			5,385			11,164			10,659
Cost of management and other fees		1,611			1,073			3,251			1,997
		91,593			83,479			179,532			164,759
Earnings from operations		40,968			32,847			80,946			64,000

Interest expense before amortization		(24,659	)		(22,710	)		(49,316	)		(44,518	)
Amortization expense		(2,882	)		(2,736	)		(5,754	)		(5,590	)
Interest and other income		5,455			2,628			7,868			9,616
Equity income (loss) in co-investments		3,111			726			5,451			(647	)
Gain on remeasurement of co-investment		21,947			-			21,947			-
Loss on early retirement of debt		(1,450	)		(253	)		(1,450	)		(253	)
Income from continuing operations		42,490			10,502			59,692			22,608
Income from discontinued operations		-			5,551			10,037			5,952
Net income		42,490			16,053			69,729			28,560
Net income attributable to noncontrolling interest		(4,044	)		(2,304	)		(7,193	)		(5,851	)
Net income attributable to controlling interest		38,446			13,749			62,536			22,709
Dividends to preferred stockholders		(1,368	)		(1,475	)		(2,736	)		(2,017	)
Excess of cash paid to redeem preferred stock and units over the carrying value		-			(1,949	)		-			(1,949	)
Net income available to common stockholders	$	37,078		$	10,325		$	59,800		$	18,743

Comprehensive income	$	39,983		$	19,122		$	69,575		$	31,020
Comprehensive income attributable to noncontrolling interest		(3,887	)		(2,506	)		(7,183	)		(6,011	)
Comprehensive income attributable to controlling interest	$	36,096		$	16,616		$	62,392		$	25,009

Per common share data:
Basic:
Income from continuing operations	$	1.07		$	0.16		$	1.47		$	0.41
Income from discontinued operations		-			0.16			0.27			0.18
Net income available to common stockholders	$	1.07		$	0.32		$	1.74		$	0.59
Weighted average number of common shares outstanding during the period		34,570,772			32,040,904			34,299,331			31,754,949

Diluted:
Income from continuing operations	$	1.07		$	0.16		$	1.47		$	0.41
Income from discontinued operations		-			0.16			0.27			0.18
Net income available to common stockholders	$	1.07		$	0.32		$	1.74		$	0.59
Weighted average number of common shares outstanding during the period		34,708,420			32,135,064			34,430,571			31,844,002
Dividend per common share	$	1.10		$	1.04		$	2.20		$	2.08

See accompanying notes to the unaudited condensed consolidated financial statements.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Equity for the six months ended June 30, 2012

(Unaudited)

(Dollars and shares in thousands)

	Series H								Additional			Distributions in excess of			Accumulated other
	Preferred stock				Common stock				paid-in			accumulated			comprehensive			Noncontrolling
	Shares		Amount		Shares		Amount		capital			earnings			loss, net			Interest			Total
Balances at December 31, 2011		2,950	$	73,750		33,888	$	3	$	1,844,611		$	(408,066	)	$	(72,771	)	$	116,201		$	1,553,728
Comprehensive income:
Net income		-		-		-		-		-			62,536			-			7,193			69,729
Change in fair value of cash flow hedges and amortization of swap settlements		-		-		-		-		-			-			648			42			690
Change in fair value of marketable securities		-		-		-		-		-			-			(792	)		(52	)		(844	)
Issuance of common stock under:
Stock option and restricted stock plans		-		-		42		-		2,240			-			-			-			2,240
Sale of common stock		-		-		1,141		-		170,944			-			-			-			170,944
Equity based compensation costs		-		-		-		-		(350	)		-			-			1,161			811
Contributions from noncontrolling interest		-		-						-			-			-			2,400			2,400
Distributions to noncontrolling interest		-		-		-		-		-			-			-			(9,134	)		(9,134	)
Redemptions of noncontrolling interest		-		-		-		-		-			-			-			(681	)		(681	)
Common and preferred stock dividends		-		-		-		-		-			(79,528	)		-			-			(79,528	)
Balances at June 30, 2012		2,950	$	73,750		35,071	$	3	$	2,017,445		$	(425,058	)	$	(72,915	)	$	117,130		$	1,710,355

See accompanying notes to the unaudited condensed consolidated financial statements.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

	Six Months Ended
	June 30,
	2012			2011
Cash flows from operating activities:
Net income	$	69,729		$	28,560
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of marketable securities		(521	)		(4,543	)
Gain on remeasurement of co-investment		(21,947	)		-
Loss on early retirement of debt		1,450			253
Co-investments		3,770			2,120
Amortization expense		5,754			5,590
Amortization of discount on notes receivables		(917	)		(878	)
Amortization of discount on marketable securities		(2,518	)		(2,297	)
Gain on the sales of real estate		(10,870	)		(5,853	)
Depreciation		82,629			74,541
Equity-based compensation		1,925			1,056
Changes in operating assets and liabilities:
Prepaid expenses and other assets		(4,420	)		(697	)
Accounts payable and accrued liabilities		5,133			5,299
Other liabilities		195			1,200
Net cash provided by operating activities		129,392			104,351
Cash flows from investing activities:
Additions to real estate:
Acquisitions of real estate		(80,502	)		(38,958	)
Improvements to recent acquisitions		(3,569	)		(11,804	)
Redevelopment		(17,223	)		(16,296	)
Revenue generating capital expenditures		(1,638	)		(1,220	)
Non-revenue generating capital expenditures		(7,040	)		(7,711	)
Acquisitons of and additions to real estate under development		(17,166	)		(65,695	)
Acquisition of membership interest in co-investment		(85,000	)		-
Dispositions of real estate		27,800			15,972
Changes in restricted cash and refundable deposits		(1,805	)		(3,210	)
Purchases of marketable securities		(34,363	)		(6,805	)
Sales and maturities marketable securities		5,070			27,997
Collections of notes and other receivables		6,574			368
Contributions to co-investments		(114,746	)		(43,207	)
Distributions from co-investments		7,430			450
Net cash used in investing activities		(316,178	)		(150,119	)
Cash flows from financing activities:
Borrowings under debt agreements		762,580			645,419
Repayment of debt		(671,153	)		(661,193	)
Additions to deferred charges		(2,622	)		(1,441	)
Payment to settle derivative instruments		-			(2,395	)
Net proceeds from issuance of Preferred stock, Series H		-			71,427
Retirement of Series B preferred units		-			(78,800	)
Redemption of Series F preferred stock		-			(25,000	)
Equity related issuance cost		(274	)		(591	)
Net proceeds from stock options exercised		1,400			5,983
Net proceeds from issuance of common stock		170,944			168,592
Contributions from noncontrolling interest		2,400			-
Distributions to noncontrolling interest		(9,134	)		(9,667	)
Redemption of noncontrolling interest		(681	)		(4,019	)
Common and preferred stock dividends paid		(75,431	)		(67,491	)
Net cash provided by financing activities		178,029			40,824
Net (decrease) in cash and cash equivalents		(8,757	)		(4,944	)
Cash and cash equivalents at beginning of year		12,889			13,753
Cash and cash equivalents at end of year	$	4,132		$	8,809

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

	2012		2011
Supplemental disclosure of cash flow information:
Cash paid for interest, net of $3.9 million, and $4.5 million capitalized in 2012 and 2011, respectively.	$	47,575	$	43,594
Supplemental disclosure of noncash investing and financing activities:
Transfer from real estate under development to rental properties	$	4,294	$	40,784
Transfer from real estate under development to co-investments	$	148,053	$	48,886
Mortgage notes assumed in connection with purchases of real estate including the loan premiums recorded	$	30,298	$	10,500
Contribution of note receivable to co-investment	$	12,325	$	-
Change in accrual of dividends	$	4,097	$	1,570
Change in fair value of derivative liabilities	$	2,841	$	1,836
Purchase of marketable securities pending settlement	$	8,340	$	-
Change in fair value of marketable securities	$	845	$	2,283
Change in construction payable	$	2,930	$	2,041
Non-cash contribution from noncontrolling interest	$	-	$	800

See accompanying notes to the unaudited condensed consolidated financial statements

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

(1) Organization and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements present the accounts of Essex Property Trust, Inc. (the “Company”), which include the accounts of the Company and Essex Portfolio, L.P. (the “Operating Partnership,” which holds the operating assets of the Company) and are prepared in accordance with U.S. generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q. In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included and are normal and recurring in nature. 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, 2011.

All significant intercompany balances and transactions have been eliminated in the condensed consolidated financial statements.

The unaudited condensed consolidated financial statements for the three and six months ended June 30, 2012 and 2011 include the accounts of the Company and the Operating Partnership. The Company is the sole general partner in the Operating Partnership, with a 94.0% general partnership interest as of June 30, 2012. Total Operating Partnership units outstanding were 2,238,571 and 2,229,230 as of June 30, 2012 and December 31, 2011, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $344.6 million and $313.2 million, as of June 30, 2012 and December 31, 2011, respectively.

As of June 30, 2012, the Company owned or had ownership interests in 160 apartment communities, aggregating 33,015 units, excluding the Company’s ownership in preferred interest co-investments, (collectively, the “Communities”, and individually, a “Community”), five commercial buildings and nine active development projects (collectively, the “Portfolio”). The Communities are located in Southern California (Los Angeles, Orange, Riverside, San Diego, Santa Barbara, and Ventura counties), Northern California (the San Francisco Bay Area) and the Seattle metropolitan area.

Marketable Securities

The Company reports its available for sale securities at fair value, based on quoted market prices (Level 2 for the unsecured bonds and Level 1 for the common stock and investment funds, as defined by the Financial Accounting Standards Board (“FASB”) standard for fair value measurements as discussed later in Note 1), and any unrealized gain or loss is recorded as other comprehensive income (loss). Realized gains and losses, interest and dividend income, and amortization of purchase discounts are included in interest and other income on the condensed consolidated statement of operations and comprehensive income.

As of June 30, 2012 and December 31, 2011, marketable securities consisted primarily of investment-grade unsecured bonds, common stock, investments in mortgage backed securities and investment funds that invest in U.S. treasury or agency securities. As of June 30, 2012 and December 31, 2011, the Company classified its investments in mortgage backed securities, which mature in November 2019 and September 2020, as held to maturity, and accordingly, these securities are stated at their amortized cost. The estimated fair values of the mortgage backed securities (Level 2 securities) are approximately equal to the carrying values.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

As of June 30, 2012 and December 31, 2011 marketable securities consist of the following ($ in thousands):

	June 30, 2012
	Cost/		Gross
	Amortized		Unrealized
	Cost		Gain(Loss)			Fair Value
Available for sale:
Investment-grade unsecured bonds	$	5,227	$	(22	)	$	5,205
Investment funds - US treasuries		15,383		593			15,976
Common stock		42,970		721			43,691
Held to maturity:
Mortgage backed securities		49,294		-			49,294
Total	$	112,874	$	1,292		$	114,166

	December 31, 2011
	Cost/		Gross
	Amortized		Unrealized
	Cost		Gain		Fair Value
Available for sale:
Investment-grade unsecured bonds	$	3,615	$	399	$	4,014
Investment funds - US treasuries		11,783		121		11,904
Common stock		10,067		1,552		11,619
Held to maturity:
Mortgage backed securities		46,738		-		46,738
Total	$	72,203	$	2,072	$	74,275

The Company uses the specific identification method to determine the cost basis of a security sold and to reclassify amounts from accumulated other comprehensive income for securities sold. For the three months ended June 30, 2012, the proceeds from sales of available for sales securities totaled $5.1 million which resulted in a $0.5 million gain. For the six months ended June 30, 2012 and 2011, the proceeds from sales of available for sale securities totaled $5.1 million and $28.0 million, respectively, which resulted in gains of $0.5 million and $4.5 million, respectively.

Variable Interest Entities

The Company evaluates its investments in entities to determine whether such entities may be a variable interest entity, or VIE, and, if a VIE, whether it is the primary beneficiary and therefore should consolidate the VIE. Generally, an entity is determined to be a VIE when either: (1) the equity investment at risk is insufficient to finance that entity's activities without additional subordinated financial support, (2) the equity holders, as a group, lack any of the following three characteristics: (i) the power, through voting rights or similar rights, to direct the activities of the entity that most significantly impact the entity’s economic performance , (ii) the obligation to absorb the expected losses of the entity, (iii) the right to receive the expected residual returns of the entity, or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.

The Company consolidates 19 DownREIT limited partnerships (comprising twelve communities) since the Company is the primary beneficiary of these variable interest entities (“VIEs”). Total DownREIT units outstanding were 1,061,848 and 1,063,848 as of June 30, 2012 and December 31, 2011, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $163.4 million and $149.5 million, as of June 30, 2012 and December 31, 2011, respectively. The consolidated total assets and liabilities related to these VIEs, net of intercompany eliminations, were approximately $201.4 million and $174.0 million, respectively, as of June 30, 2012 and $199.8 million and $171.5 million, respectively, as of December 31, 2011. Interest holders in VIEs consolidated by the Company are allocated income equal to the cash payments made to those interest holders. The remaining results of operations are generally allocated to the Company. As of June 30, 2012 and December 31, 2011, the Company did not have any other VIEs of which it was deemed to be the primary beneficiary.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

Equity Based Compensation

The Company accounts for equity based compensation using the fair value method of accounting. The estimated fair value of stock options granted by the Company is being amortized over the vesting period of the stock options. The estimated grant date fair values of the long term incentive plan units (discussed in Note 13, “Equity Based Compensation Plans,” in the Company’s Form 10-K for the year ended December 31, 2011) 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 June 30, 2012 and 2011, and $0.8 million and $0.7 million for the six months ended June 30, 2012 and 2011, respectively. The intrinsic value of the stock options exercised during the three months ended June 30, 2012 and 2011 totaled $0.7 million and $2.0 million, respectively and $1.8 million and $3.0 million for the six months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, the intrinsic value of the stock options outstanding totaled $16.3 million. As of June 30, 2012, total unrecognized compensation cost related to unvested share-based compensation granted under the stock option and restricted stock plans totaled $4.9 million. The cost is expected to be recognized over a weighted-average period of 1 to 6 years for the stock option plans and is expected to be recognized straight-line over 7 years for the restricted stock awards.

The Company has adopted an incentive program involving the issuance of Series Z-1 Incentive Units of limited partnership interest in the Operating Partnership. Stock-based compensation expense for Z-1 Units totaled $0.5 million and $0.3 million for the three months ended June 30, 2012 and 2011, respectively and $1.1 million and $0.5 million for the six months ended June 30, 2012 and 2011, respectively. Stock-based compensation for Z-1 units capitalized totaled $0.2 million and $0.1 million for the three months ended June 30, 2012, and 2011, respectively and $0.3 million and $0.2 million for the six months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, the intrinsic value of the Z-1 Units subject to future vesting totaled $22.8 million. As of June 30, 2012, total unrecognized compensation cost related to Z-1 Units subject to future vesting totaled $9.2 million. The unamortized cost is expected to be recognized over the next fourteen years subject to the achievement of the stated performance criteria.

Fair Value of Financial Instruments

The Company values its financial instruments based on the fair value hierarchy of valuation techniques described in the FASB's accounting standard for fair value measurements. Level 1 inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability. The Company uses Level 1 inputs for the fair values of its cash equivalents and its marketable securities except for unsecured bonds and mortgage backed securities. The Company uses Level 2 inputs for its investments in unsecured bonds, mortgage backed securities, notes receivable, notes payable, and derivative liabilities. These inputs include interest rates for similar financial instruments. The Company’s valuation methodology for the swap related to the multifamily revenue refunding bonds for the 101 San Fernando apartment community, is described in more detail in Note 8. The Company does not use Level 3 inputs to estimate fair values of any of its financial instruments. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Management believes that the carrying amounts of its amounts outstanding under lines of credit, notes receivable and notes and other receivables approximate fair value as of June 30, 2012 and December 31, 2011, because interest rates, yields and other terms for these instruments are consistent with yields and other terms currently available for similar instruments. Management has estimated that the fair value of the Company’s $1.79 billion of fixed rate debt, including unsecured bonds, at June 30, 2012 is approximately $1.90 billion and the fair value of the Company’s $439.0 million of variable rate debt, excluding borrowings under the lines of credit, at June 30, 2012 is $417.7 million based on the terms of existing mortgage notes payable, unsecured bonds and variable rate demand notes compared to those available in the marketplace. Management believes that the carrying amounts of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities, construction payables, other liabilities and dividends payable approximate fair value as of June 30, 2012 due to the short-term maturity of these instruments. The fair values of the Company’s investments in mortgage backed securities are approximately equal to the amortized cost carrying value of these securities. Marketable securities and both the note payable and the swap related to multifamily revenue refunding bonds for the 101 San Fernando apartment community, are carried at fair value as of June 30, 2012, as discussed above and in Note 8.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

Capitalization Policy

The Company capitalizes all direct and certain indirect costs, including interest and real estate taxes, incurred during development and redevelopment activities. Interest is capitalized on real estate assets that require a period of time to get them ready for their intended use. The amount of interest capitalized is based upon the average amount of accumulated development expenditures during the reporting period. Included in capitalized costs are management’s accounting estimates of the direct and incremental personnel costs and indirect project costs associated with the Company's development and redevelopment activities. Indirect project costs consist primarily of personnel costs associated with construction administration and development, including accounting, legal fees, and various office costs that clearly relate to projects under development. The Company’s capitalized internal costs related to development and redevelopment projects totaled $1.1 million during each of the three months ended June 30, 2012 and 2011, respectively, and $2.2 million and $2.0 million for the six months ended June 30, 2012 and 2011, respectively, most of which relates to development projects. These totals include capitalized salaries of $0.6 million for both the three months ended June 30, 2012 and 2011, respectively, and $1.3 million and $1.1 million for six months ended June 30, 2012 and 2011, respectively.

Co-investments

The Company owns investments in joint ventures (“co-investments”) in which it has significant influence, but its ownership interest does not meet the criteria for consolidation in accordance with the accounting standards. Therefore, the Company accounts for these investments using the equity method of accounting. Under the equity method of accounting, the investment is carried at the cost of assets contributed, plus the Company’s equity in earnings less distributions received and the Company’s share of losses. The significant accounting policies of the Company’s co-investments entities are consistent with those of the Company in all material respects. For preferred equity investments the Company recognizes its preferred interest as equity in earnings.

Upon the acquisition of a controlling interest of a co-investment, the co-investment entity is consolidated and a gain or loss is recognized upon the remeasurement of co-investments in the consolidated statement of operations equal to the amount by which the fair-value of the co-investment interest the Company previously owned exceeds its carrying value.

A majority of the co-investments, excluding the preferred equity investments, compensate the Company for its asset management services and may provide promote distributions if certain financial return benchmarks are achieved. Asset management fees are recognized when earned, and promote fees are recognized when the earnings events have occurred and the amount is determinable and collectible.

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 portfolio, its investments in and advances to joint ventures and affiliates, its notes receivables and its qualification as a Real Estate Investment Trust (“REIT”). The Company bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could be different under different assumptions or conditions.

Reclassifications for discontinued operations have been made to prior year statements of operations balances in order to conform to current year presentation. Such reclassifications have no impact on reported earnings, cash flows, total assets or total liabilities.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

(2) Significant Transactions During the Second Quarter of 2012 and Subsequent Events

Acquisitions

In April, the Company purchased the joint venture partner’s membership interest in the co-investment Essex Skyline at MacArthur Place, a 349-unit premier high-rise apartment community containing luxury amenities located in Santa Ana, California, for a total purchase price of $85.0 million. During the second quarter, the Company recorded promote income of $2.3 million included in interest and other income on the condensed consolidated statements of operations, earned as a result of achieving certain performance hurdles as defined in the joint venture agreement. Upon the acquisition of partner’s membership interest, the property was consolidated and a gain on remeasurement of the Company’s co-investment interest of $21.9 million was recorded equal to the amount by which the fair value of the Company’s previously owned noncontrolling interest exceeded its carrying value. The secured $80.0 million loan was repaid early as part of this transaction, and the property is now an unencumbered asset.

In June, the Company purchased Park Catalina, a 90-unit property located in the Koreatown submarket of Los Angeles, California containing a mix of studio, one and two bedrooms apartments, for a total purchase price of $23.7 million. Also, at the end of June, the Company purchased The Huntington, a 276-unit property located in Huntington Beach, California containing a pool, spa, fitness center and clubhouse, for a purchase price of $48.3 million. The Company assumed a $30.3 million loan secured by the property at a fixed rate of 5.7% for seven years. The interest rate on the loan was unfavorable compared to currently available market rates for mortgage loans, and thus in conjunction with the purchase price allocation, the Company recorded a $4.3 million loan premium to reflect the debt at fair value. This resulted in an effective interest rate for this loan of 3.3%.

In July, the Company purchased Montebello, a 248-unit property located in Kirkland, Washington, containing a mix of one, two and three bedroom units and townhomes, for a purchase price of $52.0 million from a related party entity. The Company assumed a $26.5 million mortgage loan secured by the property at a fixed rate of 5.6% for eight years. The interest rate on the loan was unfavorable compared to currently available market rates for mortgage loans, and thus in conjunction with the purchase price allocation, the Company is expected to record a $4.1 million loan premium to reflect the debt at fair value. This results in an effective interest rate for this loan of 3.1%.

Development

In April, the Company acquired an entity that owns a land parcel in Emeryville, California for the development of a 190-unit apartment and total estimated costs of $58.2 million. Initial occupancy is expected in the third quarter of 2014.

In June, the Company in a co-investment partnership with the Canada Pension Plan Investment Board (“CPPIB”), acquired two adjacent land parcels in San Francisco, California for the development of two nine story apartment communities containing a total of 463 units and approximately 9,300 square feet of retail space. The Company expects initial occupancy in the second quarter of 2014 for a total estimated cost of $250 million. The Company holds a 55% noncontrolling interest in the venture and will earn customary management fees and may earn a promoted interest if certain performance hurdles as defined in the joint venture agreement are achieved.

In July, the Company entered into an agreement to purchase a 121-unit community under construction in Valley Village a district of Los Angeles, California. The Company made a $1.0 million deposit and will take ownership of the property upon receipt of a temporary certificate of occupancy for total estimated costs of $37.6 million, which is expected in the first quarter of 2014.

Co-investments

In early July, the Company made a $14.0 million preferred equity investment in a related party entity that owns an apartment community located in Cupertino, California. The investment has a preferred return of 9.5% and matures in May 2016. The Company will invest an additional $4.0 million in preferred equity to fund renovation costs.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

Common Stock

During the second quarter, the Company sold 920,281 shares of common stock for $139.4 million, net of commissions, at an average per share price of $152.94. Year to date through July, the Company has sold 1,769,989 shares of common stock for $268.2 million, net of commissions, at an average price of $153.01.

Mortgage Notes Payable

During late June, the Company repaid $137.7 million in secured mortgage loans with a weighted average interest rate of 5.6% related to eight communities with the net proceeds from the unsecured note offering announced in March 2012. Also, the $80.0 million Essex Skyline secured loan was repaid in April. The Company incurred $1.5 million in losses from early retirement of debt, and these nine communities are now unencumbered assets.

Unsecured Term Loan

In July, the Company increased the capacity of its five-year, $200 million unsecured term loan to $350 million, and the tiered pricing structure was reduced from LIBOR + 142.5 basis points to LIBOR + 130 basis points. The $150 million of additional funds can be drawn between August and December 31, 2012.

Unsecured Line of Credit

In May, the Company amended its $425 million unsecured revolving credit facility by increasing the borrowing capacity to $500 million. The amended facility, which matures in December 2015, contains two one-year extension options and an accordion feature that allows the Company to borrow up to $600 million. Based on the Company's current BBB credit rating, the facility carries an interest rate of LIBOR + 120 basis points and a facility fee of 20 basis points.

Interest Rate Swaps

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

(3) Co-investments

The Company has co-investments, which are accounted for under the equity method. The co-investments own, operate and develop apartment communities.

The following table details the Company's co-investments (dollars in thousands):

	June 30,		December 31,
	2012		2011
Investments in joint ventures accounted for under the equity method of accounting:

Membership interest in Wesco I	$	83,919	$	75,588
Partnership interest in Fund II		61,560		64,294
Membership interest in a limited liability company that owns Essex Skyline at MacArthur Place		-		24,063
Total operating co-investments		145,479		163,945

Membership interests in limited liability companies that own and are developing Epic, Lync, Elkhorn, and Folsom and Fifth		130,870		62,897
Membership interest in a limited liability company that owns and is developing Expo		18,518		17,981
Membership interests in limited liability companies that own and are developing Fountain at La Brea and Santa Monica at La Brea		15,830		15,194
Total development co-investments		165,218		96,072

Membership interest in Wesco II that owns a preferred equity interest in Parkmerced with a perferred return of 10.1%		89,986		88,075
Preferred interests in limited liability companies that own apartment communities in downtown Los Angeles with preferred returns of 9% and 10%		22,792		22,792
Preferred interest in a related party limited liability company that owns Madison Park at Anaheim with a preferred return of 13%		12,755		12,528
Total preferred interest investments		125,533		123,395
Total co-investments	$	436,230	$	383,412

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

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

	June 30,		December 31,
	2012		2011
Balance sheets:
Rental properties and real estate under development	$	1,625,272	$	1,659,078
Other assets		77,879		63,847

Total assets	$	1,703,151	$	1,722,925

Debt	$	838,003	$	900,095
Other liabilities		59,915		48,518
Equity		805,233		774,312

Total liabilities and equity	$	1,703,151	$	1,722,925

Company's share of equity	$	436,230	$	383,412

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Statements of operations:
Property revenues	$	28,233		$	24,084		$	62,556		$	42,596
Property operating expenses		(10,029	)		(9,719	)		(23,166	)		(17,695	)
Net property operating income		18,204			14,365			39,390			24,901

Interest expense		(7,792	)		(10,549	)		(16,337	)		(15,410	)
General and administrative		(920	)		(38	)		(1,716	)		(1,022	)
Depreciation and amortization		(8,876	)		(9,943	)		(22,772	)		(18,006	)

Net income (loss)	$	616		$	(6,165	)	$	(1,435	)	$	(9,537	)

Company's share of net income (loss)	$	3,111		$	726		$	5,451		$	(647	)

(4) Notes and Other Receivables

Notes receivable secured by real estate, and other receivables consist of the following as of June 30, 2012 and December 31, 2011 (dollars in thousands):

	June 30,		December 31,
	2012		2011

Note receivable, secured, bearing interest at 9.8%, paid in full January 2012	$	-	$	7,331
Note receivable, secured, bearing interest at 5.0%, due November 2012 (1)		875		12,428
Note receivable, secured, bearing interest at 8.8%, due December 2012		10,924		10,928
Note receivable, secured, bearing interest at LIBOR + 8.0%, due December 2012		6,372		6,422
Note receivable, secured, bearing interest at 8.0%, due November 2013		971		971
Note receivable, secured, effective interest at 9.6%, due February 2014		18,075		17,646
Note receivable, secured, bearing interest at 4.0%, due December 2014 (2)		3,212		3,221
Note and other receivables from affiliates		4,683		2,734
Other receivables		5,783		4,688
	$	50,895	$	66,369

(1) $12.4 million note receivable was contributed to the Elkhorn co-investment during the first quarter of 2012. An additional $0.9 million note was funded in the second quarter of 2012 which was contributed to the co-investment in the third quarter.

(2) During the first quarter 2012, the Company amended the loan secured by Vacationer RV Park to extend the maturity date to December 2014. Beginning January 1, 2012 the note which has a carrying value of $3.2 million, bears interest at a rate of 4%, and the borrower will fund an impound account for capital replacement.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

(5) Related Party Transactions

Management and other fees from affiliates include management, development and redevelopment fees from co-investments of $2.8 million and $1.4 million during the three months ended June 30, 2012 and 2011, respectively, and $5.2 million and $2.6 million for the six months ended June 30, 2012 and 2011, respectively. All of these fees are net of intercompany amounts eliminated by the Company.

The Company’s Chairman and founder, Mr. George Marcus, is the Chairman of The Marcus & Millichap Company, which is a holding company for certain real estate brokerage services and other subsidiary companies including Pacific Urban Residential (“PUR”). During July 2012, the Company invested $14.0 million as a preferred equity interest investment in an entity affiliated with PUR that owns an apartment community in Cupertino, California. The investment has a preferred return of 9.5% and matures in May 2016. The Company will invest an additional $4.0 million in preferred equity to fund renovation costs. Independent directors on the Company’s Board of Directors approved the investment in this entity.

Also during July 2012, the Company acquired Montebello, a 248 unit apartment community in Kirkland, Washington for $52.0 million from an entity affiliated with PUR. The Company assumed a $26.5 million mortgage loan secured by the property at a fixed rate of 5.6% for eight years. Independent directors on the Company’s Board of Directors approved the acquisition of this apartment community.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

(6) Segment Information

The Company defines its reportable operating segments as the three geographical regions in which its apartment communities are located: Southern California, Northern California and Seattle Metro. Excluded from segment revenues are properties classified in discontinued operations, management and other fees from affiliates, and interest and other income. Non-segment revenues and net operating income included in the following schedule also consist of revenue generated from commercial properties. Other non-segment assets include co-investments, real estate under development, cash and cash equivalents, marketable securities, notes receivable, other assets and deferred charges.

The revenues, net operating income, and assets for each of the reportable operating segments are summarized as follows for the three and six months ended June 30, 2012 and 2011 (dollars in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Revenues:
Southern California	$	61,356		$	55,330		$	119,916		$	109,193
Northern California		42,570			36,550			84,192			71,867
Seattle Metro		22,668			20,210			44,977			39,966
Other real estate assets		3,171			2,816			6,153			5,088
Total property revenues	$	129,765		$	114,906		$	255,238		$	226,114

Net operating income:
Southern California	$	41,107		$	36,173		$	80,937		$	71,559
Northern California		29,225			24,099			58,168			47,438
Seattle Metro		14,841			12,774			29,673			25,331
Other real estate assets		2,175			2,089			3,878			3,591
Total net operating income		87,348			75,135			172,656			147,919



Management and other fees from affiliates		2,796			1,420			5,240			2,645
Depreciation		(41,801	)		(37,250	)		(82,535	)		(73,908	)
General and administrative		(5,764	)		(5,385	)		(11,164	)		(10,659	)
Cost of management and other fees		(1,611	)		(1,073	)		(3,251	)		(1,997	)
Interest expense before amortization		(24,659	)		(22,710	)		(49,316	)		(44,518	)
Amortization expense		(2,882	)		(2,736	)		(5,754	)		(5,590	)
Interest and other income		5,455			2,628			7,868			9,616
Equity income (loss) from co-investments		3,111			726			5,451			(647	)
Gain on remeasurement of co-investment		21,947			-			21,947			-
Loss on early retirement of debt		(1,450	)		(253	)		(1,450	)		(253	)
Income from continuing operations	$	42,490		$	10,502		$	59,692		$	22,608

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

Total assets for each of the reportable operating segments are summarized as follows as of June 30, 2012 and December 31, 2011:

	June 30,		December 31,
	2012		2011
Assets:
Southern California	$	1,682,453	$	1,478,018
Northern California		1,247,579		1,241,320
Seattle Metro		589,653		579,612
Other real estate assets		89,577		94,088
Net reportable operating segment - real estate assets		3,609,262		3,393,038
Real estate under development		55,343		44,280
Cash and cash equivalents		27,810		35,463
Marketable securities		114,166		74,275
Co-investments		436,230		383,412
Notes and other receivables		50,895		66,369
Other non-segment assets		45,410		40,127
Total assets	$	4,339,116	$	4,036,964

(7) Net Income Per Common Share

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

	Three Months Ended						Three Months Ended
	June 30, 2012						June 30, 2011
	Income		Weighted- average Common Shares		Per Common Share Amount		Income		Weighted- average Common Shares		Per Common Share Amount
Basic:
Income from continuing operations available to common stockholders	$	37,078		34,571	$	1.07	$	5,135		32,041	$	0.16
Income from discontinued operations available to common stockholders		-		34,571		-		5,190		32,041		0.16
		37,078			$	1.07		10,325			$	0.32

Effect of Dilutive Securities (1)		54		137				-		94

Diluted:
Income from continuing operations available to common stockholders		37,132		34,708	$	1.07		5,135		32,135	$	0.16
Income from discontinued operations available to common stockholders		-		34,708		-		5,190		32,135		0.16
	$	37,132			$	1.07	$	10,325			$	0.32

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

	Six Months Ended June 30, 2012						Six Months Ended June 30, 2011
	Income		Weighte d Average Common Shares		Per Common Share Amount		Income		Weighte d Average Common Shares		Per Common Share Amount
Basic:
Income before discontinued operations available to common stockholders	$	50,379		34,299	$	1.47	$	13,183		31,755	$	0.41
Income from discontinued operations available to common stockholders		9,421		34,299		0.27		5,560		31,755		0.18
		59,800			$	1.74		18,743			$	0.59

Effect of Dilutive Securities (1)		108		132				-		89

Diluted:
Income from continuing operations available to common stockholders (1)		50,487		34,431		1.47	$	13,183		31,844		0.41
Income from discontinued operations available to common stockholders		9,421		34,431		0.27		5,560		31,844		0.18
	$	59,908			$	1.74	$	18,743			$	0.59

(1)

Weighted average convertible limited partnership units of 2,239,057 and 2,230,354, which includes vested Series Z incentive units, for the three months ended June 30, 2012, and 2011, respectively, and 2,242,112 and 2,230,354 for the six months ended June 30, 2012 and 2011, respectively, were not included in the determination of diluted EPS because they were anti-dilutive. Income allocated to convertible limited partnership units, which includes vested Series Z units, aggregating $2.5 million and $1.0 million for the three months ended June 30, 2012 and 2011, respectively, and $4.1 million and $1.6 million for the six months ended June 30, 2012 and 2011, respectively, have been excluded from income available to common stock holders for the calculation of diluted income per common share since these units are excluded from the diluted weighted average common shares for the period as the effect was anti-dilutive. The Company has the ability to redeem DownREIT limited partnership units for cash and does not consider them to be potentially dilutive securities.

Stock options of 29,500 and 41,250 for the three and six months ended June 30, 2011, respectively, were not included in the diluted earnings per share calculation because the effects on earnings per share were anti-dilutive.

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

(8) Derivative Instruments and Hedging Activities

The Company uses interest rate swaps and interest rate cap contracts to manage certain interest rate risks. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

As of June 30, 2012 the Company also had twelve interest rate cap contracts totaling a notional amount of $187.8 million that qualify for hedge accounting as they effectively limit the Company’s exposure to interest rate risk by providing a ceiling on the underlying variable interest rate for $202.3 million of the Company’s tax exempt variable rate debt. As of June 30, 2012 and December 31, 2011 the aggregate carrying value of the interest rate swap contracts was a liability of $5.0 million and $1.4 million, respectively, and the aggregate carrying value of the interest rate cap contracts was an asset of $0.1 million and $0.2 million, respectively.

During July 2010, the Company entered into a swap transaction (the “Swap”) with respect to $38.0 million of tax-exempt bonds for the 101 San Fernando apartment community (the “Bonds”) with Citibank, N.A. (“Citibank”). This swap is not designated as a hedge; accordingly the change in fair value of the swap is recorded as a gain or loss in the Company’s consolidated statement of operations. Under the terms of the Swap, the Company pays a variable amount equal to the SIFMA Index plus a fixed spread on a notional amount that starts at $35.2 million and over the three-year term of the Swap increases ratably to $38.0 million. In return, Citibank pays an amount equal to the coupon on the Bonds multiplied by the outstanding par value of the Bonds, $38.0 million. The Swap has a termination date of July 12, 2013 and may be terminated by the Company at anytime commencing in July 2011 and by Citibank if certain events occur. Upon termination of the Swap, whether early or on the stated termination date, a payment based on the change in value of the Bonds will occur. Should the Bonds decline in value from the $35.2 million value of the Bonds at the inception of the Swap, the Company will be obligated to make a payment equal to 100% of the price depreciation. Should the Bonds increase in value, Citibank will be obligated to make a payment equal to approximately 85% of the price appreciation. As of June 30, 2012 and December 31, 2011 the fair value of the Swap was a liability of $1.1 million and $1.8 million, respectively.

(9) Discontinued Operations

The Company classifies real estate as "held for sale" when the sale is considered to be probable.

During the first quarter of 2012, the Company sold Tierra Del Sol/Norte, a 156 unit community located in the San Diego, California for $17.2 million for a gain of $7.0 million. Also in the first quarter, the Company sold Alpine Country, a 108 unit community located in San Diego metropolitan area, for $11.1 million for a gain of $3.9 million.

The components of discontinued operations are outlined below and include the results of operations for the respective periods that the Company owned such assets, as described above (dollars in thousands).

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012		2011			2012			2011

Rental revenues	$	-	$	1,006		$	608		$	2,347
Property operating expenses		-		(459	)		(260	)		(1,024	)
Depreciation and amortization		-		(261	)		(94	)		(636	)
Income from real estate sold		-		286			254			687
Gain on sale		-		5,854			10,870			5,854
Internal dispositon costs		-		(589	)		(1,087	)		(589	)
Income from discontinued operations	$	-	$	5,551		$	10,037		$	5,952

(10) Commitments and Contingencies

As of June 30, 2012, the Company had six non-cancelable ground leases for certain apartment communities and buildings that expire between 2027 and 2080. Land lease payments are typically the greater of a stated minimum or a percentage of gross rents generated by these apartment communities. Total minimum lease commitments, under land leases and operating leases, are approximately $1.6 million per year for the next five years.

Index

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

To the extent that an environmental matter arises or is identified in the future that has other than a remote risk of having a material impact on the financial statements, the Company will disclose the estimated range of possible outcomes, and, if an outcome is probable, accrue an appropriate liability for remediation and other potential liability. The Company will consider whether such occurrence results in an impairment of value on the affected property and, if so, impairment will be recognized.

Except with respect to three communities, the Company has no indemnification agreements from third parties for potential environmental clean-up costs at its communities. The Company has no way of determining at this time the magnitude of any potential liability to which it may be the subject, arising out of unknown environmental conditions or violations with respect to the communities formerly owned by the Company. No assurance can be given that existing environmental studies with respect to any of the communities reveal all environmental liabilities, that any prior owner or operator of a Property did not create any material environmental condition not known to the Company, or that a material environmental condition does not otherwise exist as to any one or more of the communities. The Company has limited insurance coverage for the types of environmental liabilities described above.

The Company may enter into transactions that may require the Company to pay the tax liabilities of the partners in the Operating Partnership or in the DownREIT entities. These transactions are within the Company’s control. Although the Company plans to hold the contributed assets or defer recognition of gain on their sale pursuant to like-kind exchange rules under Section 1031 of the Internal Revenue Code, the Company can provide no assurance that it will be able to do so and if such tax liabilities are incurred they may have a material impact on the Company’s financial position.

There have been a number of lawsuits in recent years against owners and managers of apartment communities alleging personal injury and property damage caused by the presence of mold in residential real estate. Some of these lawsuits have resulted in substantial monetary judgments or settlements. The Company has been sued for mold related matters and has settled some, but not all, of such matters. Insurance carriers have reacted to mold related liability awards by excluding mold related claims from standard policies and pricing mold endorsements at prohibitively high rates. The Company has, however, purchased pollution liability insurance, which includes some coverage for mold. The Company has adopted policies for promptly addressing and resolving reports of mold when it is detected, and to minimize any impact mold might have on residents of the property. The Company believes its mold policies and proactive response to address any known existence, reduces its risk of loss from these cases. There can be no assurances that the Company has identified and responded to all mold occurrences, but the company promptly addresses all known reports of mold. Liabilities resulting from such mold related matters are not expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows. As of June 30, 2012, potential liabilities for mold and other environmental liabilities are not considered probable or the loss cannot be quantified or estimated.

The Company carries comprehensive liability, fire, extended coverage and rental loss insurance for each of the communities. Insured risks for comprehensive liabilities covers claims in excess of $100,000 per incident, and property casualty insurance covers losses in excess of a $1.0 million deductible per incident. There are, however, certain types of extraordinary losses, such as, for example, losses from terrorism and earthquake, for which the Company does not have insurance. Substantially all of the communities are located in areas that are subject to earthquakes.

The Company provides loan and construction completion guarantees in order to fulfill the lenders’ standard financing requirements related to the construction of the Company’s co-investment developments. The Company provided a payment guarantee to the counterparties in relation to the total return swaps entered into by the joint venture responsible for the development of the Fountain at La Brea and Santa Monica at La Brea communities. Further the Company has guaranteed completion of development and made certain debt service guarantees for Fountain at La Brea and Santa Monica at La Brea. The outstanding balance for the loans is included in the debt line item in the balance sheet of the co-investments included in Note 3. The payment guarantee is for the payment of the amounts due to the counterparty related total return swaps which are scheduled to mature in September and December 2016. The maximum exposure of the guarantee as of June 30, 2012 was $38.7 million based on the aggregate outstanding debt amount.

The outstanding balance for the construction loan is included in the debt line item in the balance sheet of the co-investments included in Note 3. The construction completion guarantee is for the life of the loan, which is scheduled to mature on July 1, 2014, with two, one-year extension options at the Expo joint venture’s option. As of June 30, 2012, the Company was in compliance with all terms of the construction loan and the construction of the community is expected to be completed on time and within budget. The maximum exposure of the guarantee as of June 30, 2012 was $76.0 million based on the construction costs that were budgeted to be incurred to complete the construction.

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ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

The Company is subject to various other 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 O perations

The following discussion should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and accompanying Notes thereto included elsewhere herein and with the Company’s 2011 Annual Report on Form 10-K for the year ended December 31, 2011.

The Company is a fully integrated Real Estate Investment Trust (“REIT”), and its property revenues are generated primarily from apartment community operations. The Company’s investment strategy has two components: constant monitoring of existing markets, and evaluation of new markets in the Company’s current three geographical regions to identify areas with the characteristics that underlie rental growth. The Company’s strong financial condition supports its investment strategy by enhancing its ability to quickly shift the Company’s acquisition, development, and disposition activities to markets that will optimize the performance of the portfolio.

As of June 30, 2012, the Company had ownership interests in 160 apartment communities, comprising 33,015 apartment units, excluding the Company’s ownership in preferred interest co-investments. The Company’s apartment communities are located in the following major West Coast regions:

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

Northern California (the San Francisco Bay Area)

Seattle Metro (Seattle metropolitan area)

As of June 30, 2012, the Company also had ownership interests in five commercial buildings with approximately 315,900 square feet.

As of June 30, 2012, the Company’s development pipeline was comprised of two consolidated projects under development, seven unconsolidated joint venture projects under development, one unconsolidated joint venture predevelopment project and three consolidated land parcels held for future development or sale aggregating 2,985 units, with total incurred costs of $403.2 million, and estimated remaining project costs of approximately $595.5 million for total estimated project costs of $998.7 million.

The Company’s consolidated apartment communities are as follows:

	As of June 30, 2012					As of June 30, 2011
	Apartment Units		%			Apartment Units		%
Southern California		13,656		49	%		13,068		49	%
Northern California		8,206		29	%		7,817		29	%
Seattle Metro		6,168		22	%		5,979		22	%
Total		28,030		100	%		26,864		100	%

Co-investments including Fund II and Wesco I communities, and preferred equity co-investment communities are not included in the table presented above for both periods.

Comparison of the Three Months Ended June 30, 2012 to the Three Months Ended June 30, 2011

The Company’s average financial occupancies for the Company’s stabilized apartment communities or “Quarterly Same-Property” (stabilized properties consolidated by the Company for the quarters ended June 30, 2012 and 2011) decreased 60 basis points to 96.2% as of June 30, 2012 from 96.8% as of June 30, 2011. 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.

Index

Market rates are determined using a variety of factors such as effective rental rates at the property based on recently signed leases and asking rates for comparable properties in the market. The recently signed effective rates at the property are used as the starting point in the determination of the market rates of vacant units. The Company then increases or decreases these rates based on the supply and demand in the apartment community’s market. The Company will check the reasonableness of these rents based on its position within the market and compare the rents against the asking rents by comparable properties in the market. Financial occupancy may not completely reflect short-term trends in physical occupancy and financial occupancy rates as disclosed by other REITs may not be comparable to the Company’s calculation of financial occupancy.

The Company does not take into account delinquency and concessions to calculate actual rent for occupied units and market rents for vacant units. The calculation of financial occupancy compares contractual rates for occupied units to estimated market rents for unoccupied units, thus the calculation compares the gross value of all apartment units excluding delinquency and concessions. For apartment communities that are development properties in lease-up without stabilized occupancy figures, the Company believes the physical occupancy rate is the appropriate performance metric. While an apartment community is in the lease-up phase, the Company’s primary motivation is to stabilize the property which may entail the use of rent concessions and other incentives, and thus financial occupancy which is based on contractual revenue is not considered the best metric to quantify occupancy.

The regional breakdown of the Company’s Quarterly Same-Property portfolio for financial occupancy for the quarter ended March 31, 2012 and 2011 is as follows:

	Three months ended
	June 30,
	2012			2011
Southern California		95.9	%		96.6	%
Northern California		96.6	%		97.2	%
Seattle Metro		96.1	%		96.7	%

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

			Three Months Ended
	Number of		June 30,				Dollar		Percentage
	Properties		2012		2011		Change		Change
Property Revenues (dollars in thousands)
Quarterly Same-Property:
Southern California		60	$	56,437	$	54,542	$	1,895		3.5	%
Northern California		33		39,420		35,956		3,464		9.6
Seattle Metro		28		21,060		19,510		1,550		7.9
Total Quarterly Same-Property revenues		121		116,917		110,008		6,909		6.3
Quarterly Non-Same Property Revenues (1)				12,848		4,898		7,950		162.3
Total property revenues			$	129,765	$	114,906	$	14,859		12.9	%

(1)	Includes seven communities acquired after January 1, 2011, one redevelopment community, five development communities, and three commercial buildings.

Quarterly Same-Property Revenues increased by $6.9 million or 6.3% to $116.9 million in the second quarter of 2012 from $110.0 million in the second quarter of 2011. The increase was primarily attributable to an increase in scheduled rents of $7.2 million as reflected in an increase of 6.8% in average rental rates from $1,371 per unit in the second quarter of 2011 to $1,464 per unit in the second quarter of 2012. Scheduled rents increased by 3.9%, 10.1%, and 8.9% in Southern California, Northern California, and Seattle Metro, respectively. Income from utility billings and other income also increased $0.3 million and $0.2 million, respectively, compared to the second quarter of 2011. Quarterly Same-Property financial occupancy decreased 60 basis points which contributed to a decrease of $1.2 million in revenues. On a sequential basis the Company experienced quarterly same-property revenue growth from the first quarter of 2012 to the second quarter of 2012 of 1.0%, resulting from sequential revenue growth in all three regions mainly driven by a 1.8% increase in scheduled rent offset by a 70 basis point decrease in occupancy compared to the first quarter of 2012.

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Quarterly Non-Same Property Revenues increased by $8.0 million or 162% to $12.8 million in the second quarter of 2012 from $4.9 million in the second quarter of 2011. The increase was primarily due to revenue generated from five development communities (Via, Allegro, Bellerive, Muse, and Santee Village) seven communities acquired or consolidated since January 1, 2011 (Bernard, 1000 Kiely, Delano/Bon Terra, Reed Square, Park Catalina, The Huntington, and Essex Skyline at MacArthur Place).

Management and Other Fees increased by $1.4 million in the second quarter of 2012 as compared to the first quarter of 2011. The increase is primarily due to the asset and property management fees earned from Wesco I and II co-investments formed during 2011, and development fees earned from the joint ventures formed in 2011 and 2012 to develop Epic, Expo, Lync, Elkhorn, Folsom and Fifth, Fountain at La Brea, and Santa Monica at La Brea development projects.

Property operating expenses, excluding real estate taxes increased $1.8 million or 6.1% to $30.7 million in the second quarter of 2012 from $28.9 million in the second quarter of 2011, primarily due to the acquisition of seven communities and the lease-up of five development properties. Quarterly Same-Property operating expenses excluding real estate taxes, were consistent with the prior year and only increased by $0.1 million or 0.4% for the second quarter of 2012 compared to the second quarter of 2011.

Real Estate taxes increased by $0.9 million or 8.1% for the second quarter of 2012 compared to the second quarter of 2011, due primarily to the acquisition of seven communities and expensing property taxes instead of capitalizing the cost for communities that were previously under development. Quarterly Same-Property real estate taxes increased by $0.2 million or 1.8% for second quarter of 2012 compared to the second quarter of 2011 due to an increase of 2% in property taxes for the majority of the properties located in California regulated by Prop. 13 as offset by a reduction in assessed property valuations for select communities located in California.

Depreciation expense increased by $4.6 million or 12.2% for the second quarter of 2012 compared to the second quarter of 2011, due to the acquisition of seven communities and the lease-up of five development properties. Also, the increase is due to the capitalization of approximately $17.3 million in additions to rental properties in the second quarter of 2012, including $9.0 million spent on redevelopment, $1.0 million spent on revenue generating capital and $1.1 million spent on recent acquisitions, and the capitalization of approximately $95.3 million in additions to rental properties for 2011, including $45.1 million spent on redevelopment, $16.4 million spent on improvements to recent acquisitions, and $7.6 million spent on revenue generating capital.

Cost of management and other fees increased $0.5 million for the second quarter of 2012 compared to 2011 primarily due to an increase in administrative costs due to hiring of additional staff to assist with the management of the Company’s co-investments including Wesco I and II and the development joint ventures formed in 2011 and 2012.

Interest expense before amortization increased by $1.9 million or 8.6% for the second quarter of 2012 compared to the second quarter of 2011, primarily due to the payoff of the $250 million secured line of credit in the fourth quarter of 2011 which had an average interest rate of 1.3%. The Company replaced the secured line with debt at an average interest rate of 2.6%. Also, on March 31, 2011, the Company sold $150 million of unsecured bonds with an interest rate of 4.4%, and thus the increase in interest expense is also due to an increase in average outstanding debt in the second quarter of 2012 as compared to the second quarter of 2011. Finally, there was a decrease of $0.1 million in capitalized interest in the second quarter of 2012 compared to the second quarter of 2011.

Interest and other income increased by $2.8 million for the second quarter of 2012 compared to the second quarter of 2011 due to $2.3 million of promote income earned from achieving certain performance hurdles related to the Essex Skyline co-investment and the sale of marketable securities for a gain of $0.5 million in the second quarter of 2012.

Equity income (loss) in co-investments increased $2.4 million in the second quarter of 2012 to income of $3.1 million compared to $0.7 million in the second quarter of 2012 primarily due to the income of $3.2 million related to the Company’s preferred equity investments made in 2011 including the Wesco II preferred equity investment made in the fourth quarter of 2011 which earned $2.2 million in the second quarter of 2012.

Gain on remeasurement of co-investment of $21.9 million recorded in the second quarter of 2012 relates to the acquisition of the joint venture partner’s membership interest of the Essex Skyline co-investment and consolidation of the property. A gain of $21.9 million was recorded due to the remeasurement of the Company’s co-investment interest which was equal to the amount by which the fair value of the Company’s previously owned noncontrolling interest exceeds its carrying value.

Income from discontinued operations for the second quarter of 2012 was $0 as compared to $5.5 million for the second quarter of 2011 due to the sale of Woodlawn Colonial for $16.0 million at a gain of $5.2 million, net of internal disposition costs.

Index

Excess of the carrying amount of preferred stock redeemed over the cash paid to redeem preferred stock for the second quarter of 2011 was $1.9 million due to the redemption of all of the Series B preferred units, which resulted in excess of cash paid of $1.0 million over the carrying value of Series B preferred units and the redemption of Series F preferred stock which resulted in excess of cash paid of $0.9 million over the carrying value of Series F preferred stock due to deferred offering costs and original issuance discounts.

Comparison of the Six Months Ended June 30, 2012 to the Six Months Ended June 30, 2011

Our average financial occupancies for the Company’s stabilized apartment communities or “2012/2011 Same-Properties” (stabilized properties consolidated by the Company for the six months ended June 30, 2012 and 2011) decreased 20 basis points to 96.5% for the six months ended June 30, 2012 from 96.7% for the six months ended June 30, 2011. The regional breakdown of the Company’s 2012/2011 Same-Property portfolio for financial occupancy for the six months ended June 30, 2012 and 2011 is as follows:

The regional breakdown of the Company’s Quarterly Same-Property portfolio for financial occupancy for the six months ended June 30, 2012 and 2011 is as follows:

	Six Months Ended
	June 30,
	2012	2011
Southern California	96.3%	96.4%
Northern California	97.0%	97.1%
Seattle Metro	96.4%	96.7%

The following table provides a breakdown of revenue amounts, including revenues attributable to the 2012/2011 Same-Property portfolio:

			Six Months Ended
	Number of		June 30,				Dollar		Percentage
	Properties		2012		2011		Change		Change
Property Revenues (dollars in thousands)
2012/2011 Same-Properties:
Southern California		60	$	112,627	$	108,238	$	4,389		4.1	%
Northern California		33		78,227		71,259		6,968		9.8
Seattle Metro		28		41,853		38,592		3,261		8.4
Total 2012/2011 Same-Property revenues		121		232,707		218,089		14,618		6.7
2012/2011 Non-Same Property Revenues (1)				22,531		8,025		14,506		180.8
Total property revenues			$	255,238	$	226,114	$	29,124		12.9	%

(1)

Includes seven communities acquired after January 1, 2011, one redevelopment community, five development communities, and three commercial buildings.

2012/2011 Same-Property Revenues increased by $14.6 million or 6.7% to $232.7 million for the six months ended June 30, 2012 from $218.1 million for the six months ended June 30, 2011. The increase was primarily attributable to an increase in scheduled rents of $13.9 million as reflected in an increase of 6.6% in average rental rates from $1,362 per unit for the six months ended June 30, 2011 to $1,451 per unit for the six months ended June 30, 2012. Scheduled rents increased by 3.7%, 9.8%, and 8.6% in Southern California, Northern California, and Seattle Metro, respectively. Income from utility billings and other income also increased $0.7 million and $0.6 million, respectively, compared to the six months ended June 30, 2011. 2012/2011 Same-Property financial occupancy decreased 20 basis points which contributed to a decrease of $1.1 million in revenues.

2012/2011 Non-Same Property Revenues increased by $14.5 million or 181% to $22.5 million for the six months ended June 30, 2012 from $8.0 million for the six months ended June 30, 2011. The increase was primarily due to revenue generated from five development communities (Via, Allegro, Bellerive, Muse, and Santee Village), seven communities acquired or consolidated since January 1, 2011 (Bernard, 1000 Kiely, Delano/Bon Terra, Reed Square, Park Catalina, The Huntington, and Essex Skyline at MacArthur Place) and the acquisition of the Santa Clara retail center.

Management and Other Fees increased by $2.6 million for the six months ended June 30, 2012 as compared to for the six months ended June 30, 2011. The increase is primarily due to the asset and property management fees earned from Wesco I and II co-investments formed during 2011, and development fees earned from the joint ventures formed in 2011 and 2012 to develop Epic, Expo, Lync, Elkhorn, Folsom and Fifth, Fountain at La Brea, and Santa Monica at La Brea development projects.

Index

Property operating expenses, excluding real estate taxes increased $2.7 million or 4.7% to $59.5 million for the six months ended June 30, 2012 from $56.8 million for the six months ended June 30, 2011, primarily due to the acquisition of seven communities and one retail center, and the lease-up of five development properties. 2012/2011 Same-Property operating expenses excluding real estate taxes, decreased by $0.2 million or 0.4% for the six months ended June 30, 2012 compared to the six months ended June 30, 2011, due mainly to a decrease of $0.2 million in utility expense.

Real Estate taxes increased by $1.7 million or 7.9% for the six months ended June 30, 2012 compared to the six months ended June 30, 2012, due primarily to the acquisition of seven communities and one retail center and expensing property taxes instead of capitalizing the cost for communities that were previously under development. 2012/2011 Same-Property real estate taxes increased by $0.3 million or 1.4% for the six months ended June 30, 2012 compared to the six months ended June 30, 2011 due to an increase of 2.0% in property taxes for the majority of the properties located in California regulated by Prop. 13 as offset by a reduction in assessed property valuations for select communities located in California.

Depreciation expense increased by $8.6 million or 11.7% for the six months ended June 30, 2012 compared to the six months ended June 30, 2011, due to the acquisition of seven communities and one retail center and the lease-up of five development properties. Also, the increase is due to the capitalization of approximately $27.6 million in additions to rental properties during the first six months of 2012, including $17.1 million spent on redevelopment, $3.6 million spent on recent acquisitions, and $1.6 million of revenue generating capital, and the capitalization of approximately $95.3 million in additions to rental properties for 2011, including $45.1 million spent on redevelopment, $16.4 million spent on improvements to recent acquisitions, and $7.6 million on revenue generating capital.

Cost of management and other fees increased $1.3 million for the six months ended June 30, 2012 compared to the six months ended June 30, 2011 primarily due to an increase in administrative costs due to hiring of additional staff to assist with the management of the Company’s co-investments including Wesco I and II and the development joint ventures formed in 2011 and 2012.

Interest expense before amortization increased by $4.8 million or 10.8% for the six months ended June 30, 2012 compared to the six months ended June 30, 2011, primarily due to the payoff of the $250 million secured line of credit in the fourth quarter of 2011 which had an average interest rate of 1.3%. The Company replaced the secured line with debt at an average interest rate of 2.6%. Also, on March 31, 2011, the Company sold $150 million of unsecured bonds with an interest rate of 4.4%, and thus the increase in interest expense is also due to an increase in average outstanding debt in the first half of 2012 compared to the first half of 2011. Finally, there was a decrease of $0.6 million in capitalized interest for the six months ended June 30, 2012 compared to the six months ended June 30, 2011.

Interest and other income decreased by $1.7 million for the six months ended June 30, 2012 compared to the six months ended June 30, 2011, due to $2.3 million of promote income earned from achieving certain performance hurdles related to the Essex Skyline co-investment and the sale of marketable securities for a gain of $0.5 million for the six months ended June 30, 2012, compared to a gain of $4.5 million from the sale of marketable securities for the six months ended June 30, 2011.

Equity income (loss) in co-investments increased $6.1 million for the six months ended June 30, 2012 to income of $5.5 million compared to a loss of $0.6 million for the six months ended June 30, 2011 primarily due to the income of $6.5 million related to the Company’s preferred equity investments made in 2011 including the Wesco II preferred equity investment made in the fourth quarter of 2011 which earned $4.4 million for the six months ended June 30, 2012.

Income from discontinued operations for the six months ended June 30, 2012 was $10.0 million and included a gain of $9.8 million from the sale of Tierra del Sol/Norte and Alpine Country along with the operating results for these properties net internal disposition costs. For the six months ended June 30, 2011, discontinued operations was $6.0 million and included a gain of $5.2 million from the sale of Woodlawn Colonial net of internal disposition costs, and the operating results of these two properties sold in 2012.

Excess of the carrying amount of preferred stock redeemed over the cash paid to redeem preferred stock for the six months ended June 30, 2011 was $1.9 million due to the redemption of all of the Series B preferred units, which resulted in excess of cash paid of $1.0 million over the carrying value of Series B preferred units and the redemption of Series F preferred stock which resulted in excess of cash paid of $0.9 million over the carrying value of Series F preferred stock due to deferred offering costs and original issuance discounts.

Index

Liquidity and Capital

As of June 30, 2012, Standard and Poor's (“S&P”) and Moody’s Investors Service credit agencies rated Essex Property Trust, Inc. and Essex Portfolio, L.P. BBB/Stable and Baa2/Stable, respectively. Also, Fitch Ratings ("Fitch") assigned a BBB issuer rating to Essex Portfolio, L.P., and the rating outlook is positive.

As of June 30, 2012, the Company had $4.1 million of unrestricted cash and cash equivalents and $114.2 million in marketable securities, of which $64.9 million were held available for sale. We believe that cash flows generated by our operations, existing cash, cash equivalents, and marketable securities balances, availability under existing lines of credit, access to capital markets and the ability to generate cash from the disposition of real estate are sufficient to meet all of our reasonably anticipated cash needs during the next twelve months. The timing, source and amounts of cash flows provided by financing activities and used in investing activities are sensitive to changes in interest rates and other fluctuations in the capital markets environment, which can affect our plans for acquisitions, dispositions, development and redevelopment activities.

The Company has two lines of credit aggregating $525 million as of June 30, 2012. The Company has a $500 million unsecured line of credit with an accordion option to $600 million. As of June 30, 2012 there was a $240 million balance on this unsecured line. The underlying interest rate on the $500 million line is based on a tiered rate structure tied to the Company's credit ratings on the credit facility and the rate was LIBOR + 1.20% as of June 30, 2012. This facility matures in December 2015 with two one-year extensions, exercisable by the Company. The Company has a working capital unsecured line of credit agreement for $25 million. As of June 30, 2012 there was a $17.1 million balance outstanding on this unsecured line. The underlying interest rate on the $25 million line is based on a tiered rate structure tied to the Company's credit ratings on the credit facility of LIBOR + 1.20%.

During the six months ended June 30, 2012, the Company entered into an agreement for $200 million of private placement unsecured notes for a term of 9-years at an all-in rate of 4.3%. During the second quarter, the Company issued $150 million of these private placement unsecured notes, $100 million at a rate of 4.27% and $50 million at a rate of 4.30%. The notes were forward funded with the remaining $50 million to close at the end of August of 2012 at a rate of 4.37%.

The net proceeds from the note offering were used to prepay secured mortgage debt prior to coming due in late 2012 and 2013 at an average rate of 5.6%. As a result of the prepayment of the Skyline loan and the prepayment of secured debt coming due in 2012 and 2013, the Company incurred $1.5 million of prepayment penalties and write-offs of deferred charges during the second quarter of 2012. The Company expects to use additional proceeds from the unsecured private placement note offering announced in March 2012 to repay secured debt maturing in 2013 related to five communities. As a result, the Company expects to incur up to $1.0 million of prepayment penalties and write-offs of deferred charges in the third quarter, and these five communities will become unencumbered assets.

In July, the Company increased the capacity of its $200 million unsecured term loan originated in the fourth quarter of 2011 to $350 million, and the tiered pricing structure was reduced from LIBOR + 142.5 basis points to LIBOR + 130 basis points. The $150 million of additional funds can be drawn between August and December 31, 2012.

During the second quarter, the Company entered into interest rate swap contracts with an aggregate notional amount of $125 million. The first $50 million notional amount effectively converted the interest rate on $50 million of the $200 million term loan originated in fourth quarter of 2011 to a fixed rate of 2.46%. The remaining $75 million notional amount effectively fixed $75 million of the Company’s unsecured line of credit at 2.2%, and the Company expects to use these interest rate swap contracts to hedge the variable rate $150 million unsecured term loan when the proceeds are drawn before the end of 2012. These derivatives qualify for hedge accounting.

In January 2011, additional banks entered into equity distribution agreements with the Company including Barclays Capital Inc., BMO Capital Markets Corp., Liquidnet, Inc., and Mitsubishi UFJ Securities (USA), Inc., and in 2012 Citigroup Global Markets Inc. Pursuant to its equity distribution program the Company issued 2,459,947 shares of common stock for $323.9 million, net of fees and commissions, during the year ended December 31, 2011. During the second quarter of 2012, the Company sold 920,281 shares of common stock for $139.4 million, net of commissions, at an average per share price of $152.94. From December 31, 2011 through August 2, 2012, the Company has sold 1,769,989 shares of common stock for $268.2 million, net of commissions at an average price of $153.01.

Under this program, the Company may from time to time sell shares of common stock into the existing trading market at current market prices, and the Company anticipates using the net proceeds to pay down debt, acquire apartment communities and fund the development pipeline. As of August 2, 2012, the Company may sell an additional 2,841,590 shares under the current equity distribution program.

Index

As of June 30, 2012, the Company’s mortgage notes payable totaled $1.6 billion which consisted of $1.4 billion in fixed rate debt with interest rates varying from 4.3% to 6.4% and maturity dates ranging from 2012 to 2021 and $239.0 million of variable rate debt with a weighted average interest rate of 1.8% ($202.3 million of the variable debt is tax-exempt variable rate demand notes). The tax-exempt variable rate demand notes have maturity dates ranging from 2025 to 2039, and $187.8 million are subject to interest rate caps.

The Company pays quarterly dividends from cash available for distribution. Until it is distributed, cash available for distribution is invested by the Company primarily in investment grade securities held available for sale or is used by the Company to reduce balances outstanding under its line of credit.

The Company has benefited from borrowing from Fannie Mae and Freddie Mac, and there are no assurances that these entities will lend to the Company in the future. To the extent that the Company’s access to capital and credit is at a higher cost than the Company has experienced in recent years (reflected in higher interest rates for debt financing or a lower stock price for equity financing) the Company’s ability to make acquisitions, develop communities, obtain new financing, and refinance existing borrowing at competitive rates could be adversely impacted.

Derivative Activity

During the fourth quarter of 2011, the Company entered into four interest rate swap contracts with an aggregate notional amount of $150 million that effectively fixed the interest rate on $150 million of the $200 million unsecured term loan at 2.66% through November 2016. During April 2012, the Company entered into additional interest rate swap contracts with a notional amount totaling $50 million, which effectively converted the interest rate on $50 million of the term loan to fixed rate of 2.46%. These derivatives qualify for hedge accounting. During the second quarter, the Company entered into interest rate swap contracts with an aggregate notional amount of $125 million. The first $50 million notional amount effectively converted the interest rate on $50 million of the $200 million term loan originated in fourth quarter of 2011 to a fixed rate of 2.46%. The remaining $75 million notional amount effectively fixed $75 million of the Company’s unsecured line of credit at 2.2%, and the Company expects to use these interest rate swap contracts to hedge the variable rate $150 million unsecured term loan when the proceeds are drawn before the end of 2012. These derivatives qualify for hedge accounting.

During July 2010, the Company entered into a swap transaction (the “Swap”) with respect to $38.0 million of tax-exempt bonds for the 101 San Fernando apartment community (the “Bonds”) with Citibank, N.A. (“Citibank”). This swap is not designated as a hedge; accordingly the change in fair value of the swap is recorded as a gain or loss in the Company’s consolidated statement of operations. Under the terms of the Swap, the Company pays a variable amount equal to the SIFMA Index plus a fixed spread on a notional amount that starts at $35.2 million and over the three-year term of the Swap increases ratably to $38.0 million. In return, Citibank pays an amount equal to the coupon on the Bonds multiplied by the outstanding par value of the Bonds, $38.0 million. The Swap has a termination date of July 12, 2013 and may be terminated by the Company at any time commencing in July 2011 and by Citibank if certain events occur. Upon termination of the Swap, whether early or on the stated termination date, a payment based on the change in value of the Bonds will occur. Should the Bonds decline in value from the $35.2 million value of the Bonds at the inception of the Swap, the Company will be obligated to make a payment equal to 100% of the price depreciation. Should the Bonds increase in value, Citibank will be obligated to make a payment equal to approximately 85% of the price appreciation. As of June 30, 2012 and December 31, 2011 the fair value of the Swap was a liability of $1.1 million and $1.8 million, respectively.

Index

Development and Predevelopment Pipeline

The Company defines development activities as new properties that are being constructed, or are newly constructed and, in the case of development communities, are in a phase of lease-up and have not yet reached stabilized operations. As of June 30, 2012, the Company had two consolidated development projects, and seven unconsolidated joint venture development projects aggregating 2,495 units for an estimated cost of $934.4 million, of which $595.5 million remains to be expended.

The Company owned one predevelopment project consisting of 192 units with an aggregate carrying value of $19.8 million as of June 30, 2012. In addition, the Company owned three land parcels held for future development or sale aggregating an estimated 298 units as of June 30, 2012. The aggregate carrying value for these three land parcels was $44.5 million as of June 30, 2012. The Company expects to fund the development and predevelopment pipeline by using a combination of some or all of the following sources: its working capital, amounts available on its lines of credit, net proceeds from public and private equity and debt issuances, and proceeds from the disposition of properties, if any.

In August, the Company’s co-investment partnership with CPPIB expects to acquire a land parcel located in San Mateo, California on which the joint venture currently holds a note receivable secured by the land. The joint venture expects to develop a 197-unit community on the site for a total estimated cost of $76.1 million, and initial occupancy is expected in the second quarter of 2014. The Company holds a 55% noncontrolling interest in the venture and will earn customary management fees and may earn a promoted interest if certain performance hurdles as defined in the joint venture agreement are achieved.

Redevelopment

The Company defines redevelopment activities as existing properties owned or recently acquired, which have been targeted for additional investment by the Company with the expectation of increased financial returns through property improvement. The Company’s redevelopment strategy strives to improve the financial and physical aspects of the Company’s redevelopment apartment communities and to target at least an 8 to 10 percent return on the incremental renovation investment. Many of the Company’s properties are older and in excellent neighborhoods, providing lower density with large floor plans that represent attractive redevelopment opportunities. During redevelopment, apartment units may not be available for rent and, as a result, may have less than stabilized operations. As of June 30, 2012, the Company had five redevelopment communities aggregating 1,056 apartment units with estimated redevelopment costs of $63.5 million, of which approximately $28.1 million remains to be expended.

Alternative Capital Sources

Fund II has eight institutional investors, and the Company, with combined partner equity contributions of $265.9 million that were fully contributed as of 2008. The Company contributed $75.0 million to Fund II, which represents a 28.2% interest as general partner and limited partner. Fund II utilized leverage equal to approximately 55% upon the initial acquisition of the underlying real estate. Fund II invested in apartment communities in the Company’s targeted West Coast markets and, as of June 30, 2012, owned fourteen apartment communities. The Company records revenue for its asset management, property management, development and redevelopment services when earned, and promote income when realized if Fund II exceeds certain financial return benchmarks.

In 2011, the Company entered into a 50/50 programmatic joint venture, Wesco I, with an institutional partner for a total equity commitment of $200 million. Each partner’s equity commitment is $100 million, and Wesco I will utilize leverage equal to approximately 50% to 60%. The Company has contributed $88.2 million to Wesco I, and as of June 30, 2012, Wesco owned six apartment communities with 2,013 units. Investments must meet certain criteria to qualify for inclusion in the joint venture and both partners must approve any new acquisitions and material dispositions. The joint venture has an investment period of up to two years. The Company will receive asset and property management fees, and may earn a promoted interest. The Company accounts for this joint venture on the equity method.

Critical Accounting Policies and Estimates

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. The Company defines critical accounting policies as those accounting policies that require the Company’s management to exercise their most difficult, subjective and complex judgments. The Company’s critical accounting policies and estimates relate principally to the following key areas: (i) consolidation under applicable accounting standards for entities that are not wholly owned; (ii) assessing the carrying values of our real estate properties and investments in and advances to joint ventures and affiliates; (iii) internal cost capitalization; and (iv) qualification as a 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 differ from those estimates made by management.

Index

The Company’s critical accounting policies and estimates have not changed materially from information reported in Note 2, “Summary of Critical and Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Forward Looking Statements

Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this quarterly report on Form 10-Q which are not historical facts may be considered forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Company's expectations, hopes, intentions, beliefs and strategies regarding the future. Forward looking statements include statements regarding the Company’s expectations as to the total projected costs of predevelopment, development and redevelopment projects, the Company’s reduced risk of loss from mold cases, beliefs as to our ability to meet our cash needs during the next twelve months, expectations as to the sources for funding the Company’s development and redevelopment pipeline and statements regarding the Company's financing activities.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors including, but not limited to, that the Company will fail to achieve its business objectives, that the total projected costs of current predevelopment, development and redevelopment projects exceed expectations, that such development and redevelopment projects will not be completed, that development and redevelopment projects and acquisitions will fail to meet expectations, that estimates of future income from an acquired property may prove to be inaccurate, that future cash flows will be inadequate to meet operating requirements, that there may be a downturn in the markets in which the Company's properties are located, that the terms of any refinancing may not be as favorable as the terms of existing indebtedness, and that mold lawsuits will be more costly than anticipated, as well as those risks, special considerations, and other factors referred to in Item 1A, “Risk Factors,” of the Company's Annual Report on Form 10-K for the year ended December 31, 2011, and those risk factors and special considerations set forth in the Company's other filings with the Securities and Exchange Commission (the “SEC”) which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. All forward-looking statements are made as of the date hereof, and the Company assumes no obligation to update this information.

Funds from Operations (“FFO”)

FFO is a financial measure that is commonly used in the REIT industry. The Company presents funds from operations as a supplemental operating performance measure. FFO is not used by the Company as, nor should it be considered to be, an alternative to net earnings computed under GAAP as an indicator of the Company’s operating performance or as an alternative to cash from operating activities computed under GAAP as an indicator of the Company’s ability to fund its cash needs.

FFO is not meant to represent a comprehensive system of financial reporting and does not present, nor does it intend to present, a complete picture of the Company's financial condition and operating performance. The Company believes that net earnings computed under GAAP remain the primary measure of performance and that FFO is only meaningful when it is used in conjunction with net earnings. The Company considers FFO and FFO excluding non-recurring items (referred to as “Core FFO”) to be useful financial performance measurements of an equity REIT because, together with net income and cash flows, FFO provides investors with an additional basis to evaluate operating performance and ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures and ability to pay dividends. Further, the Company believes that its consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of its financial condition and its operating performance.

In calculating FFO, the Company follows the definition for this measure published by the National Association of REITs (“NAREIT”), which is a REIT trade association. The Company believes that, under the NAREIT FFO definition, the two most significant adjustments made to net income are (i) the exclusion of historical cost depreciation and (ii) the exclusion of gains and losses (including impairment charges on depreciable real estate) from the sale of previously depreciated properties. The Company agrees that these two NAREIT adjustments are useful to investors for the following reason:

(a)

historical cost accounting for real estate assets in accordance with GAAP assumes, through depreciation charges, that the value of real estate assets diminishes predictably over time. NAREIT stated in its White Paper on Funds from Operations “since real estate asset values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves.” Consequently, NAREIT’s definition of FFO reflects the fact that real estate, as an asset class, generally appreciates over time and depreciation charges required by GAAP do not reflect the underlying economic realities.

Index

(b)

REITs were created as a legal form of organization in order to encourage public ownership of real estate as an asset class through investment in firms that were in the business of long-term ownership and management of real estate. The exclusion, in NAREIT’s definition of FFO, of gains and losses (including impairment charges on depreciable real estate) from the sales of previously depreciated operating real estate assets allows investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT’s activity and assists in comparing those operating results between periods.

Management believes that it has consistently applied the NAREIT definition of FFO to all periods presented. However, there is judgment involved and other REITs’ calculation of FFO may vary from the NAREIT definition for this measure, and thus their disclosure of FFO may not be comparable to the Company’s calculation.

The following table sets forth the Company’s calculation of FFO and Core FFO for the three and six months ended June 30, 2012 and 2011 (in thousands except for per share data):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011

Net income available to common stockholders	$	37,078		$	10,325		$	59,800		$	18,743
Adjustments:
Depreciation and amortization		41,801			37,511			82,629			74,544
Gains not included in FFO, net of internal disposition costs		(21,947	)		(5,265	)		(31,730	)		(5,265	)
Depreciation add back from unconsolidated co-investments		3,312			1,957			7,643			4,838
Noncontrolling interests related to Operating Partnership units		2,502			987			4,092			1,619
Depreciation attributable to third party of co-investments		(303	)		(261	)		(592	)		(523	)
Funds from operations	$	62,443		$	45,254		$	121,842		$	93,956
Funds from operations per share - diluted	$	1.69		$	1.32		$	3.32		$	2.76

Non-core items:
Co-investment promote income		(2,299	)		-			(2,299	)		-
Loss on early retirement of debt		1,450			253			1,450			253
Gain on sales of marketable securities		(521	)		-			(521	)		(4,543	)
Acquisition costs		312			510			498			840
Excess of cash paid to redeem preferred stock and units over the carrying value		-			1,949			-			1,949
Core Funds from operations	$	61,385		$	47,966		$	120,970		$	92,455
Core Funds from operations per share-diluted	$	1.66		$	1.40		$	3.30		$	2.71
Weighted average number shares outstanding diluted (1)		36,947,477			34,365,418			36,672,683			34,079,471

(1)	Assumes conversion of all dilutive outstanding operating partnership interests in the Operating Partnership.

Index

Net Operating Income (“NOI”)

Same-property net operating income (“NOI”) is considered by management to be an important supplemental performance measure to earnings from operations included in the Company’s consolidated statements of operations. The presentation of same-property NOI assists with the presentation of the Company’s operations prior to the allocation of depreciation and any corporate-level or financing-related costs. NOI reflects the operating performance of a community and allows for an easy comparison of the operating performance of individual communities or groups of communities. In addition, because prospective buyers of real estate have different financing and overhead structures, with varying marginal impacts to overhead by acquiring real estate, NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset or group of assets. The Company defines same-property NOI as same-property revenue less same-property operating expenses, including property taxes. Please see the reconciliation of earnings from operations to same-property NOI, which in the table below is the NOI for stabilized properties consolidated by the Company for the periods presented:

	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
Earnings from operations	$	40,968		$	32,847		$	80,946		$	64,000
Adjustments:
General and administrative		5,764			5,385			11,164			10,659
Cost of management and other fees		1,611			1,073			3,251			1,997
Depreciation		41,801			37,250			82,535			73,908
Management and other fees from affiliates		(2,796	)		(1,420	)		(5,240	)		(2,645	)
Net operating income		87,348			75,135			172,656			147,919
Less: Non same-property net operating income		(8,693	)		(3,092	)		(15,009	)		(4,853	)
Same-property net operating income	$	78,655		$	72,043		$	157,647		$	143,066

Item 3: Quantitative and Qualitative Disclosures About Market Risks

Interest Rate Hedging Activities

The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company uses interest rate swaps as part of its cash flow hedging strategy. As of June 30, 2012, the Company has entered into nine interest rate swap contracts to mitigate the risk of changes in the interest-related cash outflows on $275.0 million of the variable rate five-year unsecured term debt. As of June 30, 2012, the Company also had $202.3 million of variable rate indebtedness, of which $187.8 million is subject to interest rate cap protection. All of the Company’s derivative instruments are designated as cash flow hedges, and the Company does not have any fair value hedges as of June 30, 2012. The following table summarizes the notional amount, carrying value, and estimated fair value of the Company’s derivative instruments used to hedge interest rates as of June 30, 2012. The notional amount represents the aggregate amount of a particular security that is currently hedged at one time, but does not represent exposure to credit, interest rates or market risks. The table also includes a sensitivity analysis to demonstrate the impact on the Company’s derivative instruments from an increase or decrease in 10-year Treasury bill interest rates by 50 basis points, as of June 30, 2012.

					Carrying and			Estimated Carrying Value
	Notional		Maturity		Estimate Fair			+ 50		- 50
(Dollars in thousands)	Amount		Date Range		Value			Basis Points		Basis Points
Cash flow hedges:
Interest rate swaps	$	275,000		2016-2017	$	(4,976	)		1,264		(10,241	)
Interest rate caps		187,787		2013-2016		30			157		2
Total cash flow hedges	$	462,787		2013-2017	$	(4,946	)	$	1,421	$	(10,239	)

Interest Rate Sensitive Liabilities

The Company is exposed to interest rate changes primarily as a result of its lines of credit and long-term tax exempt variable rate debt and unsecured term debt. The Company’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives the Company borrows primarily at fixed rates and may enter into derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate its interest rate risk on a related financial instrument. The Company does not enter into derivative or interest rate transactions for speculative purposes.

Index

The Company’s interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows.

For the Years Ended	2012			2013			2014			2015				2016				Thereafter				Total			Fair value

(In thousands)
Fixed rate debt	$	12,051			58,410			66,076			69,624				162,783				1,422,746			$	1,791,690		$	1,897,510
Average interest rate		4.9	%		5.6	%		5.4	%		5.3	%			4.4	%			5.3	%			5.1	%
Variable rate debt	$	-			36,650			17,102			240,000		(1)		200,000		(2)		202,305		(3)	$	696,057		$	674,792
Average interest rate		-	%		1.7	%		1.6	%		2.1	%			2.6	%			1.9	%			2.1	%

(1)	$75.0 million subject to interest rate swap agreements.

(2)	$200.0 million subject to interest rate swap agreements.

(3)	$187.8 million subject to interest rate caps.

The table incorporates only those exposures that exist as of June 30, 2012; it does not consider those exposures or positions that could arise after that date. As a result, our ultimate realized gain or loss, with respect to interest rate fluctuations and hedging strategies would depend on the exposures that arise prior to settlement.

Item 4: Controls and Proce dures

As of June 30, 2012, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2012, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such disclosure controls and procedures were also effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

There were no changes in the Company's internal control over financial reporting, that occurred during the quarter ended June 30, 2012, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Part II -- Other Information

Item 1: Legal Proceed ings

Recently there has been an increasing number of lawsuits against owners and managers of apartment communities alleging personal injury and property damage caused by the presence of mold in residential real estate. Some of these lawsuits have resulted in substantial monetary judgments or settlements. The Company has been sued for mold related matters and has settled some, but not all, of such matters. Insurance carriers have reacted to mold related liability awards by excluding mold related claims from standard policies and pricing mold endorsements at prohibitively high rates. The Company has, however, purchased pollution liability insurance, which includes some coverage for mold. The Company has adopted policies for promptly addressing and resolving reports of mold when it is detected, and to minimize any impact mold might have on residents of the property. The Company believes its mold policies and proactive response to address any known existence, reduces its risk of loss from these cases. There can be no assurances that the Company has identified and responded to all mold occurrences, but the Company promptly addresses all known reports of mold. Liabilities resulting from such mold related matters are not expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows. As of June 30, 2012, no potential liabilities for mold and other environmental liabilities are quantifiable and an estimate of possible loss cannot be made.

The Company carries comprehensive liability, fire, extended coverage and rental loss insurance for each of the Company’s communities. Insured risks for comprehensive liability covers claims in excess of $100,000 per incident, and property insurance covers losses in excess of a $1.0 million deductible per incident. There are, however, certain types of extraordinary losses, such as, for example, losses for terrorism and earthquake, for which the Company does not have insurance. Substantially all of the Properties are located in areas that are subject to earthquakes.

Index

The Company is subject to various other lawsuits in the normal course of its business operations. Such lawsuits could, but are not expected to, have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Item 1A: Risk Factors

There were no material changes to the Risk Factors disclosed in Item IA of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the SEC and available at www.sec.gov .

Item 6: Exhibits

Exhibits

10.1

First Amendment to Amended and Restated Revolving Credit Agreement, dated May 31, 2012.

10.2

Modification Agreement, dated July 30, 2012.

12.1

Ratio of Earnings to Fixed Charges.

31.1

Certification of Michael J. Schall, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Michael T. Dance, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Michael J. Schall, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Michael T. Dance, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*

XBRL Instance Document

101.SCH*

XBRL Taxonomy Extension Schema Document

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document

*XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not part of a registration statement or Prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

Index

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ESSEX PROPERTY TRUST, INC.
	(Registrant)

	Date: August 3, 2012

		By: /S/ BRYAN G. HUNT

	Bryan G. Hunt
	First Vice President, Chief Accounting Officer

		By: /S/ MICHAEL T. DANCE

	Michael T. Dance
	Executive Vice President, Chief Financial Officer
	(Authorized Officer, Principal Financial Officer)

TIER	GUARANTOR'S SENIOR UNSECURED LONG TERM DEBT RATING	APPLICABLE LIBOR COMMITTED LOAN MARGIN (BPS)	FACILITY FEE (BPS PER ANNUM)	APPLICABLE REFERENCE RATE COMMITTED LOAN MARGIN (BPS)
I	BBB+ and/or Baa1 or better	107.5	17.5	7.5
II	BBB and/or Baa2	120	20	20
III	BBB- and/or Baa3	155	25	55
IV	Less than BBB- and/or Baa3	205	25	105

ESSEX PORTFOLIO, L.P.,
a California limited partnership

BY:	ESSEX PROPERTY TRUST, INC.,
	a Maryland corporation, its general partner

	By:	/s/ Jordan E. Ritter
		Jordan E. Ritter
		Senior Vice President

PNC BANK, NATIONAL ASSOCIATION,
as Administrative Agent

By:	/s/ Nicolas Zitelli
	Nicolas Zitelli, Vice President

PNC BANK, NATIONAL ASSOCIATION,
as L/C Issuer, Swing Line Lender and Lender

By:	/s/ Nicolas Zitelli
	Nicolas Zitelli, Vice President

UNION BANK, N.A.,
as Lender

By:	/s/ Thomas E Little
	Thomas E Little
	Vice President

COMERICA BANK, a Texas Banking Association
as Lender

By :	/s/SAM F. MEEHAN
	Name:	SAM F. MEEHAN
	Title:	VICE PRESIDENT

KEYBANK NATIONAL ASSOCIATION,
as Lender

By:	/s/ Jason R.Weaver
	Name:	Jason R.Weaver
	Title:	Senior Vice President

US BANK, NATIONAL ASSOCIATION,
as Lender

By:	/s/ Jeffrey Hoppen
	Name:	Jeffrey Hoppen
	Title:	Senior Vice President

CAPITAL ONE, N.A.
(successor by merger to Chevy Chase Bank, F.S.B.) as Lender

By:	/s/Frederick H. Denecke
	Name:	Frederick H. Denecke
	Title:	Vice President

BANK OF THE WEST,
as Lender

By:	/s/Irina Galiena
	Name:	Irina Galiena
	Title:	Vice President

BANK OF THE WEST,
as Lender

By:	/s/Benjamin Amayo
	Name:	Benjamin Amayo
	Title:	Vice President

WELLS FARGO BANK, NATIONAL ASSOCIATION,
as Lender

By:	/s/Carl Skanderup
	Name:	Carl Skanderup
	Title:	V.P.

BANK OF MONTREAL, as Lender


By:	/s/Lloyd Baron
	Name:	Lloyd Baron
	Title:	Vice President

COMPASS BANK, as Lender


By:	/s/ Brian Tueff
	Name:	Brian Tueff
	Title:	SVP

CITIBANK, as Lender


By:	/s/John C. Rowland
	Name:	John C. Rowland
	Title:	Vice President

HSBC BANK USA, NA, as Lender


By:	/s/Karen Kokame
	Name:	Karen Kokame
	Title:	Vice President

ESSEX PROPERTY TRUST, INC.,
a Maryland corporation, as Guarantor

By:	/s/Jordan E. Ritter
	Name:	Jordan E. Ritter
	Title:	Senior Vice President

Existing Lenders	Original Commitment		Increased Commitment
PNC Bank, National Association	$	65,000,000	$	75,000,000
Bank of West	$	40,000,000	$	40,000,000
Union Bank, N.A.	$	50,000,000	$	60,000,000
Wells Fargo, National Association	$	50,000,000	$	60,000,000
Capital One, N.A.	$	30,000,000	$	30,000,000
Comerica Bank	$	30,000,000	$	30,000,000
US Bank, National Association	$	50,000,000	$	60,000,000
Keybank, N.A.	$	40,000,000	$	40,000,000
Compass Bank	$	30,000,000	$	30,000,000
Bank of Montreal	$	40,000,000	$	40,000,000
TOTAL:	$	425.000.000	$	465 000 000

Additional Lenders	Commitment
Citibank	$	25,000,000
HSBC Bank USA, N.A.	$	10,000,000

Lender		Commitment	Pro Rata Share
PNC Bank, National Association	$	75,000,000	15.00	%
Bank of West	$	40,000,000	8.00	%
Union Bank, N.A.	$	60,000,000	12.00	%
Wells Fargo, National Association	$	60,000,000	12.00	%
Capital One, N.A.	$	30,000,000	6.00	%
Comerica Bank	$	30,000,000	6.00	%
US Bank, National Association	$	60,000,000	12.00	%
Keybank, N.A.	$	40,000,000	8.00	%
Compass Bank	$	30,000,000	6.00	%
Bank of Montreal	$	40,000,000	8.00	%
Citibank	$	25,000,000	5.00	%
HSBC Bank USA, N.A.	$	10,000,000	2.00	%
Total	$500!000!000		100.00	%

TIER	GUARANTOR'S SENIOR UNSECURED LONG TERM DEBT RATING	APPLICABLE LIBOR COMMITTED LOAN MARGIN	APPLICABLE REFERENCE RATE COMMITTED LOAN MARGIN
I	A- and/or A3 or better	1.10%	.10%
II	BBB+ and/or Baal	1.20%	.20%
Ill	BBB and/or Baa2	1.30%	.30%
IV	BBB- and/or Baa3	1.70%	.70%
v	Less than BBB- and/or Baa3	2.25%	1.25%

___________	___________
Borrower's Initials	Guarantor's Initials

Borrower:

ESSEX PORTFOLIO, L.P.,
a California limited partnership

By:	ESSEX PROPERTY TRUST, INC.,
	a Maryland corporation, its general partner

	By:	/s/ Mark J. Mikl
		Name :	Mark J. Mikl
		Title:	Senior Vice President

925 East Meadow Drive
Palo Alto, CA 94303
Attn:	Mark J. Mikl (facsimile: (650) 843-1514) Jorden E. Ritter (facsimile: (650) 858-1372) Michael T. Dance (facsimile: (650) 858-0139) Internet Website: www.essexpropertytrust.com

Agent:

U.S. BANK NATIONAL ASSOCIATION,
as Administrative Agent

By:
	Jeffrey G. Hoppen, Senior Vice President

Lenders:

U.S. BANK NATIONAL ASSOCIATION,
as Lender

By:	/s/ Jeffrey G. Hoppen
	Jeffrey G. Hoppen, Senior Vice President

WELLS FARGO BANK, NATIONAL ASSOCIATION,
as Lender

By:	/s/ Carl Skanderup
	Carl Skanderup, Vice President

UNION BANK, N.A.,
as Lender

By:	/s/ Thomas E. Little
	Thomas E. Little, Vice President

BANK OF MONTREAL,
as Lender

By:	/s/ Aaron Lanski
	Aaron Lanski,
	Managing Director

BANK OF THE WEST,
as Lender

By:	/s/ Lynn Foster
	Lynn Foster, Senior Vice President

By:
	Name:
	Title:

HSBC BANK USA, NATIONAL ASSOCIATION,
as Lender

By:	/s/ Karen K. Kokame
	Karen K. Kokame
	Vice President

KEYBANK NATIONAL ASSOCIATION,
as Lender

By:	/s/ Jason R. Weaver
	Jason R. Weaver, Senior Vice President

CAPITAL ONE, N.A.,
as Lender

By:	/s/ Frederick H. Denecke
	Frederick H. Denecke, Vice President

CITIBANK, N.A.,
as Lender

By:	/s/ Michael Chlopak
	Michael Chlopak, Vice President

COMERICA BANK,
a Texas banking association,
as Lender

By:	/s/ Sam F. Meehan
	Sam F. Meehan, Vice President

Dated as of July 30, 2012.

	"Guarantor"

	ESSEX PROPERTY TRUST, INC.,
	a Maryland corporation

	By:	/s/ Mark J. Mikl
	Name :	Mark J. Mikl
	Title :	Senior Vice President