The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and accompanying Notes thereto included elsewhere herein and with our 2008 Annual Report on Form 10-K for the year ended December 31, 2008 and our Current Report on Form 10-Q for the quarter ended September 30, 2009.

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

As of September 30, 2009, we had ownership interests in 133 apartment communities, comprising 27,221 apartment units. Our apartment communities are located in the following major West Coast regions:

Southern California (Los Angeles, Orange, Riverside, Santa Barbara, San Diego and Ventura counties)
Northern California (the San Francisco Bay Area) Seattle Metro (Seattle metropolitan area)

As of September 30, 2009, we also had ownership interests in five office and commercial buildings (with approximately 215,840 square feet).

As of September 30, 2009, our consolidated development pipeline was comprised of three development projects, two predevelopment projects and four land parcels held for future development or sale aggregating 1,818 units, with total incurred costs of $223.0 million. The estimated remaining project costs of active development projects were $85.0 million for total estimated active development project costs of $189.3 million.

The Company's consolidated apartment communities are as follows:

                          As of September 30, 2009             As of September 30, 2008
                      Apartment Units            %         Apartment Units            %
Southern California             12,264              51 %             12,225              51 %
Northern California              6,695              28 %              6,457              27 %
Seattle Metro                    5,297              22 %              5,338              22 %
Total                           24,256             100 %             24,020             100 %

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

Comparison of the Three Months Ended September 30, 2009 to the Three Months Ended September 30, 2008

Our average financial occupancies for the Company's stabilized apartment communities or "Quarterly Same-Property" (stabilized properties consolidated by the Company for the quarters ended September 30, 2009 and 2008) increased 70 basis points to 97.0% as of September 30, 2009 from 96.3% as of September 30, 2008. Financial occupancy is defined as the percentage resulting from dividing actual rental revenue by total possible rental revenue. Actual rental revenue represents contractual rental revenue pursuant to leases without considering delinquency and concessions. Total possible rental revenue represents the value of all apartment units, with occupied units valued at contractual rental rates pursuant to leases and vacant units valued at estimated market rents. We believe that financial occupancy is a meaningful measure of occupancy because it considers the value of each vacant unit at its estimated market rate. Financial occupancy may not completely reflect short-term trends in physical occupancy and financial occupancy rates as disclosed by other REITs may not be comparable to our calculation of financial occupancy.

The regional breakdown of the Company's Quarterly Same-Property portfolio for financial occupancy for the quarter ended September 30, 2009 and 2008 is as follows:

                                            Three months ended
                                               September 30,
                                            2009           2008
                    Southern California        96.6 %        95.4 %
                    Northern California        97.6 %        97.7 %
                    Seattle Metro              97.1 %        96.6 %

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

                                                       Three Months Ended
                                    Number of             September 30,                               Percentage
                                    Properties         2009          2008         Dollar Change         Change
Property Revenues (dollars in
thousands)
Quarterly Same-Property:
Southern California                           55     $  45,362     $  47,227     $        (1,865 )            (3.9 ) %
Northern California                           24        25,657        26,894              (1,237 )            (4.6 )
Seattle Metro                                 23        14,331        15,464              (1,133 )            (7.3 )
Total Quarterly Same-Property
revenues                                     102        85,350        89,585              (4,235 )            (4.7 )
Quarterly Non-Same Property
Revenues (1)                                            15,473        12,357               3,116              25.2
Total property revenues                              $ 100,823     $ 101,942     $        (1,119 )            (1.1 ) %

(1) Includes two communities acquired after January 1, 2008, eight redevelopment communities, two development communities, and three commercial buildings.

Quarterly Same-Property Revenues decreased by $4.2 million or 4.7% to $85.4 million in the third quarter of 2009 from $89.6 million in the third quarter of 2008. The decrease was primarily attributable to a decrease in scheduled rents of $5.1 million or a decrease of 5.7% for the Quarterly Same-Property portfolio from an average rental rate of $1,411 per unit in the third quarter of 2008 to $1,330 per unit in the third quarter of 2009. Schedule rents decreased in all regions including a decrease in scheduled rents of 5.3%, 4.7%, and 8.8% in Southern California, Northern California, and Seattle Metro, respectively. The decrease in scheduled rents was partially offset by an increase of occupancy of 70 basis points or $0.8 million, from 96.3% for the third quarter of 2008 to 97.0% for the third quarter of 2009, Ratio utility billing system ("RUBS") income increased $0.4 million, and other income, rent concessions and bad debt expense were consistent between quarters. The Company expects that total Quarterly Same-Property revenues will continue to decrease in the fourth quarter of 2009 from the same period in 2008, due to an expected decrease in scheduled rents compared to the same period in 2008.

Quarterly Non-Same Property Revenues increased by $3.1 million or 25.2% to $15.5 million in the third quarter of 2009 from $12.4 million in the third quarter of 2008. The increase was primarily due to two new communities acquired since January 1, 2008, two development communities in lease-up and eight communities that are in redevelopment and classified in non-same property results.

Property operating expenses, excluding real estate taxes increased $1.5 million or 5.8% for the third quarter of 2009 compared to the third quarter of 2008, primarily due to the acquisition of two new properties, and the completion of two development properties. Quarterly Same-Property operating expenses excluding real estate taxes for the third quarter of 2009 increased slightly by $0.3 million or 1.5% compared to the third quarter of 2008.

Real estate taxes increased $0.7 million or 8.0% for the third quarter of 2009 compared to the third quarter of 2008, primarily due to the acquisition of two new properties, the completion of two development properties and increases in real estate taxes in the Seattle Metro area.

Depreciation expense increased by $2.2 million or 7.9% for the third quarter of 2009 compared to the third quarter of 2008, due to the acquisition of two new communities, the completion of two development properties, and the capitalization of approximately $38.1 million in additions to rental properties for the nine months ended September 30, 2009 and approximately $88.0 million of additions to rental properties, including $55.5 million spent on redevelopment and revenue generating capital expenditures during 2008.

General and administrative expense decreased $0.4 million or 6.7% for the quarter ended September 30, 2009 compared to the quarter ended September 30, 2008, primarily due to a workforce reduction of corporate employees in the fourth quarter of 2008.

Impairment and other charges were $11.1 million for the third quarter of 2009 due to the write-off of development costs totaling $6.7 million related to two land parcels that will no longer be developed by the Company, the recognition of $3.8 million in unamortized costs related to the cancellation of the Outperformance Plan, and $0.6 million recorded for additional loan loss reserves related a note receivable secured by an apartment community in the Portland Metropolitan Area.

Gain on sale of real estate of $2.5 million in the third quarter of 2008 resulted from the recognition of a gain on sale of $1.0 million related to the sale of the Circle RV park and $1.5 million gain that was previously deferred on the gain on sale of the 2005 sale of Eastridge Apartments.

Interest and other income increased by $0.6 million for the quarter ended September 30, 2009 due to an increase in investment and interest income of approximately $2.5 million generated primarily from the $72.7 million increase in the balance of marketable securities from September 30, 2008, and that increase was partially offset by a $1.6 million decrease in lease income due to the sale of the Company's remaining RV parks in 2008, the lease for the Cadence campus expired in January 2009, and a decrease of structured finance and other income of $0.3 million for the quarter ended September 30, 2009 compared to the quarter ended September 30, 2008.

Income from discontinued operations for the third quarter of 2009 includes operating results of the apartment community Spring Lake which was sold during the quarter for a gain of $2.5 million. Discontinued operations for the third quarter of 2008 includes the operating results for Spring Lake, as well as Carlton Heights, Grand Regency, and Mountain View which were sold in the first and second quarter of 2009, and Cardiff by the Sea, St. Cloud and Coral Gardens, which were sold in the third and fourth quarters of 2008.

Comparison of the Nine Months Ended September 30, 2009 to the Nine Months Ended September 30, 2008

Our average financial occupancies for the Company's stabilized apartment communities or "2009/2008 Same-Properties" (stabilized properties consolidated by the Company for the nine months ended September 30, 2009 and 2008) increased 70 basis points to 96.9% for the nine months ended September 30, 2009 from 96.2% for the nine months ended September 30, 2008. The regional breakdown of the Company's 2009/2008 Same-Property portfolio for financial occupancy for the nine months ended September 30, 2009 and 2008 is as follows:

                                             Nine Months Ended
                                               September 30,
                                             2009           2008
                     Southern California        96.5 %       95.5 %
                     Northern California        97.6 %       97.3 %
                     Seattle Metro              97.1 %       96.6 %

The following table illustrates a breakdown of revenue amounts, including revenues attributable to 2009/2008 Same-Properties.

                                                        Nine Months Ended
                                    Number of             September 30,                               Percentage
                                    Properties         2009          2008         Dollar Change         Change
Property Revenues (dollars in
thousands)
2009/2008 Same-Properties:
Southern California                           55     $ 138,192     $ 141,610     $        (3,418 )            (2.4 ) %
Northern California                           24        79,066        79,037                  29               0.0
Seattle Metro                                 23        44,719        45,402                (683 )            (1.5 )
Total 2009/2008 Same-Property
revenues                                     102       261,977       266,049              (4,072 )            (1.5 )
2009/2008 Non-Same Property
Revenues (1)                                            45,548        33,965              11,583              34.1
Total property revenues                              $ 307,525     $ 300,014     $         7,511               2.5 %

(1) Includes properties acquired after January 1, 2008, eight redevelopment communities, two development communities, and three commercial buildings.

2009/2008 Same-Property Revenues decreased by $4.1 million or 1.5% to $262.0 million for the nine months ended September 30, 2008 compared to $266.0 million for the nine months ended September 30, 2008. Scheduled rents decreased by 2.8% or $7.3 million for the nine months ended September 30, 2009 from an average rental rate of $1,402 for the nine months ended September 30, 2008 compared to $1,363 for the nine months ended September 30, 2009. Schedule rents decreased in all regions including a decrease in scheduled rents of 3.7%, 0.9%, and 3.1% in Southern California, Northern California, and Seattle Metro, respectively. The decrease in scheduled rents was partially offset by an increase of occupancy of 70 basis points or $2.2 million, from 96.2% for the nine months ended September 30, 2008 to 96.9% for the nine months ended September 30, 2009, RUBS income increased $1.0 million and other income increased $0.3 million. Bad debt expense and rent concessions were consistent between periods. The Company expects that total Same-Property revenues will decrease for the year ended December 31, 2009, due to an expected decrease in scheduled rents compared to the year ended December 31, 2008.

2009/2008 Non-Same Property Revenues increased by $11.6 million or 34.1% to $45.5 million for the nine months ended September 30, 2008 from $34.0 million for the nine months ended September 30, 2008. The increase was primarily due to two new communities acquired since January 1, 2008, two development communities in lease and eight communities that are in redevelopment and classified in non-same property results.

Property operating expenses, excluding real estate taxes increased $2.1 million or 2.9% for the nine months ended September 30, 2009 compared to the nine month ended September 30, 2008, primarily due to the acquisition of two new properties, and the completion of two development properties. 2009/2008 Same-Property operating expenses excluding real estate taxes increased slightly by $1.5 million or 1.4% for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.

Real estate taxes increased $2.6 million or 10.7% for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008, primarily due to the acquisition of two new properties, the completion of two development properties and increases in real estate taxes in the Seattle Metro area.

Depreciation expense increased by $6.0 million or 7.3% for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008, due to the acquisition of two new communities, the completion of two development properties, and the capitalization of approximately $38.1 million in additions to rental properties for the nine months ended September 30, 2009 and approximately $88.0 million of additions to rental properties, including $55.5 million spent on redevelopment and revenue generating capital expenditures during 2008.

General and administrative expense decreased $1.5 million or 7.8% for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2009, primarily due to a workforce reduction of corporate employees in the fourth quarter of 2008.

Impairment and other charges were $16.9 million for the nine months ended September 30, 2009 due to the write-off of development costs totaling $6.7 million related to two land parcels that will no longer be developed by the Company, the write-off of $5.8 million of an investment in a predevelopment joint venture project in Southern California, the recognition of $3.8 million in unamortized costs related to the cancellation of the Outperformance Plan, and $0.6 million recorded for additional loan loss reserves related a note receivable secured by an apartment community in the Portland Metro Area.

Gain on early retirement of debt was $6.1 million for the nine months ended September 30, 2009 compared to $0 for the nine month ended September 30, 2008, due to the repurchase of $71.3 million of 3.625% exchangeable bonds at a discount to par value.

Gain on sale of real estate of $2.5 million for the nine months ended September 30, 2008 resulted from the recognition of a gain on sale of $1.0 million related to the sale of the Circle RV park and $1.5 million gain that was previously deferred on the gain on sale of the 2005 sale of Eastridge Apartments.

Interest and other income increased by $1.5 million for the nine months ended September 30, 2009 due to a variety factors including an increase in investment and interest income of approximately $4.8 million generated primarily from the $72.7 million increase in the balance of marketable securities since September 30, 2008, a $1.0 million gain generated from the sale of marketable securities, $0.6 million generated from TRS activities. Those increases in income were partially offset by a $4.5 million decrease in lease income due to the sale of the Company's remaining RV parks in 2008, the lease for the Cadence campus expiring in January 2009, and a decrease of structured finance income of $0.4 million for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.

Equity income in co-investments decreased by $6.7 million for the nine months ended September 30, 2009 due primarily to the repayment of the Company's remaining investment in the Mountain Vista, LLC joint venture for the nine months ended September 30, 2008. The Company recognized $6.3 million of preferred income resulting from the final repayment of the investment for the nine months ended September 30, 2008.

Income from discontinued operations for the nine months ended September 30, 2009 includes operating results of the apartment communities sold in 2009 including Spring Lake which was sold for a gain of $2.5 million, Mountain View which was sold for a gain of $0.8 million, and Carlton Heights and Grand Regency which sold for a combined gain of $2.5 million. Discontinued operations for the nine months ended September 30, 2008 includes the operating results for the four communities sold in 2009 as well as Cardiff by the Sea, St. Cloud and Coral Gardens, which were sold in the third and fourth quarters of 2008.

Liquidity and Capital Resources

In June 2009, Standard and Poor's ("S&P") reaffirmed its corporate credit rating of BBB/Stable for Essex Property Trust, Inc.

At September 30, 2009, the Company had $81.9 million of unrestricted cash and cash equivalents and $131.3 million in marketable securities held available for sale. We believe that cash flows generated by our operations, existing cash balances, availability under existing lines of credit, access to capital markets and the ability to generate cash from the disposition of real estate and marketable securities held available for sale are sufficient to meet all of our reasonably anticipated cash needs during the remainder of 2009 and 2010. 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 a $200.0 million unsecured line of credit and, as of September 30, 2009, there was no outstanding balance on the line. This facility matures in March 2010. The underlying interest rate on this line is based on a tiered rate structure tied to an S&P rating on the credit facility (currently BBB-) at LIBOR plus 0.8%. We also have a $150.0 million credit facility from Freddie Mac, which is expandable to $250.0 million at any time until the fourth quarter of 2010 and the credit facility matures in December 2013. This line is secured by ten apartment communities. As of September 30, 2009, we had $150.0 million outstanding under this line of credit at an average interest rate of 1.7%. The underlying interest rate on this line is between 99 and 150 basis points over the Freddie Mac Reference Rate and the interest rate is subject to change by the lender in November 2011. The Company's line of credit agreements contain debt covenants related to limitations on indebtedness and liabilities and maintenance of minimum levels of consolidated earnings before depreciation, interest and amortization. The Company was in compliance with the line of credit covenants as of September 30, 2009 and December 31, 2008.

The Company may from time to time sell shares of common stock into the existing trading market at current market prices as well as through negotiated transactions under its Controlled Equity Offering ("CEO") program with Cantor Fitzgerald & Co. ("Cantor"). In May 2009, the Company's Board of Directors approved the sale of up to 7.5 million shares of common stock under the CEO program. Pursuant to this approval, the Company entered in a sales agreement with Cantor on May 6, 2009, for the sale of up to 7.5 million shares pursuant to the CEO program. During the nine months ended September 30, 2009, pursuant to the CEO program, the Company issued 2,276,250 shares of common stock at an average price of $71.36 for approximately $160.0 million, net of fees and commissions.

In August 2007, the Company's Board of Directors authorized a stock repurchase plan to allow the Company to acquire shares in an aggregate of up to $200.0 million. The program supersedes the common stock repurchase plan that Essex announced on May 16, 2001. In February 2009, the Company repurchased 350,000 shares of common stock for $20.3 million at an average price of $57.89 per share. After the Series G Preferred Stock repurchases described below, the Company has authorization to repurchase an additional $42.9 million under the stock repurchase plan.

In 2006, the Company sold 5,980,000 shares of 4.875% Series G Cumulative Convertible Preferred Stock (the "Series G Preferred Stock") for net proceeds of $145.9 million. Holders may convert Series G Preferred Stock into shares of the Company's common stock subject to certain conditions. The conversion rate was initially 0.1830 shares of common stock per the $25 share liquidation preference, which is equivalent to an initial conversion price of approximately $136.62 per share of common stock (the conversion rate will be subject to adjustment upon the occurrence of specified events). On or after July 31, 2011, the Company may, under certain circumstances, cause some or all of the Series G Preferred Stock to be converted into shares of common stock at the then prevailing conversion rate.

During the first quarter of 2009, the Company repurchased $58.2 million of its Series G Preferred Stock at a discount to carrying value, and the excess of the carrying value over the cash paid to redeem the Series G Preferred Stock totaled $25.7 million. Additionally, during the third quarter of 2009, the Company repurchased $81.9 million of its Series G Preferred Stock at a discount to carrying value, and the excess of the carrying value over the cash paid to redeem the Series G Preferred Stock totaled $23.9 million. As of September 30, 2009, the carrying value of the Series G Preferred Stock outstanding totaled $5.8 million. The Company may continue to repurchase Series G Preferred Stock.

In 2005 the Company, through its Operating Partnership, issued $225.0 million of outstanding exchangeable senior notes (the "Bonds") with a coupon of 3.625% due 2025. The Bonds are senior unsecured obligations of the Operating Partnership, and are fully and unconditionally guaranteed by the Company. On or after November 1, 2020, the Bonds will be exchangeable at the option of the holder into cash and, in certain circumstances at Essex's option, shares of the Company's common stock at an initial exchange price of $103.25 per share subject to certain adjustments. The Bonds will also be exchangeable prior to November 1, 2020, but only upon the occurrence of certain specified events. On or after November 4, 2010, the Operating Partnership may redeem all or a portion of the Notes at a redemption price equal to the principal amount plus accrued and unpaid interest (including additional interest, if any). Bond holders may require the Operating Partnership to repurchase all or a portion of the Bonds at a purchase price equal to the principal amount plus accrued and unpaid interest (including additional interest, if any) on the Bonds on November 1, 2010, November 1, 2015 and November 1, 2020.

During the fourth quarter of 2008 the Company repurchased $53.3 million of these Bonds at a discount to par value, and during the first quarter of 2009, the Company repurchased an additional $71.3 million of these Bonds at a discount to par value and recognized a gain of $6.1 million on cash paid of $66.5 million. As of September 30, 2009, the carrying value of the Bonds outstanding totaled $98.2 million. The Company may continue to repurchase Bonds.

As of September 30, 2009, 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 4.86% to 8.18% and maturity dates ranging from 2010 to 2020 and $251.6 million of variable rate debt with a weighted average interest rate of 2.3%, which $219.9 million of the variable debt is tax-exempt variable rate demand notes. The tax-exempt variable rate demand bonds have maturity dates ranging from 2020 to 2039, and $167.4 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's current financing activities have been impacted by the instability and tightening in the credit markets which has led to an increase in spreads and pricing of secured and unsecured debt. Our strong balance sheet, the established . . .