Essex Property Trust, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Unaudited results; dollar amounts below are in millions unless otherwise noted. Essex is a residential REIT focused on West Coast markets. At quarter-end it owned or held interests in 149 apartment communities totaling 30,557 units, six commercial buildings, and six active development projects.
Financial results and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $117.2 | $100.2 | $230.5 | $200.9 |
| Property revenue | $115.8 | $99.2 | $227.9 | $198.4 |
| Net operating income (NOI) | $75.5 | $64.3 | $148.7 | $129.6 |
| Income before discontinued operations | $10.7 | $13.7 | $23.0 | $31.4 |
| Net income attributable to common stockholders | $10.3 | $9.5 | $18.7 | $22.6 |
| Basic/diluted earnings per common share | $0.32 / $0.32 | $0.32 / $0.32 | $0.59 / $0.59 | $0.78 / $0.77 |
| FFO per diluted share | $1.32 | $1.34 | $2.76 | $2.80 |
- Q2 property revenue rose 16.8%; same-property revenue grew 3.4% to $98.3 million. Same-property NOI margin was approximately 65.2%, versus 64.9% a year earlier.
- Same-property financial occupancy was 96.9% in Q2 versus 97.2% a year earlier. Average rents per unit increased 3.4% to $1,352. For the six-month comparison, occupancy was 96.9% versus 97.4% (a 50-basis-point decline), while same-property revenue increased 2.5%.
- Q2 net income included $5.4 million of discontinued-operations income, principally the $5.3 million net gain on the sale of Woodlawn Colonial. Excluding discontinued operations, Q2 income available to common stockholders was $0.17 per share versus $0.32.
- Six-month operating cash flow was $104.4 million, versus $89.4 million. Investing activities used $150.1 million; financing provided $40.8 million. Cash and cash equivalents declined $4.9 million to $8.8 million.
- At June 30, total assets were $3.83 billion and total liabilities $2.37 billion. Debt comprised $1.779 billion of mortgage notes, $210 million drawn on credit lines, and $265 million of unsecured bonds, or about $2.254 billion in total. Cash and cash equivalents were $32.8 million including restricted cash; marketable securities were $75.7 million.
- Credit facilities totaled $540 million, with $210 million drawn. The company reported $330 million of undrawn capacity; its $275 million unsecured facility matures December 2011, with two company options to extend, and its $15 million working-capital facility matures January 2012, with one extension option.
- Mortgage debt included $1.5 billion fixed-rate debt and $256.8 million variable-rate debt. Weighted average interest rate was 4.2% at June 30, versus 4.6% a year earlier. The company had $213 million of tax-exempt variable-rate debt, with $191.9 million covered by caps.
Material changes and transactions
- Revenue growth reflected acquisitions and newly completed development communities as well as same-property rent growth. Non-same-property revenue rose sharply from the prior-year quarter as acquired and newly operating assets entered the portfolio.
- Q2 property operating costs excluding real estate taxes increased 16.9%; real estate taxes increased 12.4%; and depreciation increased 20.4%, primarily reflecting acquisitions and completed developments. Same-property operating costs excluding taxes rose 5.5% in Q2.
- Q2 interest expense before amortization increased 12.6% to $22.7 million, mainly due to higher average debt, partly offset by a lower weighted average rate. Interest and other income fell to $2.6 million from $7.1 million, reflecting lower investment income and the absence of the prior-year quarter’s securities-sale gains.
- In April, Essex issued $71.4 million net proceeds of 7.125% Series H preferred stock and used the proceeds toward redeeming $80 million of Series B preferred units. It also redeemed $25 million of 7.8125% Series F preferred stock. The transactions produced a $1.9 million charge related to redemption amounts exceeding carrying values.
- Essex issued $265 million of unsecured bonds during the first half at rates of 4.4%–4.92%, with maturities in 2016, 2017, and 2019. It also issued common shares for $168.6 million net proceeds in the first half and a further $48.3 million in July.
- Portfolio activity included the $27 million acquisition of a 63-unit vacant condominium project in West Los Angeles, the $16 million sale of the 159-unit Woodlawn Colonial community, new joint ventures, and additional development activity. Co-investments increased to $197.4 million from $107.8 million at year-end.
Outlook, risks, and contingencies
- Management stated that operating cash flow, existing cash and securities, credit availability, capital-market access, and potential property dispositions should be sufficient for reasonably anticipated cash needs over the next 12 months. This is a management expectation, not formal earnings guidance.
- Consolidated and unconsolidated development projects totaled 1,284 units, with estimated costs of $434.3 million and $249.0 million remaining to be spent. Five redevelopment communities had estimated costs of $75.2 million, with about $37.1 million remaining. Management targets an 8%–10% return on incremental redevelopment investment.
- Management cautioned that tighter credit markets, wider financing spreads, refinancing terms, interest-rate movements, and reduced availability of agency financing could affect acquisitions, development, and refinancing. The company said it was in compliance with line-of-credit covenants at quarter-end.
- The company faces mold-related litigation and other lawsuits. It said such matters were not expected to materially affect results, but potential mold and environmental liabilities were not quantifiable. Some extraordinary losses, including earthquake and terrorism losses, are not insured; substantially all properties are in earthquake-prone areas.
- Forward-looking results depend on project costs and completion, property performance, cash flows, market conditions, refinancing, and the ability to maintain REIT dividend requirements. No material changes to the risk factors in the 2010 Form 10-K were reported.
Important facts for investors to verify
- Separate recurring operating performance from the Woodlawn Colonial sale gain and other discontinued operations; assess the decline in continuing income and six-month EPS.
- Check same-property rent growth against occupancy softness and higher same-property operating costs, including maintenance, payroll, and utilities.
- Review debt maturities and renewal options, the variable-rate exposure, and whether market access remains available on acceptable terms.
- Track funding needs and execution risk for the development, redevelopment, and joint-venture pipelines, including the estimated remaining project costs.
- Evaluate whether cash and undrawn credit capacity are adequate alongside dividend obligations, and monitor unquantified mold/environmental contingencies and uninsured earthquake exposure.