Essex Property Trust, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; unaudited. Essex is a residential REIT operating primarily in Southern and Northern California and Seattle. At quarter-end, it had interests in 134 apartment communities with 27,405 units, five office and commercial buildings, and development activity across its portfolio.
Financial and operating performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Property revenue | $99.6 million | $102.5 million | $199.3 million | $206.4 million |
| Net income | $13.9 million | $17.5 million | $31.7 million | $40.8 million |
| Net income available to common stockholders | $9.5 million | $11.4 million | $22.6 million | $53.7 million |
| Diluted EPS | $0.32 | $0.43 | $0.77 | $1.96 |
| Operating cash flow | — | $89.4 million | $89.2 million | |
| FFO per diluted share | $1.34 | $1.43 | $2.80 | $3.92 |
- Quarterly net operating income was $64.6 million, versus $68.6 million a year earlier; NOI margin on property revenue was approximately 64.9%, down from 67.0%.
- Same-property revenue fell 4.4% in Q2 and 5.5% for the six-month period. Lower scheduled rents were the primary driver; same-property financial occupancy improved 40 basis points to 97.2% in Q2 and 97.4% for the six months.
- At June 30, total assets were $3.32 billion and total liabilities were $2.09 billion. Mortgage notes payable were $1.64 billion; lines of credit were $264 million; exchangeable bonds were $3.2 million.
- Unrestricted cash was $8.4 million, restricted cash $19.4 million, and marketable securities $92.5 million. The company reported $450 million of committed credit facilities, with $14 million drawn on its $200 million unsecured facility and the $250 million Freddie Mac facility fully drawn.
- Investing activities used $123.2 million in the first half, including $53.4 million of development spending and $66.5 million of contributions to co-investments. Financing activities provided $21.4 million. The quarterly common dividend was $1.033 per share.
Material changes and notable items
- Q2 property revenue decreased 2.8% year over year, while same-property average rental rates fell 5.8%; higher occupancy and lower bad debt partly offset the rent decline. Seattle had the largest regional same-property revenue decline.
- Q2 interest and other income included a $4.0 million gain on marketable-security sales. First-half gains on such sales totaled $9.0 million. Depreciation and amortization increased, while impairment charges were nil versus $5.8 million in the prior-year first half.
- First-half 2010 common earnings and FFO comparisons are affected by prior-year items, including a $25.7 million accounting benefit from redeeming preferred stock below its carrying value, a $6.1 million debt-retirement gain, and discontinued-operation gains. First-half 2010 had none of these reported benefits.
- During Q2, Essex issued 437,200 common shares for net proceeds of $45.7 million. It also purchased the Santee Court secured note for $21.0 million, at a discount to principal, with an October 2010 maturity.
- After quarter-end, the company acquired two communities for a combined $106.6 million. It refinanced $129.5 million of loans at 7.7%–8.2% with $130.1 million of fixed-rate loans at 4.6%; settlement of $100 million of forward-starting swaps increased the effective rate on those new loans to 6.0% and required $16.7 million in payments.
Outlook, risks, and contingencies
- Management expected same-property revenue in Q3 2010 to be slightly lower than Q3 2009, due to expected rent and/or occupancy declines, but slightly higher than Q2 2010 as scheduled rents improved. The filing does not provide a full-year earnings or FFO forecast.
- Management believed operating cash flow, cash and securities, credit availability, capital-market access, and potential property dispositions would meet reasonably anticipated 2010 cash needs. It cautioned that capital-market disruption could constrain acquisitions, development, and refinancing or raise financing costs.
- Development and predevelopment plans require additional capital; the company cited remaining project costs and potential funding from working capital, credit facilities, securities issuance, and dispositions. Future costs, completion, lease-up, and returns remain uncertain.
- At quarter-end, seven forward-starting swaps had a $375 million notional amount and a net liability of approximately $72.5 million; rate caps covered $191.9 million of notional. The filing identifies interest-rate and refinancing exposure.
- The company faced mold-related and other ordinary-course litigation. Potential mold and environmental liabilities were not quantifiable; management did not expect lawsuits to materially affect results. The filing also notes that certain extraordinary risks, including earthquake, are uninsured.
Investor verification priorities
- Track same-property rents and revenue, particularly the expected Q3 trend and regional weakness.
- Review debt maturities, credit-facility extensions and covenants, and the cost and terms of future refinancing.
- Confirm the cash and earnings effects of swap settlements and the related effective borrowing rates.
- Assess development funding needs, remaining project costs, lease-up progress, and co-investment performance.
- Reconcile year-over-year GAAP earnings and FFO changes for prior-year preferred-stock, debt-retirement, and property-sale items.