Business Context and Reporting Period
Company: Essex Property Trust, Inc. (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2010
Portfolio Overview: As of March 31, 2010, the Company owned or had ownership interests in 133 apartment communities (27,249 units) located in Southern California, Northern California, and the Seattle metropolitan area, along with five office/commercial buildings and five active development projects.
Key Financial Metrics
| Metric (in thousands) | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues | $101,184 | $105,111 |
| Net Income (Total) | $17,858 | $23,338 |
| Net Income Available to Common Stockholders | $13,127 | $42,265 |
| Diluted EPS (Common) | $0.45 | $1.53 |
| Funds from Operations (FFO) | $45,743 | $71,807 |
| FFO per Share (Diluted) | $1.46 | $2.50 |
| Operating Cash Flow | $52,975 | $55,063 |
| Total Assets | $3,308,431 | $3,254,637 |
| Total Liabilities | $2,037,791 | $1,976,747 |
| Debt (Mortgage Notes + Lines of Credit) | $1,882,734 | $1,842,549 |
| Cash & Cash Equivalents (Unrestricted) | $22,312 | $41,909 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 3.7% to $101.2 million. Property revenues dropped 4.0% to $99.7 million, driven by a 6.5% decrease in "Quarterly Same-Property" revenues due to lower scheduled rents (average rental rate fell from $1,404 to $1,297 per unit). This was partially offset by a 60 basis point increase in financial occupancy to 97.5%.
- Net Income Volatility: Net income available to common stockholders fell significantly to $13.1 million from $42.3 million. The prior year included a $25.7 million gain from the redemption of Series G Preferred Stock and a $6.1 million gain on early debt retirement, neither of which occurred in Q1 2010.
- Investing Activity: Net cash used in investing activities increased to $77.5 million (from $3.6 million used in 2009), primarily due to $66.5 million in contributions to co-investments and $27.5 million in additions to real estate under development.
- Co-Investments: The Company entered a joint venture to acquire Essex Skyline at MacArthur Place (349 units) for $128 million, acquiring a 47% effective interest.
Guidance, Outlook, and Risks
- Outlook: Management expects total Quarterly Same-Property revenues to continue decreasing in Q2 2010 compared to the same period in 2009 due to expected decreases in scheduled rents.
- Liquidity: The Company maintains $22.3 million in unrestricted cash and $114.3 million in marketable securities. It has $450 million in committed lines of credit, with $256 million outstanding as of March 31, 2010. Management believes current resources are sufficient to meet 2010 cash needs.
- Development Pipeline: The consolidated development pipeline includes four projects and two predevelopment projects totaling 2,242 units with $112.5 million in remaining costs.
- Risks:
- Market Conditions: Instability in credit markets may impact the ability to refinance debt or make acquisitions at acceptable rates.
- Legal Proceedings: The Company faces mold-related lawsuits. While management believes liabilities will not be material, insurance carriers have excluded mold from standard policies, and an estimate of possible loss cannot be made.
- Interest Rate Risk: The Company utilizes interest rate swaps and caps to hedge variable rate debt exposure.
Investor Verification Checklist
- Rent Trends: Verify the sustainability of the 60 basis point occupancy increase against the 7.6% decline in average rental rates across the portfolio.
- Debt Maturities: Review the $139.9 million in mortgage notes payable maturing in 2010 and the refinancing strategy given current credit market conditions.
- Co-Investment Exposure: Assess the impact of the $66.5 million cash outflow for co-investments and the equity method accounting for the new Skyline at MacArthur Place joint venture.
- FFO vs. GAAP: Note the significant divergence between GAAP Net Income ($13.1M) and FFO ($45.7M) due to the absence of one-time gains in 2010 compared to 2009.
- Derivative Liabilities: Monitor the $38.6 million net liability associated with cash flow hedges and its impact on comprehensive income.