Business Context and Reporting Period
Company: Essex Property Trust, Inc. (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2009
Portfolio Overview: As of September 30, 2009, the Company owned or had ownership interests in 133 apartment communities (27,221 units) located in Southern California, Northern California, and the Seattle Metro area, plus five office/commercial buildings. The Company also maintained a development pipeline of three active projects and two predevelopment projects.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2008 |
|---|---|---|---|
| Total Revenues | $101,847 | $310,902 | $303,979 |
| Net Income (Consolidated) | $2,349 | $43,139 | $58,431 |
| Net Income Available to Common Stockholders | $21,739 | $75,418 | $34,945 |
| Diluted EPS (Common) | $0.74 | $2.69 | $1.39 |
| Funds from Operations (FFO) | $50,791 | $164,597 | $126,345 |
| FFO Per Share (Diluted) | $1.69 | $5.61 | $4.57 |
| Operating Cash Flow | N/A | $147,662 | $143,048 |
| Total Assets | $3,265,022 | N/A | N/A |
| Total Liabilities | $2,014,238 | N/A | N/A |
| Debt (Mortgage Notes + Lines of Credit) | $1,758,570 | N/A | N/A |
| Cash & Cash Equivalents (Unrestricted) | $81,942 | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Trends: Total property revenues for the nine months ended September 30, 2009, increased 2.5% to $307.5 million compared to $300.0 million in the prior year. However, "Same-Property" revenues decreased 1.5% due to a 2.8% decline in scheduled rents, partially offset by a 70 basis point increase in financial occupancy (96.9% vs. 96.2%).
- Impairment Charges: The Company recorded $16.9 million in impairment and other charges for the nine months ended September 30, 2009, compared to zero in the prior year. This included a $6.7 million write-off of development costs for two land parcels, a $5.8 million write-off of a predevelopment joint venture investment, and a $3.8 million write-off related to the cancellation of the Outperformance Plan.
- Debt Restructuring: The Company recognized a $6.1 million gain on the early retirement of debt due to the repurchase of $71.3 million of exchangeable bonds at a discount. Additionally, the Company repurchased $81.9 million of Series G Preferred Stock at a discount, resulting in a $23.9 million gain.
- Dispositions: The Company sold four apartment communities in the first nine months of 2009, recognizing a total gain of $5.7 million on these sales.
Guidance, Outlook, and Risks
- Outlook: Management expects total Same-Property revenues to decrease for the full year 2009 compared to 2008 due to continued declines in scheduled rents. The Company anticipates that cash flows from operations, existing cash balances, and credit facilities will be sufficient to meet cash needs for the remainder of 2009 and 2010.
- Liquidity: The Company holds $81.9 million in unrestricted cash and $131.3 million in marketable securities. It maintains a $200 million unsecured line of credit (no balance outstanding) and a $150 million secured line of credit with Freddie Mac (fully drawn).
- Capital Markets Risk: Management notes that instability and tightening in credit markets have increased spreads and pricing for debt. While the Company has strong relationships with lenders, continued turmoil could negatively impact the ability to refinance or acquire properties at acceptable rates.
- Legal Contingencies: The Company faces ongoing mold-related lawsuits. While management believes liabilities will not have a material adverse effect, no estimate of possible loss can be made, and insurance coverage for mold is limited.
Investor Verification Checklist
- Same-Property Rent Decline: Verify the sustainability of the 2.8% decline in scheduled rents and the impact on future cash flows.
- Impairment Specifics: Review the details of the $16.9 million in impairment charges to ensure all non-recurring costs have been identified.
- Debt Maturities: Assess the refinancing risk for the $1.6 billion in mortgage notes payable, particularly given the tight credit market environment.
- Preferred Stock Redemption: Confirm the remaining carrying value of Series G Preferred Stock ($5.8 million) and the potential for further redemptions.
- Development Pipeline: Evaluate the $85 million remaining cost to complete active development projects and the $143 million predevelopment pipeline against current market absorption rates.