Business Context and Reporting Period
Company: Essex Property Trust, Inc. (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2008
Portfolio Overview: As of June 30, 2008, the Company owned or had interests in 133 apartment communities (26,963 units), six office buildings, two recreational vehicle parks, and one manufactured housing community. Primary markets include Southern California, Northern California, and the Seattle metropolitan area.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2008 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenues | $207,497 | $186,254 |
| Net Income | $30,013 | $49,733 |
| Net Income Available to Common Stockholders | $25,392 | $45,180 |
| Funds from Operations (FFO) | $86,128 | $81,884 |
| FFO Per Share (Diluted) | $3.13 | $3.01 |
| Net Cash Provided by Operating Activities | $89,733 | $99,652 |
| Total Assets | $3,063,909 | $2,980,323 |
| Total Liabilities | $1,884,184 | $1,762,133 |
| Stockholders' Equity | $752,820 | $790,318 |
Debt & Liquidity: Total mortgage notes payable were $1.39 billion. The Company held $21.0 million in unrestricted cash and cash equivalents. It maintains a $200 million unsecured line of credit ($55 million outstanding) and a $100 million secured line of credit ($100 million outstanding).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 11.4% year-over-year, driven by a 5.4% increase in Same-Property revenues (due to higher scheduled rents) and a 46.4% increase in Non-Same Property revenues (due to acquisitions and redevelopment).
- Net Income Decline: Net income decreased 39.7% to $30.0 million. This decline is primarily attributable to the absence of significant gains from discontinued operations in 2008, which included a $13.7 million gain on the sale of the City Heights property and other disposition gains totaling $24.8 million in the prior year.
- FFO Increase: Funds from Operations increased 5.2% to $86.1 million, reflecting the underlying operational strength of the portfolio excluding non-recurring gains/losses.
- Occupancy: Financial occupancy for stabilized properties increased 50 basis points to 96.1% for the six-month period.
- Equity Income: Equity income in co-investments increased significantly ($4.5 million) due to the repayment of the Company's investment in Mountain Vista Apartments, LLC, which generated $6.3 million in preferred income.
Outlook, Risks, and Management Commentary
- Development Pipeline: The Company has a consolidated development pipeline (excluding Fund II) of five projects and three predevelopment projects totaling 2,715 units. Total estimated project costs are $830.0 million, with $509.3 million remaining to be expended.
- Financing Strategy: Management anticipates closing a new five-year secured line of credit facility in Q4 2008, expanding capacity from $100 million to $150 million (expandable to $250 million) to replace the facility maturing in January 2009.
- Interest Rate Risk: The Company utilizes forward-starting interest rate swaps (notional amount $400 million) to hedge refinancing risks. While credit markets have tightened, the Company states its strong balance sheet and relationships with Fannie Mae and Freddie Mac have mitigated impacts.
- Accounting Changes: The Company will adopt APB 14-1 effective January 1, 2009, which will result in additional non-cash interest expense of approximately $4.0 million for 2008 related to exchangeable senior notes.
- Risks: Key risks include potential delays in development projects, construction cost overruns, interest rate fluctuations affecting variable debt, and environmental liabilities (specifically mold-related litigation, though management believes current policies mitigate material impact).
Investor Verification Checklist
- Discontinued Operations Impact: Verify the extent to which the reported Net Income decline is driven by the one-time gains in 2007 versus ongoing operational performance (FFO is a better indicator of operational trend).
- Debt Maturity Wall: Review the schedule of debt maturities, specifically the $155 million in lines of credit maturing in 2009 and the refinancing strategy for the $89 million in mortgage notes due in 2008.
- Development Capital Needs: Assess the $509 million remaining development commitment against current liquidity and access to capital markets given the tightening credit environment.
- APB 14-1 Impact: Monitor the upcoming adoption of APB 14-1 and its effect on reported interest expense and Net Income starting in 2009.
- Co-Investment Returns: Evaluate the sustainability of the equity income spike from the Mountain Vista repayment, as this was a non-recurring event.