Business Context and Reporting Period
Company: Essex Property Trust, Inc. (Essex)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Essex is a self-administered and self-managed Real Estate Investment Trust (REIT) focused on the ownership, operation, and development of apartment communities primarily in supply-constrained West Coast markets (Southern California, Northern California, and Seattle Metro). As of December 31, 2008, the portfolio consisted of 134 apartment communities (26,992 units), six office buildings, and six active development projects.
Key Financial Metrics
| Metric | 2008 Value | 2007 Value |
|---|---|---|
| Total Revenues | $412.9 million | $379.0 million |
| Net Income | $65.4 million | $115.6 million |
| Net Income Available to Common Stockholders | $56.1 million | $106.5 million |
| Funds from Operations (FFO) | $170.9 million | $153.9 million |
| EBITDA | $257.3 million | $295.7 million |
| Total Assets | $3.16 billion | $2.98 billion |
| Total Indebtedness | $1.76 billion | $1.66 billion |
| Same-Property Occupancy | 96.3% | 95.8% |
| Same-Property Gross Operating Margin | 68% | 67% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 9.0% to $412.9 million, driven by a 4.5% increase in Same-Property revenues and a 33.3% increase in Non-Same Property revenues due to acquisitions and lease-ups.
- Net Income Decline: Net income decreased significantly to $65.4 million from $115.6 million in 2007. This decline is primarily attributed to the absence of large gains from discontinued operations in 2008 compared to 2007 (which included a $47.6 million gain on the sale of Portland communities).
- FFO Increase: Funds from Operations increased 11.0% to $170.9 million, reflecting improved core operating performance despite the decline in GAAP net income.
- Debt Activity: Total indebtedness increased to $1.76 billion. The company obtained $378.1 million in new fixed-rate mortgage loans and repaid or had assumed $169.4 million in existing debt. The company also repurchased $53.3 million of exchangeable bonds at a discount, recognizing a $3.5 million gain.
- Portfolio Changes: Acquired two communities for $88.4 million. Disposed of three apartment communities, two RV parks, and one manufactured housing community for gross proceeds of $118.5 million.
Guidance, Outlook, and Risks
- 2009 Outlook: Management forecasts a slowing national economy with an estimated GDP decline of 1.3% and a loss of 2 million non-farm jobs. Regionally, the company expects job losses and reductions in market rents in 2009: Southern California (-2.5% rents), Northern California (-0.7% rents), and Seattle Metro (-2.0% rents).
- Liquidity: The company believes cash flows, existing cash balances ($41.9 million unrestricted), and access to credit lines ($200 million unsecured, $150 million secured) are sufficient to meet 2009 needs.
- Development Pipeline: As of year-end, the consolidated development pipeline included 2,200 units with estimated remaining costs of $404.0 million. The redevelopment pipeline included 2,631 units with $56.5 million remaining to be expended.
- Key Risks:
- Capital Markets: Instability and tightening in credit markets have increased spreads and pricing for debt, potentially impacting refinancing and acquisition plans.
- Refinancing: Approximately $1.76 billion of debt is subject to balloon payments. The company does not expect sufficient cash flows from operations to make all balloon payments and relies on refinancing.
- Interest Rates: $251.1 million of variable-rate debt exists, though $183.4 million is subject to interest rate caps. Rising rates could increase interest expense.
- Geographic Concentration: 82% of rental revenues are generated from California communities, exposing the company to local economic downturns.
Investor Verification Checklist
- Refinancing Strategy: Verify the company's ability to refinance the $1.76 billion in debt maturing between 2009 and 2013 given the tight credit market conditions described in the filing.
- Discontinued Operations Impact: Confirm the extent to which the 2007 net income was inflated by one-time gains from discontinued operations ($73.3 million) versus 2008's minimal discontinued income ($1.8 million).
- Development Funding: Assess the funding sources for the $404 million remaining development costs, specifically reliance on lines of credit and construction loans in a volatile market.
- Dividend Sustainability: Review the coverage of the $4.08 annual dividend per share against FFO and cash flows, noting the company's REIT distribution requirements.
- Interest Rate Exposure: Evaluate the effectiveness of the $375 million in forward-starting interest rate swaps in mitigating the risk of rising rates on variable debt.