Business Context and Reporting Period
Company: Essex Property Trust, Inc. (Essex)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: Essex is a self-administered and self-managed equity REIT focused on the ownership, acquisition, development, and management of multifamily apartment communities. As of December 31, 2003, the portfolio consisted of 121 properties with 26,012 apartment units, primarily located in Southern California (58% of units), Northern California (18%), and the Pacific Northwest (23%). The company also holds interests in recreational vehicle parks, office buildings, and manufactured housing communities.
Key Financial Metrics
| Metric | 2003 | 2002 |
|---|---|---|
| Total Revenues | $234.5 million | $200.1 million |
| Net Income | $37.9 million | $52.9 million |
| Net Income Available to Common Stockholders | $36.8 million | $52.9 million |
| Funds from Operations (FFO) | $100.5 million | $94.6 million |
| FFO Per Share (Diluted) | $4.20 | $4.50 |
| Net Cash Provided by Operating Activities | $103.3 million | $85.7 million |
| Total Property Indebtedness | $832.2 million | $804.1 million |
| Debt-to-Total-Market-Capitalization | 31.2% | N/A |
| Same Property Occupancy Rate | 96% | 95% |
| Dividends Declared Per Common Share | $3.12 | $3.08 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 17.2% to $234.5 million, driven primarily by a $48.8 million increase in revenue from properties acquired subsequent to January 1, 2002. This growth offset a 1.9% decline in revenue from "Same Store Properties."
- Regional Performance:
- Southern California: Same store property revenues increased 4.8% due to rental rate increases and higher occupancy (96.3%).
- Northern California: Same store property revenues decreased 9.4% due to rental rate declines and slight occupancy drops.
- Pacific Northwest: Same store property revenues decreased 3.0% due to rental rate declines, partially offset by occupancy gains.
- Net Income Decline: Net income decreased 28.2% to $37.9 million. This was primarily due to increased interest expense ($7.7 million increase), higher property operating expenses ($34.0 million increase), and the absence of a $8.1 million gain on the sale of real estate recorded in 2002. Additionally, 2003 included non-cash charges related to preferred stock transactions totaling approximately $1.2 million.
- Acquisitions: In 2003, the company acquired three multifamily communities (Canyon Pointe, Forest View, and Walnut Heights) for approximately $66 million. Subsequent to year-end, three additional acquisitions were announced totaling approximately $166 million.
- Financing: The company expanded its unsecured revolving credit facility to $185 million and secured a new $90 million Freddie Mac credit facility. It also issued 1.6 million shares of common stock raising approximately $97 million and 1 million shares of Series F Preferred Stock.
Guidance, Outlook, and Risks
- Outlook: Management expects Southern California to continue generating positive results. Northern California rents are expected to remain flat in 2004, while the Pacific Northwest is expected to see slight revenue increases due to anticipated job growth. The company plans to increase investment focus in Northern California and the Pacific Northwest after 2004.
- Development: The company has two development communities totaling 444 units with approximately $17.9 million in remaining commitments. No new development projects are expected to start in 2004.
- Liquidity: The company maintains $275 million in committed lines of credit with $93.1 million outstanding as of year-end. Management believes cash flows and borrowing capacity are adequate to meet operating requirements and dividend obligations.
- Risks:
- Interest Rates: Approximately $168 million of debt is variable rate. Rising rates could increase interest expense and impact refinancing costs.
- Refinancing: Significant balloon payments are due in future years; inability to refinance could lead to foreclosure or higher costs.
- Economic Downturn: Concentration in West Coast markets exposes the company to regional economic downturns, particularly in high-tech sectors.
- Environmental: Potential liabilities related to mold, asbestos, and groundwater contamination exist, though management does not currently believe these are material.
Investor Verification Checklist
- Debt Maturities: Verify the schedule of debt maturities, noting $20.7 million due in 2004 and significant balances maturing in 2008 and thereafter.
- Variable Rate Exposure: Confirm the current interest rate environment and the impact on the $168.4 million of variable rate indebtedness.
- Regional Rent Trends: Monitor rental rate trends in Northern California and the Pacific Northwest, which showed declines in 2003.
- Preferred Stock Obligations: Review the terms of the Series B, D, and F preferred securities, including dividend requirements and redemption dates.
- Development Costs: Track the completion and stabilization of the Hidden Valley and San Marcos Phase II projects against the $17.9 million remaining commitment.
- Subsequent Acquisitions: Verify the integration and performance of the three properties acquired in early 2004 (Marina City Club, Mountain View, and Fountain Park).