Essex Property Trust, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2016, compared with the three months ended March 31, 2015. Essex is a West Coast apartment REIT operating through Essex Portfolio, L.P.; the combined filing reports the same consolidated operating assets and liabilities. At quarter-end, the company had interests in 244 stabilized apartment communities with 59,441 homes, two commercial buildings, and seven active developments.
Financial performance
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenue | $314.2 million | $282.9 million; up 11.1% |
| Property revenue | $312.2 million | $280.2 million; up 11.4% |
| Earnings from operations | $100.0 million | $75.3 million |
| Net income | $86.9 million | $64.8 million |
| Net income available to common stockholders | $78.0 million; $1.19 per diluted share | $59.4 million; $0.92 per diluted share |
| Operating cash flow | $200.6 million | $162.5 million |
| Net cash used in investing activities | $80.8 million | $286.9 million |
| Net cash used in financing activities | $101.4 million | Net cash provided of $316.1 million |
| Same-property revenue | $279.7 million; up 7.3% | $260.7 million |
| Same-property NOI | $195.5 million; up 8.8% | $179.7 million |
| FFO / Core FFO, diluted | $2.64 / $2.68 per share | $2.27 / $2.29 per share |
Quarterly same-property average rental rates rose 7.4%, to $2,017 per apartment home from $1,878. Financial occupancy was 96.0%, compared with 96.1%. The common dividend was $1.60 per share, versus $1.44 a year earlier. FFO and Core FFO are non-GAAP supplemental measures, not substitutes for GAAP earnings or operating cash flow.
Balance sheet, debt, and liquidity
- At March 31, 2016, total assets were $12.07 billion and total debt, net, was $5.35 billion, versus $5.32 billion at December 31, 2015. Debt comprised $2.94 billion unsecured debt, $2.25 billion mortgage notes, and $164.3 million lines of credit.
- Unrestricted cash was $48.2 million; restricted cash was $32.3 million; marketable securities were $138.6 million. The filing identifies $54.7 million of marketable securities as available for sale.
- Two unsecured credit facilities totaled approximately $1.03 billion. Draws at quarter-end were about $168.4 million before unamortized issuance costs. Management said operating cash flow, cash and securities, credit availability, capital-market access, and asset dispositions should cover reasonably anticipated cash needs over the next 12 months.
- Weighted-average rates disclosed were 3.6% on fixed-rate unsecured bonds, 2.4% on the variable-rate term loan, 1.8% on credit lines, and 4.4% on mortgage notes. The filing estimated the fair value of $4.6 billion of fixed-rate debt at approximately $4.8 billion.
Material changes and unusual items
- Same-property revenue growth was driven primarily by higher rental rates. Non-same-property revenue rose 66.1%, mainly reflecting ten communities acquired or consolidated, net of dispositions, since January 1, 2015.
- Net income included $20.3 million of gains on real estate and land sales and $15.1 million of equity income in co-investments. Co-investment income included a $7.4 million company share of gain on a joint-venture property sale. In Q1 2015, results included a $21.4 million gain from remeasurement of co-investments; there was no such gain in Q1 2016.
- Interest expense increased to $52.5 million from $47.5 million, primarily reflecting the full-quarter expense on $500 million of senior notes issued in March 2015 and lower capitalized interest. Q1 2016 also included $3.1 million of total return swap income.
- The company acquired two communities for an aggregate $148.7 million and sold its former headquarters and Harvest Park. It funded $31.8 million of a $47.1 million preferred-equity commitment for a Glendale development, carrying a 12% preferred return.
- In April 2016, the company issued $450 million of 3.375% senior notes due 2026, using proceeds to repay credit-line debt and for general corporate and working-capital purposes. It also redeemed all 2.95 million Series H preferred shares for $25 per share; at March 31, the $73.8 million preferred stock was classified as a liability, and a $2.5 million redemption-value charge reduced income available to common stockholders.
Outlook, risks, and contingencies
No specific earnings or FFO guidance is provided in the supplied filing text. Management reported a development pipeline of 2,551 homes, with estimated total project costs of $1.4 billion, including approximately $0.9 billion remaining. Five major redevelopment communities covered 1,313 homes, with estimated costs of $159.8 million, of which approximately $72.0 million remained. Funding may come from operating cash, credit facilities, debt or equity issuance, and asset dispositions. Management noted that project costs, completion, property performance, future cash flows, market conditions, and refinancing terms may differ from expectations.
The company reported ordinary-course lawsuits and said their resolution was not expected to materially affect financial condition, results, or cash flows. It reported no material change in the risk factors from its 2015 Form 10-K. Interest-rate exposure is managed in part with swaps and caps; $225 million of variable-rate term debt was effectively fixed at 2.4%, while total-return swaps convert $257.3 million of mortgage debt to floating rates. Management cautioned that actual results may differ from forward-looking statements. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether rental-rate growth and same-property NOI gains persist, particularly across Southern California, Northern California, and Seattle.
- How much of GAAP earnings growth reflects recurring operations versus property-sale gains, co-investment gains, and the prior-year remeasurement gain.
- Development and redevelopment spending, completion schedules, leasing progress, and remaining funding needs.
- Debt maturities, credit-line usage after the April note issuance, interest-rate exposure, and liquidity under less favorable capital-market conditions.
- The effects of the Series H preferred redemption and other subsequent events on cash, debt, and per-share results.