Business context and reporting period
Essex Property Trust, Inc. and its operating partnership reported unaudited results for the quarter and six months ended June 30, 2014. Essex is a West Coast apartment REIT; the operating partnership holds substantially all operating assets and debt. On April 1, Essex completed its approximately $4.3 billion merger with BRE Properties, issuing about 23.1 million shares and paying approximately $555.8 million in cash. BRE results are included from the acquisition date, making reported year-over-year comparisons substantially affected by the merger.
At June 30, the company had interests in 239 apartment communities totaling 55,855 units, five commercial buildings, and 11 active developments. The portfolio spans Southern California, Northern California, Seattle, and Phoenix.
Financial and operating results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $259.5 million | $150.8 million | $420.1 million | $297.9 million |
| Net income | $8.4 million | $29.6 million | $34.8 million | $59.3 million |
| Net income available to common shareholders | $5.0 million; $0.08/share | $24.9 million; $0.67/share | $26.9 million; $0.54/share | $50.1 million; $1.35/share |
| Operating earnings | $42.1 million | $48.1 million | $75.9 million | $94.7 million |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $179.1 million | $150.6 million |
| FFO per diluted share | $1.72 | $1.91 | $3.41 | $3.88 |
| Core FFO per diluted share | $2.08 | $1.88 | $4.11 | $3.74 |
Quarterly same-property revenue rose 7.2% to $148.8 million, driven mainly by a 6.9% increase in average rental rates; average financial occupancy increased to 96.1% from 96.0%. Same-property NOI was $102.8 million versus $94.2 million, a 9.1% increase; the corresponding NOI margin was approximately 69.1% versus 67.9% (calculated from reported figures). For the first half, same-property revenue increased 7.2% to $295.2 million and same-property NOI rose to $203.9 million from $187.5 million. Six-month same-property occupancy was 96.3% in both years.
GAAP earnings fell despite higher revenue, primarily reflecting $26.5 million of Q2 merger expenses, higher depreciation and interest expense, and the larger share count. Merger expenses totaled $42.6 million for the first half. Core FFO increased, while reported FFO per share declined; these non-GAAP measures exclude or adjust for selected items and should be considered alongside GAAP results.
Balance sheet, debt, and liquidity
- Total assets were $11.35 billion at June 30, up from $5.19 billion at year-end 2013, primarily reflecting the BRE merger.
- Debt on the balance sheet was approximately $5.07 billion: $2.25 billion of mortgage notes, $2.75 billion of unsecured debt, and $67.0 million drawn on credit lines. The filing’s scheduled principal payments total $4.94 billion; figures differ from balance-sheet debt carrying amounts.
- Unrestricted cash was $17.9 million and marketable securities were $106.4 million, including $43.7 million classified as available for sale. The company reported two unsecured credit facilities totaling $1.03 billion, with approximately $67 million outstanding at quarter-end.
- Operating cash flow was $179.1 million for the first half. Investing activities used $726.3 million, including $555.8 million of cash merger consideration; financing activities provided $406.2 million. Cash ended the period at $17.9 million.
- In April, the company issued $400 million of 3.875% senior notes due 2024. It also assumed BRE senior notes and mortgage debt, and recorded a $124.5 million fair-value premium on assumed debt.
Material changes, outlook, and risks
Same-property rental growth was positive across the reported regions, while the merger expanded the portfolio and materially increased debt, depreciation, corporate expenses, and dividends required on the enlarged share base. Development and redevelopment spending remains significant: the 11-project pipeline totaled 2,219 units, with $904 million incurred and approximately $328 million of estimated remaining costs.
Management stated that operating cash flow, cash and securities, credit availability, capital-market access, and potential property dispositions should cover reasonably anticipated cash needs over the next 12 months. It expects to fund higher dividends following the merger from increased property cash flows. No quantified earnings or operating guidance is provided in the filing.
Key risks and contingencies include interest-rate and refinancing exposure, development cost and completion risks, potential changes in financing access or cost, and earthquake and mold-related exposures. The company self-insures certain earthquake losses through its subsidiary and notes that some extraordinary losses may not be insured. Mold and other environmental liabilities were not quantifiable. Guarantees connected with two joint-venture developments had a maximum exposure of $114.4 million at June 30. Management reported no material change to the risk factors in the 2013 Form 10-K. Disclosure controls were assessed as effective.
Subsequent to quarter-end, the company acquired Paragon Apartments for $111 million and issued additional shares through its equity distribution program. The filing also reports a $19.8 million affiliate receivable repaid in July.
Investor verification points
- Review merger purchase accounting and the preliminary valuation of acquired assets, assumed debt, and equity consideration; measurement-period adjustments could follow.
- Separate legacy same-property performance from BRE contributions and other acquired-property revenue when assessing growth and earnings.
- Reconcile GAAP earnings with FFO and Core FFO, including the treatment of merger costs and other adjustments.
- Assess debt maturities, interest-rate exposure, available credit capacity, and the effect of increased dividends and future equity issuance.
- Monitor the development pipeline’s remaining costs and schedule, joint-venture leverage, and the $114.4 million maximum guarantee exposure.
- Verify insurance coverage and potential financial effects of earthquake, mold, environmental, and other legal claims.