Essex Property Trust, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. Essex is a self-managed REIT focused on apartment ownership, operation, acquisition, development and redevelopment in Southern California, Northern California and Seattle. At year-end it owned or held interests in 246 communities with 59,160 homes, plus commercial properties and development projects. Essex conducts substantially all operations through Essex Portfolio, L.P.
Financial and operating performance
- Revenue: Total revenue was $1.194 billion, including $1.185 billion of rental and other property revenue, up 23.3% from 2014. Same-property revenue rose 8.0% to $658.1 million; average same-property rents increased 8.1% to $1,882 per home.
- Occupancy: Average financial occupancy for the comparable stabilized portfolio remained 96.2%, unchanged from 2014.
- Profit: Net income was $248.2 million versus $134.4 million in 2014; net income available to common stockholders was $226.9 million, or diluted EPS of $3.49, compared with $116.9 million and $2.06. Results include material gains from property sales and remeasurement of co-investments.
- REIT supplemental measures: FFO attributable to common stockholders and unitholders was $654.1 million, or $9.72 per diluted share/unit; Core FFO was $660.7 million, or $9.82. FFO and Core FFO are non-GAAP measures and should be considered alongside GAAP results.
- Cash flow: Cash from operations was $617.4 million, investing activities used $725.6 million, and financing activities provided $108.2 million. Unrestricted cash was $29.7 million; marketable securities and other investments were $137.5 million. Restricted cash was an additional $93.4 million.
- Debt and liquidity: Total indebtedness was $5.315 billion, up from $5.081 billion at year-end 2014. This included $3.089 billion of unsecured debt and $2.215 billion of mortgage debt. The company reported covenant compliance. Its $1.0 billion revolver had $15 million drawn at year-end; a separate $25 million working-capital line had no balance. Management said available cash, operating cash flow, credit facilities, capital markets access and potential dispositions should meet anticipated 2016 cash needs.
- Distributions: Common dividends were $5.76 per share for 2015, versus $5.11 in 2014. A $1.60-per-share first-quarter 2016 dividend was declared.
Material changes versus 2014
- Property revenue growth reflected the BRE merger, completed in April 2014, and acquisitions or consolidations; the non-same-property comparison is therefore affected by portfolio changes. Same-property revenue increased 8.0%, while comparable occupancy was flat.
- Operating cash flow rose to $617.4 million from $493.3 million. Investing outflows narrowed to $725.6 million from $1.147 billion, which included cash consideration for the BRE merger.
- Interest expense increased $40.3 million, or 24.5%, primarily because of higher average debt, including debt assumed in the BRE merger, and lower capitalized interest.
- Merger and integration expense declined to $3.8 million from $53.5 million. Depreciation and amortization increased 25.7%, principally reflecting the expanded portfolio.
- Common stock issuance provided $332.3 million net in 2015, compared with $534.0 million in 2014. Debt increased year over year.
Outlook, risks and unusual items
- 2016 outlook: Management projected same-property revenue growth of 5.25%–6.25% in Southern California, 8.50%–9.50% in Northern California, and 6.00%–7.00% in Seattle. Same-property operating expenses were projected to increase 3.25%–4.25%. The company assumed regional job growth and housing-supply conditions described in the filing; these are estimates, not assurances.
- Investment commitments: Eight active development projects comprised 2,447 homes, with estimated total costs of $1.4 billion and $787 million remaining to be spent; the company’s share of remaining development costs was estimated at $542 million. Five major redevelopment communities had approximately $82.5 million of costs remaining. 2016 non-revenue-generating capital expenditures were projected at approximately $1,200 per home.
- 2015 unusual items: Property dispositions generated $44.9 million of gains, and commercial-building sales generated $2.4 million. Remeasurement gains of $34.0 million followed acquisitions of controlling interests in The Huxley, The Dylan and Reveal. The company also recorded $6.1 million of losses on early debt retirement and $5.7 million of total-return-swap income.
- Concentration and operating risks: California communities generated 83% of rental revenue. The portfolio is exposed to local economic and housing-market changes, competition, rent regulation, property taxes, construction costs and development delays. All communities are in earthquake-prone areas; insurance may be limited, costly or insufficient.
- Debt and capital markets: Risks include refinancing maturities, interest-rate increases, covenant compliance, credit-rating changes and access to debt or equity funding. $350 million of unsecured debt was scheduled for 2016 maturity; $150 million of private-placement notes was repaid in January 2016. The company issued $500 million of 3.5% senior notes due 2025 in March 2015. In January 2016, it extended and repriced its credit facilities.
- Cybersecurity and litigation: The company reported a 2014 cyber-intrusion with evidence of data exfiltration. A putative resident class action was pending, and the company could not predict its outcome or potential economic consequences. The filing also discusses environmental, mold and other legal exposures; possible losses from certain environmental and theft/fraud matters were not quantifiable.
- Other key exposures: Joint-venture interests can limit control; development and acquisitions may not meet expectations; uninsured losses, especially from earthquakes, may be material; and REIT qualification depends on meeting complex income, asset and distribution requirements.
Important facts for investors to verify
- Reconcile the 2015 increase in net income and diluted EPS with gains on sales and co-investment remeasurement, and compare recurring performance using same-property results and FFO/Core FFO.
- Review debt maturities, the January 2016 repayment and credit-facility amendments, variable-rate exposure, hedges and covenant headroom.
- Track actual 2016 regional rent growth, expenses, occupancy and leasing performance against management’s projections.
- Monitor development and redevelopment spending, remaining commitments, completion timing and lease-up assumptions.
- Follow the cybersecurity class action and assess earthquake, environmental, mold and other uninsured or unquantified exposures.