Essex Property Trust, Inc. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual filing, not a standalone fourth-quarter report; quarterly results are included. Essex is a West Coast apartment REIT operating mainly in Southern California, the San Francisco Bay Area and Seattle. At year-end it reported interests in 147 apartment communities with 30,072 units and five commercial buildings.
Financial and operating performance
| Metric | 2010 | 2009 | Change / context |
|---|---|---|---|
| Total revenue | $415.7 million | $411.4 million | Up 1.1% |
| Same-property revenue | $370.4 million | $383.3 million | Down 3.3%; average rents fell 4.0%, from $1,356 to $1,301 per unit |
| Average same-property financial occupancy | 97.0% | 97.0% | Flat |
| Net operating income (NOI) | $265.7 million | $267.4 million | Down 0.6%; NOI margin was approximately 64.6% versus 65.7% |
| Net income | $50.8 million | $53.7 million | Down 5.5% |
| Net income available to common stockholders | $33.8 million; $1.14 per diluted share | $82.2 million; $2.91 per diluted share | Prior-year result included a $50.0 million preferred-stock redemption accounting benefit and $8.7 million from discontinued operations |
| Funds from operations (FFO) | $171.4 million; approximately $5.35 per diluted share | $200.4 million; approximately $6.74 per diluted share | Down approximately 14.5% in total; FFO is a non-GAAP measure |
| Cash from operating activities | $175.5 million | $173.6 million | Up 1.1% |
| Cash used in investing activities | $510.9 million | $219.0 million | Higher investment in acquisitions, development and co-investments |
| Cash from financing activities | $328.4 million | $24.1 million | Included increased borrowing and $251.5 million net common-stock proceeds |
| Common dividend | $4.13 per share | $4.12 per share | 2010 common dividends included 11.93% classified as return of capital for tax purposes |
Debt and liquidity
- Year-end debt was approximately $2.26 billion: $1.83 billion of mortgage debt and $426 million drawn on credit facilities. Total assets were $3.73 billion and stockholders’ equity was $1.15 billion.
- Cash and cash equivalents totaled $35.7 million, including $13.8 million unrestricted. Marketable securities totaled $92.3 million, of which $50.3 million was available-for-sale securities and $42.0 million was mortgage-backed securities classified as held to maturity.
- Committed credit facilities totaled $525 million; $426 million was drawn. The unsecured facility had $176 million outstanding and matured in December 2011, with two one-year extension options. The $250 million Freddie Mac facility matured in December 2013.
- Mortgage debt included $1.56 billion fixed-rate debt and $269.2 million variable-rate mortgage debt. The company also reported $695.2 million of variable-rate indebtedness when credit facilities are included; $191.9 million was protected by interest-rate caps. Credit covenants were met at year-end.
- Management said operating cash flow, cash and securities, credit availability, capital-market access and potential property dispositions should meet reasonably anticipated 2011 cash needs.
Material changes versus the prior comparable period
- Same-property revenue declined across all three regions: Southern California 2.0%, Northern California 3.7%, and Seattle Metro 7.0%. Management attributed the weakness to the economic slowdown, job losses and new housing supply. Sequential revenue growth and higher scheduled rents began in the third quarter of 2010.
- Total property revenue rose despite same-property declines, as revenue from non-same properties increased 71.2% to $40.7 million, primarily reflecting acquisitions and properties completing development or redevelopment.
- Property operating expenses excluding real estate taxes increased 2.9%; real estate taxes increased 7.7%. Depreciation and amortization rose 9.9%, reflecting acquisitions, completed development properties and capitalized improvements.
- Interest and other income rose to $27.8 million from $13.0 million, primarily because of $12.5 million in gains on marketable-security sales and higher interest income from notes receivable. Equity results from co-investments shifted to a $1.7 million loss from $0.7 million income.
- Essex acquired communities during 2010 and reported no apartment-community sales. The filing describes acquisitions as 12 communities totaling $584 million in one section, but elsewhere reports 11 communities for approximately $456.3 million; the scope and reconciliation are not clear in the filing text.
- Essex issued 2.4 million common shares for approximately $251.4 million net proceeds, versus 2.7 million shares and $198.5 million in 2009. It made no common-stock repurchases in 2010.
Outlook, commentary and risks
- Management expected 2011 same-property revenue to increase approximately 3.5% year over year. Regional rental-income expectations were 2.0%–3.0% in Southern California and 4.0%–5.0% in both Northern California and Seattle Metro, based on assumed job growth and limited new supply.
- Management expected approximately $1,100 per apartment unit of non-revenue-generating capital expenditures in 2011. Two active development projects comprised 436 units, with estimated total costs of $170.9 million and $53.6 million remaining to spend; four major redevelopment communities had $31.8 million remaining against estimated costs of $64.2 million.
- In February 2011, the board approved a dividend increase to an annualized $4.16 per share. Future distributions remain subject to board discretion, cash flow, capital requirements and REIT distribution rules.
- 2010 unusual items included $2.3 million of expense from hedge ineffectiveness and $1.6 million of non-recurring compensation related to the CEO’s retirement. Essex also settled $355 million of forward-starting swaps for $81.3 million, increasing the effective rate on related mortgage financing. The filing gives differing effective-rate descriptions for this financing—6.4% in one section and 6.8% in another.
- Key risks include geographic concentration (81% of 2010 rental revenue came from California), refinancing and interest-rate exposure, competition and weaker local economies, and execution, cost or lease-up risks in development and redevelopment. Substantially all communities are in earthquake-prone areas; the company self-insures earthquake risk through a wholly owned subsidiary.
- Environmental and mold claims, including lawsuits, were disclosed; potential mold and other environmental liabilities were not considered probable or could not be estimated at year-end. Management did not expect ordinary-course litigation to have a material adverse effect. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Reconcile the filing’s different 2010 acquisition counts and totals, including the treatment of joint-venture and development properties.
- Confirm the effective interest rate on the 2010 mortgage financing after settlement of forward-starting swaps; the filing reports both 6.4% and 6.8%.
- Track same-property rent and revenue recovery by region, particularly Seattle and California, and compare actual 2011 performance with management’s approximately 3.5% revenue outlook.
- Review debt maturities, the December 2011 unsecured-credit-facility renewal or extensions, variable-rate exposure, and remaining development and redevelopment funding needs.
- Assess FFO and dividend coverage using the company’s reconciliation to GAAP cash flows, including dilution from equity issuance and the tax classification of dividends.
- Monitor earthquake self-insurance exposure, environmental and mold matters, and development-project costs and lease-up progress.