ESSEX PROPERTY TRUST, INC. annual report, FY2016

Essex Property Trust, Inc. — 2016 Form 10-K

Reporting period: Fiscal year ended December 31, 2016; the filing also reports fourth-quarter results. Essex is a self-managed REIT focused mainly on apartment communities in Southern California, the San Francisco Bay Area and Seattle. At year-end, it owned or held interests in 245 communities with 59,645 apartment homes. The Operating Partnership holds and operates substantially all assets and debt; Essex owned 96.7% of it.

Key financial and operating metrics

Metric20162015
Rental and other property revenue$1.286 billion$1.185 billion
Net income$438.4 million$248.2 million
Net income available to common stockholders$411.1 million; $6.28 basic EPS$226.9 million; $3.50 basic EPS
Funds from operations (FFO), diluted per share$11.12$9.72
Core FFO, diluted per share$11.04$9.82
Cash provided by operating activities$712.5 million$617.4 million
Net cash used in investing activities$421.4 million$725.6 million
Total indebtedness at year-end$5.563 billion$5.319 billion
Total assets at year-end$12.217 billion$12.008 billion
  • Same-property revenue rose 6.7% to $1.116 billion; average rental rates increased 6.4%, and same-property financial occupancy improved to 96.3% from 96.0%.
  • Same-property NOI was $780.9 million, up from $722.7 million. Same-property operating expenses excluding real estate taxes rose 4.7%; same-property real estate taxes increased 2.0%.
  • Year-end unrestricted cash was $64.9 million and marketable securities were $139.2 million. The Company had $125 million drawn on its $1.0 billion unsecured credit facility and no borrowings on its $25 million working-capital line. Management said available liquidity and capital sources should cover reasonably anticipated 2017 cash needs.
  • Quarterly dividend was $1.60 per share; full-year dividends were $6.40, versus $5.76 in 2015. The fourth-quarter dividend was paid in January 2017.

Changes, transactions and unusual items

  • Net income increased substantially, but the comparison includes material gains: 2016 gains on real estate and land totaled $154.6 million, including a $126.6 million gain from selling a 49.9% interest in BEX II. BEX II was then accounted for under the equity method. Core FFO, which excludes specified non-core items, increased 12.4% per diluted share.
  • 2016 acquisitions totaled $333.7 million for four communities and 753 homes. The Company sold three communities for $80.8 million and two joint-venture communities for $147.3 million in proceeds. It also sold its former headquarters for $18.0 million.
  • In April 2016, the Company issued $450 million of 3.375% senior notes due 2026, using proceeds to repay credit-line borrowings and for general purposes. It repaid $177 million of secured mortgage notes and redeemed all $73.8 million of Series H preferred stock.
  • Operating cash flow increased 15.4%. Investing outflows declined year over year, while financing activities used $255.9 million, compared with $108.2 million provided in 2015.
  • Fourth-quarter revenue was $326.9 million and net income was $204.5 million, including the effect of significant property transaction gains. Fourth-quarter net income available to common stockholders was $195.6 million, or $2.98 per share.

Outlook, risks and contingencies

  • For 2017, management projected same-property revenue growth of 2.75%–3.75% and same-property operating expense growth of 2.50%–3.50%. Regional revenue-growth projections were 3.50%–4.50% for Southern California, 1.25%–2.25% for Northern California and 3.75%–4.75% for Seattle.
  • At year-end, the development pipeline comprised 2,223 homes with estimated total costs of $1.3 billion, including $704 million remaining to be spent and approximately $528 million as the Company’s share. Six major redevelopment communities had estimated costs of $170.2 million, with $65.5 million remaining. The 2017 estimate for non-revenue-generating capital expenditures was approximately $1,250 per apartment home.
  • Key exposures include geographic concentration (83% of 2016 rental revenue came from California), short-term leases, local supply and rent trends, and newly enacted rent-control measures in Richmond and Mountain View. All communities are in earthquake-prone areas; earthquake insurance is limited and the Company partly self-insures through its subsidiary, which held about $69.9 million in cash and marketable securities.
  • Other risks include interest-rate and refinancing exposure, development cost and lease-up uncertainty, joint-venture partner and investment risks, environmental liabilities, REIT qualification and distribution requirements, and potential uninsured losses. Debt covenants were met at year-end. KPMG issued unqualified opinions on the financial statements and Essex’s internal control over financial reporting; management also reported effective controls.
  • A class action related to the 2014 cyber-intrusion was dismissed subject to possible appeal. The Company reported evidence of data exfiltration but no evidence of misuse; it stated that other pending legal and regulatory matters were not expected to have a material adverse effect.
  • Subsequent events: in January 2017, Essex sold Jefferson at Hollywood for $132.5 million and acquired its partner’s 50% interest in Palm Valley for $183.0 million, repaying the property’s mortgage at closing.

Investor verification points

  • Separate recurring operating growth from the $126.6 million BEX II gain and other property-sale gains when assessing 2016 GAAP net income.
  • Review the same-property portfolio definition and regional growth assumptions against actual 2017 results, especially Northern California.
  • Check the debt maturity schedule, variable-rate exposure, hedging arrangements and refinancing of 2017 maturities.
  • Monitor remaining development and redevelopment commitments, costs to complete, and the funding mix for those projects.
  • Assess exposure to California rent-control changes, earthquakes and insurance limitations, and the status of the dismissed cyber-intrusion litigation.