Essex Property Trust, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; unaudited. Essex is a West Coast apartment REIT operating through Essex Portfolio, L.P. At quarter-end, it had interests in 245 stabilized apartment communities with 58,768 homes, four commercial buildings, and nine active developments.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $304.6 million | $270.9 million | $883.7 million | $691.7 million |
| Net income | $47.2 million | $58.6 million | $162.5 million | $89.6 million |
| Net income available to common stockholders | $42.3 million | $53.6 million | $147.2 million | $76.7 million |
| Diluted EPS | $0.65 | $0.85 | $2.27 | $1.41 |
| FFO per diluted share | $2.53 | $2.08 | $7.19 | $5.55 |
| Core FFO per diluted share | $2.49 | $2.16 | $7.19 | $6.28 |
| Net cash from operating activities | — | $487.9 million | $358.2 million |
Q3 property revenue was $302.5 million, up 12.7%; total NOI was $208.4 million, up 15.5%. Nine-month property revenue rose 28.0% and NOI rose 31.4%. Same-property revenue increased 7.6% in Q3 and 8.1% for the nine-month comparison; average financial occupancy was 96.0% in Q3 and 96.3% year to date. FFO and Core FFO are supplemental non-GAAP measures, not substitutes for GAAP earnings or operating cash flow.
At September 30, total assets were $12.0 billion and total debt was $5.32 billion, compared with $5.08 billion at year-end 2014. Debt comprised $3.09 billion unsecured debt, $2.22 billion mortgage notes, and $2.0 million drawn on lines of credit. Weighted-average rates were 3.6% on fixed-rate unsecured bonds, 4.5% on mortgage debt, and 1.7% on lines of credit. Unrestricted cash was $35.7 million; marketable securities and other investments were $133.1 million, including $56.1 million available for sale. The $1.0 billion revolving facility had no borrowings; $2.0 million was drawn under the $25 million working-capital line.
Nine-month investing cash outflow was $660.3 million, principally reflecting real estate acquisitions, development and redevelopment, and co-investment funding. Financing cash inflow was $178.5 million, including $307.8 million net equity proceeds. Dividends paid were $272.0 million; declared common dividends were $4.32 per share for the nine-month period.
Changes, outlook and risks
- Q3 GAAP net income and EPS fell year over year despite higher revenue and NOI, chiefly because Q3 2014 included $31.4 million of real estate sale gains. Nine-month earnings increased substantially, reflecting $34.0 million in co-investment remeasurement gains and lower merger costs; the 2014 comparison also included BRE merger activity and substantial merger expenses.
- Same-property rent growth drove operating gains: Q3 average rental rates increased 7.6% year over year. Non-same-property revenue also grew as acquired or consolidated communities contributed results.
- Management stated that cash, operating cash flows, securities, credit availability, capital-market access, and possible asset dispositions should be sufficient for reasonably anticipated cash needs over the next 12 months. This is not formal earnings guidance.
- The development pipeline comprised nine projects and 2,759 homes, with estimated total costs of $1.6 billion and approximately $0.8 billion remaining. Five major redevelopment communities had estimated costs of $159.8 million, with about $100 million remaining. Funding may involve working capital, credit facilities, debt or equity issuance, and dispositions.
- Key exposures include interest-rate changes, capital-market conditions, development cost and completion risks, property-market downturns, refinancing terms, and litigation. The company reported routine-course lawsuits, not expected to have a material adverse effect; insurance coverage has exclusions, limits, deductibles, and self-insured retentions. No material risk-factor changes were reported.
- Three MMC-affiliated preferred equity investments totaling $20 million were made in 2015 and carry 9.5% preferred returns; the filing describes board committee approval. Related-party transactions and the assumptions used in co-investment valuations warrant attention. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Underlying rent and NOI trends against the effects of acquisitions, consolidation, and changing same-property definitions.
- Debt maturities, variable-rate exposure, credit availability, and funding needs for the $1.6 billion development pipeline and redevelopment commitments.
- How much reported earnings growth depends on nonrecurring items, including property-sale and co-investment remeasurement gains, insurance proceeds, and merger-related costs.
- Equity issuance and dilution: 1.48 million shares were issued through October 30, 2015 for $332.3 million net; additional shares remained available under the distribution program.
- Related-party preferred investments, co-investment debt and performance, and the assumptions supporting fair values—particularly mortgage-backed securities carried at $77.0 million with estimated fair value of $107.4 million.
- Potential uninsured losses, litigation developments, and execution and cost risks for development and redevelopment projects.