Essex Property Trust, Inc. — Q1 2015 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2015. Essex is a REIT operating through Essex Portfolio, L.P. At quarter-end, the portfolio included interests in 240 apartment communities with 57,203 units, four commercial buildings, and 12 active developments. The April 1, 2014 BRE merger substantially expanded the portfolio, so reported year-over-year growth is not directly comparable with the prior-year quarter.
Financial and operating results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $282.9 million | $161.0 million |
| Net income | $64.8 million | $26.4 million |
| Net income available to common stockholders | $59.4 million; $0.92 per diluted share | $21.9 million; $0.58 per diluted share |
| Cash from operating activities | $162.5 million | $91.9 million |
| Total debt at quarter-end | $5.44 billion | $5.11 billion at December 31, 2014 |
- Quarterly same-property revenue rose 7.7% to $159.8 million, primarily as average rental rates increased 8.0%. Same-property financial occupancy was 96.3%, versus 96.5% a year earlier.
- Same-property NOI increased 10.7% to $113.0 million. Total NOI was $193.1 million, up from $107.0 million; the comparison includes the enlarged portfolio.
- Management-reported Core FFO was $152.6 million, or $2.29 per diluted share, compared with $81.1 million, or $2.02 per share. NAREIT FFO was $151.5 million, or $2.27 per diluted share, versus $67.8 million, or $1.68 per share. These supplemental measures are not GAAP earnings or cash flow.
- Quarterly cash flow was $162.5 million from operations, $(286.9) million from investing, and $316.1 million from financing. Unrestricted cash ended the quarter at $219.2 million, up from $25.6 million at year-end.
- The common dividend was $1.44 per share for the quarter, compared with $1.21 in Q1 2014.
Material changes and unusual items
- Revenue growth primarily reflects the BRE portfolio, acquired April 1, 2014, and other acquisitions and consolidations, in addition to same-property rental growth. Same-property operating expenses were comparatively modest: operating expenses excluding property taxes rose 0.6%, and real estate taxes rose 1.8%.
- Net income included a $21.4 million noncash gain from remeasuring the Company’s previously held interests in The Huxley and The Dylan after acquiring control. Real estate sale gains were $7.1 million.
- Merger and integration expense declined to $2.4 million from $16.1 million. Interest expense increased to $47.5 million from $29.0 million, primarily due to higher average debt following the BRE merger.
- Investing cash outflows included $199.2 million for real estate acquisitions and $90.9 million for development; financing included $756.6 million of borrowings and $536.8 million of debt repayments.
Debt, liquidity, outlook, and risks
- Quarter-end debt comprised $2.32 billion of mortgage notes and $3.11 billion of unsecured debt; no amounts were outstanding under the $1.03 billion combined unsecured credit facilities. Essex issued $500 million of 3.50% senior notes due 2025 and used proceeds partly to repay credit-line borrowings. Weighted average rates were 3.6% on fixed-rate unsecured bonds and 4.5% on mortgage debt.
- Management stated that operating cash flow, cash and securities, credit availability, capital-market access, and potential dispositions were expected to meet reasonably anticipated cash needs over the next 12 months. Cash and cash equivalents were $219.2 million and marketable securities and other investments were $128.5 million; the filing identifies $52.7 million as available-for-sale securities.
- The development pipeline comprised 3,616 units, with estimated total costs of $2.0 billion and approximately $1.0 billion remaining. Redevelopment projects had $96.0 million of estimated costs remaining. Management expected to fund these activities through operating resources, credit facilities, debt and equity issuances, and possible asset sales.
- Management cited risks including development costs or completion outcomes differing from estimates, inadequate future cash flows, market downturns, refinancing terms, and acquisition performance. The filing reported no material change to the risk factors in the 2014 Form 10-K. The Company also disclosed ordinary-course litigation and potential insurance coverage limits or uninsured losses; it did not identify a material litigation outcome.
- Credit ratings were BBB+/Stable from Fitch, Baa2/Positive from Moody’s, and BBB/Stable from S&P. Interest-rate swaps and caps hedge portions of variable-rate debt; these reduce, but do not eliminate, exposure to rate changes.
Important facts for investors to verify
- Separate organic same-property growth from BRE merger and acquisition contributions, and monitor rental-rate growth, occupancy, and expenses.
- Assess the sustainability of earnings and FFO excluding the $21.4 million remeasurement gain and other nonrecurring items.
- Track debt maturities, refinancing costs, variable-rate exposure, and the use of undrawn credit facilities and equity issuance.
- Review remaining development and redevelopment commitments, joint-venture funding needs, and actual project costs and lease-up progress.
- Confirm available liquidity and insurance coverage against potential property losses and other contingencies.