ESSEX PROPERTY TRUST, INC. quarterly report, Q3 FY2011

Essex Property Trust, Inc. — Q3 2011 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2011. Essex is a West Coast apartment REIT with interests in 155 apartment communities totaling 32,076 units, six commercial buildings, and development and joint-venture investments. Financial statements are unaudited.

Financial performance

Metric	Q3 2011	Q3 2010	Nine months 2011	Nine months 2010
Total revenue	$120.1 million	$104.3 million	$350.6 million	$305.3 million
Net income	$11.1 million	$10.4 million	$39.6 million	$42.2 million
Net income available to common stockholders	$7.7 million	$6.4 million	$26.4 million	$29.0 million
Diluted EPS	$0.23	$0.21	$0.82	$0.99
Diluted FFO per share	$1.43	$1.25	$4.19	$4.05

Q3 property revenue rose 14.3% to $118.1 million. Same-property revenue increased 4.1% to $98.5 million, principally on higher rents; average rental rates rose 5.3%. Same-property financial occupancy fell to 95.4% from 96.7%.
Q3 same-property NOI was $76.8 million, about 65.0% of property revenue, compared with $65.7 million, about 63.5%, in Q3 2010. NOI is a company-reported operating measure, not GAAP net income.
Q3 diluted FFO increased to $50.5 million from $39.9 million. For the nine-month period, FFO was $144.6 million versus $128.3 million, while GAAP net income available to common stockholders declined.
Nine-month operating cash flow was $170.7 million, versus $148.3 million. Investing activities used $258.5 million and financing activities provided $83.1 million. Ending unrestricted cash was $9.0 million.
At September 30, total assets were $3.91 billion and total liabilities $2.39 billion. Debt consisted of $1.750 billion in mortgage notes, $244.8 million drawn on lines of credit, and $265.0 million in unsecured bonds, or approximately $2.260 billion in total.
Cash and cash equivalents totaled $33.0 million, including $24.0 million restricted; marketable securities were $75.6 million. The company reported $690 million of aggregate line capacity and approximately $244.8 million drawn.

Changes versus comparable periods

Q3 revenue and common earnings improved year over year, supported by rent growth, acquisitions, and lease-up of development properties. Q3 diluted EPS rose to $0.23 from $0.21.
For the first nine months, total revenue increased 14.9%, but common earnings fell to $26.4 million from $29.0 million and diluted EPS to $0.82 from $0.99. Lower interest and other income, including reduced gains on securities sales and less interest from the Santee Court note, contributed to the decline.
Same-property financial occupancy weakened in both comparisons: down 130 basis points for Q3 and 70 basis points for the nine-month period. Same-property revenue nevertheless grew 4.1% and 3.0%, respectively, mainly from higher scheduled rents.
Debt composition changed with $265 million of unsecured bond issuance and substantial repayments/refinancing activity. The company also issued $256.8 million of common stock year to date and issued $71.4 million net from Series H preferred stock, using those preferred proceeds toward redemptions of other preferred securities.
Co-investments increased to $275.4 million from $107.8 million at year-end, reflecting new joint ventures and investments. The company’s portfolio and development activity expanded; acquisitions and lease-ups also raised operating costs and depreciation.

Outlook, risks and notable items

No specific earnings or FFO guidance is stated in the supplied filing text. Management said operating cash flows, cash and securities, credit availability, capital-markets access, and potential property dispositions should meet reasonably anticipated cash needs for the next 12 months.
The consolidated and unconsolidated development pipeline comprised five projects totaling 1,335 units, with estimated total costs of $458.9 million and $258.4 million remaining to be spent. Redevelopment covered five communities and estimated costs of $75.3 million, with $32.4 million remaining. Costs, timing, lease-up, and returns may differ from estimates.
Management cited capital-market instability, higher borrowing spreads, tighter loan-to-value and debt-service requirements, and uncertainty about future agency financing as risks to acquisitions, development, and refinancing. The Freddie Mac secured credit line was scheduled for termination in Q4; $174 million was outstanding at quarter-end.
Variable-rate exposure included $202.9 million of tax-exempt variable-rate debt; $191.9 million was covered by interest-rate caps. A separate swap had a $1.6 million fair-value liability. The company noted that interest-rate changes and financing-market conditions could affect cash flows and borrowing costs.
Essex guaranteed construction completion for the Queen Anne joint venture, with maximum exposure of $79.1 million, and provided guarantees related to Fountain at La Brea with maximum exposure of $13.5 million. Management reported compliance with the Queen Anne loan terms and expected construction to finish on time and within budget.
The company disclosed mold-related lawsuits and other ordinary-course litigation; potential mold and environmental liabilities were not quantifiable. Earthquake and certain extraordinary losses may be uninsured. Management did not expect ordinary-course litigation to materially harm financial condition, results, or cash flows.
Woodlawn Colonial was sold for $16.0 million, producing a reported gain of $4.4 million net of disposition costs and taxes. Q3 included $0.6 million of loss on early debt retirement; the nine-month period included $0.8 million. The filing also reported no material changes to risk factors from the 2010 Form 10-K.

Investor verification priorities

Review the reconciliation and assumptions for FFO, and distinguish this supplemental measure from GAAP earnings and operating cash flow.
Verify same-property rent growth, occupancy trends, and the extent to which revenue gains reflect acquired and newly stabilized properties.
Assess debt maturities, the planned Freddie Mac line termination and repayment, available line capacity, and the effects of refinancing terms and interest rates.
Monitor remaining development and redevelopment commitments, project budgets and timelines, and the joint-venture guarantees and related exposures.
Review the impact of common and preferred equity issuance, redemption transactions, and dividends on per-share results and capital needs.
Consider the limits of insurance and the uncertainty around mold, environmental, earthquake, and other litigation exposures.