Business Context and Reporting Period
Company: Essex Property Trust, Inc. (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2009
Portfolio Overview: As of June 30, 2009, the Company owned or had interests in 133 apartment communities (27,143 units) located in Southern California, Northern California, and the Seattle Metro area, plus five office/commercial buildings. The Company also manages "Fund II," an investment fund with 13 apartment communities and one development project.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenues | $209,272 | $201,076 |
| Net Income (Total) | $40,791 | $39,167 |
| Net Income Available to Common Stockholders | $53,680 | $23,525 |
| Diluted EPS (Common) | $1.96 | $0.94 |
| Funds from Operations (FFO) | $113,809 | $84,093 |
| FFO per Share (Diluted) | $3.92 | $3.05 |
| Cash Flow from Operating Activities | $89,234 | $89,733 |
| Total Assets | $3,238,981 | $3,164,823 |
| Total Liabilities | $1,967,556 | $1,932,913 |
| Debt (Mortgage Notes + Lines of Credit) | $1,731,693 | $1,588,931 |
| Cash & Cash Equivalents (Unrestricted) | $65,435 | $41,909 |
| Marketable Securities | $115,432 | $23,886 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 4.1% year-over-year, driven by a 38.5% increase in non-same property revenues (new acquisitions, developments, and redevelopments). Same-property revenues remained relatively flat (+0.1%) despite a 1.8% decrease in scheduled rents, offset by an 80 basis point increase in financial occupancy to 96.9%.
- Profitability: Net income available to common stockholders more than doubled to $53.7 million from $23.5 million. This surge was primarily due to a $25.7 million gain from the redemption of Series G preferred stock and a $6.1 million gain on the early retirement of exchangeable bonds.
- One-Time Charges: The Company recorded a $5.8 million write-off of an investment in a development joint venture in the first quarter of 2009.
- Balance Sheet: Total debt increased by approximately $143 million, reflecting new mortgage loans ($54.2 million) and increased utilization of lines of credit. Marketable securities increased significantly to $115.4 million, up from $23.9 million, funded by equity issuances and new debt.
Guidance, Outlook, and Risks
- Outlook: Management expects total same-property revenues to decrease in the third quarter of 2009 compared to the same period in 2008 due to anticipated decreases in scheduled rents. However, the Company believes its strong balance sheet and liquidity are sufficient to meet cash needs for 2009.
- Liquidity: The Company holds $65.4 million in unrestricted cash and $115.4 million in marketable securities. It maintains a $200 million unsecured line of credit ($25 million drawn) and a $150 million Freddie Mac line ($140 million drawn).
- Capital Markets: Management notes that instability and tightening in credit markets have increased spreads and pricing for debt. While the Company has benefited from relationships with Fannie Mae and Freddie Mac, there are no assurances of future access to these lenders.
- Development Pipeline: The Company has three active development projects with $101.9 million remaining to be expended and a predevelopment pipeline with $258.5 million remaining to be expended.
- Risks: Key risks include interest rate fluctuations, potential failure to complete development projects, and the impact of credit market tightening on refinancing capabilities. The Company also faces ongoing litigation regarding mold, though no material adverse effect is currently expected.
Investor Verification Checklist
- Debt Maturities: Verify the schedule of debt maturities, noting $305.6 million due in 2010-2011 and the reliance on Fannie Mae/Freddie Mac for refinancing in a tight credit market.
- Same-Property Rent Trends: Monitor the trend of scheduled rents, which decreased 2.5% in Q2 2009, to assess the sustainability of revenue growth.
- Development Costs: Review the $101.9 million remaining cost for active development projects and the $258.5 million for predevelopment to ensure funding sources are secure.
- Preferred Stock Redemption: Note that the significant boost to net income included a $25.7 million non-cash gain from preferred stock redemption; verify if this is a recurring benefit.
- Joint Venture Write-off: Confirm the status of the $5.8 million write-off and any remaining exposure to similar development joint ventures.