Essex Property Trust, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Figures are in U.S. dollars; financial statements are unaudited and consolidated with Essex Portfolio, L.P., its operating partnership.
Business context and material events
Essex is a REIT focused on apartment communities in Southern California, Northern California and the Seattle metropolitan area. Before the BRE merger, it had interests in 176 apartment communities comprising 37,569 units, plus four commercial buildings. Its consolidated communities totaled 30,003 units.
The BRE Properties merger closed on April 1, 2014, after quarter-end, so BRE’s operating results are included beginning in Q2. On March 31, BRE contributed 14 properties valued at approximately $1.4 billion to the operating partnership for about 8.6 million OP units, subsequently retired at the merger closing. The merger consideration was approximately $4.3 billion, including cash and approximately 23.1 million Essex shares. The reported Q1 results exclude the contributed properties’ operating results as immaterial for one day.
Key financial results
| Metric | Q1 2014 | Q1 2013 | Change / context |
|---|---|---|---|
| Total revenue | $161.6 million | $148.0 million | Up 9.2% |
| Rental and other property revenue | $159.0 million | $145.1 million | Up 9.6% |
| Earnings from operations | $33.8 million | $46.6 million | Down 27.5%; includes $16.1 million of merger expenses |
| Net income | $26.4 million | $29.7 million | Down 11.1% |
| Net income available to common shareholders | $21.9 million; $0.58/share | $25.2 million; $0.68/share | Per-share earnings declined |
| Operating cash flow | $82.9 million | $85.7 million | Down 3.2% |
| FFO per diluted share | $1.68 | $1.97 | Down; non-GAAP measure |
| Core FFO per diluted share | $2.02 | $1.87 | Up; excludes specified non-core items and is non-GAAP |
Same-property revenue increased 7.2% to $146.4 million, primarily from a 6.8% increase in average rental rates; same-property financial occupancy was unchanged at 96.5%. Same-property NOI was $101.1 million, up from $93.3 million, with an approximate NOI margin of 69.0% versus 68.3%. Total NOI was $107.0 million versus $98.7 million. These NOI measures are supplemental, non-GAAP measures.
The common dividend was $1.21 per share for the quarter, unchanged year over year. The filing does not provide forward earnings or dividend guidance.
Balance sheet, debt and liquidity
- At March 31, 2014, total assets were $6.63 billion and total liabilities were $3.07 billion.
- Debt consisted of $1.41 billion of mortgage notes, $1.41 billion of unsecured debt and $135.9 million drawn on lines of credit, totaling approximately $2.95 billion. Debt is incurred by the operating partnership; Essex guarantees specified obligations.
- Unrestricted cash was $19.9 million; restricted cash was $28.8 million. Marketable securities totaled $100.3 million, of which $39.7 million were available for sale.
- Management said available cash, operating cash flows, securities, credit capacity, capital-market access and property dispositions were expected to meet reasonably anticipated cash needs for the next 12 months.
- Operating cash flow of $82.9 million was offset by $51.6 million of investing outflows and $29.9 million of financing outflows. Essex raised $157.6 million net through common-stock issuance during the quarter.
Management commentary, outlook and risks
- Same-property rent growth was strongest in Northern California: scheduled rents increased 9.1%, compared with 4.6% in Southern California and 7.7% in Seattle. Management reported sequential same-property revenue growth of 1.4% from Q4 2013.
- Property operating expenses rose 13.6%, partly reflecting six acquisitions and $1.3 million of earthquake-damage charges. Same-property operating expenses, excluding real estate taxes, rose 4.3%.
- Q1 merger expenses included $6.9 million of transfer taxes and $3.8 million related to termination of a bridge loan, as well as professional fees. These charges materially reduced reported operating earnings.
- After quarter-end, Essex assumed BRE debt, including $900 million of senior notes and $711.4 million of secured debt, and issued $400 million of 3.875% senior notes due 2024. The merger increases the share count and dividend obligations; management expected acquired-property cash flows to help fund the higher dividends.
- The development pipeline was described as 2,392 units with estimated total costs of $1.5 billion and approximately $562 million remaining. Elsewhere, the filing describes 2,192 units of development projects costing an estimated $995 million, with $309 million remaining, plus a 200-unit predevelopment project. The presentations have different scopes and should be reconciled.
- Interest-rate exposure is partly hedged: $300 million of variable-rate term debt was swapped, and $156.9 million of variable-rate debt was covered by caps. A company guarantee related to joint-venture development projects had maximum exposure of $109.1 million at quarter-end.
- Risks include higher financing costs or reduced capital access, development cost and completion uncertainty, market downturns, earthquake exposure and mold-related claims. The company self-insures earthquake losses through a wholly owned subsidiary and stated that potential mold and other environmental liabilities were not quantifiable. Management reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Final BRE merger purchase accounting, acquired debt and assets, and the impact of the merger on Q2 results and leverage; the Q1 filing’s purchase accounting was preliminary.
- Whether post-merger operating cash flows support the increased dividend burden and the company’s stated 12-month liquidity expectations.
- The development-pipeline unit counts, cost estimates and remaining funding needs, given the differing presentations in the filing.
- Underlying operating trends versus one-time effects, including merger expenses, earthquake charges and gains/promote income from property and co-investment sales.
- Exposure under joint-venture guarantees, earthquake self-insurance and unresolved mold or environmental matters.