Essex Property Trust, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing, not a standalone fourth-quarter report. Essex Property Trust, Inc. (ESS) is a REIT that conducts substantially all operations through Essex Portfolio, L.P.; figures below are consolidated unless otherwise noted.
Business context
Essex owns, operates, acquires, develops and redevelops apartment communities, primarily in Southern California, the San Francisco Bay Area and the Seattle metropolitan area. At year-end, it held interests in 164 communities with 34,079 units, four commercial buildings, and 11 active development projects. California generated 82% of 2013 rental revenue. Apartment communities accounted for 97.5% of company revenue.
Financial and operating performance
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Rental and other property revenue | $602.0 million | $526.7 million | +14.3% |
| Total revenue, including affiliate fees | $613.7 million | $538.2 million | +14.0% |
| Earnings from operations | $188.7 million | $167.0 million | +13.0% |
| Income before discontinued operations | $140.9 million | $127.7 million | +10.4% |
| Net income | $172.1 million | $139.6 million | +23.3% |
| Net income available to common stockholders | $150.8 million | $119.8 million | +25.9% |
| Diluted net income per share | $4.04 | $3.41 | +18.5% |
| Funds from operations (FFO), diluted per share | $7.59 | $6.71 | +13.1% |
| Core FFO, diluted per share | $7.60 | $6.82 | +11.4% |
| Cash provided by operating activities | $305.0 million | $267.5 million | +14.0% |
FFO and Core FFO are non-GAAP supplemental measures; the company cautions they are not substitutes for GAAP earnings or operating cash flow. Net income benefited from real estate sale gains and co-investment income, including the company’s $38.8 million share of gains on Fund II property sales. Same-property revenue rose 6.3% to $513.0 million, while same-property NOI increased to $350.6 million from $326.3 million. Same-property financial occupancy edged down to 96.2% from 96.3%; average rents increased 6.3%.
Investing activities used $453.7 million, versus $812.1 million in 2012; financing activities provided $148.6 million, versus $550.4 million. The year-end balance sheet showed $5.19 billion in assets and $3.18 billion in total liabilities. Debt comprised $1.404 billion of mortgage notes, $1.410 billion of unsecured debt and $219.4 million drawn on credit lines—about $3.03 billion in total. Unrestricted cash was $18.5 million, restricted cash $35.3 million and marketable securities $90.1 million.
Common dividends were $4.84 per share for 2013, up from $4.40. The board declared a $1.21 first-quarter 2014 dividend and, in February 2014, acknowledged management’s recommendation to raise the quarterly dividend to $1.30, or $5.20 annualized. Future distributions remain subject to board discretion and cash flows.
Material changes and financing
- Revenue growth reflected 6.3% same-property growth and a sharp increase in non-same-property revenue following acquisitions and property additions.
- Same-property operating expenses excluding taxes rose 3.2%; same-property real estate taxes increased 6.0%. Depreciation increased 13.7%, primarily due to acquisitions and capitalized improvements.
- ESS issued $300 million of 3.25% senior unsecured notes due 2023. The company repaid $103.7 million of secured debt and replaced the Expo construction loan with a seven-year $45 million term loan, swapped to a fixed 3.7% rate.
- Common equity issuance generated $138.4 million net in 2013, down from $357.7 million in 2012. The company paid $180.7 million of common and preferred dividends.
- At year-end, $300 million of term-loan debt was effectively fixed through swaps; $156.9 million of variable-rate tax-exempt debt was capped. Credit ratings were BBB+/Stable (Fitch), Baa2/Stable (Moody’s) and BBB/Stable (S&P). The company reported compliance with debt covenants.
Outlook, transaction and risks
For 2014, management forecast same-property revenue growth of 3.8%–5.0% in Southern California, 6.3%–7.8% in Northern California and 5.5%–7.0% in Seattle. The forecasts assumed regional job growth and higher rents; management also expected operating expenses to increase, with property taxes accounting for about 56% of the forecast expense increase. These projections are for Essex standalone and exclude the proposed BRE merger. Planned non-revenue-generating capital expenditures were approximately $1,200 per unit for 2014, compared with $1,051 in 2013.
Essex and BRE Properties agreed to a merger in December 2013. Under the agreement, each BRE share would receive 0.2971 Essex shares plus $12.33 cash, subject to specified adjustments. Essex obtained commitments for a $1.0 billion 364-day bridge facility and was considering asset sales, joint ventures or other financing; alternative funding was not yet finalized. The merger faced shareholder-approval and other closing conditions, and three lawsuits sought to enjoin it. Risks include funding and closing uncertainty, dilution, higher leverage, integration costs and execution risks. The agreement could be terminated if not completed by June 17, 2014, subject to its terms.
Other material risks include approximately $3.0 billion of debt, sensitivity to interest rates and refinancing conditions, geographic concentration in California, development cost and lease-up risks, competition, and earthquake exposure. The company self-insures earthquake losses through its subsidiary and has only limited third-party seismic coverage on selected assets. Environmental and mold liabilities were not quantifiable at year-end. The filing reports no real estate impairment charges in 2013, 2012 or 2011. KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether the BRE merger closed, its final financing mix and resulting leverage, dilution and dividend implications.
- Whether forecast 2014 same-property revenue growth and expense assumptions were achieved, especially property-tax increases and regional supply conditions.
- How much of reported earnings and FFO growth came from recurring property operations versus property-sale and co-investment gains.
- Debt maturities, variable-rate exposure, hedge coverage and available liquidity after merger-related funding and development commitments.
- Progress, cost-to-complete and lease-up of the $1.1 billion development pipeline, including the company’s stated $407 million of remaining project costs.
- Potential financial exposure from earthquake, environmental and mold claims, and the status of merger-related litigation.