Essex Property Trust, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Financial statements are unaudited. Essex is a multifamily REIT operating primarily in Southern and Northern California and the Seattle metropolitan area.
Business context
At quarter-end, the company owned or held interests in 158 apartment communities totaling 32,649 units, five commercial buildings, and five active development projects. Its apartment markets are Southern California, Northern California, and Seattle Metro.
Financial and operating performance
| Metric | Q1 2012 | Q1 2011 or prior date |
|---|---|---|
| Total revenue | $127.9 million | $112.4 million |
| Property revenue | $125.5 million | $111.2 million |
| Earnings from operations | $40.0 million | $31.2 million |
| Income from continuing operations | $17.2 million | $12.1 million |
| Net income available to common stockholders | $22.7 million; $0.67 diluted per share | $8.4 million; $0.27 diluted per share |
| Operating cash flow | $72.2 million | $57.3 million |
| Net operating income (NOI) | $85.3 million | $72.8 million |
| Same-property revenue | $115.8 million, up 7.1% | $108.1 million |
| Same-property NOI | $79.0 million | $71.0 million |
| FFO per diluted share | $1.63 | $1.44 |
| Core FFO per diluted share | $1.63 | $1.31 |
| Common dividend per share | $1.10 | $1.04 |
Same-property financial occupancy was 96.9%, up from 96.5%. Average rental rates increased 6.4%, to $1,439 per unit from $1,353. Same-property revenue rose in each region: Southern California 4.6%, Northern California 9.9%, and Seattle Metro 9.0%.
Cash used in investing activities was $44.1 million, compared with $84.2 million in Q1 2011. Financing activities used $27.3 million, versus providing $110.8 million a year earlier. Cash and cash equivalents ended the quarter at $13.7 million, compared with $97.7 million at March 31, 2011.
At March 31, 2012, total assets were $4.05 billion and total liabilities were $2.47 billion. Debt comprised $1.72 billion of mortgage notes, $465.0 million of unsecured debt, and $153.6 million drawn on lines of credit. The company reported $13.7 million of unrestricted cash and $80.0 million of marketable securities; $32.0 million of the securities were available for sale. Two credit lines totaled $450.0 million, with $153.6 million outstanding. The company reported investment-grade ratings of BBB/Stable from S&P, Baa2/Stable from Moody’s, and BBB with a positive outlook from Fitch.
Changes and unusual items
- Revenue increased 13% year over year; same-property revenue grew 7.1%, supported primarily by higher scheduled rents and a 40-basis-point occupancy improvement.
- Net income available to common stockholders rose to $22.7 million, substantially reflecting $10.9 million of gains on two property sales, reported in discontinued operations. The sales generated $7.0 million and $3.9 million gains, respectively. Core FFO, which excludes specified non-core items, was $1.63 per diluted share versus $1.31.
- Interest expense before amortization increased 13.1%, mainly because the company replaced lower-cost borrowings and had higher average debt outstanding. Interest and other income fell $4.6 million, principally because Q1 2011 included a $4.5 million gain on securities sales.
- Property acquisitions included Bon Terra in Redmond, Washington, for $16.0 million and Reed Square in Sunnyvale, California, for $23.0 million. The company also issued 221,072 common shares for net proceeds of $31.6 million during the quarter.
- Operating cash flow improved, while available cash declined from the prior-year quarter. Investing outflows included property acquisitions and development, redevelopment, and co-investment contributions.
Outlook, management commentary, and risks
Management said existing cash and securities, operating cash flow, credit availability, capital-market access, and potential property dispositions should cover reasonably anticipated cash needs over the next 12 months. This is a management assessment, not quantified earnings guidance; the filing provides no clear numerical forecast for revenue, earnings, or FFO.
The company contracted to issue $200 million of nine-year unsecured notes at an average all-in rate of approximately 4.3%, with funding scheduled in April, June, and August 2012. Proceeds were intended to refinance secured mortgage debt coming due in late 2012 and 2013, which carried an average rate of 5.5%. Management warned that prepayments could result in up to $2.5 million of penalties and deferred-charge write-offs during the remainder of 2012. In April, after quarter-end, the company acquired its joint-venture partner’s interest in Essex Skyline at MacArthur Place for $85 million; it expected to recognize $2.3 million of incentive income in Q2.
The development pipeline included five unconsolidated projects totaling 1,524 units, with estimated costs of $515.6 million and $310.5 million remaining. Five redevelopment communities had estimated costs of $60.1 million, with $28.5 million remaining. Management targeted an 8%–10% return on incremental redevelopment investment. The company expects to fund these activities through working capital, credit lines, debt or equity issuance, and property dispositions.
Risks include tighter or more costly credit, refinancing terms, development cost overruns or delays, weaker property markets, and uncertainty in future cash flows. The company disclosed environmental and mold-related litigation exposure, with possible losses not considered probable or not estimable at quarter-end. Substantially all properties are in earthquake-prone areas; earthquake and certain other extraordinary losses are not insured. Guarantees included up to $79.1 million for a joint-venture construction completion obligation and up to $31.3 million related to joint-venture swap payments. The company reported no material changes to the risk factors in its 2011 Form 10-K.
Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- How much of the increase in GAAP net income came from property-sale gains, and how recurring operating performance compares using FFO, Core FFO, and same-property NOI.
- Whether rental-rate and occupancy growth persists across all three regions, and how property expenses and real estate taxes affect NOI.
- Completion and funding of the $200 million note issuance, planned mortgage repayments, and the potential $2.5 million of prepayment and write-off costs.
- Remaining development and redevelopment spending, project schedules, lease-up progress, and actual returns relative to management’s redevelopment target.
- Liquidity after acquisitions, dividends, development spending, and debt refinancing; also review exposure from joint-venture guarantees, environmental matters, and uninsured earthquake losses.