Business context and reporting period
Essex Property Trust, Inc. is a self-managed REIT focused on owning, operating, acquiring, developing and redeveloping apartment communities, primarily on the West Coast. This Form 10-K covers the fiscal year ended December 31, 2011; it is an annual report, not a standalone fourth-quarter filing. At year-end, the portfolio included interests in 159 communities with 32,753 units and five commercial buildings. California generated 82% of rental revenue.
Financial and operating highlights
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $475.6 million | $413.3 million |
| Net income | $57.5 million | $50.8 million |
| Net income available to common stockholders | $40.4 million; $1.24 per share | $33.8 million; $1.14 per share |
| Cash from operating activities | $216.6 million | $175.5 million |
| Funds from operations (FFO) | $200.2 million | $171.4 million |
| Same-property financial occupancy | 96.4% | 96.9% |
| Common dividend per share | $4.16 | $4.13 |
Property revenue increased 14.7%; same-property revenue rose 3.9%, while same-property NOI increased 5.5%. The company reported no impairment charges in 2011, compared with $2.3 million of impairment and other charges in 2010. Fourth-quarter 2011 property revenue was $123.2 million, net income was $17.9 million, and net income available to common stockholders was $13.9 million ($0.42 per share).
Cash flow, debt and liquidity
2011 operating cash flow was $216.6 million; investing activities used $425.8 million and financing activities provided $208.3 million. Year-end unrestricted cash was $12.9 million and marketable securities were $74.3 million. Debt totaled approximately $2.36 billion: $1.75 billion of mortgage debt, $465 million of unsecured debt and $150 million drawn on the unsecured credit line. The $425 million line had $275 million of undrawn capacity at year-end; the company also reported a separate $15 million working-capital line with no balance, renegotiated to $25 million in January 2012.
During 2011, the company issued $265 million of unsecured bonds and closed a $200 million five-year unsecured term loan. Swaps fixed the rate on $150 million of the term loan at 2.66%. The company also issued 2.5 million common shares for net proceeds of $323.9 million and issued $71.2 million net of Series H preferred stock proceeds. Credit ratings at year-end were BBB/Stable from S&P and Fitch; Moody’s assigned Baa2/Stable to the Operating Partnership in February 2012. The company stated it was in compliance with debt covenants.
Material changes versus the prior comparable period
- Total revenue increased 15.1%, and net income available to common stockholders increased from $33.8 million to $40.4 million; common EPS rose from $1.14 to $1.24.
- Same-property revenue growth resumed after a 3.4% decline in 2010: 2011 same-property revenue increased 3.9%, supported by a 4.1% rise in average rents. Occupancy declined 50 basis points.
- Operating cash flow improved by $41.0 million. FFO increased 16.8%.
- Mortgage debt declined year over year, while unsecured debt increased from zero to $465 million and the line-of-credit balance fell from $426 million to $150 million.
- Investment activity expanded: the company acquired interests in communities, formed the Wesco I investment joint venture and increased co-investments substantially. It sold one apartment community and one office building for $23.4 million, recording an $8.4 million gain.
Outlook, risks and unusual items
Management expected 2012 same-property revenue to increase 5%–7%, financial occupancy to remain near 96.4%, operating expenses to rise 2%–3%, and same-property NOI to increase 7%–9%. The company announced a $0.24 per-share increase to its annualized common dividend, to $4.40, beginning with the first-quarter 2012 distribution. These are expectations, not guarantees.
At year-end, five joint-venture development projects comprised 1,235 units, with estimated total costs of $422.6 million; the development table reports $282.6 million remaining to spend. Six major redevelopment communities had estimated costs of $96.4 million, with $43.1 million remaining. The filing also reports $169.7 million of co-investment commitments, including development. The company’s contractual-obligations table lists total obligations and commitments of $3.16 billion, including debt, interest and investment commitments.
- Major risks include geographic concentration, economic and rental-market weakness, competition, development delays or cost overruns, access to capital, refinancing and interest-rate exposure, and potential dilution from future securities issuance.
- Substantially all communities are in earthquake-prone areas. The company self-insures earthquake losses and may face material uninsured losses. Environmental conditions, mold claims and regulatory requirements also create potential exposures; management said potential mold and environmental liabilities were not considered probable or could not be estimated.
- The company provided a construction-completion guarantee for the Queen Anne project with maximum exposure of $79.1 million, and guarantees related to La Brea joint-venture swaps and development/debt service with maximum exposure of $28.5 million.
- Unusual items included $5.0 million of gains on marketable-security sales, an $8.4 million gain on real estate sold, a $1.6 million tax benefit related to a prior-year investment write-off, and a $1.2 million loss from early debt retirement and financing-cost write-offs.
- KPMG gave unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Investor facts to verify
- Reconcile the 2011 FFO increase with GAAP earnings and review the company’s FFO definition and adjustments.
- Check debt maturities, variable-rate exposure, hedge terms and covenant headroom, including the effect of the disclosed guarantees.
- Track actual same-property rent growth, occupancy, expenses and NOI against management’s 2012 outlook.
- Confirm development and redevelopment spending, completion schedules, joint-venture funding obligations and the source’s reported remaining development cost.
- Assess California and earthquake concentration, uninsured and environmental exposures, and the effect of common and preferred share issuance on per-share results and dividend capacity.