Essex Property Trust, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. Unless otherwise noted, financial amounts below are in millions of dollars. Essex is a West Coast apartment REIT with interests in 149 apartment communities totaling 30,343 units, five commercial buildings, and development projects across Southern California, Northern California, and Seattle.
Financial results and position
| Metric | Q1 2011 | Q1 2010 / prior date |
|---|---|---|
| Property revenue | $112.5 | $99.7; up 12.9% |
| Total revenue | $113.8 | $101.2 |
| Net operating income (NOI) | $73.5; 65.3% of property revenue | $65.5; approximately 65.7% |
| Earnings from operations | $31.6 | $30.9 |
| Net income | $12.5 | $17.9 |
| Net income available to common stockholders / diluted EPS | $8.4 / $0.27 | $13.1 / $0.45 |
| Funds from operations (FFO) / diluted FFO per share | $48.5 / $1.44 | $45.7 / $1.46 |
| Cash from operations | $57.3 | $53.0 |
Investing activities used $84.2 million, including $31.4 million for acquisitions and $29.2 million for development. Financing activities provided $110.8 million. Unrestricted cash was $97.7 million at quarter-end, versus $13.8 million at December 31, 2010; marketable securities totaled $74.8 million, including $31.6 million classified as available for sale.
At March 31, 2011, mortgage notes payable were $1.811 billion, lines of credit $409 million, and unsecured bonds $150 million, for total reported borrowings of approximately $2.370 billion. The company had $540 million of credit facilities, with $409 million outstanding. Mortgage debt included approximately $1.6 billion fixed-rate and $255 million variable-rate debt; the company reported a 4.7% weighted-average interest rate, versus 4.9% a year earlier. Total assets were $3.867 billion and total liabilities $2.495 billion.
Changes versus the prior comparable period
- Same-property revenue increased 1.6% to $97.3 million, with average rental rates up 1.8%; financial occupancy declined to 96.8% from 97.5%.
- Total property revenue rose 12.9%, primarily reflecting acquisitions and completed development properties; non-same-property revenue increased $11.3 million.
- Operating expenses increased: property operating costs excluding taxes rose 15.0%, real estate taxes 12.4%, and depreciation and amortization 21.5%. Interest expense increased $3.8 million, partly offset by a lower weighted-average interest rate.
- Net income available to common stockholders and EPS declined, while FFO increased in total but fell slightly per diluted share. The filing attributes the earnings pressure to higher interest and depreciation costs, lower interest and other income, and larger co-investment losses.
- Debt increased from approximately $2.259 billion at year-end 2010, including a new $150 million five-year unsecured bond issue. The company also raised $38.4 million net through common-stock sales during the quarter.
Outlook, risks, and notable items
- No specific earnings or revenue guidance is provided. Management said operating cash flow, cash and securities, credit availability, capital-market access, and potential property dispositions should be sufficient for reasonably anticipated cash needs over the next 12 months.
- The consolidated development pipeline comprised 2,012 units, with $120.5 million of estimated remaining costs; five redevelopment communities had $40.3 million of estimated remaining costs. Management expects to fund investment activity through working capital, credit facilities, securities issuance, and potential dispositions.
- Management cited tighter credit conditions, wider financing spreads, and uncertainty about future Fannie Mae and Freddie Mac lending as risks to acquisitions, development, and refinancing. Variable-rate debt and interest-rate movements are additional exposures.
- The company settled its remaining $20 million of forward-starting swaps for $2.3 million. A separate non-hedge swap had a $3.5 million liability at quarter-end; 12 interest-rate caps covered $191.9 million of notional debt.
- Subsequent to quarter-end, Essex issued $71.4 million net from Series H preferred stock to redeem $80 million of Series B preferred units, and announced redemption of $25 million of Series F preferred stock. It also reported a 50% joint-venture acquisition of a California community for $92 million and the sale of a California community for $16 million.
- Litigation includes mold-related claims; the company said potential mold and environmental liabilities were not quantifiable. It also noted that substantially all properties are in earthquake-prone areas and certain extraordinary losses, including earthquake losses, are uninsured. Management did not expect normal-course litigation to materially affect results.
Important facts for investors to verify
- Whether rental-rate gains continue and occupancy stabilizes, particularly given the 70-basis-point year-over-year occupancy decline.
- Drivers of the gap between higher total FFO and lower FFO per diluted share, and between revenue growth and lower GAAP net income.
- Near-term refinancing and extension terms for credit facilities, variable-rate exposure, and the effect of capital-market conditions on planned development spending.
- Actual remaining costs, schedules, lease-up, and expected returns for development and redevelopment projects.
- Potential exposure from mold claims, earthquake and other uninsured losses, and the financial implications of preferred-stock redemptions and subsequent transactions.