Business Context and Reporting Period
Company: Essex Property Trust, Inc. (Essex)
Filing Type: Form 10-K
Period Ended: December 31, 2009
Business Overview: Essex is a self-administered and self-managed Real Estate Investment Trust (REIT) focused on the ownership, operation, acquisition, development, and redevelopment of apartment communities. As of December 31, 2009, the portfolio consisted of 133 apartment communities (27,248 units) and five office buildings, primarily located in Southern California, Northern California, and the Seattle metropolitan area. The company also manages Essex Apartment Value Fund II, L.P. (Fund II).
Key Financial Metrics
| Metric | 2009 Value | 2008 Value |
|---|---|---|
| Total Revenues | $411.4 million | $408.4 million |
| Net Income (Total) | $53.7 million | $84.4 million |
| Net Income Available to Common Stockholders | $82.2 million | $52.9 million |
| Diluted EPS (Common) | $2.91 | $2.09 |
| Funds from Operations (FFO) | $200.4 million | $167.5 million |
| Same-Property Occupancy | 97.0% | 96.3% |
| Total Indebtedness | ~$1.85 billion | ~$1.75 billion |
| Cash and Marketable Securities | $155.5 million | $65.8 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 0.7% to $411.4 million, driven by a 28.8% increase in non-same-property revenues (new acquisitions and developments) which offset a 2.8% decline in same-property revenues due to lower scheduled rents.
- Profitability: Net income available to common stockholders increased significantly to $82.2 million from $52.9 million in 2008. This increase was largely due to a $49.9 million gain from the redemption of Series G Preferred Stock at a discount to par value.
- Impairment Charges: Impairment and other charges rose sharply to $17.4 million in 2009 from $1.4 million in 2008. This included a $6.7 million write-off of development costs for land parcels no longer being developed and a $3.8 million non-cash expense related to the cancellation of the Outperformance Plan.
- Debt Management: The company repurchased $166.7 million of exchangeable bonds and $145.0 million of Series G Preferred Stock at discounts, resulting in gains on early retirement of debt of $4.8 million.
- Portfolio Activity: Acquired two communities for $43.0 million and sold five communities for gross proceeds of $38.0 million, realizing an aggregate gain of $8.6 million.
Guidance, Outlook, and Risks
2010 Outlook:
- Revenue Forecast: Management expects same-property revenues to decline approximately 5.5% in 2010 as existing leases renew at lower market rates, despite a forecast of flat market rents.
- Acquisition/Disposition Plans: Targets the purchase of up to $300 million of real estate and the sale of up to $100 million of real estate in 2010.
- Dividends: On February 24, 2010, the Board approved a $0.01 per share increase to the annualized cash dividend, resulting in a quarterly distribution of $1.0325 per share.
Key Risks and Contingencies:
- Refinancing Risk: Approximately $1.85 billion of indebtedness is subject to balloon payments. The company does not expect sufficient cash flows from operations to make all balloon payments and relies on refinancing, which carries risks of higher rates or inability to refinance.
- Geographic Concentration: 81% of rental revenues are generated from communities in California, exposing the company to local economic downturns.
- Interest Rate Risk: The company has $490.6 million of variable rate indebtedness, though $197.1 million is protected by interest rate caps.
- Environmental and Legal: Potential liabilities exist regarding mold, environmental contamination, and earthquake damage (for which the company is largely self-insured).
Investor Verification Checklist
- Refinancing Strategy: Verify the company's ability to refinance the $1.85 billion in debt maturing in the near term, particularly given the tight credit markets mentioned in the filing.
- Same-Property Rent Trends: Monitor the anticipated 5.5% decline in same-property revenues for 2010 and the actual performance of lease renewals in the first half of the year.
- Development Pipeline Costs: Review the $155.2 million in remaining estimated costs for the development and predevelopment pipeline to ensure funding sources (lines of credit, equity) remain available.
- Preferred Stock Redemption: Confirm the impact of the $49.9 million gain from preferred stock redemption on 2009 earnings was a one-time event and does not recur in 2010.
- Impairment Charges: Assess whether the $17.4 million in impairment charges indicates broader issues with the valuation of land holdings or development projects.