Business Context and Reporting Period
Company: Essex Property Trust, Inc. (Essex)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Essex is a self-administered and self-managed Real Estate Investment Trust (REIT) focused on the ownership, operation, and development of apartment communities. As of December 31, 2006, the portfolio consisted of 130 apartment communities totaling 27,553 units, primarily located in Southern California, Northern California, and the Seattle metropolitan area. The company also holds interests in office buildings, recreational vehicle parks, and a manufactured housing community.
Key Financial Metrics
| Metric | 2006 Value | 2005 Value |
|---|---|---|
| Total Revenues | $348.1 million | $321.9 million |
| Net Income | $62.7 million | $79.7 million |
| Net Income Available to Common Stockholders | $57.6 million | $77.8 million |
| Funds From Operations (FFO) | $130.5 million | $115.1 million |
| Adjusted EBITDA | $211.0 million | $198.2 million |
| Total Assets | $2.49 billion | $2.24 billion |
| Total Indebtedness | $1.41 billion | $1.36 billion |
| Stockholders' Equity | $612.2 million | $581.0 million |
| Same-Property Occupancy Rate | 96.4% | 96.6% |
| Same-Property Gross Operating Margin | 67% | 66% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 8.4% to $348.1 million. Same-Property revenues rose 6.9% to $288.0 million, driven primarily by a 6.5% increase in rental rates. Non-Same Property revenues increased 32.2% due to acquisitions made since 2005.
- Net Income Decline: Net income decreased 21.3% to $62.7 million. This decline was primarily due to a significant reduction in equity income from co-investments (down $20.1 million) caused by the absence of large gains from Fund I property sales that occurred in 2005. Additionally, interest expense increased 3% due to higher debt levels and borrowing rates.
- Discontinued Operations: Income from discontinued operations was $27.4 million in 2006, compared to $30.1 million in 2005. This included gains from the sale of the Vista Pointe joint venture, Emerald Palms, and Peregrine Point condominiums.
- Portfolio Expansion: The company acquired four apartment communities in 2006 (Chimney Sweep, CBC, Hillsdale Garden, and Belmont Terrace) and sold several non-core assets including Vista Capri East, Casa Tierra, and Emerald Palms.
Guidance, Outlook, and Risks
Management Outlook:
- 2007 Rent Growth: Management expects market rent growth of approximately 4.5% in Southern California, 6.75% in Northern California, and 7.5% in the Seattle Metro area.
- Capital Expenditures: Non-revenue generating capital expenditures are expected to be approximately $850 per unit in 2007.
- Dividends: On February 23, 2007, the Board approved a $0.09 per share increase to the quarterly cash dividend, raising the annualized rate to $3.72 per share.
Key Risks and Contingencies:
- Debt Refinancing: Approximately $1.41 billion of indebtedness is subject to balloon payments. The company does not expect to have sufficient cash flows from operations to make these payments and relies on refinancing or asset sales.
- Interest Rate Risk: The company has $186.3 million of variable rate indebtedness. While $182.8 million is protected by interest rate caps, rising rates could increase interest expense.
- Development Risks: The company has a significant development and predevelopment pipeline totaling $767.0 million in estimated costs. Delays or cost overruns could impact returns.
- Environmental and Legal: The company faces potential liabilities related to mold, environmental contamination, and Proposition 65 compliance in California. It also faces litigation risks regarding employee wages and personal injury claims.
Investor Verification Checklist
- Debt Maturity Profile: Verify the company's ability to refinance the $69.1 million due in 2007 and $179.5 million due in 2008 given current market conditions.
- FFO vs. Net Income: Note the divergence between Net Income (down 21%) and FFO (up 13%), driven by non-cash depreciation and the one-time nature of prior year investment gains.
- Preferred Stock Obligations: Confirm the impact of the new Series G Cumulative Convertible Preferred Stock ($149.5 million liquidation preference) on future cash flow requirements for dividends.
- Development Pipeline Funding: Assess the funding sources for the $663.5 million remaining cost in the development pipeline, which relies on lines of credit and capital markets access.
- Geographic Concentration: Evaluate the risk of 76% of the portfolio being located in California, exposing the company to regional economic downturns and regulatory changes.