Business Context and Reporting Period
Company: Essex Property Trust, Inc. (Essex)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2003
Business Overview: Essex is a Maryland-domiciled Real Estate Investment Trust (REIT) operating primarily through Essex Portfolio, L.P. As of June 30, 2003, the Company owned interests in 118 multifamily properties (25,125 units), five recreational vehicle parks, four office buildings, and two manufactured housing communities. Operations are concentrated in Southern California, Northern California, and the Pacific Northwest. The Company also manages the Essex Apartment Value Fund, L.P., which was approximately 90% invested as of the period end.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2003 |
Six Months Ended June 30, 2003 |
|---|---|---|
| Total Revenues | $58,447 | $117,442 |
| Net Income | $10,650 | $20,881 |
| Funds from Operations (FFO) | $25,581 | $50,879 |
| Diluted EPS (Net Income) | $0.50 | $0.98 |
| Dividends per Share | $0.78 | $1.56 |
| Cash from Operating Activities | N/A | $50,100 |
| Total Debt (Mortgage + Lines of Credit) | $827,712 | $827,712 |
| Unrestricted Cash & Equivalents | $8,854 | $8,854 |
Note: Total Debt includes $662,712 in mortgage notes payable and $165,000 in lines of credit outstanding as of June 30, 2003.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 14.6% ($7.5M) for the quarter and 17.0% ($17.0M) for the six months compared to the prior year. This growth was driven primarily by acquisitions made subsequent to March 31, 2002 (quarterly) and December 31, 2001 (six-month), which added $12.9M and $26.0M in revenue, respectively.
- Net Income Decline: Net income decreased 50.1% ($10.7M) for the quarter and 36.1% ($11.8M) for the six months. The decline is largely attributable to the absence of discontinued operations (gain on sale of real estate and income from Tara Village sold in 2002) and a significant drop in "Interest and other income" due to the payoff or non-accrual status of certain notes receivable.
- Expense Increases: Total expenses rose 33.6% for the quarter and 33.4% for the six months. Interest expense increased 21.7% (quarterly) and 22.3% (six-month) due to higher mortgage and line of credit balances. Property operating expenses increased 39.8% (quarterly) and 39.6% (six-month), primarily due to the inclusion of newly acquired properties.
- Occupancy Trends: Financial occupancy rates for Same Store properties improved to 95.5% (quarterly) and 95.4% (six-month) in 2003, up from 94.3% and 93.5% in 2002. However, rental rate decreases in Northern California and the Pacific Northwest offset occupancy gains in those regions.
Guidance, Outlook, and Risks
- Development Pipeline: The Company is developing six multifamily projects (1,368 units) with a total estimated cost of $246.3M. Approximately $107.7M remains to be expended, with $49.3M committed by the Company. Stabilization is expected between late 2003 and late 2004.
- Liquidity and Capital Resources: The Company maintains $195M in unsecured lines of credit ($165M maturing May 2004, expanded to $185M in July 2003; $30M maturing Dec 2003). The Essex Apartment Value Fund has a separate $125M line of credit. Management expects cash flows from operations and credit facilities to fund operations, dividends, and development commitments.
- Accounting Changes: The Company is evaluating the impact of FASB Interpretation No. 46 (FIN 46) regarding Variable Interest Entities (VIEs). Estimated maximum exposure to loss in potential VIEs is $30.5M. FAS 150 regarding financial instruments is also under review.
- Risk Factors: Management highlights risks related to a potential recession in Western states (impacting rental rates and occupancy), interest rate fluctuations (variable rate debt exposure), and development risks (cost overruns and delays). The Company notes that current interest rates are at historic lows and rapid increases could negatively impact refinancing and acquisition economics.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the extent to which the decline in Net Income is driven by the one-time absence of 2002 gains on property sales versus recurring operational performance.
- Interest Income Volatility: Review the status of notes receivable from investees, as a significant portion of the revenue decline is attributed to non-accrual status or payoffs of these assets.
- Debt Maturities: Confirm the refinancing strategy for the $165M line of credit maturing in May 2004 and the $30M line maturing in December 2003, given the current low-interest environment.
- Development Commitments: Assess the $107.7M remaining capital commitment for development projects and the Company's ability to fund this without diluting equity or increasing leverage beyond covenants.
- Regional Performance: Analyze the divergence between Southern California (revenue growth) and Northern California/Pacific Northwest (revenue decline due to rate cuts) to understand portfolio concentration risks.