Essex Property Trust, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. Unaudited quarter and six months ended June 30, 2015. Essex is a West Coast apartment REIT operating through Essex Portfolio, L.P. At quarter-end, it had interests in 245 apartment communities totaling 58,768 units, four commercial buildings and nine active developments. The filing combines Essex and its operating partnership; their consolidated operating results are substantially the same.
Financial performance
Amounts below are in millions except per-share data. Comparisons are with the corresponding 2014 period.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $296.2 | $259.8 | $579.0 | $420.8 |
| Property revenue | $294.1 | $257.0 | $574.3 | $416.3 |
| Earnings from operations | $81.0 | $38.4 | $156.3 | $72.9 |
| Net income | $50.5 | $4.6 | $115.3 | $31.1 |
| Net income available to common stockholders | $45.6 | $1.2 | $104.9 | $23.1 |
| Diluted EPS | $0.70 | $0.02 | $1.62 | $0.46 |
| Diluted FFO per share | $2.38 | $1.72 | $4.66 | $3.41 |
| Diluted Core FFO per share | $2.40 | $2.08 | $4.69 | $4.11 |
- Q2 property revenue grew 14.5%; quarterly same-property revenue rose 7.8% to $252.2 million, primarily on a 7.3% increase in average rental rates. Same-property financial occupancy was 96.1%, versus 95.8% a year earlier. Same-property NOI increased 10.9% to $175.0 million. Total NOI was $204.0 million, approximately 69.4% of property revenue, compared with approximately 67.5% in Q2 2014.
- Q2 net income included a $12.7 million gain from remeasurement of the Reveal co-investment after Essex acquired control. Six-month net income also included a total $34.0 million of remeasurement gains relating to Reveal and The Huxley and The Dylan.
- Merger and integration expense fell to $1.4 million in Q2 from $26.5 million; six-month expense was $3.8 million versus $42.6 million. These items, acquisition-related portfolio growth and remeasurement gains make reported GAAP earnings growth different from recurring operating growth.
- Six-month revenue comparisons are affected by the BRE merger, completed April 1, 2014, and subsequent acquisitions and consolidations. The filing reports six-month same-property revenue growth of 8.0% for its defined comparable-property group.
Cash flow, debt and liquidity
- For the first six months, operating cash flow was $287.0 million, versus $189.0 million in 2014. Investing used $575.2 million and financing provided $288.7 million. Cash and cash equivalents ended at $30.2 million; restricted cash was $34.9 million.
- Total debt was $5.37 billion at June 30, up from $5.08 billion at year-end 2014. Debt included $2.25 billion of mortgage notes, $3.09 billion of unsecured debt and $28.8 million of lines of credit. Weighted-average rates were 3.6% on fixed-rate unsecured/private-placement bonds, 2.4% on the variable-rate term loan, 1.9% on lines of credit and 4.4% on mortgage debt.
- Essex reported $121.2 million of marketable securities, including $47.5 million available for sale, and unsecured credit facilities totaling $1.03 billion. Management said operating cash flow, cash and securities, credit availability, capital-market access and potential asset dispositions were expected to cover reasonably anticipated cash needs over the next 12 months.
- In March, Essex issued $500 million of 3.50% senior unsecured notes due 2025, using proceeds in part to repay credit-line borrowings. Six-month common and preferred dividends paid were $177.0 million; the declared common dividend was $1.44 per share for Q2, versus $1.30 a year earlier.
Outlook, risks and other notable items
- No numerical earnings or FFO guidance is provided. The development pipeline comprised nine projects and 2,759 units, with estimated total costs of $1.6 billion, including $0.9 billion remaining. Five major redevelopment communities had estimated costs of $148.5 million, of which approximately $100.1 million remained.
- Management identified uncertainty around development costs and completion, property-market downturns, acquisition estimates, refinancing terms, cash flows and litigation. It cautioned that actual results may differ from forward-looking statements. The company reported ordinary-course lawsuits that it did not expect to have a material adverse effect; it also noted insurance exclusions, limits, deductibles and self-insured losses.
- Essex made $15 million of preferred-equity investments in related-party property entities during June, each with a 9.5% preferred return and 2022 maturity. Independent board committee members approved the investments.
- The company adopted the debt-issuance-cost presentation standard in Q2, reclassifying $32.1 million as a reduction of debt at June 30. It was evaluating the potential effect of a new consolidation standard. Management reported effective disclosure controls and no material change in internal control over financial reporting; no material risk-factor changes or material subsequent events were reported.
Important facts for investors to verify
- Reconcile GAAP earnings with FFO/Core FFO, especially the $34.0 million year-to-date remeasurement gains and lower merger costs.
- Assess same-property rent and NOI trends alongside occupancy, operating expenses and the filing’s differing comparable-property definitions.
- Review debt maturities, available credit, interest-rate exposure and the funding needs of development, redevelopment and joint ventures.
- Evaluate the related-party preferred investments, their approval process and repayment/return risks.
- Confirm whether acquisition-driven growth and management’s 12-month liquidity assessment remain consistent with subsequent operating and financing developments.