Business context and reporting period
Essex Property Trust, Inc. and its operating partnership filed a combined unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. Essex is a self-managed REIT focused primarily on apartments in Southern and Northern California and the Seattle area. The results include BRE Properties from April 1, 2014, following a merger valued at approximately $4.3 billion. At quarter-end, the company reported interests in 239 apartment communities totaling 56,622 units, plus five commercial buildings.
Financial and operating results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $270.5 million | $153.9 million | $690.6 million | $451.8 million |
| Net income | $58.7 million | $75.9 million | $89.3 million | $135.2 million |
| Net income available to common stockholders | $53.7 million | $68.8 million | $76.4 million | $118.9 million |
| Diluted earnings per share | $0.85 | $1.84 | $1.40 | $3.19 |
| Operating cash flow | Not presented quarterly | $341.0 million | $225.1 million | |
| FFO per diluted share | $2.08 | $1.91 | $5.55 | $5.79 |
| Core FFO per diluted share | $2.16 | $1.91 | $6.28 | $5.65 |
Same-property revenue increased 7.4% in Q3 and 7.2% for the nine-month period, principally from higher scheduled rents. Same-property financial occupancy was 95.9% in Q3, up from 95.7%; nine-month occupancy was 96.2%, up from 96.1%. Same-property NOI was $104.3 million in Q3 versus $95.3 million, and $307.0 million for nine months versus $281.9 million. The corresponding NOI margins were approximately 68.7% and 67.5% for Q3, and 69.0% and 67.9% for the nine-month periods.
At September 30, total assets were $11.67 billion and total equity was $6.09 billion. Debt, including credit lines, was $5.23 billion, up from $3.03 billion at year-end 2013. Unrestricted cash was $17.9 million, restricted cash $70.1 million, and marketable securities $108.1 million. The company had $222.6 million drawn on credit lines; its facilities totaled $1.0 billion.
Material changes versus the prior comparable period
- BRE materially expanded the portfolio and increased reported revenue, expenses, assets, and debt. BRE-acquired properties contributed $95.2 million of Q3 revenue and $186.7 million for the nine months.
- Reported common earnings and EPS declined despite higher same-property revenue. Comparisons are affected by merger-related share issuance, increased depreciation and interest expense, and prior-year discontinued operations and a substantial gain recognized in co-investment income. Q3 2013 also included $13.2 million of discontinued-operations income.
- Merger and integration expenses were $3.9 million in Q3 and $46.4 million for the nine months; none were reported in the comparable 2013 periods. The company recorded $1.2 million of cyber-intrusion costs in Q3.
- Q3 equity income from co-investments fell to $4.9 million from $40.8 million, mainly because Q3 2013 included a $36.4 million gain on a joint-venture property sale.
- Nine-month gains on sales of real estate and land were $39.6 million, including sales of Vista Capri North, Coldwater Canyon, and Mt. Sutro. These disposals were not classified as discontinued operations.
Outlook, risks, contingencies, and unusual items
- Management stated that operating cash flows, existing 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. No specific earnings or revenue guidance is provided in the filing.
- The development pipeline comprised 14 projects and 3,101 units, with $1.1 billion incurred and approximately $0.5 billion of estimated costs remaining, for estimated total project costs of $1.6 billion. Funding may come from operating resources, credit lines, securities issuance, and asset dispositions.
- The April BRE merger consideration comprised approximately $3.78 billion in equity and $556 million in cash. Purchase accounting remained provisional; a Q3 valuation adjustment shifted $100.9 million from real property to personal property and increased depreciation by $4.2 million for Q3 and $8.5 million for the nine months.
- A cyber-intrusion resulted in confirmed data exfiltration, but the precise data affected and any misuse were not identified. The investigation was ongoing; the company expected further costs that could be material, though not yet estimable.
- The company had approximately $5.2 billion of debt and cited refinancing, interest-rate, covenant, and capital-market risks. It used swaps and caps to hedge certain variable-rate exposure. Ratings were BBB+/Stable (Fitch), Baa2/Stable (Moody’s), and BBB/Stable (S&P).
- The company guaranteed up to $114.4 million of joint-venture obligations related to total-return swaps. Potential mold and environmental liabilities were not quantifiable. The company also noted earthquake exposure and self-insurance through its captive insurer.
- Subsequent events included an October purchase of a 50% interest in Palm Valley Apartments for a $180 million contract price, receipt of approximately $101 million from redemption of a preferred-equity investment, and an October sale of Fund II’s remaining community. Expected fourth-quarter redemption-penalty and promote income were identified as excluded from Core FFO.
Important facts for investors to verify
- Assess post-merger operating performance using same-property revenue, occupancy, NOI, and Core FFO, separating portfolio growth and one-time merger effects from underlying trends.
- Review the final BRE purchase-price allocation, debt terms, integration costs, and whether expected merger benefits are being realized.
- Track the cyber investigation, affected data, potential claims or remediation costs, and any further disclosures.
- Evaluate leverage, debt maturities, available credit capacity, interest-rate exposure, and the $114.4 million joint-venture guarantee.
- Monitor remaining development costs, project completion and leasing assumptions, and the sensitivity of the company’s California-heavy portfolio to local conditions, taxes, and earthquakes.