Essex Property Trust, Inc. — 2014 Form 10-K
Business context and period. Annual report for the year ended December 31, 2014, filed jointly with operating partnership Essex Portfolio, L.P. Essex is a REIT focused on West Coast apartment communities. At year-end it owned or held interests in 239 communities with 57,455 units, four commercial buildings and 12 active development projects. The BRE Properties merger closed April 1, 2014; 2014 results include BRE only from that date.
Key financial results
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $969.3 million | $609.3 million |
| Net income | $134.4 million | $172.1 million |
| Net income available to common stockholders | $116.9 million; diluted EPS $2.06 | $150.8 million; diluted EPS $4.04 |
| Funds from operations (FFO), diluted per share | $7.89 | $7.59 |
| Core FFO, diluted per share | $8.54 | $7.60 |
| Cash from operating activities | $493.0 million | $305.0 million |
| Cash used in investing activities | $1.147 billion | $453.7 million |
| Cash from financing activities | $520.6 million | $148.6 million |
FFO and Core FFO are non-GAAP measures; the company cautions they should be considered alongside GAAP results and cash flows.
- Same-property operations: Revenue rose 7.3% to $599.9 million; average financial occupancy edged up to 96.2% from 96.1%. Average rental rates increased 7.1%, to $1,734 per unit. Same-property NOI was $414.9 million, versus $379.9 million.
- Liquidity and debt: At year-end, unrestricted cash was $25.3 million and marketable securities and other investments were $117.2 million. Debt totaled approximately $5.1 billion: $2.246 billion mortgage debt, $2.617 billion unsecured debt and $246.4 million lines of credit. The $1.0 billion revolving facility had $229.8 million drawn; the company reported compliance with debt covenants.
- Capital structure: Essex issued about 23.1 million shares as BRE merger consideration and sold 3.0 million additional shares for net proceeds of $534.0 million. The annual common dividend increased to $5.11 per share from $4.84.
Material changes versus 2013
- Revenue grew 59.5%, principally reflecting the BRE merger and other acquisitions; this is not a like-for-like growth rate. BRE legacy properties contributed $280.1 million of 2014 property revenue after acquisition.
- GAAP net income declined 21.9%, and diluted EPS declined from $4.04 to $2.06. The prior-year comparison included $31.2 million of discontinued-operations income; 2014 property-sale gains were reported in continuing operations following adoption of a revised discontinued-operations standard. Merger-related costs and the larger share count also affected comparisons.
- Core FFO per diluted share increased to $8.54 from $7.60. Same-property revenue growth accelerated to 7.3% from 6.3% in 2013.
- Interest expense increased $48.0 million to $164.6 million, primarily from debt assumed in the BRE merger. Merger and integration expense was $53.5 million, compared with $4.3 million in 2013.
Outlook, risks and unusual items
- 2015 outlook: Management expected same-property revenue to increase, with regional growth estimates of 4.50%–5.50% for Southern California, 8.25%–9.25% for Northern California and 5.75%–6.75% for Seattle Metro. These estimates are for Essex standalone and exclude BRE merger effects. Same-property operating expenses were expected to rise 3%–4%. Management estimated approximately $1,200 per unit of non-revenue-generating capital expenditure in 2015.
- Development commitments: The development and predevelopment pipeline totaled 2,920 units, with estimated project costs of $1.5 billion and about $420 million remaining to be spent. Three redevelopment communities had estimated costs of $122 million, including $96.4 million remaining.
- Funding assessment: Management believed operating cash flow, cash and securities, credit facilities, capital-market access and property dispositions would cover reasonably anticipated 2015 cash needs. The company also noted that capital-market conditions and interest rates could alter its investment and financing plans.
- Cyber incident and litigation: A 2014 cyber-intrusion resulted in confirmed data exfiltration; the precise data affected had not been identified. The company recorded $2.8 million of related 2014 expense and expected further costs that were not then estimable and could be material. A putative class action was pending, and the company could not predict its outcome or related consequences.
- Other risks: Results are exposed to geographic concentration—80% of 2014 rental revenue came from California—local housing and employment conditions, property-tax reassessments, development execution, merger integration, refinancing and interest-rate risk. Earthquake and other losses may exceed insurance coverage. The company reported that its financial reporting controls were effective; KPMG issued unqualified opinions on the financial statements and internal controls.
- Other significant items: The company recognized $43.6 million of gains on four property sales. In January 2015 it sold its 552-unit Arizona community for $63.8 million; subsequent events also included a $200 million Los Angeles acquisition and a $43.6 million San Francisco land purchase.
Important facts for investors to verify
- Separate recurring same-property performance and Core FFO from merger contributions, acquisition growth, sale gains and merger costs; confirm the treatment of discontinued operations in prior-period comparisons.
- Review BRE integration, purchase-accounting estimates and the acquired portfolio’s operating contribution, including the reported post-merger net loss associated with acquired properties.
- Assess debt maturities, secured-property exposure, revolver availability, interest-rate protection and the capacity to fund development, redevelopment and dividends.
- Monitor cyber-investigation findings, potential litigation or regulatory actions, and future incident-related expense and liability estimates.
- Test management’s 2015 rental-growth and expense assumptions against actual results, regional supply, employment and tax trends, and project completion costs.