Essex Property Trust, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2013, compared with the same periods in 2012. Essex is a multifamily REIT operating primarily in Southern California, Northern California and Seattle. At quarter-end, it owned or held interests in 163 apartment communities totaling 34,416 units, five commercial buildings and 11 active development projects.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $155.9m | $137.6m | $457.5m | $397.0m |
| Income from continuing operations | $63.0m | $20.1m | $121.8m | $79.4m |
| Net income | $75.9m | $20.2m | $135.2m | $90.0m |
| Net income available to common stockholders | $68.8m | $16.2m | $118.9m | $76.0m |
| Diluted earnings per common share | $1.84 | $0.45 | $3.19 | $2.18 |
| Diluted FFO per share | $1.91 | $1.67 | $5.79 | $4.99 |
| Diluted Core FFO per share | $1.91 | $1.71 | $5.65 | $5.01 |
Quarterly property revenue rose 13.7%; quarterly same-property revenue increased 6.5% and same-property NOI increased 8.4% to $88.3m. For the first nine months, same-property revenue grew 6.2% and same-property NOI grew 7.1% to $261.6m. Same-property financial occupancy was 95.7% in Q3, down 30 basis points year over year; nine-month occupancy was 96.1%, also down 30 basis points.
Quarterly earnings growth was materially affected by nonrecurring transaction gains: equity income from co-investments included Essex’s $36.4m share of gains on Fund II property sales, and discontinued operations included a $12.7m gain on the Linden Square sale. Nine-month results also included significant co-investment sale gains. GAAP income growth therefore should not be read as equivalent growth in recurring property operations. Core FFO per diluted share was up for the quarter but down for the nine-month period.
For the nine months, cash from operating activities was $225.1m, versus $219.3m in 2012; investing activities used $309.0m, versus $518.1m; financing activities provided $74.8m, versus $287.8m. Cash and cash equivalents ended the period at $9.5m. Common dividends were $1.21 per share in Q3 and $3.63 per share for the nine months.
Balance sheet, financing and liquidity
At September 30, 2013, total assets were $5.09bn and total liabilities were $3.09bn. Debt comprised $1.50bn of mortgage notes, $1.41bn of unsecured debt and $15.4m drawn on lines of credit. Unrestricted cash was $9.5m; marketable securities were $89.9m, including $33.2m classified as available for sale. The company reported $609.6m of undrawn capacity on unsecured credit facilities. Management stated that operating cash flow, available liquidity, capital-market access and potential property dispositions were expected to meet reasonably anticipated cash needs for the next 12 months.
In April, the Operating Partnership issued $300m of 3.25% senior notes due 2023, using proceeds to repay credit-line borrowings and for general corporate and working-capital purposes. The fixed-rate Expo loan was refinanced with a seven-year, $45m variable-rate loan; a swap fixes its effective rate at 3.7%. Fitch, Moody’s and S&P ratings were BBB+/Stable, Baa2/Stable and BBB/Stable, respectively, as of November 1, 2013.
Material changes, outlook and risks
- Same-property rent growth drove operating revenue gains, while occupancy edged lower. Acquisitions and consolidations since January 2012 also contributed to revenue growth and increased operating expenses and depreciation.
- Essex acquired Slater 116 in Kirkland for $29.6m; it was 44% occupied or leased and expected to stabilize in early 2014. It acquired the stabilized 58-unit Vox Apartments in Seattle for $22.2m in October, after quarter-end. Linden Square was sold for $25.3m, with a $12.7m GAAP gain. Fund II sold four communities in Q3 for gross proceeds of $294m; two remaining properties were expected to be sold in 2014.
- The development pipeline included 2,501 units under development and a 200-unit predevelopment project. Estimated total project costs were approximately $1.1bn, with $484.8m remaining to be spent. Management expected to fund the pipeline through working capital, credit facilities, securities issuance and/or property dispositions. No specific earnings or revenue guidance was provided.
- Essex had $56.8m of short-term bridge loans outstanding to Wesco III, expected to be repaid by the end of Q4 2013 through secured financing. The company also reported an $88.9m maximum exposure under guarantees related to development joint ventures, including payment, completion and debt-service guarantees for The Huxley and The Dylan.
- Risks include changes in interest rates and capital-market access, development cost overruns or delays, property-market weakness, refinancing terms, and mold-related claims. Substantially all properties are in earthquake-prone areas; the filing notes that earthquake losses are among extraordinary losses for which the company lacks insurance. Management said no material changes had occurred to the 2012 Form 10-K risk factors.
Important facts for investors to verify
- How much of reported earnings and co-investment income reflects sale gains or other nonrecurring items, versus ongoing operations; compare GAAP results with Core FFO and same-property NOI.
- Whether same-property rent growth can continue while occupancy is slightly lower, and how property taxes, operating costs and redevelopment affect margins.
- Progress, remaining funding needs and realized costs for the $1.1bn development pipeline, and repayment of the $56.8m Wesco III bridge loans.
- Debt maturities, interest-rate exposure and available liquidity, including the $88.9m joint-venture guarantee exposure and uninsured earthquake risk.