Essex Property Trust, Inc. — Q2 2012 Form 10-Q
Business context and period. Unaudited quarter and six months ended June 30, 2012. Essex is a REIT focused primarily on apartment communities in Southern California, Northern California and Seattle. At quarter-end it had interests in 160 communities with 33,015 units, five commercial buildings and nine active development projects.
Financial performance and position
- Revenue: Q2 total revenue was $132.6 million, up 14.0% from $116.3 million; property revenue was $129.8 million, up 12.9%. For the first six months, total revenue was $260.5 million versus $228.8 million.
- Same-property operations: Q2 same-property revenue rose 6.3% to $116.9 million, while same-property NOI increased to $78.7 million from $72.0 million. Average financial occupancy slipped to 96.2% from 96.8%. Same-property rental rates were up 6.8% year over year.
- Profit and per-share results: Q2 income from continuing operations was $42.5 million versus $10.5 million; net income available to common stockholders was $37.1 million versus $10.3 million. Diluted EPS was $1.07 versus $0.32. For the six months, common earnings were $59.8 million versus $18.7 million, and diluted EPS was $1.74 versus $0.59.
- FFO: Q2 diluted FFO was $1.69 per share versus $1.32; Core FFO was $1.66 versus $1.40. Six-month diluted FFO was $3.32 versus $2.76; Core FFO was $3.30 versus $2.71. These are supplemental, non-GAAP measures.
- Cash flow: First-half operating cash flow was $129.4 million, compared with $104.4 million. Investing activities used $316.2 million, including property acquisitions and co-investment contributions. Financing activities provided $178.0 million. Cash and cash equivalents ended the period at $4.1 million.
- Debt and liquidity: At June 30, mortgage notes were $1.616 billion, unsecured debt $615.0 million and lines of credit $257.1 million. The company reported $4.1 million unrestricted cash and $114.2 million of marketable securities, including $64.9 million available for sale. Two credit lines totaled $525 million; management stated it expected available operating cash flow, securities, credit capacity, capital-market access and dispositions to meet anticipated needs over the next 12 months. Ratings were BBB/Stable from S&P, Baa2/Stable from Moody’s and BBB/Positive from Fitch.
- Dividends and equity: Common dividends were $1.10 per share in Q2 and $2.20 for the first half. The company issued 920,281 shares in Q2 for $139.4 million net; 1,769,989 shares had been sold from year-end through August 2 for $268.2 million net.
Material changes and notable items
- Q2 earnings included a $21.9 million gain from remeasuring the company’s previously held interest in Essex Skyline at MacArthur Place when it acquired its joint-venture partner’s interest and consolidated the property. Q2 also included $2.3 million of promote income. These items materially boosted reported earnings and are excluded from Core FFO adjustments as described in the filing.
- Same-property revenue growth reflected higher rents, partly offset by lower occupancy. Growth in total property revenue also benefited from acquisitions, development lease-ups and consolidation of Essex Skyline.
- The company issued $150 million of nine-year private-placement notes at rates of 4.27% and 4.30%, with another $50 million scheduled to close in August. Proceeds were used to repay secured debt carrying an average 5.6% rate. It reported $1.5 million of debt-retirement costs and expected up to another $1.0 million of such costs in Q3.
- In May, the revolving credit facility was increased to $500 million, with an accordion feature to $600 million. In July, the unsecured term-loan capacity increased from $200 million to $350 million and pricing was reduced. These are post-quarter developments.
- The development pipeline had total estimated costs of $998.7 million, with $595.5 million remaining to be spent. Five redevelopment communities had estimated costs of $63.5 million, with $28.1 million remaining. Management targets an 8%–10% return on incremental redevelopment investment.
Outlook, risks and contingencies
No specific earnings or FFO guidance was provided in the supplied filing text. Management described funding the development pipeline through working capital, credit facilities, debt and equity issuance, and property dispositions. It cautioned that financing costs, capital-market conditions and interest rates could affect investment plans and refinancing. Other stated risks include development cost overruns or delays, weaker regional markets, acquisition performance, environmental and mold claims, and earthquake or terrorism losses for which the company may lack insurance. The company also disclosed loan, completion and debt-service guarantees related to co-investments, including maximum stated exposures of $38.7 million and $76.0 million for two projects. Potential environmental and mold liabilities were not considered probable or could not be quantified. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much of Q2 and first-half earnings growth came from the $21.9 million remeasurement gain, promote income and property-sale gains, versus recurring property operations.
- Whether same-property rent growth can continue while occupancy remains slightly below the prior-year level.
- Debt maturities, refinancing costs and the effect of the expanded credit and term-loan facilities, including the planned Q3 debt repayments.
- Funding needs and execution risks for the $595.5 million of remaining development costs and the redevelopment pipeline.
- Future share issuance and dilution, dividend coverage, and contingent exposure from co-investment guarantees and uninsured risks.