Essex Property Trust, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Essex is a West Coast apartment REIT operating through Essex Portfolio, L.P. At quarter-end, it had interests in 243 stabilized apartment communities totaling 59,241 homes, three commercial buildings and seven active developments. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $321.6 | $296.2 | $635.8 | $579.0 |
| Net income | $76.8 | $50.5 | $163.7 | $115.3 |
| Net income available to common stockholders | $72.0 | $45.6 | $150.0 | $104.9 |
| Diluted EPS | $1.10 | $0.70 | $2.29 | $1.62 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $350.4 | $287.0 |
| FFO per diluted share | $2.81 | $2.38 | $5.45 | $4.66 |
| Core FFO per diluted share | $2.74 | $2.40 | $5.42 | $4.69 |
Q2 property revenue rose 8.7% to $319.6 million; same-property revenue increased 6.9% to $284.9 million, primarily reflecting a 7.0% increase in average rents. Same-property financial occupancy was 96.0%, unchanged year over year. Same-property NOI was $199.3 million, up from $184.2 million; its margin on same-property revenue was approximately 70.0%, versus 69.2%.
For the first half, same-property revenue grew 7.1%, led by a 7.2% increase in average rents; financial occupancy was 96.0%, compared with 96.1%. Same-property NOI was $394.8 million, up from $364.0 million. Operating cash flow increased year over year, while investing activities used $181.1 million and financing activities used $16.4 million. Cash and cash equivalents ended the period at $182.5 million, up from $29.7 million at year-end 2015.
At June 30, total debt was $5.62 billion: $3.38 billion unsecured debt and $2.24 billion mortgage debt. The weighted-average interest rate was 3.6% on fixed-rate unsecured bonds and 4.4% on mortgage debt. Essex reported $182.5 million unrestricted cash, $32.9 million restricted cash and $152.3 million marketable securities. Its two unsecured credit lines totaled approximately $1.03 billion and were undrawn. Total assets were $12.21 billion and total liabilities $5.95 billion.
Material changes and unusual items
- Q2 net income growth reflected higher property revenue and co-investment income, including a $5.6 million share of gain from a co-investment property sale. Other income included $4.0 million of insurance reimbursements and legal settlements and $1.1 million of realized marketable-securities gains. Total return swaps contributed $2.8 million.
- First-half results included $20.3 million of real estate and land sale gains, partly offset by $4.3 million deferred tax expense, and $13.0 million of the Company’s share of co-investment sale gains. First-half 2015 included $34.0 million of co-investment remeasurement gains, which did not recur in 2016.
- In April, the Company issued $450 million of 3.375% senior unsecured notes due 2026, using proceeds to repay credit-line debt and for general corporate purposes. It also redeemed all Series H preferred shares for $73.8 million. The first-half income statement included a $2.5 million charge related to the redemption premium.
- Interest expense increased year over year, partly due to new unsecured notes; the Company also reported lower capitalized interest. Merger and integration expenses were zero in 2016, compared with $1.4 million in Q2 2015 and $3.8 million in the first half of 2015.
Outlook, risks and contingencies
Management stated that operating cash flow, existing cash and securities, credit availability, capital-market access and potential asset dispositions should be sufficient for reasonably anticipated cash needs over the next 12 months. This is not specific earnings guidance. The development pipeline covered 2,272 homes, with estimated total costs of $1.4 billion and approximately $0.8 billion remaining; the Company’s estimated share of remaining costs was $574 million. Five major redevelopment communities had estimated costs of $159.8 million, with $64.2 million remaining.
Management cited sensitivity of financing and investment plans to interest rates and capital-market conditions, as well as risks that projects may cost more or fail to meet expectations, cash flows may be inadequate, local markets may weaken, refinancing may be less favorable, and litigation may be more costly than expected. The Company was involved in ordinary-course lawsuits and did not expect their resolution to materially adversely affect financial condition, results or cash flows. It reported no material changes to the risk factors in its 2015 Form 10-K. Credit ratings were BBB+/Stable (Fitch), Baa2/Positive (Moody’s) and BBB/Positive (S&P).
Important facts for investors to verify
- Whether rent growth and high occupancy persist, especially across Southern California, Northern California and Seattle.
- How operating expense and property-tax growth compares with rental growth; same-property operating expenses excluding taxes rose 5.5% in Q2 and 5.3% in the first half.
- Funding, timing, returns and remaining cost exposure for the development, redevelopment and joint-venture pipelines.
- Debt maturities, refinancing needs and interest-rate exposure; $225 million of variable-rate term debt was swapped to a fixed rate, while other variable-rate exposures remain.
- The recurring contribution of co-investment income, sale gains, insurance/legal recoveries and swap income to reported earnings and FFO.
- Management’s liquidity assessment and the availability of credit and capital markets if investment plans or market conditions change.