Business context and reporting period
Essex Property Trust, Inc. is a publicly traded REIT focused primarily on apartment communities in Southern California, Northern California and the Seattle metropolitan area. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2012, compared with the corresponding 2011 periods. At quarter-end, the company had interests in 164 apartment communities totaling 33,637 units, five commercial buildings and nine active development projects.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $138.1 million | $119.2 million | $398.6 million | $347.9 million |
| Earnings from operations | $42.9 million | $34.3 million | $123.8 million | $98.3 million |
| Income from continuing operations | $20.2 million | $11.8 million | $79.9 million | $34.4 million |
| Net income available to common stockholders | $16.2 million | $7.7 million | $76.0 million | $26.4 million |
| Diluted EPS | $0.45 | $0.23 | $2.18 | $0.82 |
| FFO per diluted share | $1.67 | $1.43 | $4.99 | $4.19 |
| Core FFO per diluted share | $1.71 | $1.42 | $5.01 | $4.13 |
- Q3 property revenue was $135.1 million, up 15.2%; same-property revenue grew 7.2% to $119.2 million. Same-property financial occupancy increased to 96.1% from 95.3%, and average rental rates rose 6.4%.
- Q3 net operating income (NOI) was $89.8 million, versus $76.4 million; same-property NOI was $78.9 million, versus $72.0 million. Same-property revenue growth reflected higher rents and occupancy; same-property operating expenses, including property taxes, also rose.
- For the first nine months, operating cash flow was $219.3 million, compared with $170.7 million. Investing activities used $518.1 million and financing activities provided $287.8 million. Cash and cash equivalents decreased to $1.9 million from $12.9 million at year-end; this excludes $24.9 million of restricted cash.
- At September 30, total debt was approximately $2.60 billion: $1.57 billion of mortgage debt, $962.0 million of unsecured debt and $61.9 million drawn on credit lines. Total debt was approximately $2.36 billion at December 31, 2011. The company reported $141.6 million of marketable securities and $525 million of aggregate line-of-credit capacity, with $61.9 million drawn.
- Reported assets were $4.53 billion and total equity was $1.78 billion. The quarterly common dividend was $1.10 per share; dividends for the first nine months were $3.30 per share.
Material changes and notable items
- Q3 growth reflected acquisitions, development communities entering lease-up and stronger same-property rents. Same-property revenue grew in all three regions, with the largest percentage increase in Northern California.
- For the nine-month period, net income included a $21.9 million gain from remeasurement of a co-investment and $10.0 million of discontinued-operations income, including property-sale gains. These items make reported earnings growth larger than the improvement in recurring operating measures alone.
- In August, Essex issued $300 million of senior unsecured notes due 2022 at a 3.625% fixed coupon. It repaid $86.9 million of secured debt during Q3, recording a $1.2 million early-retirement loss. Debt composition shifted toward unsecured borrowing.
- The company sold 1.78 million common shares through its equity distribution program from year-end 2011 through November 1, 2012, generating $269.0 million net of commissions. Common shares outstanding increased to 35.7 million at September 30 from 33.9 million at year-end.
- Q3 acquisitions included Park West and Domaine; Riley Square was acquired by a 50%-owned joint venture. Subsequent to quarter-end, Essex acquired Ascent and Willow Lake Apartments. The development pipeline comprised 2,985 units, with estimated total costs of $999.4 million and $523.9 million remaining to be spent.
Outlook, risks and contingencies
- Management stated that operating cash flows, 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. This is management’s assessment, not formal earnings guidance.
- In October, the company fully drew its $350 million unsecured term loan after an additional $150 million borrowing; proceeds were intended for acquisitions, development and repayment of credit lines. The company had fixed the rate on $300 million of the term loan at 2.4% through swaps.
- Management expected a fourth-quarter sale of seven Fund II communities for estimated gross proceeds of approximately $413 million. Essex expected to record an approximately $2.2 million share of Fund II debt-prepayment penalties. The sale was prospective, not completed as of the filing.
- Credit ratings were BBB/Stable from S&P, Baa2/Stable from Moody’s and BBB with a positive outlook from Fitch. The filing cautions that higher borrowing costs, weaker equity-market conditions or reduced access to agency financing could affect acquisitions, development and refinancing.
- Risks include development cost overruns or delays, property-market downturns, uncertain future cash flows, environmental and mold-related claims, and exposure to uninsured earthquake and terrorism losses. The company disclosed loan and completion guarantees related to joint-venture developments, including maximum exposures of $46.6 million and $76.0 million for specified guarantees. Potential mold and environmental liabilities were not considered probable or could not be estimated.
- Related-party transactions included property acquisitions and a preferred-equity investment involving an entity affiliated with the chairman; the filing states independent directors approved them.
Important facts for investors to verify
- How much of earnings and FFO growth is supported by same-property rent and occupancy trends versus acquisitions, development lease-up and one-time gains?
- Whether the planned Fund II asset sale closed, its realized proceeds and penalties, and how sale proceeds were used.
- Funding needs and returns for the $999.4 million development pipeline, including remaining expenditures and joint-venture commitments.
- Debt maturities, variable-rate exposure, hedging coverage and the effect of additional borrowing and share issuance on leverage and per-share results.
- Performance and governance of related-party investments, as well as the scope and potential impact of environmental, mold and development-guarantee exposures.