Business Context and Reporting Period
Company: Essex Property Trust, Inc. (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2008
Portfolio Overview: As of September 30, 2008, the Company owned or had ownership interests in 133 apartment communities (26,790 units), six office buildings, and one manufactured housing community. Operations are concentrated in Southern California, Northern California, and the Seattle metropolitan area.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Total Revenues | $104,218 | $306,863 | $279,409 |
| Net Income | $14,686 | $44,699 | $62,041 |
| Net Income Available to Common Stockholders | $12,376 | $37,768 | $55,177 |
| Diluted EPS (Common) | $0.49 | $1.50 | $2.21 |
| Funds from Operations (FFO) | $40,682 | $126,808 | $119,222 |
| FFO per Share (Diluted) | $1.46 | $4.58 | $4.34 |
| Cash Flow from Operations | N/A | $143,048 | $158,148 |
| Total Assets | $3,159,326 | N/A | N/A |
| Total Liabilities | $1,863,683 | N/A | N/A |
| Debt (Mortgage Notes + Lines of Credit) | $1,494,327 | N/A | N/A |
| Cash and Cash Equivalents (Unrestricted) | $33,404 | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 8.3% for the three months and 9.8% for the nine months ended September 30, 2008, compared to the prior year periods. This was driven by a 4.0% increase in Same-Property revenues (three months) and 4.9% (nine months), primarily due to higher scheduled rents and improved occupancy (96.3% financial occupancy for the quarter).
- Net Income Decline: Net income available to common stockholders decreased significantly year-over-year for the nine-month period ($37.8M vs. $55.2M). This decline is largely attributable to a reduction in income from discontinued operations, which included a $25.2M gain in 2007 from the sale of City Heights and other properties, compared to a loss of $1.4M in 2008.
- Acquisitions and Dispositions: The Company acquired Chestnut Street Apartments ($22.1M) and The Highlands at Wynhaven ($66.3M) in Q3 2008. Dispositions included Cardiff by the Sea ($71.0M) and St. Cloud Apartments ($8.8M), resulting in a combined gain of $46,000.
- Co-Investment Income: Equity income in co-investments increased by $4.6 million for the nine months ended September 30, 2008, primarily due to the repayment of the Company's investment in Mountain Vista Apartments, LLC, which generated $6.3 million in preferred income.
Guidance, Outlook, and Risks
- Liquidity and Capital Resources: The Company reported $33.4 million in unrestricted cash and $58.6 million in marketable securities. Management believes cash flows, existing balances, and access to credit markets are sufficient to meet needs through 2009. A new five-year secured line of credit facility with Freddie Mac (expanding capacity to $150M, expandable to $250M) is expected to close by the end of Q4 2008.
- Development Pipeline: The consolidated development pipeline (excluding Fund II) includes five development projects, three predevelopment projects, and five land parcels, totaling 2,715 units with estimated remaining costs of $483.6 million.
- Market Risks: The Company highlighted the tightening of credit markets, which has increased spreads on secured financing. While the Company's strong balance sheet and relationships with lenders have mitigated immediate impacts, prolonged tightening could affect acquisition and refinancing capabilities.
- Legal and Environmental: The Company faces ongoing litigation regarding mold-related claims. While insurance coverage exists, the Company notes that potential liabilities are not quantifiable and an estimate of possible loss cannot be made.
- Accounting Changes: The Company will adopt APB 14-1 effective January 1, 2009, which will result in additional non-cash interest expense of approximately $4.0 million for 2008 and 2009 related to exchangeable senior notes.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the extent to which the year-over-year decline in Net Income is driven by the absence of large one-time gains from discontinued operations in 2007 versus core operational performance.
- Debt Refinancing: Monitor the closing of the new Freddie Mac secured line of credit and the terms of refinancing for debt maturing in 2009, given the current credit market environment.
- Development Costs: Review the $483.6 million in remaining costs for the development pipeline and assess the risk of cost overruns or delays in the current economic climate.
- FFO vs. Net Income: Note the divergence between Net Income (down) and FFO (up 6.4% for the nine months), as FFO is the primary industry metric for REIT performance.
- Convertible Notes: Confirm the impact of the upcoming APB 14-1 adoption on future interest expense and earnings per share calculations.