Business Context and Reporting Period
Company: Essex Property Trust, Inc. (Essex)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2003
Business Overview: Essex is a Maryland REIT focused on multifamily residential properties, primarily in Southern California, Northern California, and the Pacific Northwest. As of September 30, 2003, the Company owned interests in 117 multifamily properties (25,095 units), five RV parks, four office buildings, and two manufactured housing communities. The Company also manages the Essex Apartment Value Fund, L.P. (the "Fund").
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2003 | 9 Months Ended Sep 30, 2003 |
|---|---|---|
| Total Revenues | $58,237 | $175,679 |
| Net Income | $9,260 | $30,141 |
| Funds from Operations (FFO) | $25,223 | $76,103 |
| Diluted EPS (Net Income) | $0.43 | $1.42 |
| Dividends per Common Share | $0.78 | $2.34 |
| Cash from Operating Activities | N/A | $73,748 |
| Total Debt (Mortgage + Lines of Credit) | $827,296 | $827,296 |
| Unrestricted Cash | $10,400 | $10,400 |
Note: Total Debt calculated as Mortgage notes payable ($664,596) + Lines of credit ($162,700).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 19.4% ($9.4M) for the quarter and 17.8% ($26.5M) for the nine months compared to 2002. This growth was driven primarily by acquisitions made subsequent to June 30, 2002 (quarter) and December 31, 2001 (nine months).
- Net Income Decline: Net income decreased 12.8% ($1.4M) for the quarter and 30.3% ($13.1M) for the nine months. The nine-month decline was significantly impacted by the absence of discontinued operations (gain on sale of real estate) which contributed $8.3M in the prior year.
- Same-Store Performance: Property revenues from "Same Store" properties decreased 3.0% in the quarter and 2.1% in the nine months. Northern California and Pacific Northwest regions saw revenue declines due to rental rate decreases, while Southern California saw increases.
- Occupancy: Average financial occupancy for Same Store properties was 96.0% for the quarter and 95.6% for the nine months, slightly higher than the prior year's 96.1% and 94.4%, respectively.
- Interest Income: Interest and other income dropped significantly (42.3% for the quarter, 51.2% for the nine months) due to the repayment of notes receivable and the sale of co-investment assets.
Guidance, Outlook, and Risks
- Capital Markets Activity:
- Preferred Stock: Issued 1,000,000 shares of Series F Cumulative Redeemable Preferred Stock at $24.664/share (7.8125% annualized rate) to fund the redemption of Series C Preferred Units.
- Common Stock: Sold 1.6 million shares of common stock in October 2003 (subsequent event) for net proceeds of approximately $96.8M, intended for acquisitions and development.
- Acquisitions: Acquired three multifamily communities in October 2003 (subsequent event) totaling 605 units for approximately $66M.
- Development Pipeline: The Company has six development communities (1,368 units) with remaining commitments of approximately $74.8M. The Fund has three development communities (612 units) with remaining commitments of $48.8M.
- Liquidity: The Company maintains $215M in unsecured lines of credit ($185M maturing May 2004; $30M maturing Dec 2003). Unrestricted cash was $10.4M at period end.
- Risks and Contingencies:
- FIN 46 Compliance: The Company is evaluating the impact of FASB Interpretation No. 46 on Variable Interest Entities (VIEs). Preliminary estimates suggest potential assets of $77.8M and liabilities of $55.6M could be consolidated, with a maximum exposure to loss of $22.9M.
- Non-Accrual Loan: A $15M secured loan to a third party for an office building in Irvine is in default (matured March 2003). Interest accrual ceased in June 2002.
- Market Conditions: Risks include economic downturns in high-tech sectors, potential delays in development projects, and rising interest rates affecting variable rate debt.
Investor Verification Checklist
- Debt Maturities: Verify the refinancing strategy for the $30M line of credit maturing in December 2003 and the $185M line maturing in May 2004.
- FIN 46 Impact: Monitor the final determination of VIE consolidation, which could materially alter the balance sheet and leverage ratios.
- Defaulted Loan: Review the status of the $15M Irvine office building loan and the potential for foreclosure or restructuring.
- Development Costs: Track actual vs. projected costs for the $74.8M remaining development commitments to ensure no budget overruns.
- Same-Store Trends: Monitor rental rate trends in Northern California and the Pacific Northwest, which showed revenue declines in the reported period.