Business Context and Reporting Period
Company: Essex Property Trust, Inc. (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2009
Portfolio Overview: As of March 31, 2009, the Company owned or had interests in 132 apartment communities (26,862 units) located in Southern California, Northern California, and the Seattle Metro area, plus five office/commercial buildings. The Company also maintains a development pipeline of four active projects and three predevelopment projects.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $105,879 | $99,957 |
| Net Income (Consolidated) | $23,338 | $22,849 |
| Net Income Available to Common Stockholders | $42,265 | $14,780 |
| Diluted EPS (Common) | $1.53 | $0.59 |
| Funds from Operations (FFO) | $71,807 | $44,826 |
| FFO per Share (Diluted) | $2.50 | $1.64 |
| Operating Cash Flow | $55,063 | $47,235 |
| Total Assets | $3,161,915 | $3,164,823 |
| Total Liabilities | $1,978,584 | $1,932,913 |
| Unrestricted Cash & Equivalents | $65,212 | $10,357 |
| Debt (Mortgage Notes + Exchangeable Bonds + Lines of Credit) | $1,811,816 | $1,754,391 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 5.9% to $105.9 million, driven by a 6.0% increase in property revenues. Same-property revenues rose 2.0% primarily due to a 110 basis point increase in financial occupancy (97.0% vs. 95.9%).
- Significant Gains: Net income available to common stockholders surged 186% to $42.3 million. This was largely driven by a $25.7 million gain from the redemption of Series G Preferred Stock and a $6.1 million gain on the early retirement of exchangeable bonds.
- One-Time Charges: The Company recorded a $5.8 million write-off of an investment in a development joint venture in Southern California.
- Discontinued Operations: The Company sold two properties (Carlton Heights Villas and Grand Regency) in Q1 2009, recognizing a combined gain of $2.5 million.
- Equity Income: Equity income from co-investments dropped significantly to $0.5 million from $6.6 million in Q1 2008, as the prior year included a $6.3 million preferred interest gain from a joint venture repayment.
Guidance, Outlook, and Risks
- Outlook: Management expects total Same-Property revenues to decrease in Q2 2009 compared to the same period in 2008 due to expected decreases in scheduled rents.
- Liquidity: The Company holds $65.2 million in unrestricted cash and $30.1 million in marketable securities. It maintains a $200 million unsecured line of credit ($45 million drawn) and a $150 million Freddie Mac line ($140 million drawn).
- Capital Markets Risk: Management notes that instability and tightening in credit markets have increased spreads and pricing for debt. While the Company has strong relationships with lenders, continued turmoil could negatively impact refinancing and acquisition capabilities.
- Development Pipeline: The Company has $112.8 million remaining to be expended on active development projects and $271.1 million on predevelopment projects. Funding is expected to come from working capital, lines of credit, and potential dispositions.
- Legal/Environmental: The Company faces ongoing litigation regarding mold in residential properties. While insurance covers some risks, the Company states that potential liabilities are not currently quantifiable but are not expected to be material.
Investor Verification Checklist
- Debt Refinancing: Verify the Company's ability to refinance $14.5 million of mortgage debt maturing in 2009 and $302.4 million maturing in 2010-2011 given current credit market conditions.
- Preferred Stock Redemption: Confirm the sustainability of the $25.7 million gain from Series G Preferred Stock redemption, as this is a non-recurring item significantly boosting Q1 EPS.
- Development Write-off: Assess the impact of the $5.8 million joint venture write-off and the status of the remaining development pipeline ($112.8M remaining costs).
- Occupancy Trends: Monitor the 97.0% financial occupancy rate and the management's forecast of declining scheduled rents in Q2 2009.
- Derivative Exposure: Review the $54.8 million net liability associated with interest rate swaps and caps, which increased by $18.3 million during the quarter due to fair value changes.