Essex Property Trust, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. Essex is a West Coast apartment-focused REIT with interests in 167 apartment communities totaling 34,514 units, five commercial buildings, and development projects in Southern California, Northern California, and Seattle.
Financial performance and key metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $153.4m | $132.6m | $302.7m | $260.5m |
| Income from continuing operations | $29.6m | $42.5m | $59.3m | $59.7m |
| Net income available to common stockholders | $24.9m | $37.1m | $50.1m | $59.8m |
| Diluted GAAP EPS | $0.67 | $1.07 | $1.35 | $1.74 |
| FFO per diluted share | $1.91 | $1.69 | $3.88 | $3.33 |
| Core FFO per diluted share | $1.88 | $1.66 | $3.74 | $3.30 |
Q2 property revenue was $150.2m, up 15.7%. Same-property revenue rose 6.1% to $130.4m, primarily on a 6.2% increase in average rental rates; same-property financial occupancy eased 30 basis points to 96.0%. Same-property NOI was $88.7m, up 7.0%; its calculated NOI margin was approximately 68.0%, versus 67.5% a year earlier. These margins are calculated from figures in the filing.
For the first half, operating cash flow was $150.6m, compared with $129.4m. Investing activities used $281.7m and financing provided $132.7m; period-end cash and cash equivalents were $20.2m. Common dividends were $1.21 per share in Q2 and $2.42 per share for the half, versus $1.10 and $2.20, respectively, in 2012.
At June 30, total debt was approximately $2.93bn: $1.51bn mortgage debt, $1.41bn unsecured debt, and $4.4m drawn on credit lines. Unrestricted cash was $20.2m and marketable securities were $88.7m. The company reported $621m of undrawn capacity on unsecured credit facilities. Ratings were Fitch BBB+/Stable, Moody’s Baa2/Stable, and S&P BBB/Stable. A $300m issuance of 3.25% senior notes due 2023 was completed in April.
Material changes versus prior periods
- Q2 revenue growth reflected same-property rental growth and contributions from 12 communities acquired or consolidated since January 2012. Non-same-property revenue increased 185.7% to $19.8m.
- GAAP income fell year over year largely because Q2 2012 included a $21.9m gain on remeasurement of a co-investment. First-half 2012 also included $10.0m of discontinued-operations income, including property-sale gains. These items were absent in 2013.
- Operating expenses increased with acquisitions: Q2 property operating costs excluding real estate taxes rose 12.3%, real estate taxes 21.8%, and depreciation 14.9%. Management also cited higher same-property repairs, utilities, and property taxes.
- Q2 interest expense before amortization increased 6.8%, reflecting higher average debt used to fund acquisitions and development. Equity income from co-investments increased $4.2m, supported by property acquisitions, a property-sale gain, and preferred-equity prepayment income.
- During the first half, Essex issued 817,445 common shares for net proceeds of $122.9m. Common shares outstanding were 37.3m at June 30, versus 36.4m at year-end 2012.
Outlook, risks, and unusual items
- No specific earnings or operating guidance is provided in the supplied filing text. Management stated that operating cash flows, cash and securities, credit availability, capital-market access, and potential property dispositions should cover reasonably anticipated cash needs over the next 12 months.
- The development and predevelopment pipeline totaled 2,981 units, with $625.7m incurred and approximately $446.7m of estimated remaining costs; total estimated project costs were about $1.07bn. Funding may come from working capital, credit lines, securities issuances, and dispositions.
- Fund II sold three additional properties after quarter-end for $244.0m gross proceeds. It expected to sell its remaining three communities within 12 months. Fund II repaid $42.4m of bridge loans in July; $56.8m of Wesco III bridge loans remained outstanding as of July 31 and were expected to be repaid by September 30, 2013.
- Essex guaranteed certain development-related obligations for The Huxley and The Dylan; maximum exposure under the payment guarantee was $79.1m at June 30. Co-investments also carry their own debt and operating risks.
- Management identified market downturns, development cost overruns or delays, refinancing and capital-access risks, and potential differences between estimates and actual results. Mold-related claims and other lawsuits are ongoing risks; potential mold and environmental liabilities were not quantifiable. Most properties are in earthquake-prone areas, and earthquake losses are among extraordinary risks for which the company does not have insurance.
- Other unusual items included a $1.0m first-half gain on early debt retirement, a $1.5m land-sale gain, and income from early redemption of preferred-equity investments. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether same-property rent growth continues and occupancy stabilizes, particularly given the 30-basis-point year-over-year occupancy decline.
- Actual cost, timing, lease-up, and funding requirements for the $1.07bn development pipeline, including the remaining estimated $446.7m.
- Repayment timing and terms for Wesco III bridge loans and the performance and leverage of co-investments.
- Debt maturities, interest-rate exposure, hedging effectiveness, and continued access to credit and equity markets.
- Disposition proceeds and timing for Fund II, and any effects on management fees, co-investment income, or guarantees.
- Potential exposure from mold claims, earthquake losses, and the $79.1m development-related guarantee; the filing does not quantify possible mold or environmental losses.