Essex Property Trust, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; the filing also reports fourth-quarter results. Essex is a self-managed REIT focused primarily on apartment ownership and operations in Southern California, the San Francisco Bay Area and Seattle. At year-end, it held interests in 163 communities with 33,468 units, five commercial buildings and nine active development projects.
Financial and operating performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $543.4 million | $472.5 million |
| Rental and other property revenue | $531.9 million | $465.7 million |
| Earnings from operations | $168.9 million | $136.5 million |
| Net income | $139.6 million | $57.5 million |
| Net income available to common stockholders | $119.8 million; $3.42 per diluted share | $40.4 million; $1.24 per diluted share |
| Operating cash flow | $267.5 million | $216.6 million |
| FFO per diluted share | $6.71 | $5.74 |
| Core FFO per diluted share | $6.82 | $5.64 |
| Same-property NOI | $318.3 million | $291.6 million |
For the fourth quarter, property revenue was $141.6 million, net income available to common stockholders was $43.8 million ($1.22 per diluted share), FFO was $1.72 per diluted share and Core FFO was $1.81 per diluted share. Same-property revenue increased 6.7% for the year, while financial occupancy remained 96.3%. Average same-property rents rose 6.4%, from $1,388 to $1,478 per unit. Same-property NOI increased 9.2%.
Net income and FFO benefited materially from investment and transaction items, including the Company’s $21.9 million gain on remeasurement of its Essex Skyline interest and its $29.1 million share of Fund II property-sale gains. Essex reported $10.0 million of income from discontinued operations, including $9.8 million of gains on property sales. These items should be distinguished from recurring property operations. EBITDA was $422.2 million, a company-defined non-GAAP measure.
Balance sheet, debt and liquidity
- Total assets were $4.85 billion and stockholders’ equity was $1.76 billion at year-end.
- Debt comprised $1.57 billion of mortgage notes, $1.11 billion of unsecured debt and $141 million drawn on lines of credit—about $2.82 billion in total. Mortgage debt had a 5.4% weighted-average rate; the $350 million unsecured term loan averaged 2.7%.
- Cash and cash equivalents were $18.6 million unrestricted and $23.5 million restricted; marketable securities totaled $92.7 million. The $500 million unsecured revolving facility had $141 million outstanding at year-end and was expanded to $600 million in January 2013. Management said available operating cash flow, liquidity, capital-market access and asset-sale proceeds were expected to cover reasonably anticipated 2013 needs.
- Operating cash flow was $267.5 million; investing activities used $812.1 million and financing activities provided $550.4 million. Essex paid $156.3 million in common and preferred dividends during 2012. The common dividend was $4.40 per share for the year; in February 2013, the board announced an increase to an annualized $4.84.
Material changes versus the prior year
- Total revenue rose 15.0%; same-property revenue increased 6.7%, compared with 3.9% growth in the prior comparable year. Occupancy was stable at 96.3% versus 96.4% for the prior-year same-property portfolio.
- Net income available to common stockholders nearly tripled, while FFO per diluted share rose about 17%. Growth reflected stronger same-property rents, newly acquired and leased-up communities, gains from Fund II sales, preferred-equity income and the Skyline remeasurement gain.
- Interest expense before amortization increased to $100.2 million from $91.7 million, mainly reflecting higher average debt and funding of acquisitions and development. Total debt increased from approximately $2.51 billion to $2.82 billion, while secured mortgage debt declined and unsecured borrowings increased.
- Investing cash outflow increased substantially, including acquisitions, co-investment contributions and development spending. Essex issued $357.7 million of common stock net of fees, compared with $323.9 million in 2011.
Outlook, risks and contingencies
- Management forecast 2013 same-property revenue growth of 5.0%–6.5%, occupancy of about 96.3%, expense growth of 3.0%–4.0% and NOI growth of 6.0%–8.0%. Regional rental-income expectations were 3.8%–5.3% for Southern California, 6.5%–8.0% for Northern California and 6.0%–7.5% for Seattle.
- Active development projects comprised 2,495 units, with estimated total costs of $928.4 million and $463.9 million remaining to be spent. Five redevelopment communities had estimated costs of $64.9 million, with $20.7 million remaining. Completion, timing, cost and lease-up outcomes are uncertain.
- Key risks include the portfolio’s geographic concentration (82% of 2012 rental revenue came from California), interest-rate and refinancing exposure, property-market and competitive conditions, development execution, and dependence on access to capital. The filing reports approximately $692.9 million of variable-rate debt, with $300 million effectively fixed by swaps and $187.8 million covered by interest-rate caps.
- Earthquake losses are not covered by conventional insurance; Essex self-insures earthquake exposure through a subsidiary. Environmental and mold-related matters have been reported, but potential losses were not considered probable or quantifiable. The Company also disclosed development-related guarantees, including a maximum $70.0 million construction-completion guarantee for Expo and a maximum $55.7 million guarantee related to The Huxley and The Dylan.
- Fund II sold seven communities for $413.0 million in 2012, generating a $106 million total gain; Essex’s share was $29.1 million. The remaining seven Fund II communities were expected to be sold in 2013. Essex reported compliance with debt covenants. KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile reported earnings and FFO growth with recurring same-property performance and the large co-investment sale and remeasurement gains.
- Review debt maturities, floating-rate exposure, hedge terms and the capacity available under the expanded credit facility.
- Assess funding needs and returns for the development and redevelopment pipeline, including Essex’s share of joint-venture costs and any guarantees.
- Evaluate the assumptions behind 2013 rent, expense and NOI forecasts, particularly regional demand, new supply and property-tax increases.
- Monitor California concentration, earthquake and environmental exposures, and the performance and governance of joint ventures and related-party investments.