Business context and reporting period
Essex Property Trust, Inc. is a REIT focused primarily on apartment communities in Southern California, Northern California, and the Seattle metropolitan area. This unaudited Form 10-Q covers the three months ended March 31, 2013, compared with the same quarter of 2012. At quarter-end, Essex had ownership interests in 166 apartment communities totaling 34,343 units, five commercial buildings, and eight active development projects.
Financial results and key metrics
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Property revenue | $146.4 million | $125.5 million; up 16.7% |
| Total revenue, including management and other fees | $149.3 million | $127.9 million |
| Income from continuing operations | $29.7 million | $17.2 million |
| Net income available to common stockholders | $25.2 million; $0.68 diluted EPS | $22.7 million; $0.67 diluted EPS |
| Operating cash flow | $85.7 million | $72.2 million |
| Same-property revenue | $128.6 million | Up 5.9% |
| Same-property NOI | $88.0 million | $83.0 million |
| FFO / Core FFO per diluted share | $1.97 / $1.87 | $1.63 / $1.64 |
| Quarterly common dividend per share | $1.21 | $1.10 |
Same-property scheduled rents rose 6.7% on average, while same-property financial occupancy declined 30 basis points to 96.6%. Reported property revenue growth also reflected twelve communities acquired or consolidated since January 1, 2012. Property operating expenses, excluding real estate taxes, rose 13.4%; real estate taxes rose 24.0%; and depreciation rose 15.7%, with acquisitions contributing to the increases.
Cash and cash equivalents were $55.6 million, including $30.8 million unrestricted; marketable securities were $80.4 million. Total debt—mortgages, unsecured debt, and line borrowings—was approximately $2.77 billion. The company reported $102.3 million drawn on a $600 million unsecured credit line and no borrowings on its separate $25 million working-capital line. Total liabilities were $2.95 billion. Management stated available liquidity and capital sources were sufficient for reasonably anticipated cash needs over the next twelve months.
Material changes and unusual items
Q1 2013 net income included a $1.5 million gain on a land sale; interest and other income included a $1.8 million realized gain on securities and $0.8 million related to a note-receivable discount estimate. Equity income from co-investments increased to $4.2 million from $2.3 million. By contrast, Q1 2012 included $10.0 million of discontinued-operations income, largely from apartment-community sales; there were no community sales or discontinued-operations income in Q1 2013. The differing property-sale and other one-time items affect period comparisons.
Essex acquired the 56-unit Annaliese community in Seattle for $19.0 million and the 444-unit Fox Plaza property in San Francisco for $135.0 million. It sold a Palo Alto land parcel for $9.1 million, recognizing a $1.5 million gain. It also sold 817,445 common shares for net proceeds of $122.9 million. Net cash used in investing activities was $105.7 million, including $176.0 million of real estate acquisitions and $45.5 million of contributions to co-investments.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. The development and predevelopment pipeline comprised 2,669 units, with estimated total costs of $926.1 million, $528.7 million incurred, and approximately $397.4 million remaining. Management expects to fund it through working capital, credit facilities, securities offerings, and possible property dispositions. Management noted that capital-market conditions and interest-rate changes could affect financing costs and acquisition, development, and disposition plans.
Subsequent to quarter-end, Essex issued $300 million of 3.25% senior notes due 2023, receiving approximately $295.2 million net; proceeds were intended to repay credit-line debt and for general corporate and working-capital purposes. The company had investment-grade ratings of BBB+/Stable, Baa2/Stable, and BBB/Stable from Fitch, Moody’s, and S&P, respectively.
Risks include development cost or completion overruns, weaker property markets, refinancing or capital-access challenges, and environmental or mold-related claims. Substantially all properties are in earthquake-prone areas, and the company stated it does not insure against certain extraordinary losses such as earthquakes. Potential liabilities for mold and other environmental matters were not considered probable or could not be quantified. Essex disclosed maximum guarantee exposures of $70.0 million for the Expo construction completion guarantee and $68.0 million for guarantees relating to The Huxley and The Dylan. The filing reported no material change in the risk factors from the 2012 Form 10-K. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much same-property rent growth and occupancy performance persist, particularly given the 30-basis-point year-over-year occupancy decline.
- The extent to which reported revenue and earnings growth reflects acquisitions versus ongoing comparable-property operations, and the effect of Q1 nonrecurring gains.
- Funding, timing, and cost assumptions for the $397.4 million of remaining pipeline expenditures, alongside planned acquisitions and dividends.
- Debt maturities, variable-rate exposure, availability under credit facilities, and the use of proceeds from the April 2023-note issuance.
- Potential exposure under the $70.0 million and $68.0 million guarantees, and the financial impact of unquantified environmental, mold, or uninsured earthquake losses.