How did Essex perform financially in 2000?

Revenue grew 22.4% to $178.7 million and FFO rose to $80.8 million, driven by acquisitions and same-store rent growth. Net income was nearly flat at $44.4 million because higher interest and depreciation expenses offset the operating gains, and the company also recorded lower gains on property sales than in 1999.

Is the dividend covered and is it likely to be sustained?

The company raised its 2000 dividend to $2.38 per share from $2.15 and said its cash flows should cover REIT distribution requirements. Operating cash flow was $92.2 million against dividends paid of $42.4 million, but the filing warns that future dividends depend on property performance and that preferred distributions could limit common dividend capacity.

What are the main debt-related risks for investors?

Total debt is $595.5 million, and about $97.8 million matures in 2002 with a further $410.9 million in 2006 and later. Management does not expect operating cash flow to cover all balloon payments, so refinancing terms, interest rates, and access to capital markets will be important. About $111.7 million of variable-rate debt is not protected by an interest rate hedge.

How concentrated is the portfolio geographically?

Properties are located in Northern California, Southern California, and the Pacific Northwest, with 57 of 83 multifamily properties in California. The company's results are therefore highly sensitive to the California economy, energy costs, and local real estate conditions, which the filing identifies as a material risk.

Are there governance or related-party concerns?

Yes. Chairman George Marcus beneficially owned about 9.6% of common shares on an as-exchanged basis and has significant influence over the company. The filing also discloses a Marcus & Millichap relationship, a board-approved exemption from Maryland business combination protections for Marcus, Millichap, and their affiliates, and a guarantee of a director and executive stock purchase program that could create company liability.

ESS 10-K FY2000 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 30, 2001. Cited figures are marked; the original filing is the authoritative source.

Essex Property Trust (NYSE: ESS) closed 2000 with a larger, more concentrated West Coast apartment portfolio: 83 multifamily properties and 18,673 units, up from 72 properties and 15,106 units a year earlier.

Total revenues rose 22.4% to $178.7 million^a, and same-store property revenues grew 9.2%, driven mainly by rental rate increases and higher financial occupancy in Northern California (98.2%). Net income was essentially flat at $44.4 million, or $2.37 diluted EPS, as roughly $30.4 million of interest expense (up 42.9%) and higher depreciation absorbed much of the operating gains. Funds from operations rose to $80.8 million from $67.0 million, and the dividend was raised to $2.38 per share from $2.15.

The balance sheet grew more leveraged. Total indebtedness rose to $595.5 million^b from $384.1 million, and the debt-to-total-market-capitalization ratio was about 30.5%, within the company's stated policy ceiling of under 50%. Management disclosed meaningful refinancing risk: $410.9 million of debt matures in 2006 or later, $97.8 million falls due in 2002, and about $111.7 million of variable-rate debt is unhedged.

Development is a further use of capital, with 1,349 units under construction and about $108.6 million^c still to be funded. Investors should also weigh concentration risk, since 57 of 83 properties are in California and a material share of the company's economics runs through joint ventures and related-party arrangements tied to Chairman George Marcus. Overall, the filing describes a company that grew rapidly through acquisitions, improved operating metrics, and maintained REIT dividend coverage, but it did so with rising debt, a 2002 maturity wall, and significant exposure to the California economy and governance-related conflicts.

02—Key points

Key Highlights

Portfolio expanded to 83 multifamily properties (18,673 units) from 72 properties (15,106 units) in 1999, after acquiring 12 properties for about $227.6 million in 2000.
Total revenues increased 22.4% to $178.7 million; same-store property revenues rose 9.2%, led by Northern California (+14.3%) on rent growth and occupancy near 98%.
Net income was $44.4 million ($2.37 diluted EPS), roughly flat year over year, as interest expense rose 42.9% to $30.4 million and gains on sales fell to $4.0 million from $9.5 million.
Funds from operations climbed to $80.8 million from $67.0 million, and the annual common dividend increased to $2.38 per share from $2.15.
Total indebtedness nearly doubled to $595.5 million from $384.1 million, with a debt-to-total-market-capitalization ratio of about 30.5%.
Refinancing exposure is significant: $97.8 million matures in 2002, roughly $111.7 million of variable-rate debt is not hedged, and a $120 million unsecured line matures in May 2002.
Development pipeline of 1,349 units across five communities carries about $108.6 million of remaining commitments, and 57 of the 83 properties are in California, concentrating geographic risk.

03—Questions

Frequently Asked Questions

How did Essex perform financially in 2000?
Revenue grew 22.4% to $178.7 million and FFO rose to $80.8 million, driven by acquisitions and same-store rent growth. Net income was nearly flat at $44.4 million because higher interest and depreciation expenses offset the operating gains, and the company also recorded lower gains on property sales than in 1999.
Is the dividend covered and is it likely to be sustained?
The company raised its 2000 dividend to $2.38 per share from $2.15 and said its cash flows should cover REIT distribution requirements. Operating cash flow was $92.2 million against dividends paid of $42.4 million, but the filing warns that future dividends depend on property performance and that preferred distributions could limit common dividend capacity.
What are the main debt-related risks for investors?
Total debt is $595.5 million, and about $97.8 million matures in 2002 with a further $410.9 million in 2006 and later. Management does not expect operating cash flow to cover all balloon payments, so refinancing terms, interest rates, and access to capital markets will be important. About $111.7 million of variable-rate debt is not protected by an interest rate hedge.
How concentrated is the portfolio geographically?
Properties are located in Northern California, Southern California, and the Pacific Northwest, with 57 of 83 multifamily properties in California. The company's results are therefore highly sensitive to the California economy, energy costs, and local real estate conditions, which the filing identifies as a material risk.
Are there governance or related-party concerns?
Yes. Chairman George Marcus beneficially owned about 9.6% of common shares on an as-exchanged basis and has significant influence over the company. The filing also discloses a Marcus & Millichap relationship, a board-approved exemption from Maryland business combination protections for Marcus, Millichap, and their affiliates, and a guarantee of a director and executive stock purchase program that could create company liability.

04—Continue

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