01—Abstract
Summary
Summary of the 10-K filed March 31, 2003. Cited figures are marked; the original filing is the authoritative source.
Essex Property Trust (NYSE: ESS) closed 2002 as a self-administered, self-managed west coast multifamily REIT with interests in 112 properties totaling 23,699 apartment units, concentrated in Southern California (13,654 units), the Pacific Northwest (5,444 units) and Northern California (4,023 units).
Total revenues were $200.1 milliona, down 1.7% from $203.5 million in 2001, as a 5.3% decline in same-store property revenues (driven by Northern California rent cuts and Pacific Northwest weakness) was only partly offset by newly acquired properties. Net income rose 8.9% to $52.9 million, but that gain was flattered by an $8.1 million gain on the sale of Tara Village, and income from continuing operations actually fell to $44.6 million from $47.9 million. Funds from operations rose to $94.6 million from $92.3 million, helped by the December 2002 Sachs portfolio acquisition, which added roughly $306.7 million of real estate and 2,683 units in San Diego County.
The balance sheet grew and leverage rose. Total property debt climbed to $804.1 millionb from $638.7 million, and the company's debt-to-total-market-capitalization ratio was about 36.4%, below its 50% policy limit. Investors should note that approximately $55.6 million of debt matures in 2003 and $104.6 million in 2004, including a $96.5 million balance on the $165 million unsecured line.
Management expects to refinance these balances, but the filing explicitly warns that refinancing terms may be less favorable. Variable-rate exposure of about $185.9 millionc is only partly hedged, so rising rates would pressure earnings. The dividend was raised to $0.77 per quarter ($3.08 annualized) from $0.70 in 2001.
The filing also highlights several risks: heavy geographic concentration in California, a recessionary environment in the western states, a large development pipeline of 1,518 units with about $51.2 milliond of remaining company commitments, the Essex Apartment Value Fund (a $250 million co-investment vehicle), and governance concentration, since Chairman George Marcus and affiliates hold roughly 7.5% of shares and the Sachs trusts hold about 13%. Environmental and mold-related exposure is disclosed, but management does not consider it material.
02—Key points
Key Highlights
- Total revenues fell 1.7% to $200.1M in 2002 from $203.5M, reflecting a 5.3% decline in same-store property revenues, concentrated in Northern California (-12.5%) and the Pacific Northwest (-6.9%).
- Net income rose 8.9% to $52.9M, but $8.1M of that came from a one-time gain on the Tara Village sale; income from continuing operations declined to $44.6M from $47.9M.
- Funds from operations increased to $94.6M from $92.3M, supported by the $306.7M Sachs portfolio acquisition (2,683 units in San Diego County plus Houston, Hemet and RV/manufactured housing sites).
- Total property debt rose to $804.1M from $638.7M, with a debt-to-total-market-cap ratio of about 36.4% versus a 50% policy ceiling.
- Refinancing risk is significant: $55.6M of debt matures in 2003 and $104.6M in 2004, including the $96.5M drawn on the $165M unsecured credit line; about $185.9M is variable-rate, with only $59.4M capped.
- Quarterly dividend increased to $0.77 per share from $0.70 (annualized $3.08 vs. $2.80), while 2002 share repurchases of $19.7M used part of the $50M authorization.
- Concentration risk is high: 83 of 112 properties are in California, and the Chairman plus the Sachs trusts together hold meaningful influence (roughly 7.5% and 13% of shares, respectively).
03—Questions
Frequently Asked Questions
Is Essex's core apartment business getting weaker, and why?
Yes, on a same-store basis. Same-store property revenues fell 5.3% in 2002, driven by rental rate declines in Northern California (-12.5%) and the Pacific Northwest (-6.9%), partly offset by a 3.6% gain in Southern California. Average financial occupancy held near 95%, so the pressure came mainly from lower market rents amid a regional recession and high-tech weakness.
Did the higher 2002 net income reflect stronger operations?
Not entirely. Net income increased to $52.9M, but about $8.1M came from the one-time gain on the Tara Village sale. Income from continuing operations fell to $44.6M from $47.9M, mainly because revenue declined while interest expense fell only modestly and minority interest expense was roughly flat.
How exposed is Essex to refinancing and interest rate risk?
Meaningfully. Total property debt was $804.1M at year-end 2002, with $55.6M maturing in 2003 and $104.6M in 2004. About $185.9M is variable-rate, of which only $59.4M is capped (at 7.1%–7.3%), and the $126.5M of line-of-credit borrowings at LIBOR plus 1.10% is unhedged. Management says it expects to refinance, but terms may be less favorable.
What is the Sachs acquisition and how was it paid for?
On December 17, 2002, Essex acquired John M. Sachs, Inc. by merger for a total cost of $306.7M. Consideration consisted of 2,719,875 newly issued common shares (valued at $136.8M), about $64.6M of assumed mortgages, roughly $33M of assumed or repaid liabilities, and $72.2M in cash funded by four new mortgages totaling $62M and draws on credit lines. The Sachs trusts now own about 13% of the company.
Are there notable risks for dividend-focused investors?
Yes. The company raised its dividend to $3.08 annualized, which is covered by FFO of about $4.50 per diluted share (based on $94.6M FFO over roughly 21.0M diluted shares) but would be stressed by a prolonged California downturn, refinancing costs, or preferred unit distribution obligations. The filing also notes that the Maryland business-combination exemptions for Chairman George Marcus and William Millichap, together with the Operating Partnership's partner consent rights, could limit shareholder protections in certain transactions.
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