01—Abstract
Summary
Summary of the 10-K filed February 29, 2008. Cited figures are marked; the original filing is the authoritative source.
Essex Property Trust (NYSE: ESS) closed 2007 as a West Coast apartment REIT with 134 apartment communities (27,489 units), concentrated in Southern California (about 48%a of units), Northern California (about 31%), and Seattle (about 20%).
Total property revenue rose 14.5% to $383.4 millionb, and net income available to common stockholders more than doubled to $106.5 million, though much of that jump came from the December 2007 sale of four Portland communities ($47.6 million gain) and the February 2007 City Heights joint venture sale ($13.7 million gain plus $10.3 million in fees). Same-property revenue grew 6.5%, and the Northern California and Seattle markets led with 9.4% and 11.0% growth respectively, while Southern California grew 4.4%. Same-property financial occupancy was steady at about 95.9%.
The company is funding a large development pipeline of roughly $770.6 millionc in consolidated projects, with about $537.1 million still to be spent. Leverage is manageable at a debt-to-total-market-capitalization ratio of about 35.7% versus a 50% policy cap, and the interest coverage ratio improved to 3.0x. However, total indebtedness of about $1.66 billion carries significant refinancing exposure, with roughly $993 million of debt maturing after 2012 and $125 million coming due in 2008 alone.
Management also disclosed a $200 milliond share repurchase program, with $32.6 million used in 2007, and raised the quarterly dividend by $0.09 to $1.02 per share for Q1 2008. Key risks for investors include the high geographic concentration on the West Coast (81% of property revenue from California), earthquake exposure that is now partly self-insured through a new captive insurer, dilution potential from the $225 million exchangeable notes and the Series G convertible preferred, and governance influence held by Chairman George Marcus (about 7.1% ownership). The company's balance sheet and access to Fannie Mae and Freddie Mac financing are presented as insulating it from the tightening credit markets, though management acknowledged widening credit spreads.
02—Key points
Key Highlights
- Total property revenues grew 14.5% to $383.4 million in 2007, driven by 12 acquisitions since January 2006 and a 6.5% increase in same-property revenues to $303.5 million.
- Net income available to common stockholders rose to $106.5 million ($4.24 diluted EPS) from $57.6 million, but this was inflated by roughly $74 million of discontinued operations gains, including the Portland sale and City Heights.
- Same-property revenue growth was strongest in Seattle (+11.0%) and Northern California (+9.4%), while Southern California grew a more modest +4.4%.
- Consolidated development pipeline totals $770.6 million across 2,776 units, with $233.5 million incurred and about $537.1 million still to be spent; the redevelopment pipeline adds another $135.6 million.
- Total indebtedness of about $1.66 billion, with a debt-to-total-market-cap ratio of 35.7% (policy cap 50%) and interest coverage of 3.0x; $125.2 million of principal and balloon payments are due in 2008.
- Quarterly dividend increased by $0.09 to $1.02 per share for Q1 2008 (about $4.08 annualized); the company has $154 million remaining under its $200 million buyback authorization.
- Approximately 81% of property revenue comes from California, and substantially all properties are in earthquake-prone areas, now partly self-insured through the wholly owned insurer Pacific Western Insurance LLC.
03—Questions
Frequently Asked Questions
Why did net income more than double in 2007, and is that growth sustainable?
Most of the increase came from discontinued operations, which contributed $74.0 million in 2007 versus $29.7 million in 2006, mainly from the $47.6 million gain on the Portland sale and the $13.7 million gain plus $10.3 million in fees from City Heights. Income from continuing operations was $41.7 million, up from $33.0 million, a more sustainable improvement driven by acquisitions and rent growth. Investors should look at continuing operations and FFO, which was $153.9 million including gains, to judge the underlying trend.
How exposed is Essex to refinancing risk?
Refinancing exposure is significant. Of roughly $1.66 billion of debt, approximately $993 million matures after 2012, and scheduled principal and balloon payments are $125.2 million in 2008, $185.7 million in 2009, and $154.8 million in 2010. Management says it has strong relationships with its bank group and access to Fannie Mae and Freddie Mac financing, and that its credit spreads have widened to around 200 basis points over Treasuries, which raises the cost of refinancing.
What are the main sources of potential dilution for common shareholders?
Several instruments could dilute common holders: the $225 million 3.625% exchangeable senior notes (exchange price about $103.25), the $149.5 million 4.875% Series G convertible preferred (initial conversion price about $136.62), limited partnership units representing about 9.1% of the operating partnership, and an effective shelf registration covering future equity and debt issuance. The company also sold 1.67 million shares in 2007 at an average price of $127.91.
How concentrated is the portfolio, and how does that affect risk?
The portfolio is highly concentrated on the West Coast. About 81% of property revenues come from California, and the company's communities are located in supply-constrained coastal markets such as Los Angeles, Orange, and San Diego counties, the San Francisco Bay Area, and the Seattle metro area. This concentration gives Essex strong exposure to local job growth and supply constraints, but it also leaves results vulnerable to regional downturns in high-tech employment and to earthquake losses, which the company only partially insures.
04—Continue