01—Abstract
Summary
Summary of the 10-K filed February 27, 2009. Cited figures are marked; the original filing is the authoritative source.
Essex Property Trust (NYSE: ESS) closed 2008 as a West Coast apartment REIT with 134 apartment communities (26,992 units) concentrated in Southern California, the San Francisco Bay Area, and Seattle, plus six office buildings (~478,300 sq ft).
Same-property revenue grew 4.5% to $329.1 milliona, with same-property financial occupancy at 96.3%, and total property revenue rose 9.0% to $407.7 million, largely from acquisitions. Net income available to common stockholders fell to $56.1 million ($2.21 diluted EPS) from $106.5 million in 2007, which benefited from large 2007 asset sales (Portland portfolio and City Heights) that were not repeated in 2008. Funds from operations was $170.9 million for 2008 versus $153.9 million in 2007, a more representative gauge of recurring performance for a REIT.
The balance sheet carries significant leverage and refinancing risk. Total debt is roughly $1.76 billionb, with about $1.47 billion of mortgage notes payable at fixed rates averaging around 5.3% to 6.9% depending on vintage. Scheduled principal and balloon payments are modest near term ($35.8 million in 2009, $152.4 million in 2010), but the company acknowledges it does not expect operating cash flow to cover all balloon payments, and about $1.08 billion matures after 2013.
Derivative liabilities on $375 million of forward-starting swaps grew to $73.1 millionc as rates fell, and the 2025 exchangeable bonds were partly repurchased at a discount. Management states liquidity is sufficient for 2009 needs, supported by a $200 million unsecured line (LIBOR + 0.8%, extended to March 2010), a $150 million Freddie Mac secured line, and $41.9 million of unrestricted cash. Management's 2009 outlook is cautious.
The filing assumes a 1.3% GDP decline and about 2 million lost U.S. jobs, and it projects market rent declines of 0.7% to 2.5% across the three regions. The company raised its quarterly dividend by $0.01 to $1.03d per share in early 2009, a stock price of $56.09 as of late February 2009 versus a 2008 high of $129.57 indicating heavy market skepticism, and it repurchased Series G preferred stock and exchangeable bonds at discounts in Q1 2009. Investors should weigh the strong balance sheet and development pipeline against the refinancing wall, concentration in high-tech-exposed West Coast markets, and the pressure on rents and occupancy from weakening employment.
02—Key points
Key Highlights
- Total property revenues rose 9.0% to $407.7 million in 2008; same-property revenues grew 4.5% to $329.1 million, with Northern California (+9.3%) and Seattle (+7.8%) outpacing Southern California (+1.6%).
- Net income available to common stockholders dropped to $56.1 million ($2.21 diluted EPS) from $106.5 million ($4.24) in 2007, reflecting the absence of large 2007 gains from the Portland portfolio and City Heights sales.
- Funds from operations increased to $170.9 million from $153.9 million, and cash flow from operations rose to $181.2 million.
- Total indebtedness is about $1.76 billion, with $1.47 billion of mortgage notes; management warns it does not expect operating cash flow to cover all balloon payments and faces $152.4 million due in 2010 and $312.8 million due in 2013.
- Consolidated development pipeline totals $676.3 million of estimated project cost with $404.0 million still to be spent, funded mainly through lines of credit and construction loans.
- The company raised its quarterly dividend to $1.03 per share in 2009 but stock traded at $56.09 in late February 2009, down from a 2008 high of $129.57.
- Liquidity includes $41.9 million of unrestricted cash, $23.9 million of marketable securities, a $200 million unsecured line, and a $150 million Freddie Mac secured line; the 2025 exchangeable bonds were repurchased at a discount in both 2008 and early 2009.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 27, 2009Financial Statements
| Revenue | $408.43M |
| Operating Expenses | $270.45M |
| Operating Income | $137.98M |
| Interest Expense | $85.06M |
| Net Income | $62.14M |
| EPS (Basic) | $2.10 |
| EPS (Diluted) | $2.09 |
| Shares Outstanding (Basic) | 25.21M |
| Shares Outstanding (Diluted) | 25.35M |
05—Questions
Frequently Asked Questions
Why did net income fall so sharply in 2008 if revenues grew?
2007 net income of $115.6 million included large one-time gains from selling four Portland communities (about $47.6 million net of minority interest) and the City Heights joint venture property (about $13.7 million plus $10.3 million in fees). 2008 had only $4.6 million in gains on sale of real estate and $3.5 million from early debt retirement, so reported net income fell even though operating results improved.
How much debt does Essex carry, and when does it come due?
Total debt is about $1.76 billion, including $1.47 billion of mortgage notes payable, $171.7 million of exchangeable bonds (after repurchases, $100.4 million outstanding as of February 2009), and $120 million on the Freddie Mac line. Scheduled principal and balloon payments are $35.8 million in 2009, $152.4 million in 2010, $151.3 million in 2011, $31.8 million in 2012, $312.8 million in 2013, and about $1.08 billion thereafter.
Can Essex keep paying its dividend in a downturn?
The company raised its quarterly dividend to $1.03 per share for 2009 and states it expects cash from operations and credit lines to cover 2009 needs. However, the filing notes that preferred dividends must be paid in full before common dividends, that Maryland law limits distributions, and that it does not expect operating cash flow alone to repay all balloon debt, so refinancing access is a key dividend risk.
What is the outlook for rents and occupancy in 2009?
Management expects market rents to decline 2.5% in Southern California, 0.7% in Northern California, and 2.0% in Seattle in 2009, with job losses of roughly 67,900, 21,000, and 15,000 respectively. Same-property financial occupancy was 96.3% in 2008, and the company acknowledges that rents and occupancy could fall if the economic downturn continues.
What are the main risks for shareholders beyond the economy?
Key risks include geographic concentration (82% of rental revenue from California), refinancing and interest-rate exposure, roughly $236 million of tax-exempt variable-rate bonds with bond-compliance restrictions, potential dilution from the Series G convertible preferred and exchangeable bonds, and the 6.7% ownership and significant influence of Chairman George Marcus. Earthquake losses are largely self-insured through a wholly owned subsidiary, Pacific Western Insurance LLC.
06—Continue