01—Abstract
Summary
Summary of the 10-K filed February 26, 2010. Cited figures are marked; the original filing is the authoritative source.
Essex Property Trust (NYSE: ESS) closed 2009 with a portfolio of 133 apartment communities (27,248 units) concentrated on the West Coast, 81%a of rental revenue from California, and a 97.0% average same-property financial occupancy.
Results were resilient on occupancy but pressured on pricing: total property revenues rose 0.9% to $407.1 millionb, while same-property revenues fell 2.8% as scheduled rents dropped 3.9%. Net income available to common stockholders was $82.2 million ($2.91 diluted EPS), but that figure is inflated by a $49.95 million non-cash gain from retiring preferred stock below par, and operating earnings from operations fell to $26.5 million from $52.9 million, reflecting $17.4 million of impairment and other charges. The balance sheet was levered but managed.
Total indebtedness was roughly $1.85 billionc, including $490.6 million of variable-rate debt, and the company disclosed significant balloon-payment refinancing risk. Management used equity issuance (2.74 million shares for $198.5 million net) and the repurchase of discounted exchangeable bonds and Series G preferred stock to reduce obligations. Liquidity was supported by $20.7 million of unrestricted cash, $134.8 million in marketable securities, and $450 million of committed credit lines, though the unsecured line is priced at LIBOR plus 300 basis points.
Forward-starting swaps with a $30.5 milliond net liability were in place to hedge future 2010-2011 financings. Looking ahead, management guided to a roughly 5.5% decline in 2010 same-property revenues as leases reset to lower market rents, and it planned up to $300 million of acquisitions and up to $100 million of dispositions.
The first-quarter 2010 dividend was raised by one cent to $1.0325 per share ($4.13 annualized). Investors should weigh the expected 2010 revenue decline, the refinancing schedule, and the Seattle market rent weakness against the company's occupancy strength, development pipeline, and strong recent equity access.
02—Key points
Key Highlights
- Total property revenues rose 0.9% to $407.1 million, but same-property revenues declined 2.8% to $345.6 million as scheduled rents fell 3.9%.
- Average same-property financial occupancy improved 70 basis points to 97.0%, while the company forecasts 2010 same-property revenues to decline about 5.5% as leases reset to lower market rents.
- Net income available to common stockholders of $82.2 million ($2.91 diluted EPS) includes a $49.95 million gain from retiring preferred stock below par; earnings from operations fell to $26.5 million from $52.9 million on $17.4 million of impairment charges.
- Total indebtedness of about $1.85 billion includes $490.6 million of variable-rate debt, and management acknowledged it does not expect operating cash flow to cover all upcoming balloon payments.
- The company raised $198.5 million net from common equity issuance and repurchased $145.0 million of Series G preferred and $166.7 million of exchangeable bonds at discounts to par.
- Geographic concentration is high, with 81% of rental revenue from California, and the Seattle Metro region faced a forecast 2.5% market rent decline in 2010.
- Development pipeline totals 2,242 units with $430.2 million estimated total cost, of which $155.2 million remains to be spent; the 2010 acquisition plan targets up to $300 million and the disposition plan up to $100 million.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 26, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $408.88M$408.43M | +0.1% |
| Operating Expenses | $297.15M$270.45M | +9.9% |
| Operating Income | $111.73M$137.98M | −19.0% |
| Interest Expense | $81.20M$85.06M | −4.5% |
| Net Income | $37.11M$62.14M | −40.3% |
| EPS (Basic) | $3.01$2.10 | +43.3% |
| EPS (Diluted) | $2.91$2.09 | +39.2% |
| Shares Outstanding (Basic) | 27.27M25.21M | +8.2% |
| Shares Outstanding (Diluted) | 29.75M25.35M | +17.4% |
05—Questions
Frequently Asked Questions
Why did net income available to common stockholders jump so much relative to operating performance?
The 2009 net income to common stockholders of $82.2 million includes a $49.95 million excess of carrying amount over cash paid when Series G preferred stock was redeemed below par. Earnings from operations actually declined to $26.5 million from $52.9 million, so the headline earnings figure overstates recurring profitability.
How much debt does Essex carry and what are the refinancing risks?
At December 31, 2009, Essex had about $1.85 billion of mortgage loans, exchangeable bonds, and line of credit borrowings, most subject to balloon payments. Management stated it does not expect operating cash flow to cover all balloon payments and may need to refinance at higher rates or less favorable terms, with foreclosure possible on encumbered communities.
What does management expect for 2010 revenues?
Management forecasts 2010 same-property revenues to decline about 5.5% versus 2009, even though market rents are expected to be flat for the portfolio, because existing leases are resetting to lower market rents during 2010. Regionally, Southern California is projected to see a 1.1% market rent increase, Northern California 0.2%, and Seattle Metro a 2.5% decrease.
Is the dividend safe, and did it change?
Essex increased its quarterly dividend by $0.01 per share, to $1.0325 for the first quarter of 2010 (payable April 15, 2010), an annualized rate of $4.13. The 2009 cash dividend was $4.12 per share. Future distributions remain at the discretion of the Board and depend on cash flows, REIT distribution requirements, and financial condition.
What is the company's exposure to earthquake and mortgage-related risks?
Substantially all communities are in earthquake-prone areas. Essex cancelled its earthquake policy in 2007 and self-insures earthquake losses through its subsidiary Pacific Western Insurance LLC, so a major seismic event could cause uninsured losses. The company also has $197.1 million of tax-exempt variable-rate bonds partially protected by interest rate caps, and $375 million of forward-starting swaps to hedge expected 2010-2011 financings.
06—Continue