01—Abstract
Summary
Summary of the 10-K filed February 25, 2011. Cited figures are marked; the original filing is the authoritative source.
Essex Property Trust (ESS), a self-administered West Coast apartment REIT, closed 2010 with 147 communities totaling 30,072 units, plus five commercial buildings and two active development projects (436 units).
Total revenues rose 1.0% to $415.7 milliona, but the story is mixed: same-property revenues fell 3.3% as scheduled rents declined about 4%, while growth came from roughly $584 million of acquisitions (twelve communities) and the lease-up of recently completed development. Net income available to common stockholders fell to $33.8 million ($1.14 per diluted share) from $82.2 million in 2009, which benefited from a one-time $50.0 million preferred stock repurchase gain that did not recur. FFO totaled $171.4 million for 2010, down from $200.4 million in 2009, and the company's FFO per diluted share is implicitly lower year over year.
Balance sheet activity was substantial. Total assets grew to $3.73 billionb, and total indebtedness reached roughly $2.26 billion, including $695 million of variable-rate debt, of which $192 million is capped by interest rate caps. The company funded growth with $251 million of common equity, a $440.6 million of fixed-rate mortgage financing (with settled swaps lifting the effective rate to about 6.4-6.8%), and a $275 million unsecured line of credit.
Management says liquidity is sufficient for 2011, and it raised the quarterly dividend by $0.01 to $1.04c per share in February 2011 (an annualized $4.16). Management expects 2011 same-property revenue growth of about 3.5%, with the most optimistic regional assumptions in Southern and Northern California.
Key risks for investors are the heavy geographic concentration (81%d of rental revenue from California, and nearly all communities exposed to earthquake risk, with the company self-insuring earthquake losses through its subsidiary PWI), leverage that is meaningful relative to the asset base, and governance factors, including the chairman's outside real estate interests and significant influence through ownership of about 4.7% of shares and limited partnership units. The Maryland business combination exemption for the chairman and his affiliates also limits certain takeover protections.
02—Key points
Key Highlights
- Total revenues rose 1.0% to $415.7 million in 2010, but same-property revenues fell 3.3% as scheduled rents declined 4.0% on average to $1,301 per unit.
- Net income available to common stockholders dropped to $33.8 million ($1.14 per diluted share) from $82.2 million ($2.91) in 2009, which included a one-time $50.0 million gain on repurchased Series G preferred stock.
- FFO fell to $171.4 million from $200.4 million in 2009, a significant decline that management attributes partly to the non-recurring 2009 items and higher interest and depreciation costs.
- Acquisitions of about $584 million across twelve West Coast communities in 2010 expanded the portfolio, with no dispositions, and funded largely through $251.4 million of common equity issuance.
- Total indebtedness of about $2.26 billion, including $695.2 million of variable-rate debt, and roughly 81% of rental revenue from California; the company has an unsecured line of credit of $275 million and a $250 million Freddie Mac facility.
- Management guides to about 3.5% same-property revenue growth in 2011, with the dividend raised to $1.04 per quarter ($4.16 annualized) starting in April 2011.
- Development pipeline of 436 units in two active projects ($170.9 million estimated cost, $53.6 million remaining) plus 1,126 units in predevelopment and 1,032 units in redevelopment.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 25, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $410.28M$408.88M | +0.3% |
| Operating Expenses | $299.65M$297.15M | +0.8% |
| Operating Income | $110.63M$111.73M | −1.0% |
| Interest Expense | $82.76M$81.20M | +1.9% |
| Net Income | $35.93M$37.11M | −3.2% |
| EPS (Basic) | $1.14$3.01 | −62.1% |
| EPS (Diluted) | $1.14$2.91 | −60.8% |
| Shares Outstanding (Basic) | 29.67M27.27M | +8.8% |
| Shares Outstanding (Diluted) | 29.73M29.75M | 0.0% |
05—Questions
Frequently Asked Questions
Why did net income available to common stockholders fall so sharply in 2010?
The 2009 result was boosted by a $50.0 million excess from repurchasing Series G preferred stock below carrying value, plus $4.8 million in gains on early debt retirement and $8.7 million from discontinued operations. Those items did not recur in 2010, and same-property revenues declined 3.3%. Net income available to common stockholders fell to $33.8 million from $82.2 million.
Is the company's revenue outlook improving?
Management reports that same-property revenues began sequential growth in the third quarter of 2010 and expects 2011 same-property revenue to rise about 3.5%. It assumes rental income growth of 2% to 3% in Southern California, 4% to 5% in Northern California, and 4% to 5% in Seattle Metro, supported by limited new supply and job growth assumptions.
How leveraged is Essex, and what are the main debt risks?
Total indebtedness was about $2.26 billion at year-end 2010, including $695.2 million of variable-rate debt, of which $191.9 million is capped by interest rate caps. The company's secured mortgages carry a weighted fixed rate of roughly 5.0% to 6.0%, with about $93 million maturing in 2011 and $1.33 billion after 2015. Refinancing risk and rising rates are the primary concerns, and the company has covenants on its unsecured line that it says it complied with.
What are the main concentration and catastrophe risks?
About 81% of 2010 rental revenue came from California, concentrated in Southern California, the Bay Area, and Seattle. Substantially all communities are in earthquake-prone areas. The company does not carry third-party earthquake insurance and instead self-insures through its subsidiary Pacific Western Insurance LLC, so a major earthquake could produce material uninsured losses.
Does the chairman's involvement create governance concerns for shareholders?
George Marcus, the non-employee chairman, owns about 4.7% of shares including operating partnership units and has significant influence over board elections and major corporate actions. He is also chairman of The Marcus & Millichap Company, which may compete for apartment acquisitions. The board has exempted him, the company, and his affiliates from Maryland's business combination restrictions, so future transactions with them would not face the statute's supermajority requirements.
06—Continue