01—Abstract
Summary
Summary of the 10-K filed February 27, 2012. Cited figures are marked; the original filing is the authoritative source.
Essex Property Trust (NYSE: ESS) is a self-administered, self-managed West Coast apartment REIT that ended 2011 with 159 communities totaling 32,753 units, plus five commercial buildings and five active joint-venture development projects (1,235 units).
Roughly 82% of rental revenue came from California, with the remainder from the Seattle metro area. The company's 2011 results showed steady growth: total revenues rose 15% to $475.6 milliona, net income available to common stockholders was $40.4 million ($1.24 per diluted share, versus $1.14 in 2010), and funds from operations (FFO) grew to $200.2 million from $171.4 million. Same-property revenues increased 3.9%, with Northern California leading at 5.7%.
The balance sheet expanded materially through acquisitions, joint ventures and capital raises. Total assets reached $4.04 billionb, and the company acquired eleven communities for about $533 million, largely through the Wesco I joint venture with an institutional partner. The company also raised $323.9 million of common equity, issued $265 million of unsecured private placement bonds at 4.36%–4.92%, closed a $200 million unsecured term loan (partly swapped to a 2.66% fixed rate), and replaced its Freddie Mac facility with a $425 million unsecured line of credit.
Total indebtedness was about $2.36 billionc, with $593.7 million (about 25%) at variable rates. Ratings were BBB/Stable from S&P and Fitch, and Moody's initiated coverage at Baa2 in February 2012.
Management guided to 2012 same-property revenue growth of 5% to 7% and NOI growth of 7% to 9%, and the board raised the annualized dividend by $0.24 to $4.40d per share. Key risks include geographic concentration in high-cost coastal California markets, substantial leverage, earthquake exposure (largely self-insured through a captive insurer), and governance factors such as Chairman George Marcus's outside real estate interests and his significant ownership stake.
02—Key points
Key Highlights
- FFO rose about 17% to $200.2 million in 2011 (from $171.4 million), and net income available to common stockholders increased to $40.4 million, or $1.24 per diluted share, from $1.14 in 2010.
- Same-property revenues grew 3.9% to $393.1 million, led by Northern California (+5.7%) and Seattle Metro (+4.6%), with average rents rising 4.1% to $1,367 per unit; financial occupancy eased slightly to 96.4%.
- The company acquired eleven communities for about $533 million in 2011, largely through the Wesco I joint venture, and expanded its co-investment platform (Fund II, Wesco I and II, and several development JVs).
- Capital markets activity was heavy: $323.9 million of common equity issued at an average of $133.29, $265 million of new unsecured bonds at 4.36%–4.92%, and a $200 million term loan with swaps fixing $150 million at 2.66%.
- Total indebtedness was about $2.36 billion; $593.7 million (about 25%) was variable rate, of which $187.8 million is covered by interest rate caps, and secured debt was reduced to $1.75 billion from $1.83 billion.
- Management guided to 2012 same-property revenue growth of 5%–7% and NOI growth of 7%–9%, and the board raised the annualized common dividend by $0.24 to $4.40 per share.
- Balance sheet strength: total assets reached $4.04 billion, stockholders' equity was $1.44 billion, and the company carries BBB/Stable ratings from S&P and Fitch, with Moody's initiating coverage at Baa2 in February 2012.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 27, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $467.44M$410.28M | +13.9% |
| Operating Expenses | $332.82M$299.65M | +11.1% |
| Operating Income | $134.62M$110.63M | +21.7% |
| Interest Expense | $91.69M$82.76M | +10.8% |
| Net Income | $47.07M$35.93M | +31.0% |
| EPS (Basic) | $1.24$1.14 | +8.8% |
| EPS (Diluted) | $1.24$1.14 | +8.8% |
| Shares Outstanding (Basic) | 32.54M29.67M | +9.7% |
| Shares Outstanding (Diluted) | 32.63M29.73M | +9.7% |
05—Questions
Frequently Asked Questions
How did Essex's core operating performance trend in 2011?
Same-property revenues rose 3.9% to $393.1 million, driven by a 4.1% increase in average rents to $1,367 per unit. Northern California was the strongest region (+5.7%), followed by Seattle Metro (+4.6%) and Southern California (+2.7%). Financial occupancy slipped 50 basis points to 96.4%, reflecting a deliberate shift toward pushing rents over occupancy. Total revenues grew 15% to $475.6 million, largely because of acquisitions and lease-up of development properties.
How much leverage does Essex carry, and what are the main refinancing and interest-rate risks?
Total indebtedness was about $2.36 billion at year-end 2011, including $1.75 billion of secured mortgage debt, $465 million of unsecured bonds and term loan, and $150 million drawn on the $425 million line of credit. About $593.7 million (roughly 25%) is variable rate, but $150 million of the term loan is swapped to fixed at 2.66% and $187.8 million is protected by interest rate caps. Fixed-rate debt averages roughly 4.9% to 7.4%. Maturities are modest near term (about $36 million in 2012 and $216 million in 2013), but a significant share of mortgage debt comes due after 2016, and the company notes that refinancing could occur at higher rates.
What are the main risks to the dividend and to the investment thesis?
The main risks are concentration in high-cost coastal markets (82% of rental revenue from California), where a regional recession or oversupply could compress rents. Earthquake exposure is largely self-insured through the captive insurer Pacific Western Insurance. Leverage and a reliance on capital markets for acquisitions and development create refinancing and dilution risk, as the company frequently issues equity. Governance factors include Chairman George Marcus's outside real estate interests (which create potential conflicts), his roughly 4.4% ownership, and the Maryland business combination exemption for transactions with him. The 2012 dividend increase to $4.40 annualized also depends on continued FFO growth, since the company pays out a large share of FFO.
What drove the growth in Essex's external platform and co-investments, and why does it matter?
Essex expanded its co-investment strategy through Essex Apartment Value Fund II (a 28.2% interest with about $265.9 million of partner equity), the Wesco I 50/50 programmatic joint venture ($200 million commitment, $78.3 million contributed, six communities), and the new Wesco II preferred equity investment in Park Merced. Essex also formed development JVs with CPPIB and a regional developer. These structures bring in institutional capital, generate asset and property management fees (fees from affiliates rose 49% to $6.8 million), and offer promoted interests, while reducing the capital the company must put in directly. The trade-off is that much of the portfolio's growth now sits in equity-method investments with shared control and joint venture partner risk.
What do the 2012 outlook and recent events signal for the company?
Management expects 2012 same-property revenue growth of 5%–7%, with same-property NOI growth of 7%–9% after 5.5% in 2011, supported by lease renewals at higher rents, new supply in its markets that is small relative to existing stock (0.1%–0.5%), and job growth assumptions of roughly 1.2%–1.8%. Subsequent events include acquisitions of Bon Terra ($16.0 million) and Reed Square ($23.0 million), an agreement to sell two San Diego communities for about $28.4 million at a gain, and a $25 million increase in the working capital line. Together with the raised dividend, these point to management's confidence in an improving West Coast apartment market, though the outlook depends on job growth and continued rent increases.
06—Continue