01—Abstract
Summary
Summary of the 10-K filed February 25, 2013. Cited figures are marked; the original filing is the authoritative source.
Essex Property Trust (NYSE: ESS) closed 2012 as a West Coast-focused apartment REIT with 163 communities and 33,468 units, plus five commercial buildings and nine active development projects.
Total revenue rose 15% to $543.4 milliona and net income available to common stockholders more than tripled to $119.8 million ($3.41 diluted EPS), though much of the jump reflects a $106 million gain on co-investment property sales (Company share $29.1 million), a $21.9 million remeasurement gain, and $10.9 million of real estate sale gains. Same-Property revenue grew 6.7%, with Northern California (+9.6%) and Seattle (+8.4%) outpacing Southern California (+4.2%), and Same-Property NOI rose 9.2%. Funds from operations per diluted share were $6.71 (Core FFO $6.82), up from $5.74 in 2011 and above the $5.64 Core FFO of 2011.
The balance sheet grew substantially, with total assets reaching $4.85 billionb, driven by about $802 million of acquisitions (fifteen communities), a $300 million 3.625% senior unsecured bond issuance due 2022, and $358 million of common equity raised. Leverage remains investment-grade oriented: total indebtedness was roughly $2.82 billion, with $693 million variable rate, and credit ratings were upgraded (Fitch BBB+). Management guided 2013 Same-Property revenue growth of 5.0%–6.5%, Same-Property NOI growth of 6.0%–8.0%, and a 0.44 per-share increase in the annualized dividend to $4.84.
Investors should weigh the strong operating momentum and supply-constrained coastal markets against risks: 82%c of rental revenue comes from California, heavy reliance on joint ventures and co-investments (Wesco I, Wesco II, Fund II, CPPIB developments), exposure to earthquakes (the company self-insures earthquake losses through its subsidiary PWI), governance concentration in Chairman George Marcus (about 4.4% ownership with conflict-of-interest exemptions), and rising development and co-investment guarantees. Note that some 2012 earnings were non-recurring gains, so year-over-year comparisons of net income are not representative of recurring operating performance.
02—Key points
Key Highlights
- Portfolio of 163 communities (33,468 units) concentrated in Southern California, Northern California and Seattle; 82% of rental revenue from California.
- Total revenues up 15% to $543.4 million; Same-Property revenue up 6.7% and Same-Property NOI up 9.2%, led by Northern California (+9.6%) and Seattle Metro (+8.4%).
- Net income available to common stockholders of $119.8 million ($3.41 diluted EPS), boosted by non-recurring gains of roughly $106 million at the Fund II co-investment (Company share $29.1 million), a $21.9 million remeasurement gain on Essex Skyline, and $10.9 million of real estate sale gains.
- FFO of $6.71 per diluted share ($250.9 million) and Core FFO of $6.82, up from $5.74 and $5.64 in 2011.
- Invested about $802 million in fifteen acquisitions and raised $358 million of common equity, funded with a $300 million 3.625% 2022 senior bond and a term loan increase to $350 million.
- Balance sheet strengthened with total assets of $4.85 billion, total debt of about $2.82 billion, and a Fitch upgrade to BBB+; 2013 guidance calls for 5%–6.5% Same-Property revenue growth and a dividend increase to an annualized $4.84 per share.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 25, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $535.15M$467.44M | +14.5% |
| Operating Expenses | $368.13M$332.82M | +10.6% |
| Operating Income | $167.03M$134.62M | +24.1% |
| Interest Expense | $111.89M$91.69M | +22.0% |
| Net Income | $125.28M$47.07M | +166.2% |
| EPS (Basic) | $3.42$1.24 | +175.8% |
| EPS (Diluted) | $3.41$1.24 | +175.0% |
| Shares Outstanding (Basic) | 35.03M32.54M | +7.7% |
| Shares Outstanding (Diluted) | 35.12M32.63M | +7.7% |
05—Questions
Frequently Asked Questions
What drove the large increase in 2012 net income?
Net income available to common stockholders rose to $119.8 million from $40.4 million, largely because of non-recurring items: the Company's pro-rata share of the Fund II portfolio sale gain ($29.1 million), a $21.9 million gain on remeasuring the Essex Skyline co-investment after acquiring the partner's stake, and $10.9 million of real estate sale gains. Investors should focus on FFO and Same-Property NOI, which show steadier operating growth.
How strong is the operating performance outlook for 2013?
Management expects 2013 Same-Property revenue to grow 5.0%–6.5% with financial occupancy steady at 96.3%, Same-Property operating expenses to rise 3.0%–4.0%, and Same-Property NOI growth of 6.0%–8.0%. Regional rent growth forecasts are strongest in Northern California (6.5%–8.0%) and Seattle (6.0%–7.5%).
What are the main risks to investors?
Key risks include geographic concentration (82% of rental revenue from California and exposure to earthquakes, which the Company largely self-insures), leverage of about $2.82 billion including $693 million of variable rate debt, reliance on joint ventures where partners may have conflicting interests, and significant influence by Chairman George Marcus, who owns about 4.4% of shares and has a conflict-of-interest exemption under Maryland law.
How is the company funding its growth and what is its financial flexibility?
Growth is funded through a mix of unsecured bonds ($465 million privately placed plus $297 million public bonds), a $350 million term loan, a $600 million unsecured line of credit (increased from $500 million in January 2013), ongoing equity distribution programs (1.34 million shares still available), and co-investment partners such as Wesco I, Wesco III and Fund II. The company reports compliance with its debt covenants and expects cash flows to meet 2013 needs.
Is the dividend sustainable and how has it changed?
The Board increased the annualized common dividend by $0.44 to $4.84 per share, with the first-quarter 2013 payment set at $1.21 per share. In 2012, dividends per share totaled $4.40, and FFO of $6.71 per diluted share covered the distribution comfortably. Investors should note that a portion of distributions is classified as return of capital (12.7% in 2012).
06—Continue