01—Abstract
Summary
Summary of the 10-K filed February 26, 2014. Cited figures are marked; the original filing is the authoritative source.
Essex Property Trust (ESS), a West Coast apartment REIT, closed 2013 with a portfolio of 164 communities (34,079 units) concentrated in Southern California (46%a of consolidated units), Northern California (32%) and Seattle (22%).
Total property revenues rose 14.3% to $602.0 millionb, driven largely by 2012-2013 acquisitions, while same-property revenues grew 6.3% to $513.0 million on a 6.3% increase in average rent per unit to $1,597. Net income available to common stockholders was $150.8 million ($4.04 diluted EPS), and FFO per diluted share rose to $7.59 from $6.71, with Core FFO at $7.60. The company guided to 2014 same-property revenue growth of roughly 3.8% to 7.8% by region and raised its quarterly dividend to $1.30 per share, an annualized $5.20.
The dominant investor issue is the pending all-stock-plus-cash merger with BRE Properties, announced December 19, 2013. BRE holders receive 0.2971 ESS shares plus $12.33c in cash per share, with ESS holders diluted to roughly 62% of the combined company. The cash portion is backed by a committed $1.0 billion bridge loan, but the company has not yet secured permanent financing or definitive asset sales, and the bridge expires April 18, 2014.
Three shareholder lawsuits against the deal are pending, and the merger may be terminated if not completed by June 17, 2014. The balance sheet remains conservative for a REIT, with credit ratings of BBB+/Baa2/BBB (Fitch/Moody's/S&P), $3.0 billiond of debt of which 82% of 2013 rental revenue came from California, and a February 2014 expansion of the unsecured line of credit to $1.0 billion. Investors should weigh strong operating momentum and balance-sheet flexibility against integration risk, dilution, higher leverage after the merger, and heavy exposure to supply-constrained but expensive coastal markets.
02—Key points
Key Highlights
- Total property revenues grew 14.3% to $602.0 million in 2013, and same-property revenues rose 6.3% to $513.0 million, led by Northern California (+8.2%) and Seattle Metro (+7.7%).
- FFO per diluted share increased to $7.59 in 2013 from $6.71 in 2012 (+13%), with Core FFO per diluted share of $7.60 versus $6.82.
- Pending BRE Properties merger: each BRE share converts into 0.2971 ESS shares plus $12.33 cash, with ESS holders owning about 62% of the combined company.
- Financing risk on the merger: the $1.0 billion bridge loan expires April 18, 2014, and no definitive permanent debt financing or asset-sale agreements had been signed as of filing.
- Acquisitions totaled $462.5 million for eight communities (1,472 units) in 2013, while dispositions of three communities plus Fund II sales generated substantial gains, including $29.2 million from discontinued operations.
- Dividend raised to $1.30 per quarter ($5.20 annualized) in February 2014, up from $1.21, with 2013 dividends of $4.84 per share.
- Credit ratings of BBB+ (Fitch), Baa2 (Moody's) and BBB (S&P) with stable outlooks; the unsecured credit line was expanded to $1.0 billion and 2014 same-property revenue guidance ranges from 3.8% to 7.8% by region.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 26, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $610.59M$535.15M | +14.1% |
| Operating Expenses | $421.88M$368.13M | +14.6% |
| Operating Income | $188.71M$167.03M | +13.0% |
| Interest Expense | $116.52M$111.89M | +4.1% |
| Net Income | $156.28M$125.28M | +24.7% |
| EPS (Basic) | $4.05$3.42 | +18.4% |
| EPS (Diluted) | $4.04$3.41 | +18.5% |
| Shares Outstanding (Basic) | 37.25M35.03M | +6.3% |
| Shares Outstanding (Diluted) | 37.34M35.12M | +6.3% |
05—Questions
Frequently Asked Questions
What is the status of the proposed merger with BRE Properties and what will ESS shareholders receive?
The boards of both companies approved a merger agreement dated December 19, 2013, in which BRE shares convert into 0.2971 ESS shares plus $12.33 in cash. ESS shareholders will keep their existing shares and be diluted to roughly 62% ownership of the combined company. Completion requires shareholder approval at both companies and customary closing conditions, and either party may terminate if the merger is not completed by June 17, 2014.
How will the cash portion of the BRE merger be funded?
ESS has committed up to $1.0 billion in a 364-day unsecured bridge loan available at closing. The company is also exploring asset sales, joint ventures and new financing, but as of the filing it had not signed a definitive debt financing agreement or secured alternative financing, and the bridge loan expires April 18, 2014, which may precede the merger termination date.
How strong was ESS's operating performance in 2013?
Same-property revenue rose 6.3% on average rent growth of 6.3% to $1,597 per unit, while same-property occupancy held near 96.2%. Same-property NOI grew about 7.4% to $350.6 million. Growth was broadly distributed, with Northern California (+8.2%) and Seattle (+7.7%) outpacing Southern California (+4.4%). Management guides to further same-property revenue growth in 2014 across all three regions.
How much debt does ESS carry and how exposed is it to interest rates?
At year-end 2013 the company had about $3.0 billion of debt: $1.40 billion of mortgage notes, $1.41 billion of unsecured bonds and term loans, and $219 million drawn on lines of credit. Of the $737 million of variable-rate debt, $300 million is hedged by swaps and $156.9 million is covered by rate caps. The company stated it was in compliance with its debt covenants at year-end 2013 and 2012.
What are the main geographic and business risks for investors?
About 82% of 2013 rental revenue came from California, with Southern California, the Bay Area and Seattle the only markets. This concentration exposes ESS to local job markets, regional oversupply and earthquake risk, though the company is partly self-insured through its subsidiary Pacific Western Insurance and has limited third-party seismic coverage. Rent control, rising property taxes (expected to account for about 56% of 2014 expense growth) and a potential downgrade from investment grade also pose risks.
06—Continue