01—Abstract
Summary
Summary of the 10-K filed March 2, 2015. Cited figures are marked; the original filing is the authoritative source.
Essex Property Trust (NYSE: ESS) closed 2014 as a transformed company.
Its April 1, 2014 merger with BRE Properties, valued at roughly $4.3 billiona, nearly doubled the portfolio: consolidated apartment units rose from about 30,000 to 47,725, and total assets rose from $5.2 billion to $11.6 billion. Total property revenues grew 59.5% to $960.0 million, but the 2014 results include only nine months of BRE, so the reported year-over-year growth overstates organic momentum. Same-Property revenues grew 7.3%, led by Northern California (+9.6%) and Seattle (+7.5%), and management guides to 2015 Same-Property revenue growth of 4.5% to 9.25% by region, with operating expenses rising 3% to 4%.
Diluted net income available to common stockholders fell to $2.06b per share from $4.04, mainly because of $53.5 million in merger costs and the share-count increase, while FFO per diluted share rose to $7.89 from $7.59 and Core FFO per share rose to $8.54 from $7.60. Balance-sheet leverage increased materially. Total indebtedness reached about $5.1 billion, including $660.6 million of variable-rate debt, and the company assumed about $900 million of BRE senior notes plus $711 million of secured debt.
Ratings were BBB+/Baa2/BBB (Fitch/Moody's/S&P), all Stable. The company continued to fund growth through equity, raising $534 millionc in 2014 and $142 million in early 2015 at an average of about $225 per share. Quarterly dividends rose to $1.30 in 2014 and the first quarter 2015 dividend was set at $1.44.
The company also disclosed a cyber-intrusion discovered in Q3 2014 with exfiltration of data, a related punitive class action (Foster v. Essex), and $2.8 milliond of incurred costs, with further costs not yet estimable. Key risks for investors are the heavy geographic concentration (80% of rental revenue from California), the 2014 debt and equity expansion, the uncertain outcome of the cybersecurity litigation, and the exposure of a development pipeline of about $1.5 billion (with $420 million still to be spent) to construction and lease-up risk.
02—Key points
Key Highlights
- Transformational BRE merger closed April 1, 2014 (~$4.3B total consideration); portfolio grew to 239 communities and 57,455 units, with consolidated units rising to 47,725 from 29,989.
- Same-Property revenue rose 7.3% to $599.9M in 2014, with average rental rates up 7.1% to $1,734 per unit and financial occupancy steady at 96.2%.
- FFO per diluted share rose to $7.89 from $7.59; Core FFO per share rose to $8.54 from $7.60, though GAAP diluted EPS fell to $2.06 from $4.04 on $53.5M of merger costs.
- Total assets rose to $11.56B from $5.19B, and total indebtedness reached about $5.1B, including $660.6M of variable-rate debt and $225M of swapped term debt.
- Issued $534M of common equity in 2014 and $142M in early 2015 at average prices of $181.56 and $224.76, funding acquisitions and development.
- 2015 guidance calls for Same-Property revenue growth of 4.5%–5.5% in Southern California, 8.25%–9.25% in Northern California, and 5.75%–6.75% in Seattle Metro, with operating expenses up 3%–4%.
- Cyber-intrusion discovered in Q3 2014 with confirmed data exfiltration; $2.8M of costs recorded in 2014, a punitive class action (Foster) filed, and further costs not yet estimable.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2014filed March 2, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $970.94M$610.59M | +59.0% |
| Operating Expenses | $769.42M$421.88M | +82.4% |
| Operating Income | $201.51M$188.71M | +6.8% |
| Interest Expense | $164.55M$116.52M | +41.2% |
| Net Income | $122.15M$156.28M | −21.8% |
| EPS (Basic) | $2.07$4.05 | −48.9% |
| EPS (Diluted) | $2.06$4.04 | −49.0% |
| Shares Outstanding (Basic) | 56.55M37.25M | +51.8% |
| Shares Outstanding (Diluted) | 56.70M37.34M | +51.9% |
05—Questions
Frequently Asked Questions
How did the BRE merger change Essex's financial profile?
The April 2014 merger roughly doubled the company's scale. Consolidated apartment units grew from about 30,000 to 47,725, total assets rose from $5.2B to $11.6B, and property revenue rose 59.5% to $960M. Because BRE is included only from April 1, 2014, the 2015 results will show a fuller year of contribution, and the expanded share count (about 63.7M shares at year-end versus 37.4M) changes per-share comparisons.
Is the company's leverage a concern for investors?
Leverage increased meaningfully, with total indebtedness of about $5.1B at year-end 2014, including $660.6M of variable-rate debt. Ratings are investment grade (BBB+/Baa2/BBB, all Stable), and the company has said it intends to maintain them. Management relies on unsecured debt, equity issuance, and a $1.0B line of credit, which was extended to December 2018 in January 2015, to manage refinancing and liquidity.
What are the main risks from geographic concentration?
About 80% of 2014 rental revenue came from California, with the rest from the Seattle metro area. Results therefore depend heavily on the Bay Area and Southern California economies, job growth, and housing supply, and on California property tax rules such as Proposition 13. A regional downturn, a major employer's decline, or tighter rent regulation could affect occupancy, rents, and valuations.
How significant is the cyber-intrusion and related litigation?
The company confirmed exfiltration of data from certain systems in Q3 2014 and has purchased identity protection for residents and employees. It recorded $2.8M of related costs in 2014 and expects more, but the amount is not yet estimable and could be material. A punitive class action (Foster v. Essex Property Trust) is pending in federal court, and the company says it cannot predict its outcome or any government inquiries.
What does the development pipeline mean for future growth?
At year-end 2014 the company had 2,920 units in development and predevelopment with an estimated total cost of $1.5B, of which $420M remained to be spent. The company's share of remaining joint-venture costs was about $250M. These projects can add future income, but they carry construction-cost, delay, and lease-up risk, and their returns depend on achieving projected rents and occupancy.
06—Continue