01—Abstract
Summary
Summary of the 10-K filed February 26, 2016. Cited figures are marked; the original filing is the authoritative source.
Essex Property Trust (ESS), an S&P 500 self-administered REIT focused on apartment communities in Southern California, the San Francisco Bay Area and the Seattle metro, closed 2015 with 246 communities (59,160 apartment homes) and reported strong operating momentum.
Total property revenues rose 23.3% to $1.185 billiona, driven largely by the April 2014 BRE Properties merger and 2015 acquisitions, while same-property revenues grew 8.0%, with average rental rates up 8.1% to $1,882 per apartment home. Diluted net income per share was $3.49 versus $2.06 in 2014, aided by $47.3 million of real estate gains and a $34.0 million remeasurement gain on co-investments. Management's preferred metric, Core FFO per diluted share, rose to $9.82 from $8.54, a 15% increase.
Balance sheet and liquidity remain central to the investment case. Total indebtedness was about $5.3 billionb, with roughly 83% of rental revenue from California, a concentration that management flags as a key risk. The company guided to 2016 same-property revenue growth of 5.25% to 9.50% by region and same-property operating expense growth of 3.25% to 4.25%.
Credit ratings are BBB+/Baa2/BBB (Fitch/Moody's/S&P), and the company extended its $1.0 billionc revolver to 2019 at a lower spread. The first-quarter 2016 dividend was declared at $1.60 per share, an annualized $6.40. Investors should weigh the strong 2015 growth and Coastal market fundamentals against the risks in the filing: heavy geographic concentration, a dependence on capital markets for funding, the 2014 cyber-intrusion and related class action (Foster v.
Essex), and new supply in its markets. Management expects new housing supply in its three regions to be modest relative to total housing stock, which supports its outlook.
02—Key points
Key Highlights
- Total property revenues rose 23.3% to $1,185.5 million in 2015, and same-property revenues grew 8.0%, with average rental rates up 8.1% to $1,882 per apartment home.
- Core FFO per diluted share rose to $9.82 in 2015 from $8.54 in 2014, and FFO per diluted share reached $9.72 versus $7.89.
- Diluted EPS was $3.49 in 2015 versus $2.06 in 2014, helped by $47.3 million in real estate gains and a $34.0 million remeasurement gain on co-investments.
- The company acquired seven communities (1,722 apartment homes) for $638.1 million and sold two communities for $308.8 million, generating $44.9 million in gains.
- Total indebtedness was about $5.3 billion at year-end, with $525.3 million variable rate; the company issued $500 million of 3.5% senior notes due 2025 in March 2015.
- Credit ratings are BBB+ (Fitch), Baa2 (Moody's, positive outlook) and BBB (S&P, positive outlook); the $1.0 billion revolver was extended to 2019 and repriced to LIBOR plus 0.90%.
- Dividend increased to $5.76 per share for 2015 (from $5.11), with a first-quarter 2016 dividend of $1.60 per share; 83% of rental revenue comes from California, a key concentration risk.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 26, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $1.19B$970.94M | +23.0% |
| Operating Expenses | $863.23M$769.42M | +12.2% |
| Operating Income | $331.17M$201.51M | +64.3% |
| Interest Expense | $204.83M$164.55M | +24.5% |
| Net Income | $232.12M$122.15M | +90.0% |
| EPS (Basic) | $3.50$2.07 | +69.1% |
| EPS (Diluted) | $3.49$2.06 | +69.4% |
| Shares Outstanding (Basic) | 64.87M56.55M | +14.7% |
| Shares Outstanding (Diluted) | 65.06M56.70M | +14.8% |
05—Questions
Frequently Asked Questions
How did Essex perform financially in 2015 compared with 2014?
Revenue growth was driven mainly by the BRE merger and acquisitions, with total property revenue up 23.3% to $1.185 billion. Net income available to common stockholders rose to $226.9 million from $116.9 million, and Core FFO per diluted share increased 15% to $9.82. Same-property NOI grew about 10.6% to $464.5 million.
What is driving rental growth and what does the company expect for 2016?
Average rental rates rose 8.1% in 2015 and same-property revenues grew 8.0%, led by Northern California (+10.5%) and Seattle (+7.7%). For 2016, management projects same-property revenue growth of 5.25% to 6.25% in Southern California, 8.50% to 9.50% in Northern California and 6.00% to 7.00% in Seattle, with same-property operating expenses rising 3.25% to 4.25%.
What are the main risks investors should consider?
Key risks include heavy geographic concentration (83% of rental revenue from California), reliance on capital markets and the Fannie Mae/Freddie Mac financing channel, a leveraged balance sheet of about $5.3 billion in debt, earthquake exposure, and the Foster class action and cyber-intrusion discovered in 2014. Rent control legislation, Proposition 13 property tax reassessment and new housing supply are additional sector risks.
How is the company funded and how strong is its balance sheet?
Essex funds growth through unsecured public and private bonds, equity distribution programs (1.48 million shares sold in 2015 for $332.3 million net) and co-investment joint ventures. It had $29.7 million unrestricted cash and $137.5 million of marketable securities at year-end, with 1,719,109 shares remaining under its equity program as of February 22, 2016. The company was in compliance with its debt covenants at December 31, 2015.
Is the dividend sustainable and how is it taxed?
The board declared a $1.60 quarterly dividend for Q1 2016, an annualized $6.40, up from $5.76 in 2015. The 2015 distribution was 99.28% ordinary income for tax purposes, so investors should expect most REIT dividends to be taxed at ordinary income rates. Dividend sustainability depends on continued cash flow growth, and the REIT 90% distribution requirement limits retained earnings, so the company relies on external capital to fund growth.
06—Continue