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This month's REIT Focus is on Essex Property Trust, Inc. (ESS), a publicly traded, self-managed real estate investment trust that acquires, develops, redevelops, and manages multifamily residential properties in selected West Coast communities, primarily in the states of CA and WA. ESS owns a 94.5% general partner interest in Essex Portfolio, L.P., its UpReit general partnership. As of 12/31/12, ESS owned a controlling interest in 163 apartment communities with 33,468 units, five commercial buildings totaling 315,900 sq. ft. and nine active development projects with 2,495 apartment units. As of 12/31/12, the average occupancy and monthly rental rate for the apartment properties was 96% and $1,324, respectively. ESS was founded in 1971, was incorporated as a REIT in the State of Maryland in 1994, is traded on the NYSE and is based in Palo Alto, CA.

ESS has 37.9 million common shares outstanding and a market capitalization of approximately $5.9 billion. In April 2013, ESS sold $300 million of senior unsecured notes at a yield of 3.35% and with a BBB+ rating by Fitch. ESS has an experienced and well regarded management team that includes George M. Marcus, Founder and Chairman, Michael J. Schall, President and Chief Executive Officer and Michael T. Dance, Executive Vice President and Chief Financial Officer.

Select financial data for ESS as of the 12/31/12 10-K and for the period 1/1-12/31/12 is as follows (in millions where applicable):

Real Estate Assets, Gross (including co-investments) $5,672
Total Assets $4,847
Mortgages, Unsecured Debt and Line of Credit $2,819
Stockholders' Equity $1,765
Revenue $543
Net Income $120
Net Income Per Share $3.42
Cash Flow from Operations $267
Unsecured Line of Credit ($600 with $141 used) $459
Market Capitalization $5,900
Debt to:
Gross Real Estate Assets 50%
Market Capitalization 48%
Real Estate Assets Per Sq. Ft. $191
Dividend and Yield ($4.84/sh.) 3.1%
Valuation Methodology:
2012 Revenue Per Above $543
Less: Operating Expenses (excluding depreciation, amortization & interest expense, plus G&A expenses and co-investment and other income) 148
Projected Net Operating Income 2012 $395
Projected Inflation Rate at 3.5% x103.5%
Projected Forward NOI for Next Year $409
Projected Cap Rate 6%
Projected Value of Real Estate Assets $6,817
Add: Net Operating Working Capital 113
Total Projected Asset Value $6,930
Less: Total Debt Per Above (2,819)
Less: Series H Redeemable Preferred Stock (74)
Less: Series G Redeemable Convertible Preferred Stock (4)
Projected Net Asset Value $4,033
Shares Outstanding, 40M (common stock, 37.9M shares plus operating partnership units, 2.1M shares)
Projected NAV Per Share $101
Closing Market Price Per Share on 4/15/13 $155

The gross real estate assets, net income and funds from operations for 2010 to 2012 are shown in the table below:

(millions) 2010 2011 2012
Gross Real Estate Assets $4,181 $4,357 $5,672
% Change NA 4% 30%
Net Income $34 $40 $120
% Change NA 17% 200%
Funds from Operations $171 $200 $251
% Change NA 17% 26%

As shown above, our net asset value per share for ESS is $101 versus a market price of $155 per share. Current average cap rates for apartment properties on the West Coast per CBRE are in the 3.5% to 7% range, depending on the location and quality of the property. We have used a cap rate of 6% due to ESS's portfolio being primarily Class A properties located in West Coast cities with barriers to entry for new development and lack of land that can be developed. The cap rate based on the current market price of the stock is 4.5%.

ESS's strengths include; solid and experienced management team, acceptable dividend yield of 3.1%, high occupancy of 96% and strong growth in assets and funds from operations. Weaknesses include; high stock valuation, FFO multiple at 24 times and portfolio concentration in CA.

We do not recommend the purchase of this stock at the current price. ESS is a well managed REIT with a top notch portfolio, however, it is very expensive and we would not be a buyer at this level.

A five-year price chart of ESS is shown below:


(Click to enlarge)

Source: REIT Focus: Essex Property Trust, Inc.