Essex Property Trust, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. Essex is a West Coast apartment REIT. At quarter-end, it owned or held interests in 253 operating communities with 62,397 apartment homes.
Financial performance
- Q3 revenue: $409.7 million, up 12.9% year over year; rental and other property revenue was $406.9 million, up 12.8%.
- Q3 earnings: Net income was $98.7 million, down 21.0%; net income available to common stockholders was $92.8 million, or $1.43 per diluted share, versus $118.4 million, or $1.82, a year earlier.
- Q3 property operations: Same-property revenue rose 11.4% to $380.6 million, driven primarily by an 8.9% increase in average rental rates and lower cash concessions. Same-property NOI increased 15.4% to $269.2 million. Average same-property financial occupancy eased to 96.0% from 96.4%.
- Nine months: Revenue was $1.192 billion, up 11.5%; net income was $238.8 million versus $371.6 million, and diluted EPS was $3.42 versus $5.40. Same-property revenue rose 10.2% and same-property NOI rose 13.1%.
- Cash flow: Operating cash flow for the nine months was $808.7 million, up from $699.9 million. Investing activities used $69.4 million and financing activities used $744.4 million. Cash and restricted cash totaled $53.6 million at September 30.
- Debt and liquidity: Total debt, net, was $6.167 billion, down from $6.287 billion at year-end 2021. Unrestricted cash was $42.7 million and marketable securities were $141.7 million. The two unsecured credit lines totaled $1.24 billion, with $219.5 million outstanding. The weighted-average rate on fixed-rate unsecured bonds was 3.3%; line-of-credit rates averaged 3.1%.
- REIT operating measures: Q3 FFO was $3.45 per diluted share, versus $3.34; Core FFO was $3.69, versus $3.12. For nine months, FFO was $9.93 versus $9.67 and Core FFO was $10.75 versus $9.24. These are non-GAAP measures and should be considered alongside GAAP results.
Material changes and unusual items
- Q3 GAAP earnings were affected by a $17.4 million gain on remeasurement after buying a joint-venture partner’s interest in two communities, as well as $17.1 million of unrealized marketable-security losses included in interest and other loss.
- For the nine months, interest and other loss was $31.6 million, compared with $48.8 million of income in 2021, primarily reflecting unrealized losses on marketable securities. Co-investment income fell to $23.8 million from $60.7 million; the prior-year comparison included substantial gains on real estate sales.
- Operating costs increased: nine-month property operating expense excluding real estate taxes rose 7.2%, with higher utilities and maintenance costs. Corporate-level property management expense increased 12.5%.
- The Company repurchased 590,844 shares for $158.0 million during the first nine months and ended the quarter with $430.1 million of authority under a new $500 million repurchase plan.
- In October 2022, the Company obtained a $300 million unsecured term loan, swapped to a 4.2% fixed rate, maturing in October 2024 with three optional 12-month extensions.
Outlook, risks, and contingencies
Management said cash from operations, cash and securities, and available credit were expected to cover anticipated cash needs for the next 12 months. No numerical earnings or operating guidance was provided in the supplied filing text. Management reported investment-grade ratings of Baa1/Stable and BBB+/Stable and stated it was not at material risk of breaching credit covenants.
Risks discussed include inflation, higher interest rates and operating costs, recession and capital-market volatility, geopolitical uncertainty, development cost or schedule overruns, and continuing local restrictions affecting rent increases or collection of unpaid rent. Same-property cash delinquencies were 1.4% in Q3 2022, down from 1.5% a year earlier but still above pre-pandemic levels; management said delinquencies had not materially affected liquidity. The Company reported no litigation expected to have a material adverse effect and no material change to previously disclosed risk factors.
Investor verification points
- Reconcile the decline in GAAP earnings with security valuation changes, co-investment income, and prior-period property-sale gains; distinguish these from FFO and Core FFO.
- Review same-property rent growth, occupancy, concessions, and delinquency trends, including the impact of local rental and eviction rules.
- Check debt maturities, variable-rate exposure, credit-line availability, and the terms and timing of the October term loan.
- Assess the scale and returns of co-investments, preferred equity, and related-party lending, including the new and outstanding commitments.
- Monitor capital allocation: share repurchases, development spending, dividends, and the remaining authorization under the repurchase plan.