Essex Property Trust, Inc. — Q2 2022 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2022. Essex is a West Coast apartment REIT operating through Essex Portfolio, L.P. At quarter-end, it owned or held interests in 253 operating apartment communities with 62,397 homes, primarily in Southern California, Northern California, and Seattle Metro.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $400.0m | $351.0m | $781.9m | $706.1m |
| Net income | $61.7m | $69.6m | $140.1m | $246.6m |
| Net income available to common stockholders | $57.1m | $64.8m | $130.3m | $233.3m |
| Diluted EPS | $0.87 | $1.00 | $2.00 | $3.59 |
| Same-property NOI | $267.7m | $229.5m | $515.4m | $460.3m |
| Core FFO per diluted share | $3.68 | $3.04 | $7.06 | $6.12 |
Amounts are in U.S. dollars. FFO and Core FFO are non-GAAP supplemental measures, not substitutes for GAAP results or operating cash flow.
- Revenue and operations: Q2 property revenue rose 13.9%; same-property revenue grew 12.7%, reflecting 7.2% higher average rental rates and $11.5m lower cash concessions. Same-property financial occupancy was 96.1%, versus 96.6% a year earlier.
- Costs and operating profitability: Q2 same-property operating expenses excluding real estate taxes rose 8.6%, with maintenance, repairs, and utilities among the key increases. Same-property NOI increased 16.7% in Q2. For the six-month period, same-property NOI increased 12.0%.
- Cash flow: Six-month operating cash flow was $509.5m, up from $428.1m. Investing activities provided $101.7m, compared with $5.6m used in 2021; financing activities used $621.4m. Cash and restricted cash totaled $48.5m at period-end, including $37.8m unrestricted cash.
- Debt and liquidity: Total debt, net, was $6.01bn at June 30, down from $6.29bn at December 31, 2021. The debt mix included $5.31bn unsecured debt, $636.6m mortgage debt, and $63.2m drawn on credit lines. Essex reported $154.5m in marketable securities and two unsecured credit facilities totaling $1.24bn. Credit ratings were Baa1/Stable from Moody’s and BBB+/Stable from S&P.
- Dividends and capital allocation: The company declared $4.40 per share in dividends for the first half. It repurchased 218,960 shares for $60.8m at an average $277.81 per share; $153.6m remained under the repurchase authorization.
Material changes versus comparable periods
- Despite stronger rental revenue and same-property NOI, GAAP net income available to common stockholders fell 12.0% in Q2 and 44.1% for the first half. Diluted EPS declined to $0.87 for Q2 and $2.00 for the first half.
- Results included a $21.9m Q2 unrealized loss on equity securities, compared with a $10.4m unrealized gain in Q2 2021; the six-month unrealized loss was $46.4m versus a $16.7m gain. This was reflected in interest and other income.
- Q2 equity results from co-investments shifted to an $8.4m loss from $18.2m income a year earlier, primarily due to lower income from non-core investments. First-half co-investment income declined to $12.8m from $35.3m.
- First-half 2021 earnings included a $100.1m real estate sale gain and an $19.0m loss on early debt retirement; neither item recurred in first-half 2022. Core FFO per diluted share increased year over year in both periods.
Outlook, risks, and unusual items
- Management stated that operating cash flow, cash, marketable securities, and available credit were sufficient for anticipated cash needs over the next 12 months. The filing provides no specific earnings, rent-growth, or FFO guidance.
- Management cited continued uncertainty from COVID-19 and related rules, including local eviction and rent-increase restrictions. Q2 same-property cash delinquencies were 0.3%, aided by $13.0m of Emergency Rental Assistance payments; current tenant delinquencies remained above pre-pandemic levels. Management said delinquencies had not materially affected liquidity.
- Other disclosed risks include inflation, higher interest rates and operating costs, supply-chain effects, market volatility, development delays or cost overruns, leasing and occupancy weakness, and economic or geopolitical uncertainty. The company said it was not at material risk of breaching debt covenants or timely debt service.
- In July 2022, the $1.2bn credit facility maturity was extended to January 2027, and the $35m working-capital line maturity was extended to July 2024. The facilities transitioned from LIBOR-based pricing to Adjusted SOFR pricing as described in the filing.
- The company reported ordinary-course lawsuits but no pending or threatened litigation expected to have a material adverse effect. No material changes to the risk factors in its 2021 Form 10-K were reported.
Important facts for investors to verify
- Whether rental-rate growth can persist while financial occupancy and tenant delinquencies remain under pressure, and whether assistance payments continue.
- How much of reported earnings volatility reflects marketable-security and non-core co-investment valuation changes versus recurring apartment operations.
- Debt maturities, variable-rate exposure, credit-facility availability, and the effect of higher interest rates on financing costs.
- Development pipeline costs, remaining funding commitments, and the performance of joint ventures and preferred-equity investments.
- Dividend coverage using recurring cash generation, and the company’s balance among repurchases, dividends, and investment spending.