Essex Property Trust, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; compared with Q1 2016 unless otherwise noted. Amounts are in U.S. dollars. Essex is a West Coast apartment REIT operating through Essex Portfolio, L.P.
Business context and operating performance
At quarter-end, the company had interests in 246 stabilized apartment communities with 59,860 homes, one operating commercial building, and five active developments. Its markets are Southern California, Northern California, and Seattle Metro.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Property revenue | $333.2 million | $312.2 million | +6.7% |
| Total revenue, including affiliate fees | $335.4 million | $314.2 million | +6.7% |
| Net operating income (NOI) | $233.7 million | $217.7 million | +7.3% |
| Same-property revenue | $302.1 million | $287.9 million | +5.0% |
| Same-property NOI | $211.7 million | $200.5 million | +5.6% |
| GAAP net income | $187.6 million | $86.9 million | More than doubled |
| Net income available to common stockholders | $179.0 million | $78.0 million | |
| Diluted earnings per share | $2.72 | $1.19 | |
| FFO per diluted share | $2.95 | $2.64 | |
| Core FFO per diluted share | $2.94 | $2.68 | |
| Dividend per common share | $1.75 | $1.60 |
Financial position, cash flow, and liquidity
- Cash flow: Operating cash flow was $223.3 million, up from $200.6 million. Investing activities used $90.4 million and financing activities used $113.4 million. Cash and cash equivalents ended at $84.3 million, compared with $48.2 million at Q1 2016; restricted cash was $15.9 million.
- Assets and equity: Total assets were $12.45 billion, versus $12.22 billion at year-end 2016. Total equity was $6.39 billion.
- Debt: Total debt, net, was $5.60 billion, compared with $5.56 billion at year-end. Weighted average rates were 3.8% on fixed-rate unsecured bonds, 2.2% on the variable-rate term loan, 1.9% on lines of credit, and 4.3% on mortgage notes. Scheduled principal payments, excluding lines of credit, total $114.8 million for the remainder of 2017 and $301.9 million in 2018.
- Liquidity: Unrestricted cash was $84.3 million and marketable securities were $139.0 million, of which $41.0 million were available-for-sale securities. Two unsecured credit facilities total $1.03 billion; $176.2 million was outstanding at quarter-end. Management said expected operating cash flows, existing liquidity, credit availability, capital-market access, and property dispositions should cover reasonably anticipated cash needs over the next 12 months.
- Credit ratings: BBB+/Stable from Fitch and S&P; Baa1/Stable from Moody’s.
Material changes and unusual items
- Same-property revenue growth was primarily driven by a 4.1% increase in average rental rates, from $2,050 to $2,134 per home. Same-property financial occupancy rose to 96.5% from 96.0%.
- GAAP earnings included an $86.5 million gain from remeasuring the previously held Palm Valley joint-venture interest after acquiring the partner’s 50% stake for a contract price of $183.0 million. The company also recorded a $26.2 million gain on the sale of Jefferson at Hollywood. These gains materially increased reported net income; FFO and Core FFO provide additional operating-performance measures.
- In March, the company converted its $15.3 million preferred investment in Sage at Cupertino into a 40.5% common-equity interest, issued DownREIT units to other members, and consolidated the property following its VIE analysis. The transaction involved an affiliate of the company chairman’s Marcus & Millichap Company.
- In March, the company repaid $300 million of 5.5% senior notes at maturity. In April, it issued $350 million of 10-year notes at 3.625%; proceeds were used to repay credit-line borrowings and for general corporate and working-capital purposes.
- Interest expense increased $2.1 million, mainly reflecting the 2016 issuance of $450 million senior notes, partly offset by debt repaid or matured. Property operating costs increased, including higher same-property utilities and maintenance costs.
Outlook, commitments, and risks
- The development pipeline comprised 1,968 homes, with estimated total costs of $1.3 billion, $0.6 billion incurred, and about $0.7 billion remaining; the company’s estimated share of remaining costs was $0.5 billion. Seven major redevelopment communities had estimated costs of $177.1 million, with $66.8 million remaining.
- Management expects to fund development through working capital, credit facilities, construction loans, debt or equity issuance, and possible asset dispositions. No specific earnings or revenue guidance is provided in the supplied filing text.
- Forward-looking risks include development delays or cost overruns, weaker-than-expected acquisitions or project results, insufficient future cash flows, downturns in the company’s markets, and less favorable refinancing terms. The company also faces interest-rate exposure; $200 million of term debt was swapped to a fixed rate, and $20.7 million of variable-rate debt had cap protection.
- The company reported ordinary-course lawsuits that are not expected to materially affect financial condition, results, or cash flows. It reported no material change to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the reported earnings increase reflects recurring property operations versus the $86.5 million Palm Valley remeasurement gain and $26.2 million property-sale gain; reconcile GAAP earnings with FFO and Core FFO.
- Whether same-property rent and NOI growth are sustainable, particularly given regional results and rising operating expenses.
- Actual remaining company funding needs, timing, and expected returns for development and redevelopment projects, and exposure to cost overruns or lease-up delays.
- Debt maturities, variable-rate exposure, credit-facility availability, and the use and effect of the April 2017 notes issuance.
- Terms and related-party implications of the Sage at Cupertino transaction and other affiliate investments or loans.