Essex Property Trust, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Essex is a West Coast apartment REIT; at quarter-end it owned or had interests in 248 operating communities with 60,341 apartment homes. Unless otherwise noted, financial figures below are in millions of dollars.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $370.5 | $361.6 | $762.9 | $717.9 |
| Net income | $90.1 | $98.1 | $418.8 | $223.6 |
| Net income available to common stockholders | $84.5 | $92.3 | $399.5 | $211.1 |
| Diluted earnings per share | $1.29 | $1.40 | $6.07 | $3.21 |
| Net operating income (NOI) | $258.0 | $264.2 | $540.6 | $520.0 |
| Same-property NOI | $227.7 | $246.0 | $478.2 | $486.9 |
| Operating cash flow | — | $426.1 | $429.8 |
Q2 same-property revenue fell 3.8% and same-property NOI fell 7.4% year over year. Total Q2 revenue rose 2.4%, principally because six communities were consolidated after Essex bought its partner’s interests. Six-month same-property revenue declined 0.3%, while total revenue increased 6.3%.
Six-month net income included a $234.7 million noncash gain from remeasuring Essex’s existing investment when it acquired CPPIB’s 45% interests in six communities and a land parcel. It also included a $16.6 million gain on a property sale. Accordingly, the year-over-year increase in six-month GAAP earnings does not by itself indicate improved recurring operations. Core FFO per diluted share was $3.16 in Q2 versus $3.33 a year earlier, and $6.64 for the first half versus $6.57.
At June 30, 2020, total assets were $13.18 billion, total liabilities $6.79 billion, and total debt, net, $6.32 billion, up from $5.81 billion at year-end 2019. Unrestricted cash was $246.2 million; restricted cash was $10.3 million; marketable securities were $154.4 million. No amount was drawn on the $1.24 billion of unsecured credit lines. The company reported $426.1 million of operating cash flow, $287.8 million of investing cash outflow, and $37.1 million of financing cash inflow for the first half. Dividends paid were $264.8 million.
Debt actions included issuing $500 million of 2.650% senior notes due 2032 and a further $150 million of those notes, plus a $200 million variable-rate term loan. The company repaid debt, including secured mortgage debt, and reported a $4.7 million first-half loss on early debt retirement. Credit ratings were BBB+/Stable, Baa1/Stable, and BBB+/Stable from Fitch, Moody’s, and S&P, respectively.
Material changes, outlook, and risks
- COVID-19 effects: Q2 same-property financial occupancy declined to 94.9% from 96.6%. Cash delinquencies reached 4.3% of scheduled rent; after the company’s collectability assessment, reported actual delinquencies were 3.3%. Management said the increase had not materially affected liquidity as of June 30.
- Management response and outlook: Essex offered payment plans and waived late fees for affected residents, while changing office, leasing, cleaning, and maintenance practices. Management expected operating cash flows, existing cash and securities, credit availability, and possible asset dispositions to cover reasonably anticipated cash needs over the next 12 months. It cautioned that COVID-19 could reduce operating cash flows and that it might use cash reserves, credit lines, or reduce redevelopment investment. No quantified earnings or operating guidance is provided in the filing.
- Acquisitions and dispositions: The CPPIB buyout brought six communities and 2,020 homes under consolidation. In June, Essex sold two San Jose communities for $232.0 million. A 126-home community was sold in July for $51.5 million.
- Investment and capital plans: Development and predevelopment projects totaled 2,025 homes, with estimated remaining costs of $221 million ($162 million representing Essex’s share). The company repurchased 864,249 shares for $196.4 million in the first half; $229.9 million remained authorized at quarter-end.
- Other risks and contingencies: Eviction moratoriums, rent restrictions, unemployment, tenant payment capacity, construction delays, market volatility, and effects on financing and investments could materially affect results. The company reported routine litigation but no pending or threatened matter it believed would materially adversely affect it. It also noted uncertainty around compliance with differing COVID-related laws and regulations.
- Unusual accounting item: Adoption of the expected-credit-loss standard resulted in a $13.6 million allowance against a mortgage-backed security; the filing says this adoption gross-up had no impact on earnings or financial position. COVID-related lease concessions were not material.
Investor verification priorities
- Track collections, payment-plan performance, delinquencies, occupancy, and same-property rent and NOI trends as pandemic conditions and local rules change.
- Assess how much reported earnings and FFO depend on the CPPIB remeasurement gain, property sales, marketable-security fluctuations, and other non-core items.
- Review debt maturities, variable-rate exposure, covenant headroom, and the terms and extension options on the $200 million term loan and credit facilities.
- Compare development cost estimates and completion schedules with available liquidity, planned dispositions, and potential changes in redevelopment spending.
- Monitor dividends and share repurchases relative to recurring operating cash flow, capital needs, and the continuing economic and regulatory effects of COVID-19.