Essex Property Trust, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited results. Essex is a West Coast apartment REIT operating through Essex Portfolio, L.P.; the portfolio included 249 operating communities and 60,620 apartment homes, plus seven active developments.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $366.9m | $350.9m | $1,084.8m | $1,046.9m |
| Net income | $105.7m | $86.1m | $329.3m | $289.2m |
| Net income attributable to common stockholders | $99.3m | $81.0m | $310.5m | $272.3m |
| Diluted EPS | $1.51 | $1.22 | $4.71 | $4.12 |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $706.9m | $681.1m |
| FFO per diluted share (non-GAAP) | $3.50 | $3.22 | $10.19 | $9.74 |
| Core FFO per diluted share (non-GAAP) | $3.35 | $3.15 | $9.92 | $9.38 |
Q3 same-property revenue rose 3.1% and same-property NOI rose 3.1%; nine-month increases were 3.2% and 3.3%, respectively. Same-property NOI margin was approximately 71.8% in both Q3 periods. Average same-property financial occupancy was 96.0% in Q3 2019 versus 96.4% in Q3 2018; average rental rates increased 3.5% in the quarter.
For the nine months, investing activities used $704.3m and financing activities used $62.3m. Cash and restricted cash declined $59.7m to $91.7m. At September 30, unrestricted cash was $74.0m and marketable securities were $216.9m.
Debt and liquidity
Total debt, net, was $6.05bn at September 30, 2019, up from $5.61bn at year-end 2018. This included $4.69bn of unsecured debt, $1.14bn of mortgage debt and $220m drawn on credit lines. The company issued $500m of 2029 notes at 4.00% and $400m of 2030 notes at 3.00%, while repaying mortgage debt, including $289.1m in September. Weighted average rates were 3.8% on fixed-rate unsecured bonds, 2.9% on the variable-rate term loan and 4.3% on mortgage notes.
Management said cash from operations, cash and securities, credit facilities, capital-market access and potential asset dispositions should meet reasonably anticipated cash needs for the next 12 months. The company reported investment-grade ratings of BBB+/Stable from Fitch and S&P and Baa1/Stable from Moody’s. Its unsecured credit facilities totaled $1.24bn, with $220m drawn on the $1.2bn facility and none drawn on the $35m working-capital line.
Material changes and notable items
- Revenue growth reflected same-property rental-rate gains and acquisition/consolidation activity, including Marquis, One South Market and Brio. Same-property occupancy softened modestly.
- Reported nine-month net income included a $31.5m gain from remeasuring the previously held One South Market investment upon consolidation and a $7.1m gain on early debt retirement. Q3 included $5.5m of debt-retirement gain; co-investment income also included a $4.4m unrealized gain, partly offset by $1.5m deferred tax expense.
- Nine-month equity income from co-investments declined 15.0%, primarily because promote income was lower than in 2018. Core FFO increased 5.8% for the nine months.
- The development pipeline comprised 1,960 apartment homes, with estimated total project costs of $1.3bn and approximately $0.3bn of remaining costs. Four major redevelopment communities had estimated costs of $132.7m, with $17.0m remaining.
- Related-party exposures include $89.2m and $44.5m of bridge loans to joint ventures, due in December and November 2019, respectively, and related-party preferred-equity investments. An additional $150m of 2030 notes was issued in October 2019.
- The company adopted new lease accounting in 2019, recording $75.5m of operating lease right-of-use assets and $77.5m of lease liabilities. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Outlook, risks and contingencies
The filing provides no specific earnings or operating guidance. Management’s liquidity assessment and project-cost estimates are forward-looking and subject to market and execution risks. Disclosed risks include development delays or cost overruns, weaker occupancy or rental demand, higher interest rates and operating costs, capital-market volatility, refinancing availability, co-investment partner risks, and maintaining investment-grade ratings. The company reported routine litigation and environmental-law exposure but did not expect pending or threatened matters to have a material adverse effect; it reported no material changes to the risk factors in its 2018 Form 10-K.
Important facts for investors to verify
- How much of earnings and FFO growth reflects recurring same-property operations versus debt gains, investment remeasurement and unrealized co-investment gains.
- Current leasing trends, particularly occupancy and rental growth across Southern California, Northern California and Seattle.
- Funding and completion progress for the $1.3bn development pipeline and remaining redevelopment commitments.
- Repayment or refinancing of short-dated related-party bridge loans and the performance and terms of related-party investments.
- Debt maturities, available credit capacity, interest-rate exposure and the ability to sustain dividends while funding development and distributions.