Business context and reporting period
Essex Property Trust, Inc. and its operating partnership filed this combined, unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. Essex is a West Coast apartment REIT. At quarter-end it owned or held interests in 247 stabilized apartment communities with 60,305 homes, plus one commercial building and seven active developments.
Financial results and key metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $344.4 million | $329.2 million | $1,018.8 million | $965.0 million |
| Net income | $85.0 million | $70.2 million | $348.4 million | $233.9 million |
| Net income available to common stockholders | $79.7 million; $1.21 diluted EPS | $65.6 million; $1.00 diluted EPS | $329.4 million; $5.00 diluted EPS | $215.6 million; $3.29 diluted EPS |
| Net operating income (NOI) | $237.8 million | $227.7 million | $710.0 million | $668.9 million |
| Same-property revenue | $309.3 million | $300.1 million | $916.1 million | $881.0 million |
| Same-property NOI | $215.3 million | $208.8 million | $641.3 million | $614.0 million |
| FFO per diluted share/unit | $2.97 | $2.81 | $8.90 | $8.27 |
| Core FFO per diluted share/unit | $2.98 | $2.81 | $8.90 | $8.23 |
For the nine months, operating cash flow was $621.3 million, versus $580.5 million in 2016. Investing activities used $394.4 million and financing activities used $245.3 million, resulting in an $18.4 million decrease in cash. Quarter-end unrestricted cash was $46.5 million; restricted cash was $16.8 million and marketable securities were $184.6 million.
Total debt, net, was $5.62 billion at September 30, 2017, compared with $5.56 billion at year-end 2016. Debt comprised $3.50 billion unsecured debt, $2.11 billion mortgage debt and $2.6 million drawn on credit lines. The company reported $1.03 billion of unsecured credit facilities, with no balance on the $1.0 billion facility. Total assets were $12.51 billion and total liabilities $6.09 billion. The weighted-average interest rates reported for fixed-rate unsecured bonds were 3.7%; variable-rate term loans, 2.4%; and mortgage notes, 4.2%.
Material changes versus prior period
- Q3 total revenue rose 4.6% year over year; nine-month revenue increased 5.6%. Same-property revenue grew 3.1% in Q3 and 4.0% year to date, principally from higher rental rates. Same-property financial occupancy was 96.7% in Q3 and 96.5% for the nine months, up from 96.5% and 96.2%, respectively.
- Net income for the nine months included an $88.6 million gain from remeasuring the previously held Palm Valley investment when Essex acquired its partner’s 50% interest and consolidated the property. It also included $26.4 million of real estate sale gains, including a $26.2 million gain on the sale of Jefferson at Hollywood. These items materially lifted GAAP earnings versus 2016.
- Essex issued $350 million of 10-year unsecured notes at 3.625%, repaid $300 million of 5.5% notes at maturity, and repaid $40 million of private placement bonds. Interest expense was up 1.6% for the nine months but down 1.4% in Q3.
- Operating cash flow increased, while investing outflows rose to $394.4 million from $264.8 million, reflecting increased acquisitions and contributions to co-investments. Cash at period-end fell to $46.5 million from $64.9 million at December 31, 2016.
Outlook, commentary, risks and unusual items
- Management said available operating cash flows, cash and marketable securities, credit availability, capital-market access and potential property dispositions should cover reasonably anticipated cash needs for the next 12 months. This is not specific earnings or FFO guidance; the filing provides no numerical forecast.
- The development pipeline included 2,158 homes, with estimated total costs of $1.4 billion, $0.6 billion incurred and approximately $0.8 billion remaining; Essex’s estimated share of remaining costs was $0.5 billion. Five major redevelopment communities had estimated costs of $138.2 million, with $49.2 million remaining.
- Risks identified include higher interest rates and operating costs, weaker economic or housing-market conditions, delayed or over-budget development and redevelopment, refinancing on less favorable terms, and cash flows insufficient for operating needs or REIT dividend requirements. Management also noted that actual results may differ from estimates and forward-looking assumptions.
- The company reported ordinary-course lawsuits but no proceedings it believed would materially adversely affect its financial condition, results or cash flows. It reported no material changes to previously disclosed risk factors and stated disclosure controls were effective, with no material change in internal control over financial reporting.
- Related-party activity included a $55 million bridge loan to a Wesco V property, bearing 3.5% and due December 16, 2017, and other affiliate investments and transactions. Subsequent to quarter-end, the company reported an expected approximately $38 million promote-related increase in its Wesco I ownership to about 58%, and a $40 million preferred-equity investment commitment.
Important facts for investors to verify
- Assess recurring operating performance separately from the $88.6 million Palm Valley remeasurement gain and property-sale gains; reconcile GAAP earnings with FFO and Core FFO.
- Review same-property rental growth, occupancy, expense trends and regional performance, including whether rent increases persist amid local supply and affordability conditions.
- Verify debt maturities, interest-rate exposure, credit-facility availability and refinancing needs; consider the scheduled 2018–2021 principal payments and variable-rate exposure.
- Track funding requirements, completion costs and lease-up progress for development and redevelopment projects, and the company’s share of unconsolidated joint-venture commitments.
- Monitor liquidity and cash distributions, including the use of equity issuance or asset dispositions to fund investment and debt needs; assess the terms and repayment of related-party balances.