Essex Property Trust, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Essex is a West Coast apartment REIT operating through Essex Portfolio, L.P. At quarter-end, the company owned or held interests in 251 apartment communities totaling 61,924 homes, plus commercial properties, co-investments, and development interests.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $412.4 million | $381.9 million | Up 8.0% |
| Net income | $161.6 million | $78.4 million | Up 106.2% |
| Net income available to common stockholders | $153.5 million; $2.38/share | $73.3 million; $1.12/share | Up |
| Same-property revenue | $388.9 million | $361.4 million | Up 7.6% |
| Same-property NOI | $274.1 million | $251.0 million | Up 9.2% |
| Net cash from operating activities | $276.9 million | $315.1 million | Down 12.1% |
Same-property NOI margin was approximately 70.5%, compared with 69.5% a year earlier. Average same-property financial occupancy was 96.7%, versus 96.3%. Management attributed same-property revenue growth chiefly to a 6.8% increase in average rental rates and fewer cash concessions. Same-property operating expenses excluding real estate taxes rose 7.6%; real estate taxes declined slightly.
FFO was $253.7 million, or $3.80 per diluted share, compared with $227.1 million, or $3.36. Core FFO was $243.8 million, or $3.65 per diluted share, versus $228.2 million, or $3.37. These are non-GAAP supplemental measures; the filing cautions they are not substitutes for GAAP results or operating cash flow.
Balance sheet, debt, and liquidity
- Total assets were $12.28 billion and total liabilities were $6.45 billion at March 31, 2023.
- Total debt, net, was $5.91 billion, consisting primarily of $5.31 billion in unsecured debt and $593.1 million in mortgage debt. The reported weighted-average rates were 3.3% on fixed-rate unsecured bonds and 3.6% on mortgage notes.
- Cash and cash equivalents totaled $77.2 million, including restricted cash; marketable securities were $107.0 million. The company reported $67.7 million of unrestricted cash.
- The company had $1.24 billion of unsecured credit facilities, with approximately $0.5 million drawn at quarter-end. A separate $300 million term loan was undrawn at quarter-end; in April 2023, the company drew it and expected to use the proceeds to repay $300 million of notes due in May.
- Operating cash flow was $276.9 million; investing activities provided $55.2 million, including $99.4 million of real-estate disposition proceeds. Financing activities used $297.6 million, including $95.7 million for share repurchases and $142.1 million of dividends paid.
Material changes and unusual items
- Q1 net income included a $59.2 million gain on real estate and land sales, primarily from the March sale of CBC and The Sweeps, a 239-home community, for a $91.7 million contract price; the sale gain was reported as $54.5 million in the transaction note.
- Interest and other income improved to $12.5 million from a $7.6 million loss, reflecting marketable-security fair-value movements and $7.7 million of higher insurance reimbursements, legal settlements, and other items, driven by a one-time legal settlement claim.
- Equity income from co-investments fell to $10.9 million from $21.2 million, chiefly because of lower promote income.
- The company repurchased and retired 437,026 shares for $95.7 million at an average $218.88 per share; $302.7 million remained under the $500 million authorization.
- Same-property cash delinquencies were 2.1% of scheduled rent, slightly below 2.2% a year earlier but above the cited pre-pandemic historical average of 0.35%. Management said they had not materially affected liquidity.
Outlook, risks, and contingencies
The filing provides no specific numerical 2023 earnings or rent-growth guidance. Management stated that operating cash flow, cash and securities, credit availability, capital-market access, and potential asset sales should be sufficient to meet anticipated cash needs over the next 12 months. It noted that economic disruption could prompt use of reserves or credit lines, or reduced redevelopment investment. The company reported investment-grade ratings of Baa1/Stable from Moody’s and BBB+/Stable from S&P, and said it was not at material risk of breaching debt covenants.
Management highlighted inflation, higher interest rates, recession risk, tight labor markets, geopolitical uncertainty, local rent and eviction regulations, operating-cost pressure, development costs and delays, and capital-market volatility. Purported class actions concerning RealPage rent-setting software name the company among defendants. Essex considers the claims without merit and intends to defend them, but says the early-stage cases’ outcomes and potential losses cannot be estimated. The company reported no material change to the risk factors in its 2022 Form 10-K and no material adverse effect from other pending litigation was expected.
Investor verification priorities
- Separate recurring property performance from the property-sale gain, marketable-security movements, and one-time legal settlement when evaluating Q1 earnings.
- Review the sustainability of rent growth and expense trends, especially operating-cost inflation and cash delinquencies.
- Confirm the April term-loan draw and repayment of the May 2023 notes, and monitor subsequent debt maturities, interest costs, and revolver availability.
- Assess co-investment performance and leverage: summarized co-investments reported $3.46 billion of debt and a combined net loss of $18.5 million in Q1.
- Track the RealPage litigation, development commitments, and remaining share-repurchase authority for any material updates.