Essex Property Trust, Inc. — Q1 2019 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2019, compared with Q1 2018. Essex is a West Coast apartment REIT operating through Essex Portfolio, L.P. At quarter-end, the company owned or held interests in 245 operating apartment communities totaling 59,662 homes, one commercial building, and six active developments across Southern California, Northern California, and Seattle.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $356.2 million | $347.3 million; up 2.6% |
| Net income | $125.5 million | $96.6 million |
| Net income available to common stockholders | $118.9 million; $1.81 per diluted share | $90.9 million; $1.38 per diluted share |
| Same-property revenue | $337.4 million | $327.3 million; up 3.1% |
| Same-property NOI | $242.8 million | $236.3 million; up 2.8% |
| FFO per diluted share | $3.34 | $3.35 |
| Core FFO per diluted share | $3.23 | $3.09 |
| Cash from operating activities | $255.8 million | $268.4 million |
- Same-property financial occupancy was 96.9%, versus 97.1% a year earlier. Average rental rates increased 3.3%, from $2,208 to $2,280 per apartment home.
- At March 31, unrestricted cash was $107.0 million; restricted cash was $17.1 million; marketable securities were $211.0 million. Total assets were $12.58 billion and total equity was $6.32 billion.
- Total debt, net, was $5.74 billion, compared with $5.61 billion at December 31, 2018. No balance was outstanding on the company’s $1.24 billion of unsecured credit lines. The weighted average maturity of total debt was not stated; fixed-rate debt averaged 4.1% and variable-rate debt 2.8%.
- Cash used in investing activities was $219.2 million, including $126.2 million of contributions to co-investments; cash used in financing activities was $63.8 million. Cash and cash equivalents, including restricted cash, ended at $124.1 million.
Material changes versus the prior comparable period
- Reported net income rose by $28.9 million, but included a $31.5 million gain on remeasurement of the One South Market co-investment and a $1.3 million gain on early debt retirement. Core FFO increased to $220.0 million from $211.0 million, while FFO per diluted share decreased slightly to $3.34 from $3.35.
- Same-property revenue growth was driven primarily by higher rental rates. Same-property operating expenses excluding real estate taxes rose 2.9%, and same-property real estate taxes rose 5.7%.
- Equity income from co-investments fell to $16.3 million from $32.8 million, mainly because Q1 2018 included $20.5 million of promote income, compared with $0.8 million in Q1 2019.
- Operating cash flow declined $12.6 million year over year. Investment spending increased, particularly co-investment contributions, which were $126.2 million versus $56.0 million.
- The company issued $500 million of 4.000% senior notes due 2029 and repaid $290 million of 5.57% mortgage notes. Debt mix shifted toward unsecured debt; net unsecured debt rose while mortgage debt declined.
Outlook, management commentary, risks, and unusual items
- Management said existing cash, marketable securities, operating cash flow, credit availability, capital-market access, and potential asset dispositions should be sufficient for reasonably anticipated cash needs over the next 12 months. No numerical earnings or operating guidance was provided.
- The development pipeline comprised 1,861 apartment homes, with estimated total project costs of $1.2 billion, including $0.3 billion of remaining costs and approximately $0.2 billion of remaining costs attributable to the company. Five major redevelopment communities had estimated costs of $140.1 million, with $25.2 million remaining.
- In March, Essex acquired its partner’s 45% interest in One South Market for $80.6 million; it repaid $86.0 million of mortgage debt in connection with the acquisition and recognized the remeasurement gain. The company also repurchased 234,061 shares for $57.0 million and replenished its buyback authorization to $250.0 million.
- Essex adopted the new lease accounting standard on January 1, 2019, recording $77.0 million of operating lease right-of-use assets and $79.0 million of lease liabilities at quarter-end, with no opening retained-earnings adjustment.
- Management identified risks including development delays or cost overruns, changes in local rental demand and competition, higher interest rates and operating costs, capital availability, co-investment partner relationships, refinancing terms, and the possibility that cash flows may not support anticipated needs or dividends. It reported no material change to previously disclosed risk factors and no litigation expected to have a material adverse effect.
Important facts for investors to verify
- How much of the net income increase reflects recurring operations versus the One South Market remeasurement gain and other non-core items.
- Whether same-property rental growth can continue amid slightly lower occupancy and rising property expenses and taxes.
- The timing, remaining funding needs, and expected returns of development and redevelopment projects and co-investment commitments.
- Debt maturities, variable-rate exposure, refinancing costs, and continued access to capital markets.
- Whether operating cash flow and liquidity remain adequate alongside investment spending, dividends, and share repurchases.