Essex Property Trust, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited results. Essex is a West Coast apartment REIT; it reported ownership interests in 250 operating communities with 60,770 apartment homes, principally in Southern California, Northern California and Seattle.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Total revenue | $392.4 million | $356.2 million | Up 10.1% |
| Same-property revenue | $346.5 million | $335.7 million | Up 3.2%; average rental rates rose 3.1% |
| Net operating income (NOI) | $282.6 million | $255.8 million | Up 10.5%; same-property NOI was $251.8 million, up 4.0% |
| Earnings from operations | $130.8 million | $115.7 million | Up 13.1% |
| Net income | $328.8 million | $125.5 million | Includes a $234.7 million gain on remeasurement of a co-investment |
| Net income available to common stockholders | $315.0 million; $4.77/share | $118.9 million; $1.81/share | GAAP EPS substantially reflects the remeasurement gain |
| Core FFO, diluted | $238.0 million; $3.48/share | $220.0 million; $3.23/share | Non-GAAP measure; up about 8.2% in total and 7.7% per share |
| Cash from operating activities | $266.9 million | $255.8 million | Up $11.2 million |
| Cash used in investing activities | $445.6 million | $219.2 million | Higher primarily due to acquisitions |
Balance sheet, debt and liquidity
- At March 31, 2020, total assets were $13.45 billion and total liabilities were $7.00 billion. Total debt, net, was $6.50 billion, compared with $5.81 billion at year-end 2019.
- Debt comprised $5.26 billion of unsecured debt, $887.4 million of mortgage debt and $350.0 million drawn on credit lines. The reported weighted-average rates were 3.7% on fixed-rate unsecured bonds, 2.7% on the variable-rate term loan, 2.4% on credit lines and 4.1% on mortgage notes.
- Unrestricted cash was $271.9 million; restricted cash was $10.5 million. Marketable securities totaled $148.1 million. The company had two unsecured credit facilities totaling approximately $1.24 billion, with $350 million drawn on the principal facility and none drawn on its $35 million working-capital line.
- Operating cash flow and available cash, securities, credit lines, capital-market access and potential asset dispositions were identified as liquidity sources. Management said these were expected to meet reasonably anticipated cash needs over the next 12 months, while noting that COVID-19 could require use of reserves or credit lines and reduced redevelopment investment.
- The company paid $128.9 million in common-stock dividends during the quarter and declared dividends of $2.0775 per share, compared with $1.95 per share in Q1 2019. It repurchased 776,261 shares for $176.3 million, leaving $73.7 million of authorization.
Material changes and unusual items
- In January, Essex bought CPPIB’s 45% interest in a land parcel and six communities containing 2,020 homes, consolidating those assets. The transaction produced a $234.7 million remeasurement gain and $6.5 million of promote income. The acquisition was a major contributor to higher non-same-property revenue.
- In February, the Operating Partnership issued $500 million of 2.650% senior unsecured notes due in 2032. Proceeds repaid credit-line borrowings used for the CPPIB transaction and approximately $100.3 million of secured debt.
- Interest and other income shifted from $12.3 million of income to a $5.2 million loss, primarily reflecting lower marketable-securities results, including $8.7 million of unrealized equity-security losses in Q1 2020 versus $4.5 million of unrealized gains in Q1 2019.
- The company adopted the expected-credit-loss accounting standard in January. It recorded a $13.6 million allowance against a mortgage-backed security; the filing says the adoption-related gross-up had no effect on consolidated results or financial position. Notes and other receivables had a $0.1 million allowance.
- After quarter-end, Essex obtained a $200 million variable-rate term loan with a one-year maturity and two optional one-year extensions. It reported that $169.6 million of debt maturing in 2020 was prepaid in April.
Outlook, management commentary and risks
- The filing gives no quantitative earnings or operating guidance. Management emphasized substantial uncertainty about the duration and economic effects of COVID-19 and said the effects on future results could not be predicted.
- COVID-19 measures included remote work, reduced on-site staffing, online and telephone leasing, temporary amenity closures, increased cleaning and limiting most maintenance to emergencies. Essex offered affected residents a 90-day eviction halt, renewals without rent increases and payment plans with late-fee waivers.
- Post-quarter April indicators weakened: same-property financial occupancy was 95.4%, versus 96.7% in April 2019; cash delinquencies were 5.0% of scheduled rent, versus 0.4%. Management was arranging payment plans and expected a collectability reserve to partly mitigate deferred payments. Financial occupancy is based on contractual rent and estimated market rent and does not account for delinquency or concessions.
- Key risks include tenant job losses and nonpayment, eviction restrictions and changing local rules, reduced leasing activity, pressure on occupancy and rents, capital-market volatility and financing access, construction delays and costs, and borrowers’ or investment sponsors’ ability to repay. Management also cautioned that COVID-19 could heighten other disclosed risks.
- The development pipeline comprised 1,761 homes, with $963 million of costs incurred and approximately $168 million of remaining costs ($151 million representing Essex’s share). The company said it could reduce redevelopment spending if needed.
- Management reported no litigation expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether April’s rent delinquencies, payment plans and collection reserves translated into sustained cash collection and occupancy trends.
- How much of reported GAAP earnings growth came from the nonrecurring CPPIB remeasurement gain, and how recurring operating performance compares using Core FFO and same-property NOI.
- Current liquidity, available credit capacity, debt maturities and refinancing needs, including the post-quarter term loan and repayment of 2020 maturities.
- Whether planned development and redevelopment spending, project timing and remaining costs changed as COVID-19 conditions evolved.
- The performance and credit quality of marketable securities, mortgage-backed securities, co-investments and loan exposures, including the related allowances and valuation assumptions.