Essex Property Trust, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Essex is a self-managed REIT operating primarily through Essex Portfolio, L.P. Its West Coast apartment portfolio comprised 250 operating communities and 60,570 homes, including joint-venture interests; California generated 82% of rental revenue.
Financial and operating performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $1,460.2 million | $1,400.1 million | +4.3% |
| Net income | $464.4 million | $413.6 million | +12.3% |
| Net income available to common stockholders | $439.3 million; $6.66 diluted per share | $390.2 million; $5.90 diluted per share | +12.6% in income |
| Operating cash flow | $919.1 million | $826.6 million | +11.2% |
| Same-property revenue | $1,367.3 million | $1,321.9 million | +3.4% |
| Same-property NOI | $989.4 million | $952.5 million | +3.9% |
| FFO per diluted share | $13.73 | $12.76 | +7.6% |
| Core FFO per diluted share | $13.38 | $12.57 | +6.4% |
FFO and Core FFO are non-GAAP supplemental measures, not substitutes for GAAP earnings or operating cash flow. Average same-property financial occupancy eased to 96.6% from 96.7%; average rental rates increased 3.4%.
Earnings from operations declined to $481.1 million from $512.0 million, despite higher revenue. Reported net income nevertheless increased, helped by higher co-investment income and a $31.5 million gain from remeasuring the previously held One South Market interest when Essex obtained control. Total assets were $12.7 billion, total indebtedness net was $5.8 billion (up from $5.6 billion), and total equity was $6.4 billion.
Cash, debt and capital allocation
- Cash from investing activities was an outflow of $527.7 million, compared with $59.9 million in 2018; financing activities used $461.7 million. Cash and restricted cash together ended the year at $81.1 million, down from $151.4 million.
- Marketable securities were $144.2 million. Unrestricted cash was $70.1 million.
- Debt included $4.8 billion of unsecured debt, $990.7 million of mortgage debt and $55.0 million drawn on credit lines. The two unsecured facilities totaled $1.24 billion. Ratings were BBB+/Stable from Fitch and S&P and Baa1/Stable from Moody’s.
- Of $660.4 million in variable-rate indebtedness, $175.0 million was effectively fixed through interest-rate swaps. 2019 issuances included $500 million of 2029 notes at 4.0% and $550 million of 2030 notes at 3.0%.
- Common dividends were $7.80 per share for 2019, up from $7.44; the fourth-quarter dividend was $1.95 per share. The company issued $73.4 million of shares through its ATM program and repurchased $57.0 million of shares in January.
Material changes, unusual items and outlook
- Management attributed same-property revenue growth mainly to higher rental rates. Same-property revenue increased 3.0% in Southern California and 3.8% in both Northern California and Seattle. Same-property operating expenses also rose, including utilities and administrative costs.
- 2019 co-investment income included a $50.2 million company gain from the Mosso joint-venture sale. Interest and other income included $7.0 million of accelerated interest income from a mortgage-backed security maturity and gains on marketable securities. The company also recorded $7.1 million of consolidated-property impairment and an $11.5 million impairment in an unconsolidated co-investment.
- Essex acquired interests in eight communities totaling 2,007 homes for a stated aggregate contract price of $856.5 million; the financial statements separately report $373.3 million of acquisitions recorded as asset acquisitions. Development and predevelopment projects totaled 1,960 homes, with estimated project costs of $1.3 billion and about $193 million of remaining costs attributable to Essex. Four major redevelopment communities had $14.9 million of estimated costs remaining.
- For 2020, management projected total same-property revenue growth of 2.6%–3.6% and operating-expense growth of 2.5%–3.5%. Regional same-property revenue growth projections were 2.2%–3.2% for Southern California, 2.6%–3.6% for Northern California and 3.5%–4.5% for Seattle. Management said expected operating cash flows, cash and securities, credit availability, capital-market access and potential dispositions should cover reasonably anticipated 2020 cash needs.
- After year-end, Essex extended the main credit facility maturity to December 2023. In January 2020 it agreed to acquire a joint-venture partner’s 45% interest in a land parcel and six communities totaling 2,020 homes, valued at approximately $1.0 billion gross. In February 2020 the Operating Partnership issued $500 million of 2032 notes at 2.65%.
Key risks and contingencies: The portfolio is concentrated in California and the Seattle area, exposing results to local economic conditions, supply, rent-control and other regulatory changes. All communities face earthquake exposure; coverage is limited in some cases and the company self-insures certain losses. Other material risks include interest-rate and refinancing exposure, debt maturities and covenants, development costs and lease-up, co-investment dependence, environmental and litigation claims, and the transition away from LIBOR. Management stated that existing legal and environmental matters were not expected to have a material adverse effect, while noting that potential mold and other environmental liabilities were not quantifiable. The company reported compliance with debt covenants; the auditor gave an unqualified opinion and management reported effective internal controls.
Important facts for investors to verify
- Whether 2020 same-property revenue and expense guidance was achieved, especially given the occupancy decline and regional market differences.
- How much of 2019 net income growth came from recurring operations versus asset-sale, remeasurement, investment-security and accelerated-interest items; compare GAAP earnings with FFO and Core FFO.
- Debt maturities, variable-rate exposure, refinancing plans and the availability and terms of credit facilities.
- Actual costs, timing and lease-up progress for development and redevelopment projects, and the completion and economics of the post-year-end joint-venture acquisition.
- Potential effects of California rent regulation, seismic losses and insurance limits, and the status of environmental or litigation exposures.