Essex Property Trust, Inc. — Q3 2018 Form 10-Q
Business context and reporting period
Quarter and nine months ended September 30, 2018. Essex is a self-managed REIT focused on acquiring, developing, redeveloping, and operating West Coast apartment communities. At quarter-end, it owned or held interests in 247 operating apartment communities comprising 59,982 homes, primarily in Southern California, Northern California, and the Seattle area. The filing presents Essex and its operating partnership on a consolidated basis.
Financial and operating results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $350.9 million | $344.4 million | $1,046.9 million | $1,018.8 million |
| Net income | $86.1 million | $85.0 million | $289.2 million | $348.4 million |
| Net income available to common stockholders | $81.0 million; diluted EPS $1.22 | $79.7 million; diluted EPS $1.21 | $272.3 million; diluted EPS $4.12 | $329.4 million; diluted EPS $5.00 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $681.1 million | $623.6 million |
| Same-property revenue | $324.3 million | $317.3 million | $965.6 million | $939.8 million |
| Same-property NOI | $232.6 million | $227.2 million | $696.6 million | $676.3 million |
- Q3 same-property revenue rose 2.2%, driven mainly by a 2.5% increase in average rental rates; average financial occupancy was 96.4%, down from 96.7%.
- Nine-month same-property revenue increased 2.8%, with average financial occupancy of 96.7% versus 96.5%.
- Core FFO per diluted share, a non-GAAP measure, was $3.15 for Q3 versus $2.98; nine-month Core FFO per diluted share was $9.38 versus $8.90.
- Cash from operations was $681.1 million; investing activities used $135.8 million and financing activities used $431.8 million in the nine months. Cash and cash equivalents, including restricted cash, totaled $174.6 million at quarter-end.
- Total debt, net, was $5.63 billion, comprising $3.80 billion unsecured debt and $1.83 billion mortgage debt; no borrowings were outstanding under $1.24 billion of credit lines. Total assets were $12.52 billion and total equity was $6.44 billion.
- Quarterly dividend per common share was $1.86, up from $1.75 a year earlier.
Material changes versus prior periods
- Q3 revenue increased 1.9% and net income increased 1.3% year over year. Nine-month revenue increased 2.8%, but net income available to common stockholders declined to $272.3 million from $329.4 million.
- The nine-month net income comparison was affected by an $88.6 million co-investment remeasurement gain recorded in 2017, with no comparable gain in 2018. The 2018 period also included a $20.5 million BEXAEW joint-venture promote payment, contributing to higher co-investment income.
- Operating cash flow increased 9.2%. Investing cash outflow was substantially lower than in 2017, partly reflecting lower co-investment contributions and real estate acquisitions.
- Debt rose by approximately $297 million in unsecured debt while mortgage debt and credit-line balances declined; the company issued $300 million of 30-year notes at 4.50% in March 2018.
Outlook, risks, and unusual items
- Management stated that operating cash flows, cash and marketable securities, credit-line availability, capital-market access, and potential property dispositions should cover reasonably anticipated cash needs for the next 12 months. No specific earnings or same-property growth guidance is provided in the supplied filing text.
- The development pipeline covered 1,861 homes, with estimated total project costs of $1.2 billion, $0.5 billion remaining, and $0.4 billion of remaining costs attributed to Essex. Five major redevelopment communities had $140.1 million of estimated costs, with $30.9 million remaining.
- Management cited risks including development delays or cost overruns, weaker occupancy or rental demand, higher interest rates and operating costs, capital-market access, refinancing terms, and the performance of co-investments. It reported no material change to previously disclosed risk factors and no litigation expected to have a material adverse effect.
- Adoption of accounting guidance for partial sales of nonfinancial assets resulted in a $123.7 million cumulative adjustment to retained earnings/partners’ capital related to a 2016 BEX II transaction; this was an accounting transition adjustment, not current-period operating revenue.
- Related-party activity included a $26.5 million preferred-equity commitment at a 10.25% preferred return, of which $20.6 million was funded by quarter-end, and an additional $18.6 million related-party preferred-equity investment funded in October 2018 at an initial 12.00% return.
Important facts for investors to verify
- Whether rental-rate growth can offset occupancy softness, property-tax increases, and higher utilities and maintenance costs.
- How much of the development pipeline’s remaining cost is ultimately funded by Essex and whether projects meet timing, cost, lease-up, and return expectations.
- Debt maturities and interest-rate exposure, including variable-rate borrowings, hedges, and refinancing needs.
- The quality, timing, and repeatability of co-investment income, including promote income and related-party preferred-equity exposures.
- The effect of the prior-year $88.6 million remeasurement gain and accounting adoption adjustments when comparing reported net income across periods; FFO and Core FFO are non-GAAP measures.