Essex Property Trust, Inc. — Q2 2017 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2017, compared with the same 2016 periods. Essex is a self-managed REIT focused on apartment communities in Southern California, Northern California and Seattle, operating through Essex Portfolio, L.P. At quarter-end it had interests in 246 stabilized communities with 59,860 homes, plus five active developments.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $339.1m | $321.6m | $674.5m | $635.8m |
| Operating earnings | $112.2m | $105.9m | $221.5m | $205.9m |
| Net income | $75.8m | $76.8m | $263.3m | $163.7m |
| Net income available to common stockholders | $70.8m | $72.0m | $249.7m | $150.0m |
| Diluted EPS | $1.08 | $1.10 | $3.80 | $2.29 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $372.4m | $350.4m |
| FFO per diluted share | $2.97 | $2.81 | $5.93 | $5.45 |
| Core FFO per diluted share | $2.97 | $2.74 | $5.91 | $5.42 |
| Dividend per common share | $1.75 | $1.60 | $3.50 | $3.20 |
At June 30, 2017, total assets were $12.5bn, total debt was $5.66bn and total liabilities were $6.04bn. Debt comprised $3.54bn of unsecured debt and $2.12bn of mortgage notes; no amounts were drawn on the $1.03bn combined unsecured credit facilities. Unrestricted cash was $183.9m and marketable securities were $152.0m, including $101.7m of held-to-maturity securities. Six-month investing cash outflow was $174.2m and financing cash outflow was $79.2m.
Same-property financial occupancy was 96.4% in Q2, versus 96.0% a year earlier. Same-property revenue rose 3.9% to $304.7m and same-property NOI rose to $214.4m from $204.7m, an increase of approximately 4.7% and a margin of approximately 70.4% versus 69.9%.
Material changes versus prior periods
- Q2 total revenue increased 5.4%; same-property revenue growth reflected a 3.6% increase in average rental rates. Seattle same-property revenue increased 6.6%.
- Q2 net income available to common stockholders declined to $70.8m from $72.0m, and diluted EPS fell to $1.08 from $1.10. Higher operating earnings were offset by lower interest and other income and co-investment income, among other items.
- Six-month net income rose substantially, principally because of an $88.6m gain on remeasurement when Essex acquired its partner’s interest in Palm Valley, and a $26.2m real-estate sale gain. The remeasurement gain is a significant nonrecurring item.
- Palm Valley’s consolidation contributed to higher non-same-property revenue, depreciation and operating costs. Essex also issued $350m of 3.625% ten-year senior notes in April and repaid $300m of 5.5% notes at maturity in March.
- Six-month operating cash flow increased to $372.4m from $350.4m. The company issued 311,873 common shares through its equity distribution program for net proceeds of $80.6m.
Outlook, commentary and risks
- Management said existing cash, operating cash flow, marketable securities, credit availability, capital-market access and potential property dispositions were expected to meet reasonably anticipated cash needs over the next 12 months. This is not specific earnings or operating guidance.
- The development and predevelopment pipeline comprised 1,968 homes, with estimated total costs of $1.3bn; $0.6bn remained to be spent, including an estimated $0.5bn share for the company. Five major redevelopment communities represented estimated costs of $138.2m, with $55.8m remaining.
- Interest-rate exposure includes $281.2m of variable-rate indebtedness, of which $20.7m was protected by caps; $200m was effectively fixed through swaps. Management stated derivatives are not used for speculation.
- Management identified risks including project delays or cost overruns, weaker regional apartment markets, refinancing on less favorable terms and cash flows insufficient to meet operating needs or support dividends. It reported no material changes to the risks in its 2016 Form 10-K.
- The company is subject to ordinary-course litigation and environmental regulation; it reported no pending or threatened legal proceeding it believed would materially harm financial condition, results or cash flows.
Important facts for investors to verify
- How much of the six-month earnings increase reflects Palm Valley’s $88.6m remeasurement gain and property-sale gains, rather than recurring operations.
- Whether same-property rent growth and occupancy remain resilient, particularly as regional supply, concessions and affordability change.
- Funding, construction timing and expected returns for the $1.3bn development pipeline and remaining redevelopment commitments.
- Debt maturities, borrowing costs, credit-facility availability and sensitivity to interest-rate changes; total scheduled principal payments were $5.65bn, with $3.44bn due thereafter.
- That FFO, Core FFO and NOI are supplemental, non-GAAP measures and should be assessed alongside GAAP earnings and cash flows.