ESSEX PROPERTY TRUST, INC. quarterly report, Q2 FY2019

Full document

Essex Property Trust, Inc. — Q2 2019 Form 10-Q

Reporting period: Three and six months ended June 30, 2019. Essex is a West Coast apartment REIT, with 246 operating communities and 59,962 apartment homes, including ownership interests. Its portfolio spans Southern California, Northern California and Seattle. Figures below are in U.S. dollars; financial statements are unaudited.

Financial performance and position

  • Q2 revenue: $361.6 million, up 3.7% year over year. Property revenue was $359.4 million; same-property revenue increased 3.5%, primarily reflecting a 3.5% increase in average rental rates. Same-property financial occupancy was 96.6%, versus 96.7%.
  • Q2 earnings: Net income was $98.1 million, down from $106.4 million; net income available to common stockholders was $92.3 million, or $1.40 per diluted share, versus $100.4 million, or $1.52. The prior-year quarter included a $22.2 million real estate sale gain.
  • First-half revenue and earnings: Revenue was $717.9 million, up 3.1%. Net income was $223.6 million versus $203.0 million; common-stockholder income was $211.1 million, or $3.21 per diluted share, versus $191.4 million, or $2.90.
  • Operating measures: Q2 NOI was $263.9 million, up 4.6%, and same-property NOI was $248.0 million, up 4.1%. First-half NOI was $519.5 million, up 3.4%, and same-property NOI was $490.8 million, up 3.4%. Q2 NOI was approximately 73.4% of property revenue, compared with 72.8% a year earlier.
  • REIT supplemental measures: Q2 diluted FFO was $3.36 per share versus $3.17; Core FFO was $3.33 versus $3.14. First-half diluted FFO was $6.69 versus $6.52; Core FFO was $6.57 versus $6.23. These non-GAAP measures supplement, and do not replace, GAAP results or cash flow.
  • Cash flow: First-half operating cash flow was $429.8 million, compared with $423.5 million. Investing activities used $331.5 million, chiefly reflecting $167.3 million of co-investment contributions and spending on real estate. Financing activities used $194.8 million. Cash and restricted cash fell by $96.4 million to $55.0 million.
  • Debt and liquidity: Total debt, net, was $5.84 billion at June 30, versus $5.61 billion at year-end; this included $4.29 billion unsecured debt, $1.43 billion mortgage debt and $117 million drawn on credit lines. The company reported $38.2 million unrestricted cash and $215.4 million in marketable securities. Its two unsecured facilities totaled $1.24 billion, with $117 million outstanding. Weighted-average rates were 3.9% on fixed-rate unsecured bonds, 3.0% on the variable-rate term loan, 3.2% on credit lines and 4.3% on mortgage notes.
  • Balance sheet: Total assets were $12.67 billion and total equity was $6.35 billion. The company adopted lease accounting in 2019, recording $76.2 million of operating lease right-of-use assets and $78.2 million of lease liabilities.

Material changes versus the prior comparable period

  • Same-property revenue and NOI grew, supported by higher average rents; occupancy was slightly lower year over year.
  • Q2 GAAP earnings declined, with the comparison affected by the $22.2 million property-sale gain in Q2 2018. First-half net income benefited from a $31.5 million gain on remeasurement when Essex acquired its partner’s interest in One South Market.
  • First-half equity income from co-investments fell to $33.2 million from $47.8 million, mainly because promote income was $0.8 million versus $20.5 million in the prior-year period. Higher income from preferred equity investments partly offset the decline.
  • Debt increased overall. Essex issued $500 million of 4.000% senior unsecured notes due 2029, repaid $290 million of secured mortgage notes, and assumed $98.7 million of mortgage debt in the Brio acquisition.
  • Investing cash use increased substantially from the prior-year period, which included $130.7 million of real estate disposition proceeds; no real estate disposition proceeds were reported in the first half of 2019.

Outlook, management commentary and risks

  • Management said cash from operations, cash and marketable securities, available credit, capital-market access and potential asset dispositions should be sufficient for reasonably anticipated cash needs over the next 12 months. The filing provides no quantitative earnings or revenue guidance.
  • The development and predevelopment pipeline comprised 1,853 apartment homes, with $1.0 billion incurred and estimated total costs of $1.2 billion; approximately $0.2 billion remained, including an estimated $0.2 billion attributable to the company. Five major redevelopment communities had estimated costs of $140.1 million, with $22.8 million remaining.
  • Management cited risks including development delays or cost overruns, weaker rental demand or occupancy, higher interest rates and operating costs, capital-market volatility, financing availability, co-investment partner relationships, and maintaining investment-grade ratings. The company reported no material change to the risk factors in its 2018 Form 10-K.
  • The company reported various ordinary-course lawsuits but did not believe pending or threatened proceedings would have a material adverse effect. It also noted environmental-law exposure and uncertainty regarding future legal or regulatory changes.
  • Related-party activity included the Brio acquisition from an affiliate of Marcus & Millichap Company and preferred-equity investments sponsored by affiliates. The filing describes these transactions and related returns; investors may wish to review their terms and governance treatment.
  • The board replenished the stock repurchase plan, leaving $250 million of authority at quarter-end. The company repurchased and retired 234,061 shares for $57.0 million in the first half; it made no repurchases during Q2.

Important facts for investors to verify

  • Review same-property rent growth, occupancy and expense trends across the three regions, particularly as rental affordability, supply and concessions can affect results.
  • Assess recurring earnings apart from the $31.5 million One South Market remeasurement gain, marketable-security valuation changes and variable co-investment promote income.
  • Check debt maturities, refinancing needs, variable-rate exposure and remaining borrowing capacity; reported debt maturities exclude credit lines.
  • Track development and redevelopment budgets, remaining funding commitments, project delivery and lease-up progress.
  • Review co-investment leverage, commitments and related-party transaction terms, as well as the assumptions used to value securities and real estate.