Business context and reporting period
Essex Property Trust, Inc. is a West Coast apartment REIT operating through Essex Portfolio, L.P. This combined unaudited 10-Q covers the quarter and six months ended June 30, 2018, compared with the corresponding 2017 periods. At quarter-end, the company owned or held interests in 247 apartment communities with 59,982 homes, one commercial building, six active developments and three loan investments.
Key financial metrics
- Revenue: Second-quarter total revenue was $348.7 million, up 2.8% from $339.1 million; property revenue rose 2.9%. For the first six months, revenue was $696.0 million, up 3.2%.
- Property operations and margins: Second-quarter NOI was $252.4 million, up 2.6%; NOI margin on property revenue was approximately 72.8%, versus 73.0%. Six-month NOI was $502.4 million, up 3.1%, with a roughly 72.6% margin versus 72.7%. Same-property revenue increased 2.8% in Q2 and 3.0% for six months; average same-property financial occupancy was 96.7% for Q2 and 96.9% for six months.
- Profit: Q2 net income was $106.4 million versus $75.8 million; income available to common stockholders was $100.4 million, or $1.52 per diluted share, versus $70.8 million, or $1.08. Six-month net income was $203.0 million versus $263.3 million, and diluted EPS was $2.90 versus $3.80.
- FFO: Diluted FFO per share was $3.17 for Q2 versus $2.97; Core FFO was $3.14 versus $2.97. Six-month diluted FFO was $6.52 per share versus $5.93; Core FFO was $6.23 versus $5.91.
- Cash flow: Six-month operating cash flow was $423.5 million versus $372.5 million. Investing activities used $59.0 million versus $263.6 million, while financing activities used $248.1 million versus $79.3 million. Ending unrestricted and restricted cash was $177.6 million.
- Debt and liquidity: Total debt, net, was $5.69 billion, essentially unchanged from year-end 2017. Unrestricted cash was $160.9 million and marketable securities were $207.2 million. The company had $1.24 billion of unsecured credit lines, with no borrowing on the principal facility and $2.7 million outstanding on the working-capital line. Weighted-average rates were 3.9% on fixed unsecured bonds, 2.8% on the variable-rate term loan and 4.4% on mortgage debt.
- Distributions: Q2 dividend was $1.86 per share, compared with $1.75; the six-month dividend was $3.72 versus $3.50.
Material changes versus prior comparable periods
- Q2 same-property revenue growth was driven mainly by a 2.2% increase in average rental rates; same-property occupancy improved to 96.7% from 96.4%. Operating expenses and real estate taxes also increased.
- Q2 net income benefited from a $22.2 million gain on a property sale and higher co-investment income. Six-month 2018 results included $20.5 million of BEXAEW promote income, while the prior-year six-month period included an $88.6 million co-investment remeasurement gain and larger total property-sale gains. These items help explain why six-month net income fell despite higher revenue and FFO.
- In March, the company issued $300 million of 30-year senior notes at 4.5%, using proceeds to repay credit-facility borrowings and for general corporate purposes. Unsecured debt increased from year-end while mortgage debt and line-of-credit borrowings declined.
Outlook, commentary, risks and unusual items
- Management said operating cash flow, cash and securities, credit availability, capital-market access and potential asset dispositions should meet reasonably anticipated cash needs for the next 12 months. The filing provides no specific earnings or same-property growth guidance.
- The development pipeline comprised 1,861 homes, with estimated total costs of $1.2 billion and approximately $0.6 billion remaining; about $0.5 billion of remaining costs was the company’s estimated share. Five major redevelopment communities had estimated costs of $140.1 million, with $36.4 million remaining.
- Risks highlighted include higher interest rates and operating or construction costs, weaker rental demand or occupancy, project delays or cost overruns, refinancing conditions, access to capital, and co-investment partner performance. Management reported no material change to the 2017 annual-report risk factors.
- Related-party exposure includes a $26.5 million preferred-equity commitment to a Ventura community sponsored by an affiliate of the chairman; $20.4 million had been funded at quarter-end and the investment carries a 10.25% preferred return. The company also reported lawsuits in the ordinary course, but did not expect pending or threatened matters to have a material adverse effect; environmental impacts of future or changed requirements remain uncertain.
- Accounting changes adopted in 2018 included revenue recognition and partial-sale guidance. Management said the revenue standard did not affect reported revenue; adoption of the partial-sale standard resulted in a $123.7 million cumulative equity adjustment related to a 2016 transaction.
Important facts for investors to verify
- Whether rental-rate growth can continue to offset operating expense and property-tax increases across the three regions.
- How much reported profit and co-investment income reflects recurring operations versus the property sale, promote income and preferred-equity redemptions.
- Development and redevelopment budgets, remaining funding needs, lease-up progress and exposure to construction-cost or schedule overruns.
- Debt maturities, variable-rate exposure, refinancing costs and actual availability under credit facilities.
- Dividend sustainability relative to operating cash flow and recurring FFO, while recognizing that FFO and Core FFO are non-GAAP measures.
- Returns, funding obligations and related-party terms for co-investments and preferred-equity investments.