Essex Property Trust, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Essex is a West Coast apartment REIT operating through Essex Portfolio, L.P. At quarter-end, it owned interests in 247 operating apartment communities totaling 60,240 homes, one commercial building, and seven active developments.
Financial performance
Amounts below are in millions, except per-share data and where noted.
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Total revenue | $347.3 | $335.4 | Up 3.5%; property revenue increased 3.5%. |
| Same-property revenue | $322.4 | $312.0 | Up 3.3%; average rental rates rose 2.4%. |
| Same-property financial occupancy | 97.1% | 96.5% | Improved 0.6 percentage points. |
| Net operating income (NOI) | $250.0 | $241.2 | Up 3.7%. |
| Same-property NOI | $232.7 | $224.6 | Up 3.6%. |
| Earnings from operations | $110.5 | $109.2 | Up 1.2%. |
| Net income | $96.6 | $187.6 | Prior-year period included $26.2 million in real estate sale gains and $86.5 million in a co-investment remeasurement gain. |
| Net income available to common stockholders; diluted EPS | $90.9; $1.38 | $179.0; $2.72 | EPS comparison reflects the prior-year gains. |
| Diluted FFO per share | $3.35 | $2.95 | Core FFO per diluted share was $3.09 versus $2.94. |
| Operating cash flow | $268.4 | $223.3 | Increased $45.1 million. |
| Cash and restricted cash | $139.1 | $100.3 | Quarter-end balance; unrestricted cash was $122.0 million. |
| Total debt, net | $5,719.0 | $5,689.1 at Dec. 31, 2017 | Unsecured debt rose to $3,797.9 million; mortgage debt was $1,921.0 million; no credit-facility balance remained. |
| Dividend per common share | $1.86 | $1.75 | Quarterly-period reported amount. |
Cash, debt and liquidity
- Cash provided by operations was $268.4 million; investing activities used $99.0 million and financing activities used $91.4 million. Cash and restricted cash increased by $78.0 million during the quarter.
- Quarter-end marketable securities totaled $197.7 million. The company reported $1.24 billion of aggregate unsecured credit capacity, with no amount outstanding, and said available cash, operating cash flow, securities, credit access, capital markets and potential dispositions should cover reasonably anticipated needs for the next 12 months.
- In March, the company issued $300 million of 30-year senior unsecured notes at 4.50%, using proceeds to repay credit-facility borrowings and for general corporate and working-capital purposes. Total debt increased modestly from year-end.
- Quarter-end credit ratings were BBB+/Stable from Fitch, Baa1/Stable from Moody’s, and BBB+/Stable from S&P.
Material changes and management commentary
- Same-property revenue growth was supported primarily by higher average rental rates; same-property financial occupancy also improved. Real estate taxes increased 5.1%, primarily because of higher tax rates and property valuations.
- Equity income from co-investments increased to $32.8 million from $10.9 million, primarily reflecting $20.5 million of BEXAEW promote income. Core FFO excludes this promote income and other specified non-core items.
- Development and predevelopment pipeline: 1,982 apartment homes, estimated total project costs of $1.3 billion, $0.6 billion incurred, and approximately $0.7 billion remaining. The company’s estimated share of remaining costs was $0.5 billion. Five projects were consolidated and two were unconsolidated joint ventures.
- Five major redevelopment communities covered 1,727 homes, with estimated costs of $138.8 million and approximately $38.0 million remaining. Management said redevelopment spending could be curtailed as needed.
- The company adopted new revenue-recognition and other accounting standards in 2018. Management said the revenue standard did not affect reported revenue; adoption of the partial-sale standard resulted in a $123.7 million cumulative adjustment related to the BEX II transaction.
Risks, contingencies and outlook
- No earnings or operating guidance was provided. Management’s liquidity assessment is forward-looking and depends partly on operating cash flow, financing availability, capital-market conditions and possible asset dispositions.
- Management identified risks including development delays or cost overruns, weaker occupancy or rental demand, higher interest rates and operating costs, refinancing on less favorable terms, and insufficient cash flow to meet needs or support dividends. Development funding depends on a combination of working capital, credit facilities, construction loans, capital issuance and dispositions.
- The company uses derivatives to manage interest-rate exposure. At March 31, $270.1 million of variable-rate debt was reported, of which $9.9 million had interest-rate cap protection; $175 million was subject to swaps. Interest-rate changes and financing-market conditions remain relevant risks.
- The company reported ordinary-course lawsuits and environmental-law exposure, but did not believe pending or threatened litigation was reasonably expected to have a material adverse effect. It reported no material changes to the risk factors in its 2017 Form 10-K.
Key facts for investors to verify
- Whether same-property rental and NOI growth persists, and how regional trends compare with the reported company-wide figures.
- How much of Q1 co-investment income and FFO growth is repeatable, given the $20.5 million BEXAEW promote and the absence of comparable prior-year gains.
- Actual costs, timing, lease-up and funding needs for the development and redevelopment pipelines, including the company’s share of joint-venture commitments.
- Debt maturities, refinancing terms, interest-rate exposure, and continued access to the $1.24 billion credit facilities and capital markets.
- Co-investment performance, leverage and partner-related exposures, as well as the sustainability of dividends relative to operating cash flow and investment needs.