Essex Property Trust, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This annual filing covers Essex Property Trust, Inc. and its operating partnership, Essex Portfolio, L.P.; it is not a standalone fourth-quarter report.
Business context
Essex is a self-managed REIT focused on owning, operating, acquiring, developing, and redeveloping apartment communities on the West Coast. At year-end, it owned or held interests in 252 operating communities with 62,147 apartment homes, primarily in Southern California, Northern California, and the Seattle metropolitan area. Apartment communities generated 99% of 2022 revenue.
Financial and operating highlights
| Metric | 2022 | 2021 | Change / context |
|---|---|---|---|
| Total revenue | $1.607 billion | $1.441 billion | Up 11.5% |
| Earnings from operations | $595.2 million | $530.0 million | Up 12.3% |
| Net income | $433.0 million | $515.7 million | Down 16.0% |
| Net income available to common stockholders | $408.3 million; $6.27 per diluted share | $488.6 million; $7.51 per diluted share | Down 16.4% in dollars |
| FFO per diluted share | $13.70 | $13.98 | Down 2.0% |
| Core FFO per diluted share | $14.51 | $12.49 | Up 16.2% |
| Cash flow from operating activities | $975.6 million | $905.3 million | Up 7.8% |
| Same-Property revenue | $1.485 billion | $1.347 billion | Up 10.3% |
| Same-Property NOI | $1.052 billion | $929.9 million | Up 13.2% |
| Average Same-Property financial occupancy | 96.1% | 96.4% | Down 0.3 percentage points |
Same-Property revenue growth reflected a 7.2% increase in average rental rates and a 2.3% contribution from lower cash concessions. Same-Property operating expenses, including real estate taxes, increased about 4.9%. Consolidated property NOI margin was approximately 70.7% of property revenue, compared with 68.9% in 2021; NOI is a non-GAAP measure.
Net income was pressured by a $117.7 million year-over-year decline in interest and other income, primarily from unrealized losses on marketable securities, and an $85.7 million decline in equity income from co-investments. These effects more than offset higher property revenue and operating earnings. The company reported a $94.4 million gain on the sale of Anavia; gains on property sales were $143.0 million in 2021.
Cash, debt, and capital
- Year-end unrestricted cash and cash equivalents were $33.3 million; marketable securities were $112.7 million. Cash flow from investing was positive $146.0 million, while financing activities used $1.138 billion, including $565.9 million of common dividends and $189.7 million of share repurchases.
- Balance-sheet debt was approximately $5.96 billion: $5.312 billion of unsecured debt, net, $593.9 million of mortgage debt, and $52.1 million drawn on credit lines. Fixed-rate public bonds totaled about $5.4 billion at a 3.3% weighted-average rate; mortgage debt averaged 3.5%. The filing estimated fair value of fixed-rate debt at $5.2 billion versus carrying value of about $5.7 billion.
- Available unsecured credit facilities totaled $1.24 billion. The company reported compliance with debt covenants and investment-grade ratings of Baa1/Stable from Moody’s and BBB+/Stable from S&P.
- A $300 million unsecured term loan entered into in October 2022 was undrawn at year-end, fixed through a swap at 4.2%, and matures in October 2024 with three extension options. The delayed draw was expected in April 2023 to repay $300 million of notes due in May 2023.
- The company declared dividends of $8.80 per share for 2022; the fourth-quarter dividend was $2.20 per share, paid January 13, 2023. It repurchased 740,053 shares for $189.7 million during 2022.
Material changes, outlook, and notable items
- 2022 Same-Property revenue increased in each region: Southern California 11.3%, Northern California 8.4%, and Seattle Metro 12.0%. Average financial occupancy edged down from 96.4% to 96.1%.
- Management projected 2023 Same-Property revenue growth of 3.25%–4.75% and Same-Property operating-expense growth of 4.50%–5.50%. It also projected regional job growth of 0.3% in Southern California, 0.7% in Northern California, and 0.4% in Seattle Metro, alongside housing-supply growth estimates of 0.5%, 0.5%, and 1.1%, respectively.
- Management said operating cash flows, cash and securities, credit availability, capital-market access, and potential asset dispositions should cover reasonably anticipated 2023 cash needs. It noted that financing and investment plans remain sensitive to interest rates and capital-market conditions.
- Acquisitions or increased interests involved three communities/590 homes for approximately $215.9 million, including Essex’s 50% joint-venture interest in Vela and the buyout of a partner’s interests in two Los Angeles communities. The company sold one 250-home community for $160.0 million.
- The development pipeline included one 264-home joint-venture project and predevelopment projects. Estimated total project costs were $127 million, with approximately $25 million remaining, including $12.8 million as Essex’s share.
- Cash delinquencies were 1.2% of scheduled Same-Property rental income in 2022, down from 1.9% in 2021 but above the company’s historical 0.3%–0.4% range. Management said they had not materially affected liquidity.
- Other unusual items included $58.0 million of unrealized losses on equity securities recognized in income, $17.4 million of gain on remeasurement when the company consolidated a co-investment, and a $2.1 million impairment of an unconsolidated co-investment. No impairment charge was recorded on rental properties in 2022.
Risks and contingencies
- The portfolio is concentrated in California and the Seattle area, exposing results to local employment, housing demand, regulation, rent-control measures, taxes, and market supply. Inflation, recession risk, and higher interest rates may raise costs, reduce rents or valuations, and increase refinancing expense.
- All communities are in earthquake-prone areas. Coverage is limited for certain catastrophic, environmental, and seismic losses; the company also self-insures certain risks through Pacific Western Insurance, which held approximately $107.6 million in cash and marketable securities at year-end.
- Short-term apartment leases expose the company to changes in market rents, occupancy, concessions, and tenant payment performance. Local eviction restrictions and other tenant-protection laws may constrain rent increases and collection efforts.
- Development, acquisitions, joint ventures, and preferred-equity or loan investments involve cost, timing, partner-control, repayment, and valuation risks. The company had $149.1 million of remaining commitments across specified joint-venture, preferred-equity, and mezzanine-loan investments.
- Environmental and mold-related claims, uninsured losses, cyber incidents, and changes in laws or REIT tax rules could create additional costs or liabilities. Potential mold and other environmental liabilities were not quantifiable in the filing; management did not expect current legal matters to have a material adverse effect.
- KPMG issued unqualified opinions on the consolidated financial statements and, for Essex, internal control over financial reporting. The filing identifies rental-property impairment assessment as a critical audit matter, involving judgment about expected holding periods and future cash flows.
Important facts for investors to verify
- Whether 2023 Same-Property revenue and expense guidance is met, particularly as occupancy, concessions, delinquency, and regional employment trends evolve.
- Execution and funding of the planned $300 million term-loan draw and repayment of the May 2023 notes, plus subsequent debt maturities and borrowing costs.
- Cash available after dividends, capital expenditures, development spending, share repurchases, and outstanding investment commitments.
- Performance and credit quality of co-investments, preferred-equity investments, and mezzanine loans, including the timing of expected repayments and remaining commitments.
- Exposure to California and Washington rent regulation, earthquakes, insurance costs, and potential environmental or mold liabilities.
- How marketable-security valuation changes, co-investment income, and other non-core items affect reported earnings compared with Core FFO and property-level performance.