Essex Property Trust, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Essex is a West Coast apartment REIT with 247 operating communities and 60,387 apartment homes, including interests in co-investments. Unless stated otherwise, figures below are in U.S. dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $370.8 million | $366.9 million | $1,133.7 million | $1,084.8 million |
| Net income | $78.8 million | $105.7 million | $497.7 million | $329.3 million |
| Net income available to common stockholders | $73.7 million; $1.13 diluted/share | $99.3 million; $1.51 diluted/share | $473.1 million; $7.21 diluted/share | $310.5 million; $4.71 diluted/share |
| FFO per diluted share | $2.88 | $3.50 | $9.53 | $10.19 |
| Core FFO per diluted share | $3.15 | $3.35 | $9.80 | $9.92 |
| Same-property NOI | $216.9 million | $243.1 million | $693.8 million | $728.8 million |
For the nine months, operating cash flow was $653.4 million, versus $706.9 million a year earlier; investing cash outflow was $302.0 million, and financing cash inflow was $136.5 million. Cash and restricted cash increased by $488.0 million to $569.1 million.
At September 30, total debt, net, was $6.61 billion, up from $5.81 billion at December 31, 2019. Unrestricted cash was $558.4 million; marketable securities totaled $135.0 million. No balance was outstanding on the $1.24 billion of unsecured credit facilities. Total assets were $13.40 billion and total liabilities were $7.10 billion.
Material changes versus the prior period
- Q3 revenue rose 1.1%, but same-property revenue fell 6.7% and same-property NOI fell 10.8%. Nine-month same-property revenue declined 2.5%, while total revenue increased 4.5%, mainly reflecting the consolidation of six communities acquired from CPPIB.
- Q3 net income declined year over year, reflecting, among other items, a $19.1 million loss on early debt retirement; Q3 2019 had a $5.5 million gain on early debt retirement. Nine-month 2020 net income included a $234.7 million gain from remeasurement of the CPPIB co-investment, compared with $31.5 million in 2019.
- The CPPIB transaction added the company’s former 45% interest in six communities and a land parcel, valued at $1.0 billion gross, and generated the remeasurement gain. The company sold three apartment communities during 2020 for reported gains; a fourth, 416 on Broadway, was sold in October for $60.0 million.
- The company issued $1.25 billion principal amount of senior notes in 2020, including notes due 2032, 2031 and 2050, and used proceeds to refinance debt and for general corporate purposes. It also repurchased 985,509 shares for $223.0 million in the first nine months; $203.3 million of repurchase authority remained at quarter-end.
Operations, outlook and risks
- Management attributed weaker same-property results primarily to COVID-19-related concessions and rent delinquencies. Q3 same-property cash delinquencies were 2.7% of scheduled rent; after its collectability reserve, actual delinquencies were 2.0%, versus 0.4% in Q3 2019. Average same-property financial occupancy was 96.0% in both quarters.
- Same-property average rental rates decreased 0.4% year over year in Q3, from $2,346 to $2,336 per apartment home. Same-property revenue also reflected $16.8 million of additional cash concessions compared with Q3 2019.
- Management said available operating cash flow, cash, marketable securities, credit lines and access to capital markets were expected to cover anticipated cash needs for the next 12 months. It reported no material risk of covenant noncompliance and timely debt service. The filing gives no specific earnings or FFO guidance.
- COVID-19 risks include continued tenant nonpayment, eviction and rent restrictions, changes in housing demand and remote-work patterns, higher operating costs, construction delays, and uncertainty around development, lending and investment returns. Management noted that delinquencies had not materially impaired liquidity at quarter-end.
- The development pipeline covered 1,853 homes, with estimated total project costs of $1.1 billion and approximately $178 million of remaining costs ($125 million Essex’s share). Three major redevelopment projects had about $5.9 million remaining to spend; management said redevelopment funding could be reduced if needed.
- The company reported routine-course lawsuits but no pending or threatened litigation it believed would have a material adverse effect. It also noted uncertainty about compliance with changing COVID-19-related laws and eviction moratoriums.
Investor facts to verify
- How same-property revenue, concessions, delinquencies, occupancy and rental rates evolve after Q3, particularly in Northern and Southern California.
- How much reported earnings growth reflects the non-cash CPPIB remeasurement gain, and how underlying FFO and Core FFO trends compare.
- Debt maturities, refinancing costs, variable-rate exposure and continued access to capital, including the $200 million variable-rate term loan and February 2021 working-capital line maturity.
- Whether development costs, remaining commitments and project timelines change as pandemic-related conditions evolve.
- Collections and credit-loss assumptions for tenant receivables, mortgage-backed securities, mezzanine loans and preferred-equity investments.