Essex Property Trust, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Essex is a West Coast apartment REIT operating primarily in Southern California, Northern California and Seattle. It reported ownership interests in 246 operating communities with 60,799 apartment homes. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $362.9 | $370.8 | $1,069.0 | $1,133.7 |
| Net income | $125.0 | $78.8 | $371.6 | $497.7 |
| Net income attributable to common stockholders | $118.4 | $73.7 | $351.7 | $473.1 |
| Diluted EPS | $1.82 | $1.13 | $5.40 | $7.21 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $699.9 | $653.4 |
| Same-property NOI | $222.5 | $217.8 | $661.1 | $696.7 |
At September 30, total debt, net, was $6.09 billion, down from $6.25 billion at December 31, 2020. Unrestricted cash was $49.9 million, restricted cash $11.0 million, and marketable securities $183.1 million. Two unsecured credit facilities totaled $1.24 billion, with $42.7 million drawn. Total assets were $12.79 billion and total liabilities $6.62 billion.
Material changes versus the prior comparable periods
- Q3 total revenue fell 2.1% year over year, while same-property revenue rose 2.7% to $325.2 million. Same-property financial occupancy improved to 96.4% from 96.0%; cash delinquencies declined to 1.4% from 2.7%.
- For the first nine months, total revenue declined 5.7% and same-property revenue declined 2.9%. Management cited additional concessions and a 2.7% decline in average rental rates, partly offset by improved occupancy.
- Q3 net income increased year over year; nine-month net income declined despite higher operating cash flow. The 2020 nine-month comparison included a $234.7 million gain on remeasurement of a co-investment, versus $2.3 million in 2021. Nine-month 2021 results also included $143.0 million of property-sale gains and an $19.0 million loss on early debt retirement.
- Core FFO per diluted share was $3.12 in Q3 versus $3.15, and $9.24 for nine months versus $9.80. Reported FFO per diluted share was $3.34 and $9.67, respectively, compared with $2.88 and $9.53 in 2020.
- Same-property NOI increased 2.2% in Q3 but fell 5.1% for nine months. Interest expense decreased 9.7% in Q3 and 7.5% for nine months.
Outlook, risks and notable items
- Management said existing cash, marketable securities, operating cash flow and available credit were expected to cover anticipated cash needs for the next 12 months. It did not provide numerical earnings or operating guidance in the supplied filing text.
- COVID-19-related risks remained, including effects on residents’ ability to pay rent, continuing local eviction and rent-increase restrictions, labor shortages and supply-chain disruption. Management said delinquencies had not materially affected liquidity and the Company was not at material risk of breaching debt covenants.
- Development pipeline: 571 apartment homes, with $252.0 million incurred and approximately $84.0 million of remaining costs, of which $51.0 million was the Company’s estimated share.
- The Operating Partnership issued $450 million of 1.70% notes due 2028 and $300 million of 2.55% notes due 2031, using proceeds in part to repay debt. The Company reported $6.09 billion of net debt and a weighted average maturity of 8.7 years for mortgage notes and 8.9 years for public fixed-rate bonds. Debt maturities and refinancing conditions remain relevant risks.
- The Company established a $900 million at-the-market equity program; no shares had been sold under it by September 30. It repurchased $9.2 million of shares during the first quarter and had $214.5 million of repurchase authority remaining.
- Management reported no litigation expected to have a material adverse effect. The filing identifies ordinary-course lawsuits and uncertainty from future environmental, regulatory and pandemic-related measures. Controls and procedures were reported effective.
Important facts for investors to verify
- Whether improving occupancy and Q3 same-property revenue translate into sustained rent growth, particularly in Northern California and Seattle.
- How concessions, collections and local eviction or rent regulations affect cash rent receipts and future operating results.
- The recurring earnings trend apart from property-sale gains, marketable-security gains, co-investment income and debt-retirement or remeasurement items; review the Company’s FFO and Core FFO reconciliations.
- Debt maturities, variable-rate exposure, credit-facility availability and the potential effect of higher interest rates.
- Capital commitments, returns and related-party exposures associated with co-investments, preferred equity and notes receivable, including the $29.2 million bridge loan due December 2021.
- Development cost, timing and lease-up assumptions, and any dilution if the ATM program is used.