Essex Property Trust, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Essex is a West Coast apartment REIT operating through Essex Portfolio, L.P.; the combined filing reports 244 stabilized apartment communities with 59,290 homes, plus commercial properties and development projects.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $329.2 million | $304.6 million | $965.0 million | $883.7 million |
| Net income | $70.2 million | $47.2 million | $233.9 million | $162.5 million |
| Net income available to common stockholders | $65.6 million; $1.00 per diluted share | $42.3 million; $0.65 per diluted share | $215.6 million; $3.29 per diluted share | $147.2 million; $2.27 per diluted share |
| Net operating income (NOI) | $227.7 million | $208.4 million | $668.9 million | $605.5 million |
| Same-property NOI | $203.3 million | $187.7 million | $598.1 million | $551.6 million |
| FFO per diluted share | $2.81 | $2.53 | $8.27 | $7.19 |
| Core FFO per diluted share | $2.81 | $2.49 | $8.23 | $7.19 |
- Q3 same-property revenue increased 6.9%, with average rental rates up 6.0%; same-property financial occupancy was 96.5%, versus 96.0%. Nine-month same-property revenue increased 7.0%, with average rental rates up 6.8%.
- Q3 property operating expenses excluding taxes rose 5.4% and real estate taxes rose 5.9%. Same-property expense increases reflected higher management fees, maintenance, tax rates and property valuations.
- Nine-month net cash from operating activities was $580.3 million, compared with $487.9 million. Investing used $264.8 million, versus $660.3 million; financing used $150.0 million, compared with providing $178.5 million. Ending unrestricted cash was $195.2 million, versus $29.7 million at year-end 2015.
- At September 30, total debt was $5.585 billion, up from $5.315 billion at December 31, 2015. Debt comprised $3.376 billion unsecured debt and $2.209 billion mortgage notes; no amounts were drawn on the $1.025 billion of unsecured credit lines. Weighted average rates were 3.6% on fixed-rate unsecured bonds and 4.3% on mortgage notes.
- Total assets were $12.177 billion and total liabilities were $5.949 billion. Marketable securities were $153.7 million; $62.8 million were available for sale. The quarterly common dividend was $1.60 per share, versus $1.44 a year earlier.
Material changes and unusual items
- Revenue growth reflected higher rents and occupancy, as well as acquisitions or consolidations: six communities since July 2015 for the quarter and ten since January 2015 for the nine-month period.
- Interest expense rose $6.6 million in Q3 and $16.3 million for the nine months, primarily reflecting new senior notes, partly offset by repayment of private-placement debt. Essex issued $450 million of 3.375% notes due 2026 in April 2016.
- Nine-month co-investment income increased, including $13.0 million of the Company’s share of gains on co-investment sales. Real estate sale gains were $20.3 million, including Harvest Park and the former headquarters; the Harvest Park sale generated $4.3 million deferred tax expense. The prior-year period included a $34.0 million co-investment remeasurement gain, which did not recur.
- Total return swap income was $3.1 million in Q3 and $9.1 million for the nine months; none was recorded in the comparable 2015 periods. The company redeemed all $73.8 million of its 7.125% Series H preferred stock in April.
Outlook, risks and contingencies
- Management said operating cash flow, cash and securities, credit availability, capital-market access and potential property dispositions should meet reasonably anticipated cash needs for the next 12 months. This is a liquidity assessment, not earnings guidance; the filing gives no specific earnings or same-property growth forecast.
- The development pipeline comprised six projects with 2,223 homes and estimated total costs of $1.3 billion, including $0.7 billion of remaining costs. Four major redevelopment communities had estimated costs of $149.9 million, with $53.7 million remaining. Development and redevelopment costs, completion, leasing and funding are subject to uncertainty.
- Management cited market and interest-rate changes, refinancing terms, future cash flows and potential cost overruns as risks. Lawsuits are in the ordinary course and are not expected to materially affect results; the filing reported no material change to previously disclosed risk factors.
- Credit ratings at September 30 were Fitch BBB+/Stable, Moody’s Baa2/Positive and S&P BBB/Positive. Moody’s and S&P upgraded ratings in October 2016.
Most important facts for investors to verify
- Whether rent growth, high occupancy and same-property NOI gains continued after Q3, and how operating costs affected margins.
- Development and redevelopment budgets, remaining funding needs, completion timing and expected lease-up.
- Debt maturities, refinancing costs and exposure to variable rates, including the effect of swaps and rate movements.
- How much reported earnings and FFO growth depended on property/co-investment sale gains, swap income and other nonrecurring items.
- Liquidity assumptions and dividend coverage, including the use of cash, securities, credit facilities and asset-sale proceeds.