Essex Property Trust, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are with the same periods in 2022. Essex is a West Coast apartment REIT with 252 operating communities and 61,997 apartment homes, including interests in co-investments. Financial amounts below are in millions except per-share data.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $419.2 | $409.7 | $1,247.6 | $1,191.6 |
| Net income | $93.0 | $98.7 | $360.4 | $238.8 |
| Net income available to common stockholders | $87.3 | $92.8 | $340.4 | $223.2 |
| Diluted EPS | $1.36 | $1.43 | $5.30 | $3.42 |
| Same-property revenue | $398.5 | $386.2 | $1,181.6 | $1,126.5 |
| Same-property NOI | $280.0 | $272.7 | $834.9 | $794.9 |
| Core FFO per diluted share | $3.78 | $3.69 | $11.21 | $10.75 |
Q3 revenue rose 2.3%; same-property revenue grew 3.2%, primarily on higher rental rates. Average same-property financial occupancy was 96.4%, versus 96.0%. Q3 same-property NOI increased 2.7%. Core FFO per diluted share rose about 2.4% for the quarter, while reported diluted EPS declined.
For the first nine months, same-property revenue increased 4.9%, supported by a 5.1% increase in average rental rates; average financial occupancy was 96.6%, versus 96.1%. Core FFO per diluted share rose about 4.3%. Reported nine-month earnings benefited from a $59.2 million property-sale gain and improved investment-related results; the 2022 comparison included a $17.4 million co-investment remeasurement gain and substantial marketable-security losses.
Cash flow, debt and liquidity
- Operating cash flow was $776.4 million for the nine months, compared with $808.7 million in 2022. Investing activities used $102.4 million and financing activities used $316.2 million. Cash and restricted cash increased $357.8 million to $400.5 million.
- At September 30, total debt, net, was $6.205 billion, up from $5.958 billion at year-end 2022. Unsecured debt was $5.317 billion and mortgage debt $888.0 million; no credit-line balance was outstanding. The weighted average rates reported were 3.3% on fixed-rate unsecured bonds, 4.2% on the variable-rate term loan after its swap, and 4.3% on mortgage notes.
- Cash and cash equivalents were $392.0 million unrestricted; marketable securities were $90.2 million. The company had $1.24 billion in aggregate unsecured credit lines available and said existing liquidity and expected operating cash flow should cover anticipated cash needs for the next 12 months.
- In July, the company issued $298 million of 10-year secured loans at a fixed 5.08% rate, intending to use the proceeds to repay most of its $400 million of notes due May 2024. A $300 million term loan is swapped to a 4.2% fixed rate and matures in October 2024, with three one-year extension options.
Material changes, outlook and risks
- Operating cost growth pressured property economics: same-property operating expenses excluding real estate taxes rose 6.2% in Q3 and 6.7% year to date. Management cited utilities, insurance, maintenance, administrative and personnel costs. Interest expense increased 5.0% in Q3 and 3.5% year to date.
- Cash delinquencies at same-property communities rose to 2.0% of scheduled rental income in Q3 from 1.4% a year earlier, against a cited pre-pandemic average of 0.35%. Management attributed part of the year-over-year increase to lower emergency rental-assistance receipts; it said delinquencies had not materially affected liquidity.
- Management discussed inflation, higher interest rates, possible recessionary effects, labor and operating-cost pressures, geopolitical uncertainty, and local laws that may limit rent increases or collection of unpaid rent. It reported access to traditional funding, ability to service obligations, and no material risk of breaching credit covenants. No specific full-year earnings or FFO guidance is provided in the supplied filing text.
- The company repurchased and retired 437,026 shares for $95.7 million during the first nine months at an average $218.88 per share; $302.7 million remained under its repurchase authorization. It sold CBC and The Sweeps for $91.7 million and recorded a $54.5 million gain, and acquired a 73-unit community for $23.1 million.
- A new $12.3 million preferred-equity investment carries an initial 13.5% preferred return and matures in 2028. The company also has related-party preferred-equity interests and remaining funding commitments; these are relevant to investment and counterparty exposure.
- Purported class actions allege collusion involving RealPage rent-management software and multifamily lessors, including Essex. The company intends to defend the claims, but says their early stage prevents estimating any potential loss. Management states other ordinary-course litigation is not expected to have a material adverse effect.
Important facts for investors to verify
- Review the latest same-property rent growth, occupancy, delinquencies and expense trends, particularly whether rent increases continue to outpace operating costs.
- Assess refinancing plans and terms for the $400 million of notes due in May 2024, the October 2024 term loan, and other scheduled maturities.
- Reconcile reported earnings with recurring performance: nine-month results include the property-sale gain and investment-related gains, while Core FFO is a non-GAAP measure.
- Monitor the RealPage litigation, local rent and tenant-protection rules, and any related costs or changes in rent collection.
- Check subsequent filings for updated guidance, capital allocation, co-investment commitments and liquidity; the filing states management’s 12-month liquidity assessment but does not give a specific earnings outlook.