ESSEX PROPERTY TRUST, INC. quarterly report, Q2 FY2023

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Essex Property Trust, Inc. — Q2 2023 Form 10-Q

Reporting period: Three and six months ended June 30, 2023. Essex is a West Coast apartment REIT operating through Essex Portfolio, L.P. At quarter-end, it owned or held interests in 252 apartment communities with 61,997 homes, plus other investments and commercial properties.

Financial performance

  • Q2 revenue: $416.0 million, up 4.0% from $400.0 million; rental and other property revenue was $413.3 million. Six-month revenue: $828.5 million, up 6.0%.
  • Q2 net income available to common stockholders: $99.6 million, or $1.55 per diluted share, versus $57.1 million, or $0.87, a year earlier. For the first half, net income was $253.2 million, or $3.94 per diluted share, versus $130.3 million, or $2.00.
  • Core FFO per diluted share—a non-GAAP measure—was $3.77 in Q2 versus $3.68; first-half Core FFO per share was $7.42 versus $7.06. Q2 FFO per share was $3.87 versus $3.13.
  • Same-property results: Q2 revenue rose 4.0% to $394.2 million, primarily reflecting a 5.3% increase in average rental rates. Same-property NOI rose 3.5% to $280.8 million. Average financial occupancy was 96.6%, versus 96.1%. For the first half, same-property revenue increased 5.8% and NOI increased 6.3%.
  • Costs and interest: Q2 property operating expenses excluding taxes rose 5.7%, real estate taxes rose 3.7%, and interest expense rose 4.2%. Management cited maintenance, utilities, administrative costs, higher borrowing rates and lower capitalized interest.
  • Cash flow: First-half cash from operations was $488.3 million, down from $509.5 million. Investing used $34.5 million, compared with $101.7 million provided in 2022; financing used $427.4 million, versus $621.4 million. Ending unrestricted and restricted cash was $69.1 million.

Balance sheet, debt and liquidity

  • Total assets were $12.25 billion at June 30, down from $12.37 billion at year-end 2022. Total debt, net, was $5.94 billion, compared with $5.96 billion; reported total liabilities were $6.45 billion.
  • Unrestricted cash was $60.9 million and marketable securities were $102.1 million. The Company reported $1.24 billion in aggregate unsecured credit facilities, with $34.4 million outstanding at quarter-end. Management said cash, operating cash flow, securities and available credit were expected to cover anticipated needs for the next 12 months.
  • Weighted average interest rates were 3.3% on fixed-rate unsecured bonds, 4.2% on the hedged term loan, 5.9% on lines of credit and 3.8% on mortgage debt. The Company reported investment-grade ratings of Baa1/Stable from Moody’s and BBB+/Stable from S&P.
  • Quarterly dividends declared were $2.31 per share. The Company repurchased 437,026 shares for $95.7 million during the first half, with $302.7 million remaining under its repurchase authorization.

Material changes, outlook and risks

  • Q2 GAAP earnings increased substantially year over year, reflecting improved interest and other income and co-investment results, in addition to operating growth. First-half earnings also included a $59.2 million real estate sale gain. These items make GAAP net income less directly comparable to recurring property performance.
  • In March, the Company sold the 239-home CBC and The Sweeps community for $91.7 million and recognized a $54.5 million gain. In April, it acquired a 73-home community for $23.1 million.
  • After quarter-end, the Company closed $298.0 million of 10-year secured loans at a fixed 5.08% rate. Proceeds are intended to repay most of the $400.0 million of unsecured notes due May 2024 at maturity.
  • No numerical 2023 guidance is provided in the supplied filing text. Management described inflation, higher interest rates, potential recession, tight labor markets, regulatory limits on rent increases and resident collections as relevant uncertainties. It said the Company remained able to access funding, service debt and meet covenants.
  • Same-property cash delinquencies rose to 2.1% of scheduled rental income in Q2 2023 from 0.4% in Q2 2022; management attributed much of the comparison to lower emergency rental assistance receipts in 2023. It said delinquencies had not materially affected liquidity.
  • The Company is a defendant in class actions alleging multifamily rent collusion involving RealPage software. It considers the claims without merit and intends to defend them, but said the cases are at an early stage and outcomes or potential losses cannot be estimated. Other ordinary-course litigation was not expected to have a material adverse effect.

Important facts for investors to verify

  • Whether rent growth continues to exceed property expense growth, and how delinquencies and concessions affect actual collections.
  • How much reported earnings growth came from recurring operations versus securities gains, property dispositions, co-investment results and the one-time legal settlement or insurance-related items.
  • Availability and cost of refinancing, particularly the 2024 note maturity, and the effect of higher rates on floating-rate borrowings and future interest expense.
  • Progress and remaining funding needs for development and predevelopment projects, and the outcome or possible financial exposure from the RealPage-related litigation.