Essex Property Trust, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Essex is a West Coast apartment REIT operating through Essex Portfolio, L.P. At quarter-end, it owned or held interests in 253 operating communities with 62,271 homes, including co-investments.
Financial performance
- Revenue: $426.9 million, up 3.5% from $412.4 million. Rental and other property revenue was $424.2 million, up 3.6%; same-property revenue rose 3.6% to $409.8 million, mainly from a 2.1% increase in average rental rates and lower delinquencies.
- Profit: Net income was $285.1 million versus $161.6 million; net income available to common stockholders was $272.7 million, or $4.25 per diluted share, versus $153.5 million, or $2.38. Results included a $138.3 million gain from remeasuring a co-investment and $42.5 million of legal settlement gains. Earnings from operations fell to $132.4 million from $187.4 million, which included a $59.2 million real estate sale gain in Q1 2023.
- REIT operating measures: FFO per diluted share was $4.60 versus $3.80; Core FFO per diluted share was $3.83 versus $3.65. Same-property NOI increased 3.0% to $286.4 million. These are non-GAAP supplemental measures.
- Costs and occupancy: Same-property operating expenses excluding real estate taxes increased 7.8%; property operating costs rose mainly due to utilities, insurance, and personnel. Average same-property financial occupancy was 96.3%, down from 96.7%.
- Cash flow: Operating cash flow was $314.9 million versus $276.9 million. Investing used $397.4 million, including $355.3 million for acquisitions; financing provided $190.1 million. Cash and restricted cash increased $107.5 million to $507.9 million.
- Debt and liquidity: Total debt, net, was $6.553 billion, up from $6.206 billion at year-end. Unrestricted cash was $499.0 million and marketable securities were $91.3 million. The company had $1.24 billion of undrawn unsecured credit facilities. Its ratings were Baa1/Stable and BBB+/Stable.
- Dividends: The company declared $2.45 per common share for the quarter and paid $148.3 million in common dividends.
Material changes and notable items
- Essex acquired its partner’s 49.9% interest in four BEXAEW communities comprising 1,480 homes, valued at $505.0 million gross. It repaid $219.9 million of property debt, consolidated the communities, and recorded the $138.3 million remeasurement gain.
- In March, the Operating Partnership issued $350 million of 5.5% senior unsecured notes due in 2034. Proceeds were intended in part to fund repayment of 3.875% notes due May 2024.
- A $3.7 million non-cash impairment was recorded on a preferred equity co-investment. After quarter-end, Essex accepted the sponsor’s equity interest in the related 75-home Sunnyvale community, unencumbered and consolidated at a stated $46.6 million valuation.
- Cash delinquencies as a percentage of scheduled same-property rent improved to 1.3% from 2.1%, but remained above the company’s pre-pandemic historical average of 0.35%. Management said they had not materially affected liquidity.
Outlook, risks, and contingencies
- No specific earnings or operating guidance was provided. Management said operating cash flow, cash, marketable securities, credit availability, capital markets, and potential asset dispositions should cover anticipated cash needs for the next 12 months.
- Management cited inflation, higher interest rates, possible recession, geopolitical uncertainty, elevated operating costs, rental demand and affordability, and refinancing terms as risks. It said the company was not at material risk of breaching debt covenants and could service its obligations.
- The company faces multifamily rent-setting class actions involving RealPage software. It intends to defend the cases but, given their early stage, cannot predict the outcome or estimate any loss. Management did not expect other pending or threatened litigation to have a material adverse effect.
- Other matters to monitor include scheduled debt maturities, the July 2024 maturity of the $35 million working-capital line, the funded post-quarter $53.6 million related-party bridge loan due September 2024, and the performance of co-investments. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the GAAP earnings increase reflects recurring operations versus the BEXAEW remeasurement gain and legal settlements; compare Core FFO and same-property NOI trends.
- Whether rental-rate growth can offset expense inflation and occupancy softness, and whether delinquencies continue to decline.
- Funding and repayment plans for 2024 debt maturities, including the May notes, and the effect of new 5.5% debt on interest expense.
- Any developments in the RealPage litigation, the Sunnyvale consolidation, and the recovery prospects for impaired or related-party investments.