Essex Property Trust, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. Essex is a REIT focused primarily on owning, operating, acquiring, developing, and redeveloping West Coast apartment communities. At year-end, it owned or held interests in 252 operating communities with 61,997 homes, concentrated in Southern California, Northern California, and the Seattle metro area. The filing combines Essex and its Operating Partnership; figures below are consolidated unless noted.
Key financial metrics
| Metric | 2023 | 2022 | Change / context |
|---|---|---|---|
| Total revenue | $1.669 billion | $1.607 billion | Up 3.9% |
| Net income | $430.7 million | $433.0 million | Down 0.5% |
| Net income available to common stockholders | $405.8 million | $408.3 million | Down 0.6%; diluted EPS was $6.32 versus $6.27 |
| Same-property revenue | $1.582 billion | $1.516 billion | Up 4.4%; average rental rates rose 4.5% |
| Same-property NOI | $1.119 billion | $1.072 billion | Up 4.3%; approximately 70.7% of same-property revenue |
| Core FFO per diluted share | $15.03 | $14.51 | Up 3.6%; supplemental non-GAAP measure |
| Operating cash flow | $980.1 million | $975.6 million | Nearly flat |
| Cash from investing activities | $(145.1) million | $146.0 million | Shifted to cash use |
| Cash from financing activities | $(477.3) million | $(1.138) billion | Lower net cash outflow |
Property operating expenses, excluding real estate taxes, increased 5.8% to $299.7 million; real estate taxes increased 1.0% to $185.8 million. Interest expense rose 4.0% to $212.9 million. Earnings from operations declined to $584.3 million from $595.2 million, in part reflecting lower gains on property sales. The filing does not present a single company-defined GAAP operating margin.
Debt, liquidity, and capital allocation
- Year-end unrestricted cash and cash equivalents were $391.7 million; marketable securities were $87.8 million. The company reported no balance drawn on its $1.2 billion revolving facility or $35 million working-capital line.
- Unsecured debt, net, was $5.319 billion and mortgage notes payable, net, were $887.2 million; no credit-line borrowings remained at year-end. Fixed-rate public bonds had $5.1 billion of principal outstanding, with a 3.3% weighted-average rate. Mortgage debt included $665.7 million fixed-rate and $221.5 million variable-rate debt.
- Scheduled unsecured bond principal includes $400 million due in 2024 and $500 million due in 2025. The company also closed $298 million of 10-year secured loans at a 5.08% fixed rate in July 2023. Credit ratings were Baa1/Stable from Moody’s and BBB+/Stable from S&P; the company reported compliance with debt covenants.
- Operating cash flow, cash and securities, credit availability, capital-market access, and potential asset dispositions are expected by management to cover anticipated 2024 cash needs. The $1.24 billion aggregate unsecured facilities mature in January 2027 and July 2024, respectively, subject to stated extension rights on the larger facility.
- The company repurchased and retired 437,026 shares for $95.7 million during 2023; $302.7 million of authorization remained. It did not issue shares through its $900 million ATM program. The annual common dividend declared was $9.24 per share, and the fourth-quarter dividend was $2.31 per share, paid January 12, 2024.
Material changes and unusual items
- Same-property average financial occupancy improved to 96.4% from 96.1%. Same-property revenue rose in all three regions: Southern California 4.9%, Northern California 4.0%, and Seattle 4.0%.
- Cash delinquencies rose to 1.9% of scheduled rental income in 2023 from 1.3% in 2022, remaining above the pre-pandemic historical average of 0.35%. Management said delinquencies had not materially affected liquidity. Emergency rental assistance receipts fell to $2.6 million from $34.5 million.
- Interest and other income was $46.3 million, compared with a $19.0 million loss in 2022, mainly reflecting a $55.6 million year-over-year improvement in realized and unrealized marketable-securities gains and other income items, including legal-settlement-related receipts.
- Property-sale gains were $59.2 million, including a $54.5 million gain on the sale of CBC and The Sweeps and a $4.7 million gain on a land sale. The company recorded $33.7 million of impairment losses on unconsolidated co-investments, up from $2.1 million in 2022.
- Management reported no impairment charge on consolidated real estate investments in 2023. The auditor identified impairment assessment of rental properties as a critical audit matter, citing judgment involved in evaluating expected cash-flow periods.
Outlook, risks, and contingencies
For 2024, management projected same-property revenue growth of 0.7%–2.7% and same-property operating-expense growth of 3.5%–5.0%. The filing discusses 2024 earnings and FFO guidance, but the supplied filing text does not provide clear numerical guidance for those measures. The development pipeline includes one 264-home joint-venture project and predevelopment projects; total estimated project costs were $126 million, with approximately $12 million remaining and $6.5 million representing the company’s share.
Key risks include exposure to West Coast regional economic and regulatory conditions, rent-control and tenant-protection rules, housing supply and rental demand, inflation and refinancing rates, earthquake and other catastrophe losses with limited insurance, climate-related costs, and development execution. The company also faces uncertainty from preferred-equity and other co-investments, potential property impairments, and an unresolved antitrust class-action litigation matter alleging rent coordination through revenue-management software. The company intends to defend the lawsuits; at this stage it cannot predict the outcome or estimate any loss. Management reported no cybersecurity threats that had materially affected, or were reasonably likely to materially affect, the company during the year.
KPMG issued unqualified opinions on the consolidated financial statements and Essex’s internal control over financial reporting. Management also concluded that disclosure controls and internal controls were effective as of year-end.
Important facts for investors to verify
- Whether 2024 same-property rent and revenue growth can offset projected expense increases, and how leasing trends evolve across the three regions.
- Delinquency and collections trends, including the effect of reduced rental-assistance payments and applicable tenant-protection rules.
- Refinancing plans and terms for the $400 million 2024 bond maturity and subsequent debt maturities, given higher interest rates.
- Performance, repayment prospects, and further impairment exposure in preferred-equity and other co-investments, including the $33.7 million 2023 impairment.
- Updates on the antitrust litigation, insurance coverage and retained catastrophe exposure, and the company’s numerical 2024 FFO guidance, which is not clear in the supplied text.