Business context and reporting period
Essex Property Trust, Inc. (NYSE: ESS) filed a combined Form 10-K with Essex Portfolio, L.P. for the fiscal year ended December 31, 2020. Essex is a self-managed REIT focused on owning, operating, acquiring, developing, and redeveloping apartment communities, primarily in Southern and Northern California and the Seattle area. At year-end, the portfolio included interests in 246 operating communities with 60,272 apartment homes. The filing is annual; it does not provide a clear standalone fourth-quarter results summary.
Financial and operating performance
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $1.496 billion | $1.460 billion |
| Net income | $599.3 million | $464.4 million |
| Net income available to common stockholders | $568.9 million; $8.69 per diluted share | $439.3 million; $6.66 per diluted share |
| Core FFO | $868.5 million; $12.82 per diluted share | $912.2 million; $13.38 per diluted share |
| Same-property revenue | $1.287 billion, down 3.9% | $1.339 billion |
| Same-property NOI | $905.0 million | $971.5 million |
| Cash from operating activities | $803.1 million | $919.1 million |
GAAP net income increased substantially, chiefly due to a $234.7 million gain from remeasuring the previously held interest in the CPPIB joint venture when Essex acquired its partner’s 45% interest. Other notable 2020 items included $65.0 million of gains on property sales and a $22.9 million loss on early debt retirement. Core FFO per share declined 4.2%. Same-property financial occupancy fell to 96.0% from 96.6%. The filing does not provide a clear consolidated profit-margin measure; same-property NOI was approximately 70.3% of same-property revenue, versus 72.6% in 2019.
Balance sheet, debt, and liquidity
- Total assets were $12.94 billion and total liabilities were $6.72 billion at December 31, 2020.
- Total debt was approximately $6.3 billion, including $5.6 billion of net unsecured debt and $643.6 million of net mortgage debt. Approximately $775.1 million was variable-rate debt; $175 million was effectively fixed through interest-rate swaps.
- Unrestricted cash was $73.6 million and marketable securities were $147.8 million. The $1.24 billion of unsecured credit lines had no balance outstanding at year-end.
- Moody’s and S&P ratings were Baa1/Stable and BBB+/Stable, respectively. The company reported compliance with debt covenants.
- Operating cash flow fell to $803.1 million from $919.1 million. Investing activities used $416.9 million; financing activities used $383.3 million. The company paid $536.1 million in common-stock dividends and repurchased 1.20 million shares for $269.3 million.
- The board declared a fourth-quarter 2020 dividend of $2.0775 per share, paid January 15, 2021. Total 2020 dividends declared were $8.31 per share.
Material changes versus 2019
- Same-property revenue decreased $52.0 million, mainly due to $31.8 million more cash concessions, $23.5 million in delinquencies, and lower occupancy. Same-property operating expenses excluding real estate taxes rose 3.5%; same-property real estate taxes rose 4.7%.
- Total property revenue rose 2.4%, in part because Essex consolidated six communities after buying CPPIB’s 45% interest for $463.4 million. The acquisition added 2,020 apartment homes.
- Interest expense increased 1.5% to $220.6 million. Essex issued long-dated notes, including $650 million due 2032 and $600 million due 2031 and 2050, and used proceeds to refinance or repay debt.
- Operating cash flow declined, while reported GAAP net income increased due largely to the nonrecurring remeasurement gain. Equity income from co-investments fell 40.7%, primarily because of lower gains on co-investment property sales.
- Essex sold three communities or portfolios for aggregate contract prices of $343.5 million and recognized $65.0 million in gains. It also reported a $1.8 million impairment loss.
Outlook, management commentary, and risks
For 2021, management projected same-property revenue to decline 1.5%–3.5% and same-property operating expenses to increase 2.0%–3.0%. Management expected available operating cash flow, cash and securities, credit-line availability, capital-market access, and potential asset-sale proceeds to cover reasonably anticipated 2021 cash needs. A $100 million unsecured debt maturity was repaid in February 2021; a $200 million term loan due in April 2021 had two optional 12-month extensions.
COVID-19 drove weaker collections, concessions, operating costs, and uncertainty over rental demand, work-from-home patterns, and urban-market recovery. Cash delinquencies were 2.5% of scheduled same-property rent in 2020; after collectability reserves, reported actual delinquencies were 2.1%. The company said these delinquencies had not materially harmed liquidity and that it retained access to traditional financing. Key risks include continued pandemic effects, rent-control and eviction restrictions, the company’s concentration in California (81% of 2020 rental revenue), local economic and regulatory conditions, development costs and delays, refinancing and interest-rate exposure, seismic and other uninsured losses, and potential impairment of real estate assets. The auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- How 2021 rent collections, concessions, occupancy, and same-property revenue compare with management’s forecast, especially in Northern California and Southern California.
- Whether reported delinquencies and reserves adequately reflect expected resident payments, and how eviction restrictions or rent regulation affect collections.
- The effect of the $234.7 million CPPIB remeasurement gain and property-sale gains on GAAP earnings; compare recurring performance using Core FFO and same-property NOI.
- Debt maturities, extensions, refinancing costs, variable-rate exposure, and continued covenant and investment-grade rating headroom.
- Remaining development and preferred-equity funding commitments, project timing, and exposure to cost overruns or delays.
- Potential property impairment, uninsured earthquake or other losses, and any material litigation or environmental contingencies; the filing says certain potential environmental and mold liabilities are not quantifiable.