01—Abstract
Summary
Summary of the 10-K filed February 22, 2018. Cited figures are marked; the original filing is the authoritative source.
Essex Property Trust (NYSE: ESS) closed 2017 with a strong operating year concentrated on the West Coast.
Total property revenue rose 5.3% to $1.35 billiona, and Same-Property revenue grew 3.7%, driven by a 3.3% increase in average rents to $2,164 per apartment home. Net income was $458.0 million, and diluted FFO per share rose to $11.91 from $11.12 in 2016, a 7.1% increase. Earnings were boosted by non-recurring gains, including an $88.6 million remeasurement gain on the Palm Valley consolidation, $26.4 million of real estate gains (largely Jefferson at Hollywood), and $34.8 million from the BEXAEW sale, so investors should focus on FFO and Core FFO rather than headline net income.
The balance sheet is conservatively structured but carries significant leverage. Total indebtedness was $5.7 billionb, with the company rated BBB+/Baa1 and no unsecured debt maturities until 2019. Debt is mostly fixed-rate: about $4.9 billion of fixed-rate debt at a 3.5%-5.5% range, versus roughly $800 million of variable-rate debt.
The company issued $350 millionc of 3.625% notes due 2027 and retired a $300 million 5.5% note, and it expanded its unsecured credit facility to $1.2 billion in January 2018. Development is a key growth lever, with 1,982 apartment homes in the pipeline at a total estimated cost of $1.3 billion, of which $572 million remains to be funded by the company. Management guided 2018 Same-Property revenue growth of 2.0% to 3.0% and Same-Property expense growth of 2.1% to 3.1%, with Seattle expected to be the strongest region and Southern California the weakest.
Key risks include geographic concentration (83% of rental revenue from California), new supply in the coastal markets, rent-control initiatives in Richmond and Mountain View, and tax changes from the 2017 Tax Act. The dividend was raised to $7.00d per share for 2017 from $6.40, a 9.4% increase, and the quarterly rate of $1.75 was paid in January 2018.
02—Key points
Key Highlights
- Total property revenue grew 5.3% to $1.354 billion in 2017; Same-Property revenue grew 3.7%, with Seattle Metro leading at 5.8%.
- Diluted FFO per share rose 7.1% to $11.91 (from $11.12); Core FFO matched at $11.91 per share, a more reliable gauge than GAAP net income, which was inflated by one-time gains.
- Net income of $458.0 million was boosted by non-recurring items, including an $88.6 million gain on remeasuring the Palm Valley co-investment and $26.4 million in property sale gains.
- Total indebtedness stood at $5.7 billion, with about $4.9 billion at fixed rates; the company was rated BBB+/Baa1 with no unsecured maturities until 2019.
- The development pipeline totals 1,982 apartment homes at a $1.3 billion estimated total cost; $752 million remains to be spent, with $572 million borne by Essex.
- The 2018 guidance calls for Same-Property revenue growth of 2.0%-3.0%, while Same-Property operating expenses are expected to rise 2.1%-3.1%.
- Geographic concentration is high, with 83% of rental revenue from California, creating exposure to local regulation (including rent-control measures) and to earthquake risk.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 22, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $1.36B$1.29B | +5.4% |
| Operating Expenses | $917.38M$873.20M | +5.1% |
| Operating Income | $472.94M$420.80M | +12.4% |
| Interest Expense | $222.89M$219.65M | +1.5% |
| Net Income | $433.06M$411.12M | +5.3% |
| EPS (Basic) | $6.58$6.28 | +4.8% |
| EPS (Diluted) | $6.57$6.27 | +4.8% |
| Shares Outstanding (Basic) | 65.83M65.47M | +0.5% |
| Shares Outstanding (Diluted) | 65.90M65.59M | +0.5% |
05—Questions
Frequently Asked Questions
How did Essex perform on a core operating basis in 2017?
Core operating performance was solid. Same-Property revenue grew 3.7% to $1.23 billion, Same-Property NOI rose about 4.2% to $857.7 million, and average rent per apartment home increased 3.3% to $2,164. Diluted FFO per share increased 7.1% to $11.91.
Why is GAAP net income not a good indicator of 2017 earnings power?
Net income of $458.0 million includes several one-time items: an $88.6 million remeasurement gain on the Palm Valley consolidation, $26.4 million of property sale gains, and co-investment gains totaling about $44.8 million. Investors typically focus on FFO and Core FFO, which strip out these items and depreciation.
What are the main balance sheet risks?
Total debt is $5.7 billion, and the company depends on capital markets to refinance maturities. Its unsecured credit line was expanded to $1.2 billion and extended to 2021, and about 85% of debt is fixed-rate, which limits interest rate exposure. Still, rising rates or a downgrade from its investment-grade rating could raise financing costs.
What is the outlook for 2018 and what are the key risks?
Management projects 2018 Same-Property revenue growth of 2.0%-3.0% and expense growth of 2.1%-3.1%. Risks include new apartment supply in its coastal markets, potential rent-control expansion (such as the recently passed initiatives in Richmond and Mountain View), California property tax reassessment, and the effects of the 2017 Tax Act on the company and its shareholders.
How much of Essex's growth depends on development and acquisitions?
Growth is meaningfully tied to development. Essex has $572 million of remaining equity costs in its pipeline and acquired about $567 million of communities in 2017, including Palm Valley. These projects add value but also carry execution, cost-overrun, and lease-up risk, and they are funded partly through equity issuance that can dilute existing shareholders.
06—Continue