01—Abstract
Summary
Summary of the 10-K filed February 20, 2020. Cited figures are marked; the original filing is the authoritative source.
Essex Property Trust (NYSE: ESS) ended 2019 as an S&P 500 self-administered West Coast apartment REIT with 250 operating communities totaling 60,570 apartment homes, of which 82%a of rental revenue came from California.
Portfolio operations drove results: 2019 Same-Property revenue rose 3.4% to $1.37 billionb, with Same-Property NOI up 3.9% to $989.4 million, and total rental and other property revenue reached $1.45 billion. Net income available to common stockholders was $439.3 million ($6.66 diluted EPS), versus $390.2 million in 2018, aided by a $61.9 million 2018 gain that did not recur and by $112.1 million of co-investment equity income, including a $50.2 million gain on the Mosso sale. Management's FFO per diluted share rose to $13.73 from $12.76, and Core FFO per share rose to $13.38 from $12.57.
The balance sheet grew more levered and more unsecured. Total indebtedness was about $5.8 billionc, and the company refinanced and extended its maturity profile through unsecured bond issuances of $350 million plus $150 million in 2029 notes and $400 million plus $150 million in 2030 notes, while repaying $951.6 million of secured mortgage debt. Credit ratings were BBB+/Baa1/BBB+ (Essex and EPLP).
Management guided 2020 Same-Property revenue growth of 2.6% to 3.6% and Same-Property operating expense growth of 2.5% to 3.5%. Subsequent events include the January 2020 purchase of CPPIB's 45% interest in a land parcel and six communities (2,020 homes, roughly $1.0 billiond gross) and a February 2020 $500 million issuance of 2.65% notes due 2032.
Key risks for investors are concentrated California and Seattle exposure, including rent control and tax (Proposition 13) risk, short-term leases that reprice quickly in a downturn, rising interest rate and refinancing risk on roughly $5.8 billion of debt, and LIBOR transition after 2021. The company also depends on co-investment partners and on a development pipeline of about $1.3 billion total estimated cost.
02—Key points
Key Highlights
- FFO per diluted share rose 7.6% to $13.73 in 2019 (Core FFO $13.38, up 6.4%), supported by 3.4% Same-Property revenue growth and 3.9% Same-Property NOI growth to $989.4 million.
- Diluted EPS was $6.66 in 2019 versus $5.90 in 2018, but 2018 included a $61.9 million gain on dispositions, so underlying growth is more modest than the headline suggests.
- Acquisitions totaled $856.5 million across eight communities (2,007 homes), while dispositions included Mosso (sold by a CPPIB joint venture for $311.0 million, $50.2 million gain to Essex).
- Total indebtedness was about $5.8 billion at year-end, with $4.8 billion unsecured, and the company issued $1.05 billion of new senior unsecured notes in 2019 at coupons of 3.0% to 4.0%.
- 2020 guidance calls for Same-Property revenue growth of 2.6% to 3.6% and operating expense growth of 2.5% to 3.5%, with supply in Seattle and Northern California projected to be a moderating factor.
- Development pipeline of 1,960 homes carries an estimated total cost of $1.3 billion, with $193.0 million of Essex's share still to be spent, and the company is adding a $1.0 billion CPPIB buyout in January 2020.
- Regulatory and concentration risk is high: 82% of rental revenue comes from California, and rent control and Proposition 13 property tax reassessment pose ongoing threats to margins and asset values.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 20, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $1.46B$1.40B | +4.3% |
| Operating Expenses | $975.88M$949.92M | +2.7% |
| Operating Income | $481.11M$511.99M | −6.0% |
| Interest Expense | $217.34M$220.49M | −1.4% |
| Net Income | $439.29M$390.15M | +12.6% |
| EPS (Basic) | $6.67$5.91 | +12.9% |
| EPS (Diluted) | $6.66$5.90 | +12.9% |
| Shares Outstanding (Basic) | 65.84M66.04M | −0.3% |
| Shares Outstanding (Diluted) | 65.94M66.09M | −0.2% |
05—Questions
Frequently Asked Questions
What drove the growth in FFO and Core FFO in 2019?
Same-Property revenue grew 3.4% to $1.37 billion, driven by a 3.4% increase in average rent per apartment home to $2,318, and Same-Property NOI rose 3.9%. Non-same-property revenue increased 20.7% from acquisitions and developments, and co-investment equity income rose $23.0 million, including a $50.2 million gain on Mosso, which is partly excluded from FFO under NAREIT rules. Core FFO rose 6.4% to $13.38 per diluted share.
Why did reported net income per share look only moderately higher?
Net income available to common stockholders increased 12.6% to $439.3 million, but 2018 benefited from $61.9 million of real estate gains (Domain and 8th & Hope), while 2019 had a $3.2 million loss on land sales and a $7.1 million impairment on a Moorpark land parcel. Gains from co-investment remeasurement ($31.5 million in 2019 on One South Market) partly offset this. Investors should evaluate recurring FFO and Core FFO rather than headline net income.
How exposed is Essex to California and Seattle regulatory and economic risk?
Very highly concentrated. 82% of 2019 rental revenue came from California, and the rest from the Seattle metro area. The company identifies rent control and stabilization initiatives, Proposition 13 property tax reassessment risk, and state-level regulatory and litigation intensity as key threats. Its short-term leases (generally 9 to 12 months) allow it to reprice quickly in both upturns and downturns, but also expose it to rapid declines in market rents.
What does Essex's debt profile and refinancing position look like?
At year-end 2019, total indebtedness was about $5.8 billion, with fixed-rate public and private unsecured bonds of about $4.5 billion at an average rate near 3.8%, $350 million of term loan (with $175 million swapped to 2.3%), $55 million drawn on a $1.2 billion revolver, and about $1.0 billion of mortgage debt. Ratings were BBB+/Baa1/BBB+. The company reported $70.1 million of unrestricted cash and $144.2 million of marketable securities. Near-term maturities are modest: $288 million of mortgage debt in 2020 and $1.15 billion of unsecured debt in 2021 and 2022 combined, with the revolver extended to 2023 in January 2020.
What major transactions happened after year-end 2019?
In January 2020, Essex bought CPPIB's 45% interest in a land parcel and six communities totaling 2,020 apartment homes, valued at about $1.0 billion gross, which adds to its consolidated portfolio and reduces co-investment exposure. It also received $85.8 million from the payoff of a related-party bridge loan to Wesco V and extended its $1.2 billion unsecured credit facility to December 2023. In February 2020, it issued $500 million of 2.65% senior unsecured notes due 2032, with proceeds used to repay revolver borrowings.
06—Continue