01—Abstract
Summary
Summary of the 10-K filed February 19, 2021. Cited figures are marked; the original filing is the authoritative source.
Essex Property Trust (NYSE: ESS), an S&P 500 self-administered REIT, closed 2020 with a portfolio of 246 operating apartment communities totaling 60,272 apartment homes, concentrated on the West Coast: 81%a of rental revenue came from California, with Southern California, Northern California and Seattle Metro making up 43%, 37% and 20% of consolidated apartment homes.
Results were shaped by COVID-19. Same-Property revenues fell 3.9% to $1.29 billionb, Same-Property NOI declined about 6.9% to $905 million, and cash delinquencies rose from 0.3% to 2.5% of scheduled rent. Management projects 2021 Same-Property revenue to fall 1.5% to 3.5%, with Same-Property operating expenses rising 2.0% to 3.0%.
Net income available to common stockholders rose to $568.9 millionc ($8.69 per diluted share) from $439.3 million, but the increase was driven largely by non-recurring items: a $234.7 million gain on remeasurement from buying CPPIB's 45% co-investment interests, and $65.0 million of gains on asset sales. Core FFO per diluted share was $12.82, roughly flat versus $12.57 in 2018 and down from $13.38 in 2019. Management attributes the decline to lower co-investment gains, higher interest expense and COVID-related revenue pressure.
Operating cash flow was $803 milliond, and the company repurchased $269 million of stock. The balance sheet remains investment grade (Baa1/BBB+) with $5.6 billion of unsecured debt, $644 million of mortgage debt and $73.6 million of unrestricted cash. The company said it has sufficient liquidity for 2021, supported by a $1.24 billion unsecured credit facility that was undrawn at year-end.
Essex issued $1.25 billion of new senior unsecured notes in 2020 at historically low coupons, including 1.65% notes due 2031 and 2.65% notes due 2032 and 2050, and used the proceeds to retire higher-cost debt. Key risks include continued California regulatory and rent-control pressure, the pace of the pandemic and vaccine rollout, LIBOR transition and Fannie Mae/Freddie Mac policy changes.
02—Key points
Key Highlights
- Portfolio of 246 operating communities with 60,272 apartment homes; 81% of 2020 rental revenue came from California, a significant geographic concentration.
- Same-Property revenue fell 3.9% to $1.29 billion, Same-Property NOI declined to $905 million from $971 million, and cash delinquencies rose to 2.5% of scheduled rent from 0.3%.
- Reported EPS of $8.69 was inflated by a $234.7 million remeasurement gain and $65.0 million of asset-sale gains; Core FFO per diluted share was $12.82 versus $13.38 in 2019.
- Management guides to a 1.5% to 3.5% decline in 2021 Same-Property revenue, with Same-Property operating expenses up 2.0% to 3.0%.
- Completed the $463.4 million buyout of CPPIB's 45% interest in six communities and a land parcel (2,020 homes, about $1.0 billion gross valuation), taking full ownership.
- Issued $1.25 billion of senior unsecured notes at low coupons (1.65% to 2.65%) and repaid higher-cost debt; $4.9 billion of fixed-rate public bonds averaged 3.4%.
- Investment-grade ratings of Baa1 (Moody's) and BBB+ (S&P); $1.24 billion unsecured credit facility was undrawn at year-end, and $223.6 million of buyback authority remained.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2020filed February 19, 2021Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $1.50B$1.46B | +2.4% |
| Operating Expenses | $1.07B$975.88M | +9.6% |
| Operating Income | $491.44M$481.11M | +2.1% |
| Interest Expense | $220.63M$217.34M | +1.5% |
| Net Income | $568.87M$439.29M | +29.5% |
| EPS (Basic) | $8.69$6.67 | +30.3% |
| EPS (Diluted) | $8.69$6.66 | +30.5% |
| Shares Outstanding (Basic) | 65.45M65.84M | −0.6% |
| Shares Outstanding (Diluted) | 65.56M65.94M | −0.6% |
05—Questions
Frequently Asked Questions
How much of Essex's revenue depends on California, and why does that matter?
About 81% of 2020 rental revenue came from California communities, mainly in Southern California, the San Francisco Bay Area and, to a lesser extent, Seattle. This concentration exposes Essex to state-level rent-control proposals, high taxes, Proposition 13 reassessment risk, and relocation trends out of California. Local economic downturns or regulatory changes could affect results more than they would for a geographically diversified REIT.
Why did reported net income jump in 2020 if operations were weaker?
Net income available to common stockholders rose to $568.9 million from $439.3 million, mainly because of a non-cash $234.7 million gain from remeasuring the co-investment after buying out CPPIB's 45% stake, plus $65.0 million of gains on property sales. Core FFO, which excludes these items, fell to $12.82 per diluted share from $13.38, so investors should focus on Core FFO and Same-Property NOI for underlying performance.
How is the COVID-19 pandemic affecting Essex's rent collections and outlook?
Cash delinquencies rose to 2.5% of scheduled rent in 2020 from 0.3% in 2019, and Essex granted cash concessions of about $31.8 million more than the prior year. After payment plans and reserves, net delinquencies were 2.1% of scheduled rent. Management said the increase has not materially affected liquidity, but it projects a 1.5% to 3.5% decline in 2021 Same-Property revenue, with the outlook depending on vaccine distribution, job recovery and eviction moratoriums.
Is Essex's balance sheet and debt structure secure?
Essex carries about $6.3 billion of total debt, mostly unsecured (about $5.6 billion) and fixed-rate, with a weighted average public bond rate of 3.4% and maturities spread out to 2050. Its $1.24 billion credit facility was undrawn at year-end, and both ratings are investment grade. Covenants were met at year-end. Key risks include about $775 million of variable-rate debt, LIBOR's phase-out after 2021, and refinancing exposure to Fannie Mae and Freddie Mac.
Is the company still returning capital to shareholders?
Yes. Common dividends totaled $8.31 per share in 2020, with a fourth-quarter declaration of $2.0775 per share. Essex repurchased 1,197,190 shares for $269.3 million at an average of $224.96, and $223.6 million remained under its repurchase authorization. No shares were sold through its at-the-market program in 2020, and $826.6 million of capacity remains. Dividends are set by the board and depend on cash flow and REIT distribution requirements.
06—Continue