01—Abstract
Summary
Summary of the 10-K filed February 25, 2022. Cited figures are marked; the original filing is the authoritative source.
Essex Property Trust (ESS), an S&P 500 self-administered REIT, reported FY2021 results centered on its 252 stabilized apartment communities (61,911 homes) concentrated in Southern California, Northern California and the Seattle metro, with 83%a of rental revenue from California.
Net income available to common stockholders was $488.6 millionb ($7.51 per diluted share), down from $568.9 million in 2020, which had benefited from a $234.7 million remeasurement gain on the CPPIB co-investment buyout. Core FFO per diluted share was $12.49, down from $12.82 in 2020, while FFO per diluted share rose to $13.98 from $12.78, largely because of gains on property sales and non-core co-investment income. Operating fundamentals were mixed.
Same-Property revenues fell 1.2% in 2021, with Northern California down 5.6% and Seattle down 1.7%, while Southern California rose 3.2%. Same-Property NOI declined 2.7% to $891.4 millionc. Management guides to 2022 Same-Property revenue growth of 7.0% to 8.5% and operating expense growth of 3.5% to 4.5%, implying a meaningful reacceleration.
Financial occupancy improved to 96.4%, and COVID-19 delinquencies fell to 1.9% of scheduled rent from 2.5%. The balance sheet remains investment grade (Baa1/BBB+) with approximately $6.3 billiond of indebtedness, of which about $5.4 billion is fixed-rate public bonds averaging 3.3%.
Liquidity is adequate, with $1.24 billion of unsecured lines (about $340 million drawn) and $48.4 million of unrestricted cash. Investors should weigh the strong dividend coverage and portfolio quality against the concentration in high-cost coastal markets, the ongoing rent-control and Proposition 13 tax exposure, and the company's reliance on capital markets and asset sales to fund growth.
02—Key points
Key Highlights
- FFO per diluted share of $13.98 versus $12.78 in 2020, but Core FFO per diluted share fell to $12.49 from $12.82, indicating that the headline increase was driven by non-recurring gains and non-core items.
- Same-Property revenue declined 1.2% and Same-Property NOI declined 2.7% to $891.4 million, with Northern California (-5.6%) the weakest region.
- Management projects 2022 Same-Property revenue growth of 7.0% to 8.5%, with Same-Property operating expenses rising 3.5% to 4.5%.
- Net income available to common stockholders was $488.6 million ($7.51 per diluted share), down from $568.9 million in 2020, which included a $234.7 million remeasurement gain in the prior year.
- Dispositions generated $330.0 million of proceeds and a $143.0 million gain on sale, while acquisitions totaled roughly $432 million, primarily through co-investments with Wesco VI and other joint ventures.
- Investment-grade ratings (Baa1/Stable and BBB+/Stable) and a $1.24 billion unsecured credit line support liquidity, though leverage of roughly $6.3 billion of debt remains significant.
- The dividend was $2.09 per share for Q4 2021 ($8.36 annualized for 2021), with no common equity issued under the ATM program during the year, and $900 million of capacity remaining under the 2021 ATM.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2021filed February 25, 2022Financial Statements
FY2021 against FY2020
| Line item | FY2021FY2020 | Change |
|---|---|---|
| Revenue | $1.44B$1.50B | −3.7% |
| Operating Expenses | $1.05B$1.07B | −1.5% |
| Operating Income | $530.00M$491.44M | +7.8% |
| Interest Expense | $203.13M$220.63M | −7.9% |
| Net Income | $488.55M$568.87M | −14.1% |
| EPS (Basic) | $7.51$8.69 | −13.6% |
| EPS (Diluted) | $7.51$8.69 | −13.6% |
| Shares Outstanding (Basic) | 65.05M65.45M | −0.6% |
| Shares Outstanding (Diluted) | 65.09M65.56M | −0.7% |
05—Questions
Frequently Asked Questions
Why did reported FFO rise while Core FFO declined in 2021?
Reported FFO per diluted share increased to $13.98 from $12.78 mainly because of $145.3 million of gains excluded from FFO and the inclusion of $55.6 million of non-core co-investment equity income. Core FFO, which strips out these non-core items, declined to $12.49 from $12.82 because same-property revenues fell and cash concessions and delinquencies rose.
How exposed is Essex to California and Seattle market conditions?
Very exposed. As of year-end 2021, 83% of rental revenue came from California, with the remainder from the Seattle metro. The company identifies geographic concentration, California's regulatory and tax environment, Proposition 13 reassessment risk, and rent-control laws as material risks to income and property values.
Is Essex's dividend well covered and what is the outlook for growth?
Essex paid $8.36 per share in 2021 against Core FFO of $12.49 per diluted share, a payout ratio of roughly 67%, leaving room for retained cash. The 2022 outlook calls for strong same-property revenue growth of 7.0% to 8.5%, which, if achieved, would support future dividend growth, though the dividend remains at the discretion of the Board.
What is the company's debt profile and refinancing risk?
Total indebtedness was about $6.3 billion at year-end 2021. Roughly $5.4 billion is fixed-rate senior unsecured public bonds averaging 3.3% with maturities from 2023 to 2050, and only about $565.6 million is variable rate, most of it tax-exempt bond debt with total return swaps. The company has no material near-term maturity wall, but its unsecured credit facilities carry LIBOR-linked pricing, which will need to transition after LIBOR's phase-out.
What are the main risks highlighted in the filing that investors should monitor?
Key risks include declining market rents on short-term leases, rent-control and eviction-moratorium legislation (including COVID-era restrictions), climate and earthquake exposure with self-insurance through its captive PWI, dependence on capital markets and its investment-grade rating, and conflicts of interest involving Chairman George Marcus's affiliated real estate businesses. The company also notes potential dilution from future equity issuance.
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