01—Abstract
Summary
Summary of the 10-K filed February 23, 2023. Cited figures are marked; the original filing is the authoritative source.
Essex Property Trust (NYSE: ESS), an S&P 500 self-administered REIT, closed 2022 with a portfolio of 252 operating apartment communities (62,147 homes) concentrated in Southern California (43%a of consolidated homes), Northern California (37%) and Seattle (20%).
Results were solid: 2022 Same-Property revenues rose 10.3% to $1.48 billionb, driven by a 7.2% increase in average rental rates, and Same-Property NOI grew to $1.05 billion from $930 million. Net income available to common stockholders fell to $408.3 million ($6.27 per diluted share) from $488.6 million, mainly because 2022 lacked the large 2021 co-investment equity income and because of a $19.0 million loss in interest and other income from marketable securities. Core FFO per diluted share rose to $14.51 from $12.49, and FFO per share declined modestly to $13.70 from $13.98.
Management guided 2023 Same-Property revenue growth of 3.25% to 4.75% and Same-Property operating expense growth of 4.50% to 5.50%. Balance sheet and liquidity remain conservative. Essex carries investment-grade ratings (Baa1/Stable from Moody's and BBB+/Stable from S&P), and its unsecured debt is mostly fixed-rate, at a 3.3% weighted average rate across $5.35 billionc of senior notes.
Total debt was about $5.9 billiond, and the company had $33.3 million of unrestricted cash, $112.7 million of marketable securities and roughly $1.2 billion of credit line capacity. A $300 million term loan was swapped to a 4.2% fixed rate to refinance the $300 million of 3.25% notes due May 2023. Capital was also returned to shareholders: $189.7 million of buybacks in 2022 and $565.9 million of common dividends paid, with a $2.20 quarterly dividend.
The company has $398.3 million of remaining buyback authority and $900 million available under its ATM program, but it issued no equity in 2022. The main risks flagged in the filing are elevated cash delinquencies (1.2% in 2022, versus a historical 0.3% to 0.4%), decelerating growth as the company moves through an inflationary, higher-rate environment, and geographic concentration in high-cost coastal California and Seattle markets.
Rent control, California's Proposition 13 property tax reassessment risk, and the fading of Emergency Rental Assistance also weigh on the outlook. Development exposure is small, with one 264-unit joint venture (LIVIA) projected to total $127 million, and the company is also exposed to a $5.4 billion fixed-rate bond book and a $700 million-plus mortgage and credit line base that reprices with SOFR.
02—Key points
Key Highlights
- Same-Property revenue grew 10.3% to $1.48 billion in 2022, with average rental rates up 7.2% to $2,486 per home; Same-Property NOI rose 13.1% to $1.05 billion.
- Core FFO per diluted share increased 16% to $14.51 (from $12.49), while reported FFO per diluted share fell 2% to $13.70 as 2021 included more co-investment gains.
- Net income available to common stockholders declined to $408.3 million ($6.27 per diluted share) from $488.6 million ($7.51), reflecting lower co-investment equity income ($26.0 million vs. $111.7 million) and a $19.0 million loss on marketable securities.
- Balance sheet is conservative: investment-grade ratings (Baa1/BBB+), $5.35 billion of senior unsecured notes at a 3.3% average rate, and $33.3 million of unrestricted cash plus $112.7 million in marketable securities.
- Capital returns continued: $189.7 million repurchased (740,053 shares at ~$256), $398.3 million of buyback authority remaining, and $565.9 million in common dividends paid.
- 2023 guidance projects Same-Property revenue growth of 3.25% to 4.75% and Same-Property operating expense growth of 4.50% to 5.50%, signaling margin pressure from inflation.
- Cash delinquencies improved to 1.2% from 1.9% but remain well above the historical 0.3% to 0.4% range as pandemic-era eviction protections and rent limits persist.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2022, Essex Property Trust, Inc. kept $0.25.
- Revenue$1.61B100.0%
- Cost of revenue−$478.4M29.8%
- Gross profit$1.13B70.2%
- Operating costs−$533.2M33.2%
- Operating income$595.2M37.0%
- Interest, other & tax−$186.9M11.6%
- Net income$408.3M25.4%
Where FY2022 revenue went
$1.61B- Operating costs: $533.2M, 33% of revenue
- Cost of revenue: $478.4M, 30% of revenue
- Net income: $408.3M, 25% of revenue
- Interest, other & tax: $186.9M, 12% of revenue
Kept 25% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2022filed February 23, 2023Financial Statements
FY2022 against FY2021
| Line item | FY2022FY2021 | Change |
|---|---|---|
| Revenue | $1.61B$1.44B | +11.5% |
| Gross Profit | $1.13B— | — |
| Operating Expenses | $1.11B$1.05B | +5.0% |
| Operating Income | $595.23M$530.00M | +12.3% |
| Interest Expense | $204.80M$203.13M | +0.8% |
| Net Income | $408.31M$488.55M | −16.4% |
| EPS (Basic) | $6.27$7.51 | −16.5% |
| EPS (Diluted) | $6.27$7.51 | −16.5% |
| Shares Outstanding (Basic) | 65.08M65.05M | 0.0% |
| Shares Outstanding (Diluted) | 65.10M65.09M | 0.0% |
05—Questions
Frequently Asked Questions
How did Essex's core earnings performance change in 2022?
Core FFO per diluted share rose to $14.51 from $12.49, a 16% increase, driven by strong same-property revenue growth of 10.3% and higher NOI. Reported FFO per diluted share declined to $13.70 from $13.98 because 2021 included larger non-core co-investment gains that did not recur.
Why did net income fall in 2022 even though operations improved?
Net income available to common stockholders dropped to $408.3 million from $488.6 million. The main drivers were a sharp decline in equity income from co-investments ($26.0 million versus $111.7 million), a $19.0 million unrealized loss on marketable securities, and a $19.2 million rise in depreciation. These were partly offset by a $94.4 million gain on the sale of Anavia and a $17.4 million remeasurement gain.
How exposed is Essex to rising interest rates?
Most debt is fixed-rate: about $5.7 billion at a 3.5% average rate, with unsecured bonds averaging 3.3%. Variable-rate exposure is about $276 million, including $223.6 million of tax-exempt bonds that are hedged with total return swaps. The $300 million term loan is swapped to 4.2%, and the $300 million of 3.25% notes maturing in May 2023 will be refinanced with it, so the near-term refinancing cost is expected to rise.
What are the main risks investors should monitor?
Key risks include elevated rent delinquencies relative to history, cost inflation (2023 operating expenses are guided up 4.5% to 5.5%), rent control and eviction-moratorium exposure, California property tax reassessment under Prop 13, and concentration in high-cost coastal California and Seattle markets. Regulatory and insurance risks from earthquakes and climate-related events are also significant.
Is Essex's dividend supported by cash flow?
Operating cash flow was $975.6 million in 2022, well above the $565.9 million of common dividends paid. The Q4 2022 dividend was $2.20 per share, or $8.80 annually. As a REIT, Essex must distribute at least 90% of its taxable income, and the filing indicates no contractual restrictions on dividend payments.
06—Continue