01—Abstract
Summary
Summary of the 8-K filed February 6, 2024. Cited figures are marked; the original filing is the authoritative source.
Essex Property Trust (ESS) reported fourth-quarter and full-year 2023 results on February 6, 2024, and issued 2024 guidance that points to a flat-to-down year for core earnings.
Full-year 2023 Core FFO per diluted share rose 3.6% to $15.03a (above the high end of the original guidance range), while Q4 Core FFO per share rose 1.6% to $3.83. Same-property revenue grew 4.4% and same-property NOI grew 4.3% for the full year, though Q4 same-property revenue growth slowed to 2.9% year over year and sequential revenue growth was only 0.5%. GAAP net income per diluted share fell sharply in Q4 to $1.02 from $2.86, mainly because of Q4 2022's gain on sale and because of a $33.7 million impairment on a preferred equity investment in Oakland, CA.
That impairment does not affect Core FFO. The 2024 outlook is cautious. Core FFO per diluted share is guided to $14.76 to $15.30b (midpoint $15.03, essentially flat with 2023), and same-property revenue growth is guided at 0.70% to 2.70% (midpoint 1.70%).
Same-property NOI is guided at -1.10% to 2.30% (midpoint 0.60%), and operating expenses are expected to rise 3.50% to 5.00%. Management attributes the slowdown to moderating U.S. GDP and job growth, with assumed West Coast market rent growth of 1.25%. The company also plans no new development starts in 2024, and it will use expected structured-finance redemptions of $50 to $150 millionc to fund future acquisitions.
Balance sheet and liquidity remain sound. Immediately available liquidity was about $1.6 billiond as of February 2, 2024, and the company had $302.7 million of remaining buyback authority.
Net debt to Adjusted EBITDAre was 5.4x, and the company holds investment-grade ratings (Baa1 / BBB+, both stable). Investors should watch the 2024 guidance: it implies little growth in core per-share earnings, and the earnings outlook depends on whether West Coast job and rent trends hold up.
02—Key points
Key Highlights
- Q4 2023 Core FFO per diluted share was $3.83, up 1.6% year over year. Full-year Core FFO per share was $15.03, up 3.6% and above the high end of the original guidance range.
- Full-year 2023 same-property revenue grew 4.4% and same-property NOI grew 4.3%. Q4 same-property revenue growth slowed to 2.9% year over year, and sequential revenue growth was just 0.5%.
- 2024 Core FFO guidance is $14.76 to $15.30 per diluted share (midpoint $15.03), essentially flat with 2023. 2024 same-property NOI guidance is -1.10% to 2.30% (midpoint 0.60%).
- Q4 GAAP net income per diluted share fell to $1.02 from $2.86, partly because of a $33.7 million impairment on an Oakland, CA preferred equity investment. The impairment does not affect Core FFO.
- Capital activity: one non-core apartment community was sold for $91.7 million, $72.3 million in preferred equity redemptions were received, and 437,026 shares were repurchased for $95.7 million at an average price of $218.88.
- Liquidity was about $1.6 billion as of February 2, 2024, and the company has no planned new development starts in 2024. Its investment-grade ratings are Baa1 (Moody's) and BBB+ (S&P), both stable.
- Net Indebtedness / Adjusted EBITDAre was 5.4x at year-end 2023, and secured debt rose to $887 million at year-end 2023 from $594 million a year earlier, partly from a $298 million 10-year secured loan closed in July 2023.
03—Questions
Frequently Asked Questions
Did Essex beat its 2023 guidance?
Yes, in part. Full-year 2023 Core FFO per diluted share of $15.03 exceeded the high end of the company's original guidance range, and same-property revenue and NOI growth both exceeded the midpoint of guidance. Net income per diluted share was $6.32, roughly flat with 2022's $6.27.
Why did GAAP earnings drop so much in Q4 2023?
Q4 2022 included a $94.4 million gain on sale of real estate, which did not recur in Q4 2023. Q4 2023 also included a $33.7 million impairment on a preferred equity investment in Oakland, CA. Q4 net income per diluted share fell to $1.02 from $2.86. The impairment does not affect Core FFO.
What does the 2024 guidance imply for investors?
The midpoint of Core FFO per share guidance is $15.03, flat with 2023. Same-property NOI is guided to grow only 0.60% at the midpoint, with a range from -1.10% to 2.30%. Operating expenses are expected to rise 3.50% to 5.00%, and management assumes West Coast market rent growth of 1.25% as job growth slows. Growth in per-share earnings is therefore expected to be minimal in 2024.
Is Essex's balance sheet strong enough to handle a slowdown?
The company reported about $1.6 billion of liquidity, investment-grade ratings (Baa1/BBB+, stable outlook), and a Net Indebtedness to Adjusted EBITDAre ratio of 5.4x. Financial occupancy in the same-property portfolio was 96.1% at year-end. Secured debt rose notably during 2023, and the company's ability to absorb a downturn will depend on those metrics staying stable.
What are the main risks flagged in the release?
The release highlights slowing U.S. job growth, muted hiring in high-paying sectors, geopolitical tensions, inflation and escalating operating costs, the possibility of development and redevelopment delays, and changes in interest rates and in financing terms. It also cites the possibility of lower delinquency benefits after emergency rental assistance ended, and the risk that co-investment and preferred equity income falls, which the 2024 guidance expects to decline by about $0.16 per share.
04—Continue