Why did GAAP EPS nearly double, and is that growth sustainable?

The increase was driven mainly by a non-cash $138.3 million gain on remeasurement of co-investments, which is recognized when Essex takes full control of a previously partly owned asset. It is a one-time accounting gain and is excluded from FFO and Core FFO. Core FFO, which is the better gauge of recurring operating performance, grew 4.9%, so investors should not extrapolate the 78.6% EPS increase.

What drove the raise in full-year 2024 guidance?

Core FFO guidance was raised by $0.20 at the midpoint, mainly on better-than-expected same-property revenue. Management cited lower cash delinquencies and stronger other property income, along with the consolidation of the BEXAEW portfolio. Same-property NOI guidance was also raised by 0.80 percentage points at the midpoint, to 1.40%, though the new range still includes the possibility of zero growth at the low end.

How healthy is the balance sheet after the BEXAEW acquisition and the new bond issue?

Essex had total debt of about $6.55 billion at March 31, 2024, with a net debt to annualized Adjusted EBITDAre ratio of 5.4x. Liquidity was about $1.5 billion, and the company rated Baa1/BBB+ with stable outlooks. The $350 million bond at 5.50% was used to fund the acquisition and will help repay $400 million of bonds maturing in May 2024, so refinancing risk on that maturity is manageable. Investors should still watch the rising debt load and higher borrowing costs.

Are operating expenses a concern for the portfolio?

Yes. Same-property operating expenses rose 5.0% year over year and 3.4% sequentially, and insurance and other costs jumped 30.9%, while utilities rose 9.2%. These increases were large enough that same-property NOI growth (3.0%) trailed revenue growth (3.6%). Management's full-year same-property operating expense assumption is 3.50%–5.00%, so expense pressure is expected to continue through 2024.

ESS 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed April 30, 2024. Cited figures are marked; the original filing is the authoritative source.

Essex Property Trust (NYSE: ESS) reported first quarter 2024 results on April 30, 2024 that were headlined by a sharp jump in GAAP earnings and a raise to full-year guidance.

Net income per diluted share was $4.25^a, up from $2.38, but this is driven mainly by a non-cash $138.3 million gain on remeasurement of co-investments tied to the acquisition of its joint venture partner's 49.9% stake in the four-community BEXAEW portfolio (1,480 apartment homes, $505.0 million gross). Investors should look past the headline EPS figure. The more meaningful measure, Core FFO per diluted share, rose 4.9% year over year to $3.83, beating the midpoint of the company's prior guidance by $0.09.

Same-property revenue grew 3.6% and same-property NOI grew 3.0% year over year, with sequential revenue growth of 0.6%. Management raised full-year 2024 guidance. Core FFO per diluted share is now $15.03 to $15.43^b (midpoint $15.23, up $0.20), and same-property revenue growth is now 1.50% to 3.00%, with same-property NOI growth of 0.00% to 2.80%.

The Core FFO raise was driven by better-than-expected cash delinquency improvement and stronger other income, rather than a change in the market backdrop. Management noted that blended rate growth is trending slightly ahead of plan, but it will revisit new and renewal rate assumptions at mid-year. The company also dividend-raised 6.1% to an annual $9.80^c per share, its 30th consecutive annual increase.

Balance sheet activity included a $350 million^d 10-year senior unsecured bond at 5.50%, which funded the BEXAEW acquisition and will help refinance $400 million of bonds maturing in May 2024. Liquidity stood at about $1.5 billion as of April 29, 2024. The quarter was not without risks.

Total debt rose to about $6.55 billion, and the net debt to annualized Adjusted EBITDAre ratio was 5.4x. Same-property operating expenses rose 5.0% year over year, led by a 9.2% increase in utilities and a 30.9% increase in insurance and other costs, which weighed on NOI growth in Northern California and Seattle.

Core FFO was also helped by $42.8 million of insurance reimbursements and legal settlements (including a $42.5 million legal settlement gain) that were excluded from Core FFO, so the underlying operating trend is more useful than the reported total. Investors should weigh the guidance raise against the expense pressure and the reliance on non-recurring items in reported earnings.

02—Key points

Key Highlights

GAAP net income per diluted share of $4.25 vs. $2.38 a year earlier (+78.6%), mainly from a non-cash $138.3M gain on remeasurement of co-investments tied to the BEXAEW acquisition.
Core FFO per diluted share of $3.83, up 4.9% year over year and $0.09 above the midpoint of prior guidance; Total FFO per share of $4.60, up 21.1%.
Same-property revenue grew 3.6% and same-property NOI grew 3.0% year over year; sequential revenue growth was 0.6%, with Southern California leading at 4.6% revenue growth.
Full-year 2024 Core FFO guidance raised to $15.03–$15.43 (midpoint +$0.20 to $15.23); same-property revenue growth raised to 1.50%–3.00%; same-property NOI growth raised to 0.00%–2.80%.
Acquired the 49.9% joint venture interest in the four-community BEXAEW portfolio (1,480 homes) for $505.0M gross at a 5.9% expected acquisition yield, funded by a $350M 5.50% 10-year senior unsecured bond and free cash flow.
Dividend increased 6.1% to an annual $9.80 per share, the 30th consecutive annual increase; liquidity of about $1.5 billion as of April 29, 2024.
Same-property operating expenses rose 5.0% year over year, with utilities up 9.2% and insurance and other up 30.9%, pressuring NOI growth in Northern California and Seattle.

03—Questions

Frequently Asked Questions

Why did GAAP EPS nearly double, and is that growth sustainable?
The increase was driven mainly by a non-cash $138.3 million gain on remeasurement of co-investments, which is recognized when Essex takes full control of a previously partly owned asset. It is a one-time accounting gain and is excluded from FFO and Core FFO. Core FFO, which is the better gauge of recurring operating performance, grew 4.9%, so investors should not extrapolate the 78.6% EPS increase.
What drove the raise in full-year 2024 guidance?
Core FFO guidance was raised by $0.20 at the midpoint, mainly on better-than-expected same-property revenue. Management cited lower cash delinquencies and stronger other property income, along with the consolidation of the BEXAEW portfolio. Same-property NOI guidance was also raised by 0.80 percentage points at the midpoint, to 1.40%, though the new range still includes the possibility of zero growth at the low end.
How healthy is the balance sheet after the BEXAEW acquisition and the new bond issue?
Essex had total debt of about $6.55 billion at March 31, 2024, with a net debt to annualized Adjusted EBITDAre ratio of 5.4x. Liquidity was about $1.5 billion, and the company rated Baa1/BBB+ with stable outlooks. The $350 million bond at 5.50% was used to fund the acquisition and will help repay $400 million of bonds maturing in May 2024, so refinancing risk on that maturity is manageable. Investors should still watch the rising debt load and higher borrowing costs.
Are operating expenses a concern for the portfolio?
Yes. Same-property operating expenses rose 5.0% year over year and 3.4% sequentially, and insurance and other costs jumped 30.9%, while utilities rose 9.2%. These increases were large enough that same-property NOI growth (3.0%) trailed revenue growth (3.6%). Management's full-year same-property operating expense assumption is 3.50%–5.00%, so expense pressure is expected to continue through 2024.

04—Continue

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