Essex Property Trust, Inc. (NYSE: ESS) (the “Company”) announced
today its third quarter 2020 earnings results and related business
activities.
Net Income, Funds from Operations (“FFO”), and Core FFO per
diluted share for the quarter ended September 30, 2020 are detailed
below.
Three Months Ended September
30,
Nine Months Ended September
30,
%
%
2020
2019
Change
2020
2019
Change
Per Diluted
Share
Net Income
$1.13
$1.51
-25.2%
$7.21
$4.71
53.1%
Total FFO
$2.88
$3.50
-17.7%
$9.53
$10.19
-6.5%
Core FFO
$3.15
$3.35
-6.0%
$9.80
$9.92
-1.2%
Third Quarter 2020
Highlights:
- Reported Net Income per diluted share for the third quarter of
2020 of $1.13, compared to $1.51 in the third quarter of 2019.
- Core FFO declined by 6.0% per diluted share compared to the
third quarter of 2019.
- Same-property gross revenue and net operating income (“NOI”)
declined by 6.7% and 10.8%, respectively, compared to the third
quarter of 2019. The decline in same-property revenue and NOI is
primarily attributed to an additional $16.8 million of cash
concessions compared to the prior year period. If accounting for
concessions using the straight-line GAAP method, same-property
revenue and NOI would have declined 2.9% and 5.5%,
respectively.
- Disposed of one apartment community during the third quarter
for a total contract price of $51.5 million.
- Repurchased 121,260 shares of common stock totaling $26.6
million at an average price per share of $219.24 under the stock
buyback program.
- In August 2020, the Company issued $600.0 million of senior
unsecured notes consisting of two $300.0 million tranches due in
2031 and 2050, respectively. The notes bear an interest rate per
annum of 1.65% and 2.65%, respectively.
- As of October 22, 2020, the Company’s immediately available
liquidity is approximately $1.7 billion.
“The challenges related to the COVID-19 pandemic and subsequent
economic recession continued throughout the third quarter of 2020.
Local and state governments on the West Coast adopted strict
guidelines for reopening businesses, muting the recovery in job
growth and economic activity in the third quarter. However, these
restrictions have begun to subside, leading to cautious optimism
that the pace of improvement in job growth and economic activity
will accelerate. In the meantime, our strong balance sheet and
conservative dividend payout ratio allow us to remain focused on
our mission of providing essential housing services while creating
value for our shareholders,” commented Michael Schall, President
and CEO of the Company.
SAME-PROPERTY OPERATIONS
Same-property operating results exclude any properties that are
not comparable for the periods presented. The table below
illustrates the percentage change in same-property gross revenues
for the quarter ended September 30, 2020 compared to the quarter
ended September 30, 2019, and the sequential percentage change for
the quarter ended September 30, 2020 compared to the quarter ended
June 30, 2020, by submarket for the Company:
Q3 2020 vs. Q3 2019
Q3 2020 vs. Q2 2020
% of Total
Gross Revenues
Gross Revenues
Q3 2020 Revenues
Southern California
Los Angeles County
-13.5%
-5.1%
17.6%
Orange County
-2.6%
1.9%
11.5%
San Diego County
-2.1%
0.1%
8.6%
Ventura County
-2.0%
2.2%
4.7%
Total Southern California
-7.3%
-1.4%
42.4%
Northern California
Santa Clara County
-7.2%
-5.1%
18.9%
Alameda County
-10.9%
-4.9%
6.7%
San Mateo County
-9.2%
-5.0%
4.9%
Contra Costa County
-4.6%
1.6%
5.0%
San Francisco
-15.5%
-9.4%
3.0%
Total Northern California
-8.5%
-4.6%
38.5%
Seattle Metro
-1.6%
-0.1%
19.1%
Same-Property Portfolio
-6.7%
-2.4%
100.0%
The table below illustrates the components that drove the change
in Same-Property Revenues on a year-over-year basis.
Same-Property Revenue
Components
$ Amount (in millions)
% Contribution to
Growth/(Decline)
Q3 2019 Same-Property Revenue
$
337.7
Scheduled Rents
(1.5)
(0.4%)
Delinquencies
(5.5)
(1.6%)
Cash Concessions
(16.8)
(5.0%)
Vacancy
0.2
0.1%
Other Income
0.9
0.3%
Q3 2020 Same-Property
Revenues/Growth
$
315.0
(6.7%)
Year-Over-Year Growth
Year-Over-Year Growth
Q3 2020 compared to Q3
2019
YTD 2020 compared to YTD
2019
Gross Revenues
Operating Expenses
NOI
Gross Revenues
Operating Expenses
NOI
Southern California
-7.3%
2.1%
-11.1%
-3.4%
2.5%
-5.8%
Northern California
-8.5%
3.1%
-12.6%
-3.0%
2.9%
-5.0%
Seattle Metro
-1.6%
8.8%
-5.9%
0.9%
7.8%
-1.9%
Same-Property Portfolio
-6.7%
3.7%
-10.8%
-2.5%
3.7%
-4.8%
Sequential Growth
Q3 2020 compared to Q2
2020
Gross Revenues
Operating Expenses
NOI
Southern California
-1.4%
3.4%
-3.6%
Northern California
-4.6%
4.1%
-7.8%
Seattle Metro
-0.1%
-2.1%
0.9%
Same-Property Portfolio
-2.4%
2.5%
-4.5%
Financial Occupancies
Quarter Ended
9/30/2020
6/30/2020
9/30/2019
Southern California
95.9%
94.5%
96.1%
Northern California
96.2%
95.0%
95.9%
Seattle Metro
95.9%
95.4%
95.9%
Same-Property Portfolio
96.0%
94.9%
96.0%
INVESTMENT ACTIVITY
Dispositions
In July 2020, the Company sold a community in Redmond, WA
containing 126 apartment homes, for a total contract price of $51.5
million. The Company recognized a $22.7 million gain on sale, which
has been excluded from Core FFO.
Subsequent to quarter end, the Company sold a community located
in Glendale, CA containing 115 apartment homes, for a total
contract price of $60.0 million.
Other Investments
In the third quarter of 2020, the Company received cash proceeds
of $60.3 million from the full redemption of a preferred equity
investment and the partial redemption of an investment in a
mortgage backed security. The remaining portion of the mortgage
backed security is expected to be redeemed in the fourth quarter of
2020.
In the third quarter of 2020, the Company funded a preferred
equity investment totaling $10.5 million for the development of a
multifamily community located in Southern California. The
investment has an initial preferred return of 11.0% and is
scheduled to mature in August 2025.
Subsequent to quarter end, the Company originated two preferred
equity investments totaling $46.8 million. One of the investments
is for the development of a multifamily community and the other is
an investment in a stabilized multifamily community, both located
in Southern California. The investments have a weighted average
return of 10.2% with most of the proceeds funding in late 2020 and
early 2021.
DEVELOPMENT ACTIVITY
During the third quarter of 2020, the Company’s development,
Station Park Green – Phase III, reached stabilization.
The table below represents the development communities in
lease-up and the current leasing status as of October 22, 2020.
Project Name
Location
Total Apartment Homes
ESS Ownership
% Leased as of
10/22/20
Status
500 Folsom
San Francisco, CA
537
50%
84.5%
In Lease-Up
Mylo
Santa Clara, CA
476
100%
58.6%
In Lease-Up
Patina at Midtown
San Jose, CA
269
50%
33.1%
In Lease-Up
Total/Average % Leased
1,282
64.1%
LIQUIDITY AND BALANCE SHEET
Common Stock
In the third quarter of 2020, the Company repurchased 121,260
shares of its common stock totaling $26.6 million, including
commissions, at an average price of $219.24 per share. Year-to-date
through October 22, 2020, the Company has repurchased 985,509
shares of its common stock totaling $223.0 million, including
commissions, at an average price of $226.27 per share. As of
October 22, 2020, the Company had $203.3 million of purchase
authority remaining under the stock repurchase plan.
The Company did not issue any shares of common stock through its
equity distribution program in the third quarter of 2020.
Balance Sheet
In August 2020, the Company issued $600.0 million of senior
unsecured notes, consisting of $300.0 million due in January 2031
and $300.0 million due in September 2050. The senior unsecured
notes due in 2031 and 2050 bear an interest rate per annum of 1.65%
and 2.65%, respectively, and were issued at effective yields of
1.75% and 2.67%, respectively. A portion of the proceeds were used
to prepay $300.0 million of the Company’s outstanding 3.625% senior
notes due in August 2022. The Company incurred $19.1 million in
prepayment penalties and write-offs of unamortized costs in the
third quarter related to this debt repayment. The remaining
proceeds will be used to repay all remaining 2021 debt
maturities.
As of October 22, 2020, the Company had $1.2 billion in undrawn
capacity on its unsecured credit facilities and $0.5 billion in
cash and marketable securities.
COVID-19 UPDATE
Due to the uncertain nature of the COVID-19 pandemic and
evolving economic re-opening plans, the Company is not reinstating
full-year 2020 guidance. Instead, the Company continues to provide
additional disclosures related to its operations on page S-15 of
the supplemental financial information.
CONFERENCE CALL WITH MANAGEMENT
The Company will host an earnings conference call with
management to discuss its quarterly results on Thursday, October
29, 2020 at 9 a.m. PT (12 p.m. ET), which will be broadcast live
via the Internet at www.essex.com, and accessible via phone by
dialing toll-free, (877) 407-0784, or toll/international, (201)
689-8560. No passcode is necessary.
A rebroadcast of the live call will be available online for 30
days and digitally for 7 days. To access the replay online, go to
www.essex.com and select the third quarter 2020 earnings link. To
access the replay, dial (844) 512-2921 using the replay pin number
13710810. If you are unable to access the information via the
Company’s website, please contact the Investor Relations Department
at investors@essex.com or by calling (650) 655-7800.
UPCOMING EVENTS
The Company is scheduled to participate in the National
Association of Real Estate Investment Trusts (“NAREIT”) virtual
REITWorld conference from November 17 - 18, 2020, and the Company’s
President and Chief Executive Officer, Michael J. Schall, will
present at the conference on Tuesday, November 17 at 3:45 p.m. ET.
The presentation will be webcast and can be accessed on the
Investors section of the Company’s website at www.essex.com. A copy
of any materials provided by the Company at the conference will
also be made available on the Investors section of the Company’s
website.
CORPORATE PROFILE
Essex Property Trust, Inc., an S&P 500 company, is a fully
integrated real estate investment trust (REIT) that acquires,
develops, redevelops, and manages multifamily residential
properties in selected West Coast markets. Essex currently has
ownership interests in 246 apartment communities comprising
approximately 60,000 apartment homes with an additional 6
properties in various stages of active development. Additional
information about the Company can be found on the Company’s website
at www.essex.com.
This press release and accompanying supplemental financial
information has been furnished to the Securities and Exchange
Commission electronically on Form 8-K and can be accessed from the
Company’s website at www.essex.com. If you are unable to obtain the
information via the Web, please contact the Investor Relations
Department at (650) 655-7800.
FFO RECONCILIATION
FFO, as defined by the National Association of Real Estate
Investment Trusts (“NAREIT”), is generally considered by industry
analysts as an appropriate measure of performance of an equity
REIT. Generally, FFO adjusts the net income of equity REITs for
non-cash charges such as depreciation and amortization of rental
properties, impairment charges, gains on sales of real estate and
extraordinary items. Management considers FFO and FFO which
excludes non-core items, which is referred to as “Core FFO,” to be
useful supplemental operating performance measures of an equity
REIT because, together with net income and cash flows, FFO and Core
FFO provide investors with additional bases to evaluate the
operating performance and ability of a REIT to incur and service
debt and to fund acquisitions and other capital expenditures and to
pay dividends. By excluding gains or losses related to sales of
depreciated operating properties and excluding real estate
depreciation (which can vary among owners of identical assets in
similar condition based on historical cost accounting and useful
life estimates), FFO can help investors compare the operating
performance of a real estate company between periods or as compared
to different companies. By further adjusting for items that are not
considered part of the Company’s core business operations, Core FFO
allows investors to compare the core operating performance of the
Company to its performance in prior reporting periods and to the
operating performance of other real estate companies without the
effect of items that by their nature are not comparable from period
to period and tend to obscure the Company’s actual operating
results. FFO and Core FFO do not represent net income or cash flows
from operations as defined by U.S. generally accepted accounting
principles (“GAAP”) and are not intended to indicate whether cash
flows will be sufficient to fund cash needs. These measures should
not be considered as alternatives to net income as an indicator of
the REIT's operating performance or to cash flows as a measure of
liquidity. FFO and Core FFO do not measure whether cash flow is
sufficient to fund all cash needs including principal amortization,
capital improvements and distributions to stockholders. FFO and
Core FFO also do not represent cash flows generated from operating,
investing or financing activities as defined under GAAP. Management
has consistently applied the NAREIT definition of FFO to all
periods presented. However, there is judgment involved and other
REITs’ calculation of FFO may vary from the NAREIT definition for
this measure, and thus their disclosures of FFO may not be
comparable to the Company’s calculation.
The following table sets forth the Company’s calculation of
diluted FFO and Core FFO for the three and nine months ended
September 30, 2020 and 2019 (in thousands, except for share and per
share amounts):
Three Months Ended September
30,
Nine Months Ended September
30,
Funds from Operations attributable to
common stockholders and unitholders
2020
2019
2020
2019
Net income available to common
stockholders
$
73,661
$
99,335
$
473,125
$
310,468
Adjustments:
Depreciation and amortization
130,202
120,809
395,370
360,842
Gains not included in FFO
(24,879)
-
(276,170)
(32,405)
Depreciation and amortization from
unconsolidated co-investments
12,883
15,483
38,191
45,304
Noncontrolling interest related to
Operating Partnership units
2,593
3,464
16,543
10,863
Depreciation attributable to third party
ownership and other
(134)
(242)
(407)
(708)
Funds from Operations attributable to
common stockholders and unitholders
$
194,326
$
238,849
$
646,652
$
694,364
FFO per share – diluted
$
2.88
$
3.50
$
9.53
$
10.19
Expensed acquisition and investment
related costs
$
2
$
13
$
104
$
69
Deferred tax expense on unrealized gain on
unconsolidated co-investment (1)
-
1,457
1,636
1,457
Gain on sale of marketable securities
(91)
(239)
(124)
(737)
Unrealized (gains) losses on marketable
securities
(3,288)
174
(2,215)
(4,280)
Provision for credit losses
3
-
100
-
Equity income from non-core co-investment
(2)
213
(4,247)
(4,373)
(4,561)
Interest rate hedge ineffectiveness
(3)
-
-
-
181
Loss (gain) on early retirement of debt,
net
19,114
(5,475)
23,820
(7,143)
Gain on early retirement of debt from
unconsolidated co-investment
-
-
(38)
-
Co-investment promote income
-
-
(6,455)
(809)
Income from early redemption of preferred
equity investments
-
(1,699)
(210)
(2,531)
General and administrative and other,
net
2,510
-
5,642
-
Insurance reimbursements legal
settlements, and other, net
132
(15)
69
(263)
Core Funds from Operations attributable
to common stockholders and unitholders
$
212,921
$
228,818
$
664,608
$
675,747
Core FFO per share – diluted
$
3.15
$
3.35
$
9.80
$
9.92
Weighted average number of shares
outstanding diluted (4)
67,495,286
68,229,823
67,837,336
68,117,569
(1)
A deferred tax expense was recorded during
the second quarter of 2020 related to the $4.7 million net
unrealized gain on the Real Estate Technology Ventures, L.P.
co-investment discussed below.
(2)
Represents the Company’s share of
co-investment income from Real Estate Technology Ventures, L.P.
Income for the second quarter of 2020 includes a net unrealized
gain of $4.7 million.
(3)
On January 1, 2019, the Company adopted
ASU No. 2017-12 "Derivatives and Hedging - Targeted Improvements to
Accounting for Hedging Activities," which resulted in a cumulative
effect adjustment of approximately $181,000 from interest expense
to accumulated other comprehensive income. As a result of the
adoption of this standard, the Company recognizes qualifying hedge
ineffectiveness through accumulated other comprehensive income as
opposed to current earnings.
(4)
Assumes conversion of all outstanding
limited partnership units in Essex Portfolio, L.P. (the “Operating
Partnership”) into shares of the Company’s common stock and
excludes all DownREIT limited partnership units for which the
Operating Partnership has the ability and intention to redeem the
units for cash and does not consider them to be common stock
equivalents.
NET OPERATING INCOME (“NOI”) AND
SAME-PROPERTY NOI RECONCILIATIONS
NOI and Same-Property NOI are considered by management to be
important supplemental performance measures to earnings from
operations included in the Company’s consolidated statements of
income. The presentation of same-property NOI assists with the
presentation of the Company’s operations prior to the allocation of
depreciation and any corporate-level or financing-related costs.
NOI reflects the operating performance of a community and allows
for an easy comparison of the operating performance of individual
communities or groups of communities. In addition, because
prospective buyers of real estate have different financing and
overhead structures, with varying marginal impacts to overhead by
acquiring real estate, NOI is considered by many in the real estate
industry to be a useful measure for determining the value of a real
estate asset or group of assets. The Company defines same-property
NOI as same-property revenues less same-property operating
expenses, including property taxes. Please see the reconciliation
of earnings from operations to NOI and same-property NOI, which in
the table below is the NOI for stabilized properties consolidated
by the Company for the periods presented (dollars in
thousands):
Three Months Ended September
30,
Nine Months Ended September
30,
2020
2019
2020
2019
Earnings from operations
$
128,937
$
124,039
$
379,510
$
364,294
Adjustments:
Corporate-level property management
expenses
8,619
8,553
26,024
25,451
Depreciation and amortization
130,202
120,809
395,370
360,842
Management and other fees from
affiliates
(2,347)
(2,428)
(7,312)
(7,023)
General and administrative
13,310
11,345
42,244
38,731
Expensed acquisition and investment
related costs
2
13
104
69
Gain on sale of real estate and land
(22,654)
-
(39,251)
-
NOI
256,069
262,331
796,689
782,364
Less: Non-same property NOI
(39,196)
(19,196)
(102,881)
(53,575)
Same-Property NOI
$
216,873
$
243,135
$
693,808
$
728,789
SAFE HARBOR STATEMENT UNDER THE PRIVATE
LITIGATION REFORM ACT OF 1995:
This press release includes “forward-looking statements” within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements are statements which are not
historical facts, including statements regarding the Company's
expectations, estimates, assumptions, hopes, intentions, beliefs
and strategies regarding the future. Words such as “expects,”
“assumes,” “anticipates,” “may,” “will,” “intends,” “plans,”
“projects,” “believes,” “seeks,” “future,” “estimates,” and
variations of such words and similar expressions are intended to
identify such forward-looking statements. Such forward-looking
statements include, among other things, statements regarding the
Company’s expectations related to the continued impact of the
COVID-19 pandemic on the Company’s business, financial condition
and results of operations and the impact of any additional measures
taken to mitigate the impact of the pandemic, the Company’s intent,
beliefs or expectations with respect to the timing of completion of
current development and redevelopment projects and the
stabilization of such projects, the timing of lease-up and
occupancy of its apartment communities, the anticipated operating
performance of its apartment communities, the total projected costs
of development and redevelopment projects, co-investment
activities, qualification as a REIT under the Internal Revenue Code
of 1986, as amended, the real estate markets in the geographies in
which the Company’s properties are located and in the United States
in general, the adequacy of future cash flows to meet anticipated
cash needs, its financing activities and the use of proceeds from
such activities, the availability of debt and equity financing,
general economic conditions including the potential impacts from
such economic conditions, including as a result of the COVID-19
pandemic and governmental measures intended to prevent its spread,
trends affecting the Company’s financial condition or results of
operations, changes to U.S. tax laws and regulations in general or
specifically related to REITs or real estate, changes to laws and
regulations in jurisdictions in which communities the Company owns
are located, and other information that is not historical
information.
While the Company's management believes the assumptions
underlying its forward-looking statements are reasonable, such
forward-looking statements involve known and unknown risks,
uncertainties and other factors, many of which are beyond the
Company’s control, which could cause the actual results,
performance or achievements of the Company to be materially
different from any future results, performance or achievements
expressed or implied by such forward-looking statements. The
Company cannot assure the future results or outcome of the matters
described in these statements; rather, these statements merely
reflect the Company’s current expectations of the approximate
outcomes of the matters discussed. Factors that might cause the
Company’s actual results, performance or achievements to differ
materially from those expressed or implied by these forward-looking
statements include, but are not limited to, the following: the
continued impact of the COVID-19 pandemic, which remains inherently
uncertain as to duration and severity, and any additional
governmental measures taken to limit its spread and other potential
future outbreaks of infectious diseases or other health concerns,
could continue to adversely affect the Company’s business and its
tenants, and cause a significant downturn in general economic
conditions, the real estate industry, and the markets in which the
Company's communities are located; the Company may fail to achieve
its business objectives; the actual completion of development and
redevelopment projects may be subject to delays; the stabilization
dates of such projects may be delayed; the Company may abandon or
defer development or redevelopment projects for a number of
reasons, including changes in local market conditions which make
development less desirable, increases in costs of development,
increases in the cost of capital or lack of capital availability,
resulting in losses; the total projected costs of current
development and redevelopment projects may exceed expectations;
such development and redevelopment projects may not be completed;
development and redevelopment projects and acquisitions may fail to
meet expectations; estimates of future income from an acquired
property may prove to be inaccurate; occupancy rates and rental
demand may be adversely affected by competition and local economic
and market conditions; there may be increased interest rates and
operating costs; the Company may be unsuccessful in the management
of its relationships with its co-investment partners; future cash
flows may be inadequate to meet operating requirements and/or may
be insufficient to provide for dividend payments in accordance with
REIT requirements; changes in laws or regulations; the terms of any
refinancing may not be as favorable as the terms of existing
indebtedness; unexpected difficulties in leasing of development
projects; volatility in financial and securities market; the
Company’s failure to successfully operate acquired properties;
unforeseen consequences from cyber-intrusion; the Company’s
inability to maintain our investment grade credit rating with the
rating agencies; government approvals, actions and initiatives,
including the need for compliance with environmental requirements;
and those further risks, special considerations, and other factors
referred to in the Company’s annual report on Form 10-K, quarterly
reports on Form 10-Q, and other reports that the Company files with
the SEC from time to time. Additionally, the risks, uncertainties
and other factors set forth above or otherwise referred to in the
reports that the Company has filed with the SEC may be further
amplified by the global impact of the COVID-19 pandemic. All
forward-looking statements are made as of the date hereof, the
Company assumes no obligation to update or supplement this
information for any reason, and therefore, they may not represent
the Company’s estimates and assumptions after the date of this
press release.
DEFINITIONS AND RECONCILIATIONS
Non-GAAP financial measures and certain other capitalized terms,
as used in this earnings release, are defined and further explained
on pages S-17.1 through S-17.4, "Reconciliations of Non-GAAP
Financial Measures and Other Terms," of the accompanying
supplemental financial information. The supplemental financial
information is available on the Company's website at
www.essex.com.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20201028006085/en/
Rylan Burns Vice President of Finance & Investor Relations
(650) 655-7800 rburns@essex.com
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