Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
(1) Organization and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements present the accounts of Essex Property Trust, Inc. ("Essex" or the "Company"), which include the accounts of the Company and Essex Portfolio, L.P. and its subsidiaries (the "Operating Partnership," which holds the operating assets of the Company), prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and in accordance with the instructions to Form 10-Q. In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented have been included and are normal and recurring in nature. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2019.
All significant intercompany accounts and transactions have been eliminated in the unaudited condensed consolidated financial statements. Certain reclassifications have been made to conform to the current year’s presentation.
The unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2020 and 2019 include the accounts of the Company and the Operating Partnership. Essex is the sole general partner of the Operating Partnership, with a 96.6% general partnership interest as of both September 30, 2020 and December 31, 2019. Total Operating Partnership limited partnership units ("OP Units," and the holders of such OP Units, "Unitholders") outstanding were 2,295,510 and 2,301,653 as of September 30, 2020 and December 31, 2019, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled approximately $460.9 million and $692.5 million as of September 30, 2020 and December 31, 2019, respectively.
As of September 30, 2020, the Company owned or had ownership interests in 247 operating apartment communities, aggregating 60,387 apartment homes, excluding the Company’s ownership interest in preferred interest co-investments, loan investments, one operating commercial building, and a development pipeline comprised of three consolidated projects and three unconsolidated joint venture projects. The operating apartment communities are located in Southern California (primarily Los Angeles, Orange, San Diego, and Ventura counties), Northern California (the San Francisco Bay Area) and the Seattle metropolitan areas.
Accounting Pronouncements Adopted in the Current Year
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13 "Measurement of Credit Losses on Financial Instruments," which amends the current approach to estimate credit losses on certain financial assets, including trade and other receivables, available-for-sale securities, and other financial instruments. Generally, this amendment requires entities to establish a valuation allowance for the expected lifetime losses of these certain financial assets. Subsequent changes in the valuation allowance are recorded in current earnings and reversal of previous losses are permitted. Previously, U.S. GAAP required entities to write down credit losses only when losses were probable and loss reversals were not permitted. The FASB additionally issued various updates to clarify and amend the guidance provided in ASU No. 2016-13. In May 2019, the FASB issued ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments," which, with respect to credit losses, among other things, clarifies and addresses issues related to accrued interest, transfers between classifications of loans or debt securities, recoveries, and variable interest rates. Additionally, in May 2019, the FASB issued ASU No. 2019-05, "Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief," which allows entities to irrevocably elect the fair value option on certain financial instruments. The Company adopted ASU No. 2016-13, ASU No. 2019-04, and ASU No. 2019-05 as of January 1, 2020, using the modified retrospective approach by applying a cumulative effect adjustment of $0.2 million representing estimated accumulated credit losses to the opening balance of retained earnings.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
In August 2018, the FASB issued ASU No. 2018-13 "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," which eliminates certain disclosure requirements affecting all levels of measurements, and modifies and adds new disclosure requirements for Level 3 measurements. The Company adopted ASU No. 2018-13 as of January 1, 2020. This adoption did not have a material impact on the Company's consolidated results of operations or financial position.
In March 2020, the FASB issued ASU No. 2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU No. 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
In April 2020, the FASB issued a Staff Question-and-Answer (Q&A) to clarify whether lease concessions related to the effects of COVID-19 require the application of the lease modification guidance under Accounting Standards Codification ("ASC") Topic 842, Leases. The Q&A allows companies to not apply the lease modification guidance to rent concessions that result in deferred rent where the total cash flows required by the modified lease agreement are materially the same as the cash flows required under the original lease and the changes to the lease do not result in a substantial increase to the rights of the lessor or the obligations of the lessee. The Company adopted the guidance during the three months ended June 30, 2020 for eligible residential lease concessions. The lease concessions that met the criteria of the Q&A are treated as if they were part of the enforceable rights and obligations of the parties under the existing lease contract. The amount of rent concessions subject to the Q&A were not material and this adoption did not have a material impact on the Company's consolidated results of operations or financial position.
Revenues and Gains on Sale of Real Estate
Revenues from tenants renting or leasing apartment homes are recorded when due from tenants and are recognized monthly as they are earned which generally approximates a straight-line basis, else, adjustments are made to conform to a straight-line basis. Apartment homes are rented under short-term leases (generally, lease terms of 9 to 12 months). Revenues from tenants leasing commercial space are recorded on a straight-line basis over the life of the respective lease. See Note 3, Revenues, for additional information regarding such revenues.
The Company also generates other property-related revenue associated with the leasing of apartment homes, including storage income, pet rent, and other miscellaneous revenue. Similar to rental income, such revenues are recorded when due from tenants and recognized monthly as they are earned.
Apart from rental and other property-related revenue, revenues from contracts with customers are recognized as control of the promised services is passed to the customer. For customer contracts related to management and other fees from affiliates (which includes asset management and property management), the transaction price and amount of revenue to be recognized is determined each quarter based on the management fee calculated and earned for that month or quarter. The contract will contain a description of the service and the fee percentage for management services. Payments from such services are one month or one quarter in arrears of the service performed.
Subsequent to the adoption of ASC 610-20 "Gains and Losses from the Derecognition of Nonfinancial Assets" on January 1, 2018, the Company recognizes any gains on sales of real estate when it transfers control of a property and when it is probable that the Company will collect substantially all of the related consideration.
Marketable Securities
The Company reports its equity securities and available for sale debt securities at fair value, based on quoted market prices (Level 1 for the common stock and investment funds, Level 2 for the unsecured bonds and Level 3 for investments in mortgage
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
backed securities, as defined by the FASB standard for fair value measurements). As of September 30, 2020 and December 31, 2019, $2.7 million and $3.6 million, respectively, of equity securities presented within common stock and stock funds in the tables below, represent investments measured at fair value, using net asset value as a practical expedient, and are not categorized in the fair value hierarchy.
Any unrealized gain or loss in debt securities classified as available for sale is recorded as other comprehensive income. Unrealized gains and losses in equity securities, realized gains and losses in debt securities, interest income, and amortization of purchase discounts are included in interest and other income on the condensed consolidated statements of income and comprehensive income.
As of September 30, 2020 and December 31, 2019, equity securities and available for sale debt securities consisted primarily of investment-grade unsecured bonds, U.S. treasury securities, common stock and stock funds. As of September 30, 2020 and December 31, 2019, the Company classified its mortgage backed securities as held to maturity, and accordingly, the securities are stated at its amortized cost. The mortgage backed security investment which had an initial maturity date of September 2020 was partially repaid in September with the balance being extended until January 2021. The discount on the mortgage backed securities are amortized to interest income based on an estimated yield and the maturity date.
As of September 30, 2020 and December 31, 2019, marketable securities consist of the following ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
Amortized
Cost/Cost
|
|
Gross
Unrealized
Gain (Loss)
|
|
Carrying Value
|
|
Allowance for Credit Losses
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
Investment funds - debt securities
|
$
|
31,127
|
|
|
$
|
1,135
|
|
|
$
|
32,262
|
|
|
|
|
Common stock and stock funds
|
67,636
|
|
|
4,551
|
|
|
72,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-grade unsecured debt
|
1,049
|
|
|
(105)
|
|
|
944
|
|
|
—
|
|
|
Held to maturity
|
|
|
|
|
|
|
|
|
Mortgage backed security
|
29,578
|
|
|
—
|
|
|
29,578
|
|
|
13,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total - Marketable securities
|
$
|
129,390
|
|
|
$
|
5,581
|
|
|
$
|
134,971
|
|
|
$
|
13,644
|
|
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Amortized
Cost/Cost
|
|
Gross
Unrealized
Gain (Loss)
|
|
Carrying Value
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
Investment funds - debt securities
|
$
|
29,588
|
|
|
$
|
544
|
|
|
$
|
30,132
|
|
|
|
|
Common stock and stock funds
|
34,941
|
|
|
2,927
|
|
|
37,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
2,421
|
|
|
13
|
|
|
2,434
|
|
|
|
|
Investment-grade unsecured bonds
|
1,048
|
|
|
60
|
|
|
1,108
|
|
|
|
|
Held to maturity
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
72,651
|
|
|
—
|
|
|
72,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total - Marketable securities
|
$
|
140,649
|
|
|
$
|
3,544
|
|
|
$
|
144,193
|
|
|
|
The Company uses the specific identification method to determine the cost basis of a debt security sold and to reclassify amounts from accumulated other comprehensive income for such securities.
For the three months ended September 30, 2020 and 2019, the proceeds from sales and maturities of marketable securities totaled $52.6 million and $7.0 million, respectively, which resulted in $91 thousand and $0.2 million in realized gains, respectively, for such periods. For the nine months ended September 30, 2020 and 2019, the proceeds from sales and maturities of marketable securities totaled $56.9 million and $57.2 million, respectively, which resulted in $0.1 million and $0.7 million in realized gains, respectively, for such periods.
For the three and nine months ended September 30, 2020, the portion of equity security unrealized gains or losses that were recognized in income totaled $3.3 million and $2.2 million in gains, respectively, and were included in interest and other income on the Company's condensed consolidated statements of income and comprehensive income. For the three and nine months ended September 30, 2019, the portion of equity security unrealized losses or gains that were recognized in income totaled $0.2 million in losses and $4.3 million in gains, respectively, and were included in interest and other income on the Company's condensed consolidated statements of income and comprehensive income.
Unrealized losses on Investment-grade unsecured bonds as of September 30, 2020 have not been recognized into income because the debts of the issuers are of high credit quality, management does not intend to sell the securities, it is likely that the Company will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to other market conditions.
The Company monitors the credit quality of its held to maturity mortgage backed security through the review of remittance reports and individual loan watchlists, which are prepared quarterly and provide most recent debt service coverage ratios for each loan within the security, when available. The Company monitors such reports to determine the likelihood that a particular loan within the mortgage backed security may be foreclosed upon.
The Company measures the expected credit loss on its held to maturity mortgage backed security based on the present value of expected future cash flows, which takes into account current market conditions and available credit information obtained from the individual loans held within the mortgage backed security. The following table presents the allowance for credit losses rollforward for the mortgage backed security ($ in thousands):
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
$
|
—
|
|
|
Impact of adoption ASC 326 (1)
|
13,644
|
|
|
Provision for credit losses
|
—
|
|
|
Balance at September 30, 2020
|
$
|
13,644
|
|
(1) As part of the adoption of ASC 326, effective January 1, 2020, the Company recorded a gross up of the mortgage backed security and related allowance for credit losses of $13.6 million. This gross up had no effect on the Company's consolidated results of operations or financial position.
Variable Interest Entities
In accordance with accounting standards for consolidation of variable interest entities ("VIEs"), the Company consolidated the Operating Partnership, 17 DownREIT entities (comprising nine communities), and five co-investments as of September 30, 2020. As of December 31, 2019, the Company consolidated the Operating Partnership, 17 DownREIT entities (comprising nine communities) and six co-investments. The Company consolidates these entities because it is deemed the primary beneficiary. Essex has no assets or liabilities other than its investment in the Operating Partnership. The consolidated total assets and liabilities related to the above consolidated co-investments and DownREIT entities, net of intercompany eliminations, were approximately $0.9 billion and $329.9 million, respectively, as of September 30, 2020 and $1.0 billion and $364.3 million, respectively, as of December 31, 2019. Noncontrolling interests in these entities were $121.2 million and $122.5 million as of September 30, 2020 and December 31, 2019, respectively. The Company's financial risk in each VIE is limited to its equity investment in the VIE. As of September 30, 2020 and December 31, 2019, the Company did not have any VIEs of which it was not deemed to be the primary beneficiary.
Equity-based Compensation
The cost of share- and unit-based compensation awards is measured at the grant date based on the estimated fair value of the awards. The estimated fair value of stock options and restricted stock granted by the Company are being amortized over the vesting period. The estimated grant date fair values of the long term incentive plan units (discussed in Note 14, "Equity Based Compensation Plans," in the Company’s annual report on Form 10-K for the year ended December 31, 2019) are being amortized over the expected service periods.
Fair Value of Financial Instruments
Management believes that the carrying amounts of the outstanding balances under its lines of credit, and notes and other receivables approximate fair value as of September 30, 2020 and December 31, 2019, because interest rates, yields, and other terms for these instruments are consistent with interest rates, yields, and other terms currently available for similar instruments. Management has estimated that the fair value of the Company’s fixed rate debt with a carrying value of $5.8 billion and $5.2 billion at September 30, 2020 and December 31, 2019, respectively, was approximately $6.0 billion and $5.4 billion, respectively. Management has estimated that the fair value of the Company’s $804.9 million and $660.4 million of variable rate debt at September 30, 2020 and December 31, 2019, respectively, was approximately $799.6 million and $655.8 million, respectively, based on the terms of existing mortgage notes payable, unsecured debt, and variable rate demand notes compared to those available in the marketplace. Management believes that the carrying amounts of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities, construction payables, other liabilities, and dividends payable approximate fair value as of September 30, 2020 and December 31, 2019 due to the short-term maturity of these instruments. Marketable securities, except mortgage backed securities, are carried at fair value as of September 30, 2020 and December 31, 2019.
At September 30, 2020, the Company’s investment in its mortgage backed security had a net carrying value of $29.6 million and the Company estimated the fair value to be approximately $29.6 million. At December 31, 2019, the Company’s investment in mortgage backed securities had a carrying value of $72.7 million and the Company estimated the fair value to be approximately $72.7 million. The Company determines the fair value of the mortgage backed securities based on unobservable inputs (level 3 of the fair value hierarchy) considering the assumptions that market participants would make in valuing the
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
securities. Assumptions such as estimated default rates and discount rates are used to determine the expected, discounted cash flows to estimate fair value.
Capitalization of Costs
The Company’s capitalized internal costs related to development and redevelopment projects were comprised primarily of interest and employee compensation and totaled $6.1 million and $11.0 million during the three months ended September 30, 2020 and 2019, respectively, and $24.9 million and $32.1 million for the nine months ended September 30, 2020 and 2019, respectively. The Company capitalizes leasing commissions associated with the lease-up of development communities and amortizes the costs over the life of the leases. The amounts capitalized for leasing commissions are immaterial for all periods presented.
Co-investments
The Company owns investments in joint ventures in which it has significant influence, but its ownership interest does not meet the criteria for consolidation in accordance with U.S. GAAP. Therefore, the Company accounts for co-investments using the equity method of accounting. Under the equity method of accounting, the investment is carried at the cost of assets contributed, plus the Company's equity in earnings less distributions received and the Company's share of losses. The significant accounting policies of the Company’s co-investment entities are consistent with those of the Company in all material respects.
Upon the acquisition of a controlling interest of a co-investment, the co-investment entity is consolidated and a gain or loss is recognized upon the remeasurement of co-investments in the consolidated statement of income equal to the amount by which the fair value of the co-investment interest the Company previously owned exceeds its carrying value. A majority of the co-investments, excluding the preferred equity investments, compensate the Company for its asset management services and some of these investments may provide promote income if certain financial return benchmarks are achieved. Asset management fees are recognized when earned, and promote fees are recognized when the earnings events have occurred and the amount is determinable and collectible. Any promote fees are reflected in equity income from co-investments.
Changes in Accumulated Other Comprehensive Loss, Net by Component
Essex Property Trust, Inc.
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair
value and amortization
of swap settlements
|
|
Unrealized
gain/(loss) on
available for sale securities
|
|
Total
|
|
Balance at December 31, 2019
|
$
|
(13,989)
|
|
|
$
|
101
|
|
|
$
|
(13,888)
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassification
|
2,263
|
|
|
(172)
|
|
|
2,091
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(5,003)
|
|
|
—
|
|
|
(5,003)
|
|
|
Other comprehensive loss
|
(2,740)
|
|
|
(172)
|
|
|
(2,912)
|
|
|
Balance at September 30, 2020
|
$
|
(16,729)
|
|
|
$
|
(71)
|
|
|
$
|
(16,800)
|
|
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
Changes in Accumulated Other Comprehensive Loss, by Component
Essex Portfolio, L.P.
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair
value and amortization
of swap settlements
|
|
Unrealized
gain/(loss) on
available for sale securities
|
|
Total
|
|
Balance at December 31, 2019
|
$
|
(10,536)
|
|
|
$
|
104
|
|
|
$
|
(10,432)
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassification
|
2,341
|
|
|
(178)
|
|
|
2,163
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(5,178)
|
|
|
—
|
|
|
(5,178)
|
|
|
Other comprehensive loss
|
(2,837)
|
|
|
(178)
|
|
|
(3,015)
|
|
|
Balance at September 30, 2020
|
$
|
(13,373)
|
|
|
$
|
(74)
|
|
|
$
|
(13,447)
|
|
Amounts reclassified from accumulated other comprehensive loss in connection with derivatives are recorded in interest expense on the condensed consolidated statements of income and comprehensive income. Realized gains and losses on available for sale debt securities are included in interest and other income on the condensed consolidated statements of income and comprehensive income.
Redeemable Noncontrolling Interest
The carrying value of redeemable noncontrolling interest in the accompanying condensed consolidated balance sheets was $30.7 million and $37.4 million as of September 30, 2020 and December 31, 2019, respectively. The limited partners may redeem their noncontrolling interests for cash in certain circumstances.
The changes to the redemption value of redeemable noncontrolling interests for the nine months ended September 30, 2020 is as follows ($ in thousands):
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
$
|
37,410
|
|
|
Reclassification due to change in redemption value and other
|
(6,691)
|
|
|
Redemptions
|
—
|
|
|
|
|
|
Balance at September 30, 2020
|
$
|
30,719
|
|
Cash, Cash Equivalents and Restricted Cash
Highly liquid investments with original maturities of three months or less when purchased are classified as cash equivalents. Restricted cash balances relate primarily to reserve requirements for capital replacement at certain communities in connection with the Company’s mortgage debt.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Cash and cash equivalents - unrestricted
|
$
|
558,446
|
|
|
$
|
70,087
|
|
|
$
|
74,031
|
|
|
$
|
134,465
|
|
|
Cash and cash equivalents - restricted
|
10,629
|
|
|
11,007
|
|
|
17,695
|
|
|
16,930
|
|
|
Total unrestricted and restricted cash and cash equivalents shown in the condensed consolidated statement of cash flows
|
$
|
569,075
|
|
|
$
|
81,094
|
|
|
$
|
91,726
|
|
|
$
|
151,395
|
|
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
Accounting Estimates
The preparation of condensed consolidated financial statements, in accordance with U.S. GAAP, requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to acquiring, developing and assessing the carrying values of its real estate portfolio, its investments in and advances to joint ventures and affiliates, its notes receivables, and its qualification as a real estate investment trust ("REIT"). The Company bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could be different under different assumptions or conditions.
(2) Significant Transactions During The Nine Months Ended September 30, 2020 and Subsequent Events
Significant Transactions
Acquisitions
In January 2020, the Company purchased Canada Pension Plan Investment Board's ("CPPIB") 45.0% interest in each of a land parcel and six communities totaling 2,020 apartment homes, valued at $1.0 billion on a gross basis. As a result of this acquisition, the Company realized a gain on remeasurement of co-investment of $234.7 million. Furthermore, the Company recognized $6.5 million in promote income as a result of the transaction, which is included in equity income from co-investments on the condensed consolidated statements of income and comprehensive income.
Dispositions
In June 2020, the Company completed a portfolio sale which consisted of two apartment communities, One South Market and Museum Park, both located in San Jose, CA for a total contract price of $232.0 million. The Company recognized a $16.6 million gain on sale.
In July 2020, the Company sold Delano, a 126 apartment home community located in Redmond, WA, for a total contract price of $51.5 million. The Company recognized a $22.7 million gain on sale.
As of September 30, 2020, the Company had one community totaling 115 apartment homes that is qualified as held for sale.
Co-Investments
Preferred Equity Investments
In the first quarter of 2020, the Company originated two preferred equity investments totaling $91.4 million in two multifamily communities located in California. The investments have a weighted average initial return of 11.3% with most of the proceeds expected to fund in late 2020 and early 2021.
In March 2020, the Company received cash of $11.3 million, including an early redemption fee of $0.2 million, for the partial redemption of a preferred equity investment in a joint venture that holds property located in Southern California.
In the third quarter of 2020, the Company funded a $10.5 million preferred equity investment in a multifamily development community located in Southern California. The investment has an initial preferred return of 11.0% and is scheduled to mature in August 2025.
In September 2020, the Company received cash of $10.6 million for the full redemption of a preferred equity investment in a property located in Southern California.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
Notes Receivable
In January 2020, the Company received cash of $16.9 million for the full redemption of a mezzanine loan in a property located in Southern California.
In January 2020, the Company received $85.8 million for the payoff of a related party bridge loan to Wesco V, LLC ("Wesco V"). See Note 6, Related Party Transactions, for additional details.
In March 2020, the Company committed to fund an investment in mezzanine loans totaling $15.0 million as part of the development of a multifamily community located in Southern California. The investment has an initial 10.5% interest rate and maturity date of February 2023, with options to extend for up to two years. As of September 30, 2020, the Company had funded $7.5 million of this commitment.
In April 2020, the Company committed to fund a $29.2 million mezzanine loan in a multifamily community located in Northern California, with an 11.0% interest rate and an initial maturity date of October 2023, with options to extend for up to two years. As of September 30, 2020, the Company had funded $12.9 million of this commitment.
Common Stock
During the three months ended March 31, 2020, the Company repurchased and retired 776,261 shares totaling $176.3 million, including commissions. In May 2020, the board of directors approved the replenishment of the stock repurchase plan such that, as of such date, the Company had $250.0 million of purchase authority remaining under the replenished plan. During the three months ended June 30, 2020, the Company repurchased and retired 87,988 shares totaling $20.1 million, including commissions, all of which were repurchased after the replenishment in May 2020. During the three months ended September 30, 2020, the Company repurchased and retired 121,260 shares totaling $26.6 million, including commissions. As a result, as of September 30, 2020, the Company had $203.3 million of purchase authority remaining under its $250.0 million stock repurchase plan.
Senior Unsecured Debt
In February 2020, the Operating Partnership issued $500.0 million of senior unsecured notes due on March 15, 2032 with a coupon rate of 2.650% per annum (the "2032 Notes"), which are payable on March 15 and September 15 of each year, beginning on September 15, 2020. The 2032 Notes were offered to investors at a price of 99.628% of par value. The 2032 Notes are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are unconditionally guaranteed by Essex. The Company used the net proceeds of this offering to repay indebtedness under its unsecured lines of credit, which had been used to fund the buyout of CPPIB's 45.0% joint venture interests discussed above, as well as repay $100.3 million of secured debt during the quarter.
In April 2020, the Company originated a $200.0 million unsecured term loan with a one-year maturity and two 12-month extension options, exercisable at the Company’s option. The unsecured term loan bears a variable interest rate of LIBOR plus 1.20% and the proceeds were used to repay all remaining consolidated debt maturing in 2020.
In June 2020, the Operating Partnership issued an additional $150.0 million of the 2032 Notes at a price of 105.660% of par value, plus accrued interest from February 2020 up to, but not including, the date of delivery of the additional notes, with an effective yield of 2.093%. These additional notes have substantially identical terms as the 2032 Notes issued in February 2020. The proceeds were used to repay indebtedness under the Company's unsecured credit facilities and for other general corporate and working capital purposes.
In August 2020, the Operating Partnership issued $600.0 million of senior unsecured notes, consisting of $300.0 million aggregate principal amount due on January 15, 2031 with a coupon rate of 1.650% (the “2031 Notes”) and $300.0 million aggregate principal amount due on September 1, 2050 with a coupon rate of 2.650% (the “2050 Notes” and together with the 2031 Notes, the “Notes”). The 2031 Notes were offered to investors at a price of 99.035% of par value and the 2050 Notes at 99.691% of par value. Interest is payable on the 2031 Notes semiannually on January 15 and July 15 of each year, beginning
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
January 15, 2021. Interest is payable on the 2050 Notes semiannually on March 1 and September 1 of each year, beginning March 1, 2021. The Notes are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are unconditionally guaranteed by Essex. The Company used a portion of the net proceeds of this offering to fund the redemption of $300.0 million aggregate principal amount of its outstanding 3.625% senior unsecured notes due August 2022. The Company incurred $19.1 million of prepayment penalties related to this debt repayment.
Subsequent Events
In October 2020, the Company sold 416 on Broadway, a 115 apartment home community located in Glendale, CA, for a total contract price of $60.0 million.
In October 2020, the Company originated two preferred equity investments totaling $46.8 million. One of the investments is for the development of a multifamily community and the other is an investment in a stabilized multifamily community, both located in Southern California. The investments have a weighted average return of 10.2% with most of the proceeds expected to fund in later 2020 and early 2021.
(3) Revenues
Disaggregated Revenue
The following table presents the Company’s revenues disaggregated by revenue source ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Rental income
|
$
|
362,073
|
|
|
$
|
358,001
|
|
|
$
|
1,108,658
|
|
|
$
|
1,058,973
|
|
|
Other property
|
6,391
|
|
|
6,503
|
|
|
17,705
|
|
|
18,794
|
|
|
Management and other fees from affiliates
|
2,347
|
|
|
2,428
|
|
|
7,312
|
|
|
7,023
|
|
|
Total revenues
|
$
|
370,811
|
|
|
$
|
366,932
|
|
|
$
|
1,133,675
|
|
|
$
|
1,084,790
|
|
The following table presents the Company’s rental and other property revenues disaggregated by geographic operating segment ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Southern California
|
$
|
140,271
|
|
|
$
|
151,841
|
|
|
$
|
438,087
|
|
|
$
|
453,873
|
|
|
Northern California
|
148,712
|
|
|
140,509
|
|
|
462,558
|
|
|
411,694
|
|
|
Seattle Metro
|
60,617
|
|
|
61,052
|
|
|
184,310
|
|
|
180,942
|
|
|
Other real estate assets (1)
|
18,864
|
|
|
11,102
|
|
|
41,408
|
|
|
31,258
|
|
|
Total rental and other property revenues
|
$
|
368,464
|
|
|
$
|
364,504
|
|
|
$
|
1,126,363
|
|
|
$
|
1,077,767
|
|
(1) Other real estate assets consist of revenues generated from retail space, commercial properties, held for sale properties, disposition properties and straight-line rent adjustments for concessions.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
The following table presents the Company’s rental and other property revenues disaggregated by current property category status ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Same-property (1)
|
$
|
314,958
|
|
|
$
|
337,691
|
|
|
$
|
981,437
|
|
|
$
|
1,006,232
|
|
|
Acquisitions (2)
|
20,143
|
|
|
2,991
|
|
|
58,907
|
|
|
3,466
|
|
|
Development (3)
|
5,461
|
|
|
1,883
|
|
|
13,956
|
|
|
4,258
|
|
|
Redevelopment
|
4,277
|
|
|
5,272
|
|
|
14,774
|
|
|
15,741
|
|
|
Non-residential/other, net (4)
|
23,625
|
|
|
16,667
|
|
|
57,289
|
|
|
48,070
|
|
|
Total rental and other property revenues
|
$
|
368,464
|
|
|
$
|
364,504
|
|
|
$
|
1,126,363
|
|
|
$
|
1,077,767
|
|
(1) Properties that have comparable stabilized results as of January 1, 2019 and are consolidated by the Company for the three and nine months ended September 30, 2020 and 2019. A community is generally considered to have reached stabilized operations once it achieves an initial occupancy of 90%.
(2) Acquisitions includes properties acquired which did not have comparable stabilized results as of January 1, 2019.
(3) Development includes properties developed which did not have stabilized results as of January 1, 2019.
(4) Non-residential/other, net consists of revenues generated from retail space, commercial properties, held for sale properties, disposition properties, student housing, properties undergoing significant construction activities that do not meet our redevelopment criteria, and three communities located in the California counties of Riverside, Santa Barbara, and Santa Cruz, which the Company does not consider its core markets and straight-line rent adjustments for concessions.
Deferred Revenues and Remaining Performance Obligations
When cash payments are received or due in advance of the Company’s performance of contracts with customers, deferred revenue is recorded. The total deferred revenue balance related to such contracts was $3.3 million and $3.9 million as of September 30, 2020 and December 31, 2019, respectively, and was included in accounts payable and accrued liabilities within the accompanying condensed consolidated balance sheets. The amount of revenue recognized for the nine months ended September 30, 2020 that was included in the December 31, 2019 deferred revenue balance was $0.6 million, which was included in interest and other income within the condensed consolidated statements of income and comprehensive income.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the revenue recognition accounting standard. As of September 30, 2020, the Company had $3.3 million of remaining performance obligations. The Company expects to recognize approximately 6% of these remaining performance obligations in 2020, an additional 44% through 2022, and the remaining balance thereafter.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
(4) Co-investments
The Company has joint ventures and preferred equity investments in co-investments which are accounted for under the equity method. The co-investments, including BEXAEW, BEX II, BEX III, and BEX IV, Wesco I, LLC ("Wesco I"), Wesco III, LLC ("Wesco III"), Wesco IV, LLC ("Wesco IV"), and Wesco V, own, operate, and develop apartment communities. The carrying values of the Company's co-investments as of September 30, 2020 and December 31, 2019 are as follows ($ in thousands, except parenthetical amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Company Ownership Percentage (1)
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Ownership interest in:
|
|
|
|
|
|
|
CPPIB (2)
|
—
|
%
|
|
$
|
—
|
|
|
$
|
345,466
|
|
|
Wesco I, Wesco III, Wesco IV, and Wesco V
|
51
|
%
|
|
181,621
|
|
|
216,756
|
|
|
BEXAEW, BEX II, BEX III, and BEX IV
|
50
|
%
|
|
154,367
|
|
|
160,888
|
|
|
Other
|
47
|
%
|
|
27,618
|
|
|
20,351
|
|
|
Total operating and other co-investments, net
|
|
|
363,606
|
|
|
743,461
|
|
|
Total predevelopment and development co-investments
|
50
|
%
|
|
170,314
|
|
|
146,944
|
|
|
Total preferred interest co-investments (includes related party investments of $79.3 million and $73.2 million as of September 30, 2020 and December 31, 2019, respectively)
|
|
|
484,315
|
|
|
444,934
|
|
|
Total co-investments, net
|
|
|
$
|
1,018,235
|
|
|
$
|
1,335,339
|
|
(1) Weighted average Company ownership percentages are as of September 30, 2020.
(2) In January 2020, the Company purchased CPPIB's 45.0% interest in each of a land parcel and six communities totaling 2,020 apartment homes.
The combined summarized financial information of co-investments is as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Combined balance sheets: (1)
|
|
|
|
|
Rental properties and real estate under development
|
$
|
4,391,064
|
|
|
$
|
4,733,762
|
|
|
Other assets
|
216,357
|
|
|
139,562
|
|
|
Total assets
|
$
|
4,607,421
|
|
|
$
|
4,873,324
|
|
|
Debt
|
$
|
2,692,418
|
|
|
$
|
2,442,213
|
|
|
Other liabilities
|
179,121
|
|
|
117,160
|
|
|
Equity
|
1,735,882
|
|
|
2,313,951
|
|
|
Total liabilities and equity
|
$
|
4,607,421
|
|
|
$
|
4,873,324
|
|
|
Company's share of equity
|
$
|
1,018,235
|
|
|
$
|
1,335,339
|
|
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Combined statements of income: (1)
|
|
|
|
|
|
|
|
|
Property revenues
|
$
|
76,581
|
|
|
$
|
84,071
|
|
|
$
|
226,125
|
|
|
$
|
249,628
|
|
|
Property operating expenses
|
(28,047)
|
|
|
(29,214)
|
|
|
(79,621)
|
|
|
(85,768)
|
|
|
Net operating income
|
48,534
|
|
|
54,857
|
|
|
146,504
|
|
|
163,860
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(19,369)
|
|
|
(16,089)
|
|
|
(59,700)
|
|
|
(47,284)
|
|
|
General and administrative
|
(5,161)
|
|
|
(2,603)
|
|
|
(12,636)
|
|
|
(6,774)
|
|
|
Depreciation and amortization
|
(29,732)
|
|
|
(30,411)
|
|
|
(86,947)
|
|
|
(89,283)
|
|
|
Net (loss) income
|
$
|
(5,728)
|
|
|
$
|
5,754
|
|
|
$
|
(12,779)
|
|
|
$
|
20,519
|
|
|
Company's share of net income (2)
|
$
|
14,960
|
|
|
$
|
21,700
|
|
|
$
|
53,514
|
|
|
$
|
54,935
|
|
(1) Includes preferred equity investments held by the Company.
(2) Includes the Company's share of equity income from joint ventures and preferred equity investments, gain on sales of co-investments, co-investment promote income and income from early redemption of preferred equity investments. Includes related party income of $2.2 million and $2.0 million for the three months ended September 30, 2020 and 2019, respectively, and $6.4 million and $5.5 million for the nine months ended September 30, 2020 and 2019, respectively.
(5) Notes and Other Receivables
Notes and other receivables consist of the following as of September 30, 2020 and December 31, 2019 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Note receivable, secured, bearing interest at 9.00%, due May 2021 (Originated May 2017) (1)
|
$
|
—
|
|
|
$
|
16,828
|
|
|
Note receivable, secured, bearing interest at 9.90%, due November 2021 (Originated November 2018)
|
13,857
|
|
|
12,838
|
|
|
|
|
|
|
|
Related party note receivable, secured, bearing variable rate interest, due February 2020 (Originated November 2019) (2)(3)
|
—
|
|
|
85,713
|
|
|
Notes receivable, secured, bearing interest at 10.50%, due February 2023 (Originated March 2020)
|
7,499
|
|
|
—
|
|
|
Note receivable, secured, bearing interest at 11.00%, due October 2023 (Originated April 2020)
|
13,134
|
|
|
—
|
|
|
Notes and other receivables from affiliates (4)
|
5,505
|
|
|
4,442
|
|
|
Straight line rent receivables
|
21,373
|
|
|
6,083
|
|
|
Other receivables
|
14,236
|
|
|
8,461
|
|
|
Allowance for credit losses
|
(172)
|
|
|
—
|
|
|
Total notes and other receivables
|
$
|
75,432
|
|
|
$
|
134,365
|
|
(1) In January 2020, the Company received cash of $16.9 million from the payoff of this note receivable.
(2) See Note 6, Related Party Transactions, for additional details.
(3) In January 2020, the Company received cash of $85.8 million from the payoff of this note receivable.
(4) These amounts consist of short-term loans outstanding and due from various joint ventures as of September 30, 2020 and December 31, 2019. See Note 6, Related Party Transactions, for additional details.
In the normal course of business, the Company originates and holds two types of loans: mezzanine loans issued to entities that are pursuing apartment development and short-term bridge loans issued to joint ventures with the Company.
The Company categorizes development project mezzanine loans into risk categories based on relevant information about the ability of the borrowers to service their debt, such as: current financial information, credit documentation, public information,
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
and previous experience with the borrower. The Company initially analyzes each mezzanine loan individually to classify the credit risk of the loan. On a periodic basis the Company evaluates and performs site visits of the development projects associated with the mezzanine loans to confirm whether they are on budget and whether there are any delays in development that could impact the Company's assessment of credit loss.
All bridge loans that the Company issues are, by their nature, short-term and meant only to provide time for the Company’s joint ventures to obtain long-term funding for newly acquired communities. As the Company is a partner in the joint ventures that are borrowing such funds and has performed a detailed review of each community as part of the acquisition process, there is little to no credit risk associated with such loans. As such, the Company does not review credit quality indicators for bridge loans on an ongoing basis.
The Company estimates the allowance for credit losses for each loan type using relevant available information from internal and external sources, relating to past events, current conditions, and reasonable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made, if necessary, for differences in current loan-specific risk characteristics. For example, in the case of mezzanine loans, adjustments may be made due to differences in track record and experience of the mezzanine loan sponsor as well as the percent of equity that the sponsor has contributed to the project. The following table presents the activity in the allowance for credit losses for notes and other receivables by loan type ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine Loans
|
|
Bridge Loans
|
|
Total
|
|
Balance at December 31, 2019
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Impact of adoption ASC 326
|
147
|
|
|
43
|
|
|
190
|
|
|
Provision for credit losses
|
25
|
|
|
(43)
|
|
|
(18)
|
|
|
Balance at September 30, 2020
|
$
|
172
|
|
|
$
|
—
|
|
|
$
|
172
|
|
No loans were placed on nonaccrual status or charged off during the nine months ended September 30, 2020 or 2019.
(6) Related Party Transactions
The Company charges certain fees relating to its co-investments for asset management, property management, development and redevelopment services. These fees from affiliates totaled $3.0 million and $3.7 million during the three months ended September 30, 2020 and 2019, respectively, and $8.7 million and $10.6 million during the nine months ended September 30, 2020 and 2019, respectively. All of these fees are net of intercompany amounts eliminated by the Company. The Company netted development and redevelopment fees of $0.6 million and $1.2 million against general and administrative expenses for the three months ended September 30, 2020 and 2019, respectively, and $1.4 million and $3.6 million for the nine months ended September 30, 2020 and 2019, respectively.
The Company’s Chairman and founder, Mr. George M. Marcus, is the Chairman of the Marcus & Millichap Company ("MMC"), which is a parent company of a diversified group of real estate service, investment, and development firms. Mr. Marcus is also the Co-Chairman of Marcus & Millichap, Inc. ("MMI"), and Mr. Marcus owns a controlling interest in MMI, a national brokerage firm listed on the New York Stock Exchange. For the three and nine months ended September 30, 2020, the Company paid brokerage commissions totaling zero and $0.2 million, respectively, to MMC and its affiliates related to real estate transactions.
In November 2019, the Company provided an $85.5 million related party bridge loan to Wesco V in connection with the acquisition of Velo and Ray. The note receivable accrued interest at LIBOR plus 1.30% and was scheduled to mature in February 2020, but was paid off in January 2020. The bridge loan was classified within notes and other receivables in the accompanying condensed consolidated balance sheets.
In August 2019, the Company provided an $89.0 million related party bridge loan to Wesco V in connection with the acquisition of The Courtyards at 65th Street. The note receivable accrued interest at LIBOR plus 1.30% and was paid off in November 2019.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
In August 2019, the Company provided a $44.4 million related party bridge loan to BEX IV in connection with the acquisition of 777 Hamilton. The note receivable accrued interest at 3.25%. In November 2019, the term of the bridge loan was extended to February 2020, but was paid off in December 2019.
In June 2019, the Company acquired Brio, a 300 unit apartment home community located in Walnut Creek, CA. The Company issued DownREIT units to an affiliate of MMC, based on a contract price of $164.9 million. The property was encumbered by $98.7 million of mortgage debt which was assumed by the Company at the time of acquisition. As a result of this transaction, the Company consolidated the property, based on a VIE analysis performed by the Company.
In February 2019, the Company funded a $24.5 million preferred equity investment in an entity whose sponsor is an affiliate of MMC, which owns a multifamily development community located in Mountain View, CA. The investment has an initial preferred return of 11.0% and is scheduled to mature in February 2024.
In October 2018, the Company funded a $18.6 million preferred equity investment in an entity whose sponsor is an affiliate of MMC. The entity wholly owns a 268 apartment home community development located in Burlingame, CA. This investment accrues interest based on an initial 12.0% preferred return. The investment is scheduled to mature in April 2024.
In May 2018, the Company made a commitment to fund a $26.5 million preferred equity investment in an entity whose sponsors include an affiliate of MMC. The entity wholly owns a 400 apartment home community located in Ventura, CA. This investment accrues interest based on a 10.25% preferred return. The investment is scheduled to mature in May 2023. As of September 30, 2020, the Company had funded $23.3 million of the commitment. The remaining committed amount will be funded if and when requested by the sponsors.
In November 2016, the Company provided a $6.6 million mezzanine loan to a limited liability company in which MMC holds a significant ownership interest through subsidiaries. The mezzanine loan was classified within notes and other receivables in the accompanying condensed consolidated balance sheets and was paid off in October 2019.
In 2015, the Company made preferred equity investments totaling $20.0 million in three entities affiliated with MMC that own apartment communities in California. The Company earned a 9.5% preferred return on each such investment. One $5.0 million investment, which was scheduled to mature in 2022, was fully redeemed in 2017. Another $5.0 million investment, which was scheduled to mature in 2022, was fully redeemed in 2018. The remaining investment was fully redeemed in February 2019.
As described in Note 5, Notes and Other Receivables, the Company has provided short-term loans to affiliates. As of September 30, 2020 and December 31, 2019, $5.5 million and $4.4 million, respectively, of short-term loans remained outstanding due from joint venture affiliates and is classified within notes and other receivables in the accompanying condensed consolidated balance sheets.
(7) Debt
Essex does not have indebtedness as debt is incurred by the Operating Partnership. Essex guarantees the Operating Partnership’s unsecured debt including the revolving credit facilities for the full term of the facilities.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
Debt consists of the following ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Weighted Average
Maturity
In Years as of September 30, 2020
|
|
Unsecured bonds private placement - fixed rate
|
$
|
199,917
|
|
|
$
|
199,820
|
|
|
0.7
|
|
Term loan - variable rate
|
549,138
|
|
|
349,189
|
|
|
1.8
|
|
Bonds public offering - fixed rate
|
5,158,750
|
|
|
4,214,197
|
|
|
9.1
|
|
Unsecured debt, net (1)
|
5,907,805
|
|
|
4,763,206
|
|
|
|
|
Lines of credit (2)
|
—
|
|
|
55,000
|
|
|
|
|
Mortgage notes payable, net (3)
|
702,379
|
|
|
990,667
|
|
|
9.3
|
|
Total debt, net
|
$
|
6,610,184
|
|
|
$
|
5,808,873
|
|
|
|
|
Weighted average interest rate on fixed rate unsecured bonds private placement and bonds public offering
|
3.5
|
%
|
|
3.8
|
%
|
|
|
|
Weighted average interest rate on variable rate term loan
|
1.7
|
%
|
|
2.7
|
%
|
|
|
|
Weighted average interest rate on lines of credit
|
1.0
|
%
|
|
2.5
|
%
|
|
|
|
Weighted average interest rate on mortgage notes payable
|
2.7
|
%
|
|
4.1
|
%
|
|
|
(1) Includes unamortized discount of $9.1 million and $12.2 million and unamortized debt issuance costs of $33.1 million and $24.5 million, as of September 30, 2020 and December 31, 2019, respectively.
(2) Lines of credit, related to the Company's two lines of unsecured credit aggregating $1.24 billion as of September 30, 2020, excludes unamortized debt issuance costs of $3.9 million and $3.8 million as of September 30, 2020 and December 31, 2019, respectively. These debt issuance costs are included in prepaid expenses and other assets on the condensed consolidated balance sheets. As of September 30, 2020, the Company’s $1.2 billion credit facility had an interest rate of LIBOR plus 0.825%, which is based on a tiered rate structure tied to the Company’s credit ratings and a scheduled maturity date of December 2023 with one 18-month extension, exercisable at the Company’s option. As of September 30, 2020, the Company’s $35.0 million working capital unsecured line of credit had an interest rate of LIBOR plus 0.825%, which is based on a tiered rate structure tied to the Company’s credit ratings, and a scheduled maturity date of February 2021.
(3) Includes total unamortized premium of $4.2 million and $5.9 million, reduced by unamortized debt issuance costs of $2.1 million and $2.6 million, as of September 30, 2020 and December 31, 2019, respectively.
The aggregate scheduled principal payments of the Company’s outstanding debt, excluding lines of credit, as of September 30, 2020 are as follows ($ in thousands):
|
|
|
|
|
|
|
|
Remaining in 2020
|
$
|
1,000
|
|
|
2021
|
531,653
|
|
|
2022
|
393,188
|
|
|
2023
|
802,945
|
|
|
2024
|
403,109
|
|
|
Thereafter
|
4,518,383
|
|
|
Total
|
$
|
6,650,278
|
|
(8) Segment Information
The Company's segment disclosures present the measure used by the chief operating decision makers for purposes of assessing each segment's performance. The Company's chief operating decision makers are comprised of several members of its executive management team who use net operating income ("NOI") to assess the performance of the business for the Company's reportable operating segments. NOI represents total property revenues less direct property operating expenses.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
The executive management team generally evaluates the Company's operating performance geographically. The Company defines its reportable operating segments as the three geographical regions in which its communities are located: Southern California, Northern California, and Seattle Metro.
Excluded from segment revenues and NOI are management and other fees from affiliates and interest and other income. Non-segment revenues and NOI included in the following schedule also consist of revenues generated from commercial properties and properties that have been sold. Other non-segment assets include items such as real estate under development, co-investments, real estate held for sale, net, cash and cash equivalents, marketable securities, notes and other receivables, and prepaid expenses and other assets.
The revenues and NOI for each of the reportable operating segments are summarized as follows for the three and nine months ended September 30, 2020 and 2019 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Southern California
|
$
|
140,271
|
|
|
$
|
151,841
|
|
|
$
|
438,087
|
|
|
$
|
453,873
|
|
|
Northern California
|
148,712
|
|
|
140,509
|
|
|
462,558
|
|
|
411,694
|
|
|
Seattle Metro
|
60,617
|
|
|
61,052
|
|
|
184,310
|
|
|
180,942
|
|
|
Other real estate assets
|
18,864
|
|
|
11,102
|
|
|
41,408
|
|
|
31,258
|
|
|
Total property revenues
|
$
|
368,464
|
|
|
$
|
364,504
|
|
|
$
|
1,126,363
|
|
|
$
|
1,077,767
|
|
|
Net operating income:
|
|
|
|
|
|
|
|
|
Southern California
|
$
|
94,163
|
|
|
$
|
106,926
|
|
|
$
|
303,328
|
|
|
$
|
322,891
|
|
|
Northern California
|
103,657
|
|
|
103,232
|
|
|
332,566
|
|
|
304,975
|
|
|
Seattle Metro
|
41,216
|
|
|
43,401
|
|
|
126,422
|
|
|
128,081
|
|
|
Other real estate assets
|
17,033
|
|
|
8,772
|
|
|
34,373
|
|
|
26,417
|
|
|
Total net operating income
|
256,069
|
|
|
262,331
|
|
|
796,689
|
|
|
782,364
|
|
|
Management and other fees from affiliates
|
2,347
|
|
|
2,428
|
|
|
7,312
|
|
|
7,023
|
|
|
Corporate-level property management expenses
|
(8,619)
|
|
|
(8,553)
|
|
|
(26,024)
|
|
|
(25,451)
|
|
|
Depreciation and amortization
|
(130,202)
|
|
|
(120,809)
|
|
|
(395,370)
|
|
|
(360,842)
|
|
|
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
|
|
|
—
|
|
|
Interest expense
|
(55,430)
|
|
|
(54,896)
|
|
|
(165,024)
|
|
|
(162,651)
|
|
|
Total return swap income
|
2,977
|
|
|
2,154
|
|
|
7,749
|
|
|
6,174
|
|
|
Interest and other income
|
6,512
|
|
|
8,685
|
|
|
12,696
|
|
|
29,293
|
|
|
Equity income from co-investments
|
14,960
|
|
|
21,700
|
|
|
53,514
|
|
|
54,935
|
|
|
Deferred tax expense on unrealized gain on unconsolidated co-investment
|
—
|
|
|
(1,457)
|
|
|
(1,636)
|
|
|
(1,457)
|
|
|
(Loss) gain on early retirement of debt, net
|
(19,114)
|
|
|
5,475
|
|
|
(23,820)
|
|
|
7,143
|
|
|
Gain on remeasurement of co-investment
|
—
|
|
|
—
|
|
|
234,694
|
|
|
31,535
|
|
|
Net income
|
$
|
78,842
|
|
|
$
|
105,700
|
|
|
$
|
497,683
|
|
|
$
|
329,266
|
|
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
Total assets for each of the reportable operating segments are summarized as follows as of September 30, 2020 and December 31, 2019 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Assets:
|
|
|
|
|
Southern California
|
$
|
4,089,875
|
|
|
$
|
4,199,377
|
|
|
Northern California
|
5,566,802
|
|
|
4,408,404
|
|
|
Seattle Metro
|
1,417,753
|
|
|
1,456,187
|
|
|
Other real estate assets
|
11,552
|
|
|
284,692
|
|
|
Net reportable operating segment - real estate assets
|
11,085,982
|
|
|
10,348,660
|
|
|
Real estate under development
|
364,875
|
|
|
546,075
|
|
|
Co-investments
|
1,018,235
|
|
|
1,335,339
|
|
|
Real estate held for sale, net
|
32,878
|
|
|
—
|
|
|
Cash and cash equivalents, including restricted cash
|
569,075
|
|
|
81,094
|
|
|
Marketable securities
|
134,971
|
|
|
144,193
|
|
|
Notes and other receivables
|
75,432
|
|
|
134,365
|
|
|
Operating lease right-of-use assets
|
72,910
|
|
|
74,744
|
|
|
Prepaid expenses and other assets
|
46,684
|
|
|
40,935
|
|
|
Total assets
|
$
|
13,401,042
|
|
|
$
|
12,705,405
|
|
(9) Net Income Per Common Share and Net Income Per Common Unit
($ in thousands, except share and unit data):
Essex Property Trust, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020
|
|
Three Months Ended September 30, 2019
|
|
|
Income
|
|
Weighted-
average
Common
Shares
|
|
Per
Common
Share
Amount
|
|
Income
|
|
Weighted-
average
Common
Shares
|
|
Per
Common
Share
Amount
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
$
|
73,661
|
|
|
65,232,837
|
|
|
$
|
1.13
|
|
|
$
|
99,335
|
|
|
65,850,524
|
|
|
$
|
1.51
|
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
—
|
|
|
8,591
|
|
|
|
|
—
|
|
|
122,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
$
|
73,661
|
|
|
65,241,428
|
|
|
$
|
1.13
|
|
|
$
|
99,335
|
|
|
65,973,085
|
|
|
$
|
1.51
|
|
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
Nine Months Ended September 30, 2019
|
|
|
Income
|
|
Weighted-
average
Common
Shares
|
|
Per
Common
Share
Amount
|
|
Income
|
|
Weighted-
average
Common
Shares
|
|
Per
Common
Share
Amount
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
$
|
473,125
|
|
|
65,561,820
|
|
|
$
|
7.22
|
|
|
$
|
310,468
|
|
|
65,757,914
|
|
|
$
|
4.72
|
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
—
|
|
|
20,026
|
|
|
|
|
—
|
|
|
99,746
|
|
|
|
|
DownREIT units
|
587
|
|
|
94,247
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
$
|
473,712
|
|
|
65,676,093
|
|
|
$
|
7.21
|
|
|
$
|
310,468
|
|
|
65,857,660
|
|
|
$
|
4.71
|
|
The table above excludes from the calculations of diluted earnings per share weighted average convertible OP Units of 2,295,510 and 2,298,389, which include vested Series Z-1 Incentive Units, 2014 Long-Term Incentive Plan Units, and 2015 Long-Term Incentive Plan Units for the three months ended September 30, 2020 and 2019, respectively, and 2,297,141 and 2,300,888 for the nine months ended September 30, 2020 and 2019, respectively, because they were anti-dilutive. The related income allocated to these convertible OP Units aggregated $2.6 million and $3.5 million for the three months ended September 30, 2020 and 2019, respectively, and $16.5 million and $10.9 million for the nine months ended September 30, 2020 and 2019, respectively. Additionally, the table excludes all DownREIT 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.
Stock options of 493,567 and zero for the three months ended September 30, 2020 and 2019, and 299,046 and zero for the nine months ended September 30, 2020 and 2019, respectively, were excluded from the calculation of diluted earnings per share because the assumed proceeds per share of such options plus the average unearned compensation were greater than the average market price of the common stock for the periods ended and, therefore, were anti-dilutive.
Essex Portfolio, L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020
|
|
Three Months Ended September 30, 2019
|
|
|
Income
|
|
Weighted-
average
Common Units
|
|
Per
Common
Unit
Amount
|
|
Income
|
|
Weighted-
average
Common Units
|
|
Per
Common
Unit
Amount
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common unitholders
|
$
|
76,254
|
|
|
67,528,346
|
|
|
$
|
1.13
|
|
|
$
|
102,799
|
|
|
68,148,913
|
|
|
$
|
1.51
|
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
—
|
|
|
8,591
|
|
|
|
|
—
|
|
|
122,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common unitholders
|
$
|
76,254
|
|
|
67,536,937
|
|
|
$
|
1.13
|
|
|
$
|
102,799
|
|
|
68,271,474
|
|
|
$
|
1.51
|
|
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
Nine Months Ended September 30, 2019
|
|
|
Income
|
|
Weighted-
average
Common Units
|
|
Per
Common
Unit
Amount
|
|
Income
|
|
Weighted-
average
Common Units
|
|
Per
Common
Unit
Amount
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common unitholders
|
$
|
489,668
|
|
|
67,858,961
|
|
|
$
|
7.22
|
|
|
$
|
321,331
|
|
|
68,058,802
|
|
|
$
|
4.72
|
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
—
|
|
|
20,026
|
|
|
|
|
—
|
|
|
99,746
|
|
|
|
|
DownREIT units
|
587
|
|
|
94,247
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common unitholders
|
$
|
490,255
|
|
|
67,973,234
|
|
|
$
|
7.21
|
|
|
$
|
321,331
|
|
|
68,158,548
|
|
|
$
|
4.71
|
|
Stock options of 493,567 and zero for the three months ended September 30, 2020 and 2019, respectively, and 299,046 and zero for the nine months ended September 30, 2020 and 2019, respectively, were excluded from the calculation of diluted earnings per unit because the assumed proceeds per unit of these options plus the average unearned compensation were greater than the average market price of the common unit for the periods ended and, therefore, were anti-dilutive. Additionally, the table excludes all DownREIT 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.
(10) Derivative Instruments and Hedging Activities
As of September 30, 2020, the Company had interest rate swap contracts with an aggregate notional amount of $175.0 million that effectively fixed the interest rate on the $175.0 million unsecured term loan at 2.3%. These derivatives qualify for hedge accounting.
As of September 30, 2020 and December 31, 2019, the aggregate carrying value of the interest rate swap contracts were a liability of $2.9 million and an asset of $0.8 million, respectively. As of September 30, 2020 and December 31, 2019, the swap contracts were presented in the condensed consolidated balance sheets as an asset of zero and $1.0 million, respectively, and were included in prepaid expenses and other assets on the condensed consolidated balance sheets, and a liability of $2.9 million and $0.2 million, respectively, and were included in other liabilities on the condensed consolidated balance sheets.
Hedge ineffectiveness related to cash flow hedges, which is included in interest expense on the condensed consolidated statements of income and comprehensive income, was not significant for the three and nine months ended September 30, 2020 and 2019.
Additionally, the Company has four total return swap contracts, with an aggregate notional amount of $254.9 million, that effectively convert $254.9 million of mortgage notes payable to a floating interest rate based on the Securities Industry and Financial Markets Association Municipal Swap Index ("SIFMA") plus a spread. The total return swaps provide fair market value protection on the mortgage notes payable to the counterparties during the initial period of the total return swap until the Company's option to call the mortgage notes at par can be exercised. The Company can currently call all of its total return swaps, with $254.9 million of the outstanding debt at par. These derivatives do not qualify for hedge accounting and had a carrying and fair value of zero at both September 30, 2020 and December 31, 2019. These total return swaps are scheduled to mature between November 2022 and December 2024. The realized gains of $2.9 million and $2.2 million for the three months ended September 30, 2020 and 2019, respectively, and $7.7 million and $6.2 million for the nine months ended September 30, 2020 and 2019, respectively, were reported in the condensed consolidated statements of income and comprehensive income as total return swap income.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 and 2019
(Unaudited)
(11) Commitments and Contingencies
The Company is subject to various lawsuits in the normal course of its business operations. Such lawsuits have not had a material adverse effect on the Company's financial condition, results of operations or cash flows. While no assurances can be given, the Company does not believe there is any pending or threatened litigation against the Company that, individually or in the aggregate, would reasonably be expected to have a material adverse effect on the Company.
The Company is subject to various federal, state, and local environmental and other laws. Compliance by the Company with existing laws has not had a material adverse effect on the Company. However, the Company cannot predict the impact of new or changed laws or regulations on its current portfolio or on other assets that the Company may acquire in the future, including, without limitation, certain eviction moratoriums and other mandates that have been, or may be, enacted in connection with the COVID-19 pandemic. To the extent that an environmental or other matter arises or is identified in the future that has other than a remote risk of having a material impact on the condensed consolidated financial statements, the Company will disclose the estimated range of possible outcomes associated with it, and, if an outcome is probable, accrue an appropriate liability for that matter. The Company will consider whether any such matter results in an impairment of value on the affected property and, if so, impairment will be recognized.