Essex Announces Second Quarter 2023 Results and Raises Full-Year 2023 Guidance
SAN MATEO, Calif., July 27, 2023--(BUSINESS WIRE)--Essex Property Trust, Inc. (NYSE: ESS) (the "Company") announced today its second quarter 2023 earnings results and related business activities.
Net Income, Funds from Operations ("FFO"), and Core FFO per diluted share for the three and six months ended June 30, 2023 are detailed below.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||
% | % | |||||||||||||||||
2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||
Per Diluted Share | ||||||||||||||||||
Net Income | $ | 1.55 | $ | 0.87 | 78.2 | % | $ | 3.94 | $ | 2.00 | 97.0 | % | ||||||
Total FFO | $ | 3.87 | $ | 3.13 | 23.6 | % | $ | 7.68 | $ | 6.49 | 18.3 | % | ||||||
Core FFO | $ | 3.77 | $ | 3.68 | 2.4 | % | $ | 7.42 | $ | 7.06 | 5.1 | % | ||||||
Second Quarter 2023 Highlights:
Reported Net Income per diluted share for the second quarter of 2023 of $1.55, compared to $0.87 in the second quarter of 2022. The increase is largely attributable to increased income from marketable securities and the Company’s non-core co-investments.
Grew Core FFO per diluted share by 2.4% compared to the second quarter of 2022, exceeding the midpoint of the guidance range by $0.08. The increase was primarily due to higher same-property revenues and lower property taxes in Washington.
Same-property revenues and net operating income ("NOI") increased by 4.0% and 3.6%, respectively, compared to the second quarter of 2022. On a sequential basis, same-property revenues and NOI improved 1.4% and 2.4%, respectively.
Revised full-year 2023 earnings guidance:
Increased full-year Net Income per diluted share guidance by $0.31 at the midpoint to a range of $6.74 to $6.98.
Increased full-year Core FFO per diluted share guidance by $0.22 at the midpoint to a range of $14.88 to $15.12.
Raised the midpoint of full-year same-property revenues and NOI by 0.4% and 0.9%, respectively. Lowered the full-year same-property operating expense midpoint by 1.0%.
Subsequent to quarter end, the Company closed $298.0 million in 10-year secured loans priced at a 5.08% fixed interest rate. The proceeds are intended to repay a majority of the Company’s $400.0 million unsecured notes due in May 2024 at maturity and will be reinvested in short-term cash accounts until the notes are repaid.
As of July 26, 2023, the Company’s immediately available liquidity is approximately $1.6 billion.
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 revenues for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022, and the sequential percentage change for the quarter ended June 30, 2023 compared to the quarter ended March 31, 2023, by submarket for the Company:
Q2 2023 vs. | Q2 2023 vs. | % of Total | ||||
Revenue | Revenue | Q2 2023 | ||||
Southern California | ||||||
Los Angeles County | 0.2 | % | 1.2 | % | 18.6 | % |
Orange County | 7.6 | % | 1.4 | % | 10.5 | % |
San Diego County | 9.9 | % | 1.9 | % | 8.9 | % |
Ventura County | 8.3 | % | 3.2 | % | 4.1 | % |
Total Southern California | 4.7 | % | 1.6 | % | 42.1 | % |
Northern California | ||||||
Santa Clara County | 5.0 | % | 2.2 | % | 19.7 | % |
Alameda County | 2.9 | % | 0.7 | % | 7.8 | % |
San Mateo County | 2.6 | % | 2.4 | % | 4.6 | % |
Contra Costa County | 1.8 | % | 1.0 | % | 5.4 | % |
San Francisco | -0.3 | % | 0.5 | % | 2.6 | % |
Total Northern California | 3.5 | % | 1.6 | % | 40.1 | % |
Seattle Metro | 3.7 | % | 0.3 | % | 17.8 | % |
Same-Property Portfolio | 4.0 | % | 1.4 | % | 100.0 | % |
The table below illustrates the components that drove the change in same-property revenues on a year-over-year and sequential basis for the second quarter of 2023.
Same-Property Revenue Components | Q2 2023 vs. | YTD 2023 vs. | Q2 2023 | ||
Scheduled Rents | 5.2% | 6.0% | 1.0% | ||
Delinquencies(1) | -1.5% | -0.8% | 0.1% | ||
Cash Concessions | -0.2% | 0.0% | 0.2% | ||
Vacancy | 0.3% | 0.3% | -0.1% | ||
Other Income | 0.2% | 0.3% | 0.2% | ||
2023 Same-Property Revenue Growth | 4.0% | 5.8% | 1.4% |
(1) | The year-over-year negative impact from delinquencies is largely due to lower net delinquency in the prior period, which benefited from Emergency Rental Assistance payments of $13.0 million and $24.5 million in the second quarter 2022 and year-to-date 2022, respectively. This compares to Emergency Rental Assistance payments of $0.5 million and $1.7 million for the second quarter of 2023 and year-to-date 2023, respectively. |
Year-Over-Year Change | Year-Over-Year Change | ||||||||||||||||
Q2 2023 compared to Q2 2022 | YTD 2023 compared to YTD 2022 | ||||||||||||||||
Revenues | Operating | NOI | Revenues | Operating | NOI | ||||||||||||
Southern California | 4.7 | % | 4.1 | % | 4.9 | % | 6.4 | % | 6.6 | % | 6.2 | % | |||||
Northern California | 3.5 | % | 5.6 | % | 2.7 | % | 4.9 | % | 4.0 | % | 5.4 | % | |||||
Seattle Metro | 3.7 | % | 7.5 | % | 2.3 | % | 6.3 | % | 1.6 | % | 8.3 | % | |||||
Same-Property Portfolio | 4.0 | % | 5.3 | % | 3.6 | % | 5.8 | % | 4.6 | % | 6.3 | % | |||||
Sequential Change | ||||||||
Q2 2023 compared to Q1 2023 | ||||||||
Revenues | Operating Expenses | NOI | ||||||
Southern California | 1.6 | % | -4.4 | % | 4.2 | % | ||
Northern California | 1.6 | % | 2.4 | % | 1.3 | % | ||
Seattle Metro | 0.3 | % | -1.6 | % | 1.0 | % | ||
Same-Property Portfolio | 1.4 | % | -1.2 | % | 2.4 | % | ||
Financial Occupancies | ||||||||
Quarter Ended | ||||||||
6/30/2023 | 3/31/2023 | 6/30/2022 | ||||||
Southern California | 96.4 | % | 96.8 | % | 95.7 | % | ||
Northern California | 96.7 | % | 96.6 | % | 96.3 | % | ||
Seattle Metro | 96.9 | % | 96.6 | % | 96.2 | % | ||
Same-Property Portfolio | 96.6 | % | 96.7 | % | 96.1 | % | ||
Investment Activity
Real Estate
In April 2023, the Company acquired Hacienda at Camarillo Oaks, a 73-unit apartment home community located in Camarillo, CA for a total contract price of $23.1 million. The community is located within an existing Essex community and represents a value-add opportunity due to expected efficiencies from the Company’s Property Collections operating model.
Other Investments
In the second quarter of 2023, the Company received cash proceeds of $25.9 million from a partial and a full redemption of two preferred equity investments, both yielding a 9.0% return. The Company recorded $0.3 million of income from prepayment penalties as the result of an early redemption, which has been excluded from Core FFO.
Liquidity and Balance Sheet
Common Stock
In the second quarter of 2023, the Company did not issue any shares of common stock through its equity distribution program or repurchase any shares through its stock repurchase plan.
Year-to-date through July 26, 2023, the Company has repurchased 437,026 shares of its common stock totaling $95.7 million, including commissions, at an average price per share of $218.88. As of July 26, 2023, the Company has $302.7 million of purchase authority remaining under its stock repurchase plan.
Balance Sheet
Subsequent to quarter end, the Company closed $298.0 million in 10-year secured loans priced at a 5.08% fixed interest rate. The proceeds are intended to repay a majority of the Company’s $400.0 million unsecured notes due in May 2024 upon maturity. In the interim, the Company will reinvest the proceeds in short-term cash accounts, which will be slightly accretive to Total and Core FFO until the notes are repaid.
As of July 26, 2023, the Company had approximately $1.6 billion in liquidity via undrawn capacity on its unsecured credit facilities, cash, and marketable securities.
Guidance
For the second quarter of 2023, the Company exceeded the midpoint of the guidance range provided in its first quarter 2023 earnings release for Core FFO by $0.08 per diluted share. The better-than-expected results are primarily attributable to favorable same-property revenues relating to higher occupancy and lower property taxes within the Company’s Washington portfolio.
The following table provides a reconciliation of second quarter 2023 Core FFO per diluted share to the midpoint of the guidance provided in the Company’s first quarter 2023 earnings release.
Per Diluted | ||
Projected midpoint of Core FFO per diluted share for Q2 2023 | $ | 3.69 |
NOI from consolidated communities | 0.06 | |
FFO from Co-Investments | 0.01 | |
G&A and other | 0.01 | |
Core FFO per diluted share for Q2 2023 reported | $ | 3.77 |
The table below provides key changes to the Company’s 2023 full-year assumptions for Net Income, Total FFO, Core FFO per diluted share, and same-property growth. For additional details regarding the Company’s 2023 assumptions, please see page S-14 of the accompanying supplemental financial information.
2023 Full-Year and Third Quarter Guidance
Previous | Previous | Revised | Revised | Change at | |||||||||
Per Diluted Share | |||||||||||||
Net Income | $6.36 - $6.74 | $6.55 | $6.74 - $6.98 | $6.86 | $0.31 | ||||||||
Total FFO | $14.74 - $15.12 | $14.93 | $15.13 - $15.37 | $15.25 | $0.32 | ||||||||
Core FFO | $14.59 - $14.97 | $14.78 | $14.88 - $15.12 | $15.00 | $0.22 | ||||||||
Q3 2023 Core FFO | - | - | $3.69 - $3.81 | $3.75 | - | ||||||||
Same-Property Growth on a Cash-Basis(1) | |||||||||||||
Revenues | 3.25% to 4.75% | 4.00% | 4.00% to 4.75% | 4.38% | 0.38% | ||||||||
Operating Expenses | 4.50% to 5.50% | 5.00% | 3.75% to 4.25% | 4.00% | (1.00%) | ||||||||
NOI | 2.30% to 4.90% | 3.60% | 3.90% to 5.10% | 4.50% | 0.90% | ||||||||
(1) | The revised midpoint of the Company’s same-property revenues and NOI on a GAAP basis are 4.7% and 5.0%, respectively, representing a 0.3% and 0.9% increase to the Company’s original guidance midpoints. |
Conference Call with Management
The Company will host an earnings conference call with management to discuss its quarterly results on Friday, July 28, 2023 at 10 a.m. PT (1 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 second quarter 2023 earnings link. To access the replay, dial (844) 512-2921 using the replay pin number 13739823. 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.
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 252 apartment communities comprising approximately 62,000 apartment homes with an additional property in 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 land 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 six months ended June 30, 2023 and 2022 (in thousands, except for share and per share amounts):
Three Months Ended | Six Months Ended | |||||||||||||||
Funds from Operations attributable to common stockholders and unitholders | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Net income available to common stockholders | $ | 99,620 | $ | 57,054 | $ | 253,152 | $ | 130,308 | ||||||||
Adjustments: | ||||||||||||||||
Depreciation and amortization | 136,718 | 134,517 | 273,065 | 268,050 | ||||||||||||
Gains on sale of real estate and land not included in FFO | - | - | (59,238 | ) | - | |||||||||||
Casualty loss | - | - | 433 | - | ||||||||||||
Depreciation and amortization from unconsolidated co-investments | 17,848 | 18,129 | 35,457 | 36,244 | ||||||||||||
Noncontrolling interest related to Operating Partnership units | 3,506 | 1,990 | 8,910 | 4,553 | ||||||||||||
Depreciation attributable to third party ownership and other | (365 | ) | (354 | ) | (724 | ) | (707 | ) | ||||||||
Funds from Operations attributable to common stockholders and unitholders | $ | 257,327 | $ | 211,336 | $ | 511,055 | $ | 438,448 | ||||||||
FFO per share – diluted | $ | 3.87 | $ | 3.13 | $ | 7.68 | $ | 6.49 | ||||||||
Expensed acquisition and investment related costs | $ | 5 | $ | 10 | $ | 344 | $ | 18 | ||||||||
Deferred tax expense (benefit) on unconsolidated co-investments (1) | 1,733 | (6,864 | ) | 833 | (9,618 | ) | ||||||||||
Realized and unrealized (gains) losses on marketable securities, net | (7,591 | ) | 21,597 | (8,871 | ) | 34,011 | ||||||||||
Provision for credit losses | 16 | (1 | ) | 34 | (63 | ) | ||||||||||
Equity (income) loss from non-core co-investments (2) | (978 | ) | 20,710 | (884 | ) | 29,554 | ||||||||||
Loss on early retirement of debt from unconsolidated co-investment | - | 901 | - | 987 | ||||||||||||
Co-investment promote income | - | - | - | (17,076 | ) | |||||||||||
Income from early redemption of preferred equity investments and notes receivable | (285 | ) | - | (285 | ) | (858 | ) | |||||||||
General and administrative and other, net | 561 | 997 | 827 | 1,445 | ||||||||||||
Insurance reimbursements, legal settlements, and other, net | (295 | ) | (8 | ) | (8,799 | ) | (8 | ) | ||||||||
Core Funds from Operations attributable to common stockholders and unitholders | $ | 250,493 | $ | 248,678 | $ | 494,254 | $ | 476,840 | ||||||||
Core FFO per share – diluted | $ | 3.77 | $ | 3.68 | $ | 7.42 | $ | 7.06 | ||||||||
Weighted average number of shares outstanding diluted (3) | 66,444,114 | 67,566,748 | 66,584,049 | 67,587,362 | ||||||||||||
(1) | Represents deferred tax related to net unrealized gains or losses on technology co-investments. | |
(2) | Represents the Company's share of co-investment income or loss from technology co-investments. | |
(3) | 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 DownREIT limited partnership units. |
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 | Six Months Ended | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Earnings from operations | $ | 134,832 | $ | 128,628 | $ | 322,217 | $ | 238,478 | ||||||||
Adjustments: | ||||||||||||||||
Corporate-level property management expenses | 11,451 | 10,176 | 22,883 | 20,348 | ||||||||||||
Depreciation and amortization | 136,718 | 134,517 | 273,065 | 268,050 | ||||||||||||
Management and other fees from affiliates | (2,778 | ) | (2,738 | ) | (5,543 | ) | (5,427 | ) | ||||||||
General and administrative | 13,813 | 13,127 | 29,124 | 25,369 | ||||||||||||
Expensed acquisition and investment related costs | 5 | 10 | 344 | 18 | ||||||||||||
Casualty loss | - | - | 433 | - | ||||||||||||
Gain on sale of real estate and land | - | - | (59,238 | ) | - | |||||||||||
NOI | 294,041 | 283,720 | 583,285 | 546,836 | ||||||||||||
Less: Non-same property NOI | (13,250 | ) | (12,559 | ) | (28,395 | ) | (24,647 | ) | ||||||||
Same-Property NOI | $ | 280,791 | $ | 271,161 | $ | 554,890 | $ | 522,189 | ||||||||
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 evolution of the work-from-home trend, 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, 2023 Same-Property revenue and operating expenses generally and in specific regions, 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, inflation, the labor market, supply chain impacts and ongoing hostilities between Russia and Ukraine, 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: potential future outbreaks of infectious diseases or other health concerns, which could 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, inflation, escalated operating costs and possible recessionary impacts; as well as uncertainties regarding ongoing hostilities between Russia and Ukraine and the related impacts on macroeconomic conditions, including, among other things, interest rates and inflation; 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 markets; 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 for the year ended December 31, 2022, quarterly reports on Form 10-Q, and those risk factors and special considerations set forth in the Company's other filings with the SEC which may 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. 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-18.1 through S-18.4, "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.
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Contacts
Loren Rainey
Director, Investor Relations
(650) 655-7800
lrainey@essex.com
