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Essex Announces Third Quarter 2019 Results

SAN MATEO, Calif.--(BUSINESS WIRE)--

Essex Property Trust, Inc. (ESS) (the “Company”) announced today its third quarter 2019 earnings results and related business activities.

Net Income, Funds from Operations (“FFO”), and Core FFO per diluted share for the quarter ended September 30, 2019 are detailed below.

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

%

%

 

2019

2018

Change

2019

2018

Change

Per Diluted Share

 

 

 

 

 

 

 Net Income

$1.51

$1.22

23.8%

$4.71

$4.12

14.3%

 Total FFO

$3.50

$3.22

8.7%

$10.19

$9.74

4.6%

 Core FFO

$3.35

$3.15

6.3%

$9.92

$9.38

5.8%

 

 

 

 

 

 

 

Third Quarter 2019 Highlights:

  • Reported Net Income per diluted share for the third quarter of 2019 of $1.51, compared to $1.22 in the third quarter of 2018.
  • Grew Core FFO per diluted share by 6.3% compared to the third quarter of 2018, exceeding the midpoint of the guidance range by $0.04.
  • Achieved both same-property gross revenue and net operating income (“NOI”) growth of 3.1% compared to the third quarter of 2018.
  • Acquired three apartment communities for a total contract price of $414.7 million.
  • Increased full-year Net Income per diluted share guidance range to $6.04 to $6.14. Provided Net Income guidance range for the fourth quarter of $1.33 to $1.43 per diluted share.
  • Increased full-year Total FFO per diluted share guidance range to $13.50 to $13.60. Provided Total FFO guidance range for the fourth quarter of $3.31 to $3.41 per diluted share
  • Raised full-year Core FFO per diluted share guidance by $0.05 per share at the midpoint to a range of $13.28 to $13.38. Provided Core FFO guidance range for the fourth quarter of $3.36 to $3.46 per diluted share.

“We are pleased to report another quarter of healthy growth resulting in Core FFO at the top end of our guidance range. As a result, we are increasing our full-year Core FFO per share guidance midpoint for the third time this year. The dramatic reduction in our cost of capital since January has allowed us to exceed the high-end of our acquisition targets and we remain on the hunt for accretive opportunities. Looking forward, our supply-constrained West Coast markets continue to add jobs and grow incomes at a sufficient pace to maintain market rent growth near their long term averages,” commented Michael Schall, President and CEO of the Company.

SAME-PROPERTY OPERATIONS

Same-property operating results exclude any properties that are not comparable for the periods presented. The table below illustrates the percentage change in same-property gross revenues for the quarter ended September 30, 2019 compared to the quarter ended September 30, 2018, and the sequential percentage change for the quarter ended September 30, 2019 compared to the quarter ended June 30, 2019, by submarket for the Company:

 

Q3 2019 vs.
Q3 2018

 

Q3 2019 vs.
Q2 2019

 

% of Total

 

Gross
Revenues

 

Gross
Revenues

 

Q3 2019
Revenues

Southern California

 

Los Angeles County

 

2.7%

 

0.2%

 

18.9%

Orange County

 

1.8%

 

0.0%

 

10.8%

San Diego County

 

2.3%

 

0.3%

 

8.5%

Ventura County and Other

 

3.5%

 

0.9%

 

4.9%

Total Southern California

 

2.5%

 

0.3%

 

43.1%

Northern California

 

 

Santa Clara County

 

3.6%

 

0.6%

 

18.8%

Alameda County

 

3.4%

 

1.4%

 

6.9%

San Mateo County

 

2.5%

 

-0.2%

 

5.0%

Contra Costa County

 

2.9%

 

0.8%

 

4.8%

San Francisco

 

5.2%

 

0.3%

 

3.4%

Total Northern California

 

3.5%

 

0.6%

 

38.9%

Seattle Metro

 

4.1%

 

1.3%

 

18.0%

Same-Property Portfolio

 

3.1%

 

0.6%

 

100.0%

       

 

Year-Over-Year Growth

 

Year-Over-Year Growth

 

Q3 2019 compared to Q3 2018

 

YTD 2019 compared to YTD 2018

 

Gross
Revenues

Operating
Expenses

NOI

 

Gross
Revenues

Operating
Expenses

NOI

Southern California

2.5%

3.5%

2.0%

 

2.9%

3.7%

2.6%

Northern California

3.5%

5.8%

2.7%

 

3.5%

3.4%

3.6%

Seattle Metro

4.1%

-1.5%

6.6%

 

3.4%

0.8%

4.5%

Same-Property Portfolio

3.1%

3.3%

3.1%

 

3.2%

3.0%

3.3%

 

 

Sequential Growth

 

Q3 2019 compared to Q2 2019

 

Gross
Revenues

Operating
Expenses

NOI

Southern California

0.3%

4.5%

-1.4%

Northern California

0.6%

5.1%

-0.8%

Seattle Metro

1.3%

5.7%

-0.3%

Same-Property Portfolio

0.6%

4.9%

-1.0%

 

Financial Occupancies

 

Quarter Ended

 

9/30/2019

6/30/2019

9/30/2018

Southern California

96.1%

96.7%

96.5%

Northern California

95.8%

96.6%

96.3%

Seattle Metro

95.9%

96.4%

96.1%

Same-Property Portfolio

96.0%

96.6%

96.4%

INVESTMENT ACTIVITY

Real Estate

In August 2019, Wesco V, LLC (“Wesco V”), a joint venture in which the Company owns a 50.0% interest, acquired The Courtyards at 65th Street, a 331 unit apartment home community located in Emeryville, CA, for $178.0 million. The property provides convenient commuter access to San Francisco and Oakland and is located near the Company’s Emme and Avenue 64 communities.

In August 2019, BEX IV, LLC (“BEX IV”), a new joint venture in which the company owns a 50.1% interest, acquired 777 Hamilton Apartments for $148.0 million in Menlo Park, CA. Built in 2017, the 195 unit apartment home community is adjacent to Facebook’s global headquarters.

In September 2019, the Company purchased Township, a 132 unit apartment home community located in Redwood City, CA, for $88.7 million. The property is located in a highly desirable commuter location and in close proximity to the Company’s Radius Apartments. As part of the transaction, the Company assumed a $44.3 million mortgage with an effective interest rate of 2.9% and a maturity date of May 2025.

Preferred Equity

In September 2019, the Company received $31.1 million from the redemption of two preferred equity investments. The Company recorded $1.7 million of income from prepayment penalties as a result of the early redemptions, which has been excluded from Core FFO.

Subsequent to quarter end, the Company received $15.8 million from the redemption of a preferred equity investment in a property located in San Jose, CA, including $0.2 million of early redemption fees.

DEVELOPMENT ACTIVITY

The table below represents the development communities in lease-up and the current leasing status as of October 22, 2019.

Project Name

Location

Total
Apartment
Homes

ESS
Ownership

% Leased
as of
10/22/19

Status

Station Park Green - Phase II

San Mateo, CA

199

100%

63.3%

In Lease-Up

Mylo

Santa Clara, CA

476

100%

27.3%

In Lease-Up

500 Folsom

San Francisco, CA

537

50%

10.8%

In Lease-Up

Total/Average % Leased

1,212

 

25.9%

 

LIQUIDITY AND BALANCE SHEET

Common Stock

During the third quarter of 2019, the Company issued 228,271 shares of its common stock totaling $73.4 million in gross proceeds through its equity distribution program, at an average price per share of $321.56.

Balance Sheet

In August 2019, the Company issued $400.0 million of 10-year senior unsecured notes due in 2030 bearing an interest rate per annum of 3.0% and an effective yield of 3.2%. The proceeds were used to prepay, with no prepayment penalties, certain secured indebtedness under outstanding mortgage notes, including the pre-payment of $289.1 million of secured debt maturing in 2020, as well as to repay indebtedness under its unsecured lines of credit and for other general corporate and working capital purposes.

Subsequent to quarter end, the Company issued $150.0 million of 10-year senior unsecured notes due in January 2030 bearing an interest rate per annum of 3.0% and an effective interest rate of 2.8%. The notes were issued as additional notes pursuant to the notes previously issued in August 2019 described above. The Company expects to use the net proceeds to prepay certain secured mortgages maturing in 2020.

As of October 22, 2019, the Company had $1.0 billion in undrawn capacity on its unsecured credit facilities.

Guidance

For the third quarter of 2019, the Company exceeded the midpoint of the guidance range provided in its second quarter 2019 earnings release for Core FFO by $0.04 per share.

The following table provides a reconciliation of third quarter 2019 Core FFO per share to the midpoint of the guidance provided in the second quarter 2019 earnings release, which was dated July 24, 2019.

 

 

 

Per Diluted
Share

 

Projected midpoint of Core FFO per share for Q3 2019

 

$

3.31

 

NOI from consolidated communities

 

 

0.02

 

FFO from co-investments

 

 

0.02

 

Interest expense

 

 

0.02

 

G&A and other

 

 

(0.02)

 

Core FFO per share for Q3 2019 reported

 

$

3.35

 

The table below provides key changes to the 2019 full-year assumptions for Net Income, Total FFO, Core FFO per diluted share, and same-property growth. For additional details regarding the Company’s 2019 assumptions, please see page S-14 of the accompanying supplemental financial information. For the fourth quarter of 2019, the Company has established a range for Core FFO per diluted share of $3.36 to $3.46.

2019 Full-Year Guidance

 

Previous
Range

 

Previous
Midpoint

 

Revised
Range

 

Revised
Midpoint

Per Diluted Share

 

 

 

 

 

 

 

 

Net Income

 

$5.84 - $6.02

 

$5.93

 

$6.04 - $6.14

 

$6.09

Total FFO

 

$13.31 - $13.49

 

$13.40

 

$13.50 - $13.60

 

$13.55

Core FFO

 

$13.19 - $13.37

 

$13.28

 

$13.28 - $13.38

 

$13.33

Same-Property Growth

 

 

 

 

 

 

 

 

Gross Revenues

 

3.0% to 3.5%

 

3.3%

 

3.1% to 3.4%

 

3.3%

Operating Expenses

 

2.0% to 2.4%

 

2.2%

 

2.0% to 2.4%

 

2.2%

NOI

 

3.2% to 4.1%

 

3.7%

 

3.4% to 3.9%

 

3.7%

 

 

 

 

 

 

 

 

 

         

CONFERENCE CALL WITH MANAGEMENT

The Company will host an earnings conference call with management to discuss its quarterly results on Thursday, October 24, 2019 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 third quarter 2019 earnings link. To access the replay, dial (844) 512-2921 using the replay pin number 13694650. 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 249 apartment communities comprising approximately 60,000 apartment homes with an additional 7 properties in various stages of active development. Additional information about the Company can be found on the Company’s website at www.essex.com.

This press release and accompanying supplemental financial information has been furnished to the Securities and Exchange Commission electronically on Form 8-K and can be accessed from the Company’s website at www.essex.com. If you are unable to obtain the information via the Web, please contact the Investor Relations Department at (650) 655-7800.

FFO RECONCILIATION

FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), is generally considered by industry analysts as an appropriate measure of performance of an equity REIT. Generally, FFO adjusts the net income of equity REITs for non-cash charges such as depreciation and amortization of rental properties, impairment charges, gains on sales of real estate and extraordinary items. Management considers FFO and FFO which excludes non-core items, which is referred to as “Core FFO,” to be useful supplemental operating performance measures of an equity REIT because, together with net income and cash flows, FFO and Core FFO provide investors with additional bases to evaluate the operating performance and ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures and to pay dividends. By excluding gains or losses related to sales of depreciated operating properties and excluding real estate depreciation (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO can help investors compare the operating performance of a real estate company between periods or as compared to different companies. By further adjusting for items that are not considered part of the Company’s core business operations, Core FFO allows investors to compare the core operating performance of the Company to its performance in prior reporting periods and to the operating performance of other real estate companies without the effect of items that by their nature are not comparable from period to period and tend to obscure the Company’s actual operating results. FFO and Core FFO do not represent net income or cash flows from operations as defined by U.S. generally accepted accounting principles (“GAAP”) and are not intended to indicate whether cash flows will be sufficient to fund cash needs. These measures should not be considered as alternatives to net income as an indicator of the REIT's operating performance or to cash flows as a measure of liquidity. FFO and Core FFO do not measure whether cash flow is sufficient to fund all cash needs including principal amortization, capital improvements and distributions to stockholders. FFO and Core FFO also do not represent cash flows generated from operating, investing or financing activities as defined under GAAP. Management has consistently applied the NAREIT definition of FFO to all periods presented. However, there is judgment involved and other REITs’ calculation of FFO may vary from the NAREIT definition for this measure, and thus their disclosures of FFO may not be comparable to the Company’s calculation.

The following table sets forth the Company’s calculation of diluted FFO and Core FFO for the three and nine months ended September 30, 2019 and 2018 (in thousands, except for share and per share amounts):

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

Funds from Operations attributable to common stockholders and unitholders

 

2019

 

2018

 

2019

 

2018

Net income available to common stockholders

$

99,335

$

80,975

$

310,468

$

272,333

Adjustments:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

120,809

 

120,852

 

360,842

 

359,287

Gains not included in FFO

 

-

 

-

 

(32,405)

 

(22,244)

Depreciation and amortization from unconsolidated co-investments

 

15,483

 

15,766

 

45,304

 

47,345

Noncontrolling interest related to Operating Partnership units

 

3,464

 

2,789

 

10,863

 

9,381

Depreciation attributable to third party ownership and other

 

(242)

 

(234)

 

(708)

 

(699)

 

 

 

 

 

 

 

 

 

Funds from Operations attributable to common stockholders and unitholders

$

238,849

$

220,148

$

694,364

$

665,403

FFO per share – diluted

$

3.50

$

3.22

$

10.19

$

9.74

Expensed acquisition and investment related costs

$

13

$

31

$

69

$

156

Deferred tax expense on unrealized gain on unconsolidated co-investment (1)

 

1,457

 

-

 

1,457

 

-

(Gain) loss on sale of marketable securities

 

(239)

 

(120)

 

(737)

 

(669)

Unrealized losses (gains) on marketable securities

 

174

 

(1,180)

 

(4,280)

 

(426)

Equity income from non-core co-investment (2)

 

(4,247)

 

-

 

(4,561)

 

-

Interest rate hedge ineffectiveness (3)

 

-

 

(35)

 

181

 

61

Gain on early retirement of debt, net

 

(5,475)

 

-

 

(7,143)

 

-

Gain on early retirement of debt from unconsolidated co-investment

 

-

 

(3,662)

 

-

 

(3,662)

Co-investment promote income

 

-

 

-

 

(809)

 

(20,541)

Income from early redemption of preferred equity investments

 

(1,699)

 

-

 

(2,531)

 

(1,602)

General and administrative and other, net

 

-

 

141

 

-

 

2,574

Insurance reimbursements and legal settlements, net

 

(15)

 

(111)

 

(263)

 

(561)

Core Funds from Operations attributable to common stockholders and unitholders

$

228,818

$

215,212

$

675,747

$

640,733

Core FFO per share – diluted

$

3.35

$

3.15

$

9.92

$

9.38

Weighted average number of shares outstanding diluted (4)

 

68,229,823

 

68,339,057

 

68,117,569

 

68,328,370

 

(1)

 

A deferred tax expense was recorded during the third quarter of 2019 related to the $4.4 million net unrealized gain on the Real Estate Technology Ventures, L.P. co-investment discussed below.

(2)

 

Represents the Company’s share of co-investment income from Real Estate Technology Ventures, L.P. Income for the third quarter of 2019 includes a net unrealized gain of $4.4 million.

(3)

 

Interest rate swaps are generally adjusted to fair value through other comprehensive income (loss). However, because certain of the Company’s interest rate swaps do not have a 0% LIBOR floor, while related hedged debt in these cases is subject to a 0% LIBOR floor, the portion of the change in fair value of these interest rate swaps attributable to this mismatch, if any, is recorded as noncash interest rate hedge ineffectiveness through interest expense. On January 1, 2019, the Company adopted ASU No. 2017-12 "Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities," which resulted in a cumulative effect adjustment of $181,000 from interest expense to accumulated other comprehensive income.

(4)

 

Assumes conversion of all outstanding limited partnership units in Essex Portfolio, L.P. (the “Operating Partnership”) into shares of the Company’s common stock and excludes all DownREIT limited partnership units for which the Operating Partnership has the ability and intention to redeem the units for cash and does not consider them to be common stock equivalents.

NET OPERATING INCOME (“NOI”) AND SAME-PROPERTY NOI RECONCILIATIONS

NOI and Same-Property NOI are considered by management to be important supplemental performance measures to earnings from operations included in the Company’s condensed 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 revenue less same-property operating expenses, including property taxes. Please see the reconciliation of earnings from operations to NOI and same-property NOI, which in the table below is the NOI for stabilized properties consolidated by the Company for the periods presented (dollars in thousands):

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2019

 

2018

 

2019

 

2018

Earnings from operations

$

124,039

$

113,897

$

364,294

$

362,960

Adjustments:

 

 

 

 

 

 

 

 

Corporate-level property management expenses

 

8,255

 

7,761

 

24,620

 

23,313

Depreciation and amortization

 

120,809

 

120,852

 

360,842

 

359,287

Management and other fees from affiliates

 

(2,428)

 

(2,307)

 

(7,023)

 

(6,812)

General and administrative

 

11,345

 

10,601

 

38,731

 

36,539

Expensed acquisition and investment related costs

 

13

 

31

 

69

 

156

Gain on sale of real estate and land

 

-

 

-

 

-

 

(22,244)

NOI

 

262,033

 

250,835

 

781,533

 

753,199

Less: Non-same property NOI

 

(16,521)

 

(12,640)

 

(45,218)

 

(40,526)

Same-Property NOI

$

245,512

$

238,195

$

736,315

$

712,673

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 intent, beliefs or expectations with respect to the timing of completion of current development and redevelopment projects and the stabilization of such projects, the timing of lease-up and occupancy of its apartment communities, the anticipated operating performance of its apartment communities, the total projected costs of development and redevelopment projects, co-investment activities, qualification as a REIT under the Internal Revenue Code of 1986, as amended, the real estate markets in the geographies in which the Company’s properties are located and in the United States in general, the adequacy of future cash flows to meet anticipated cash needs, its financing activities and the use of proceeds from such activities, the availability of debt and equity financing, general economic conditions including the potential impacts from the economic conditions, trends affecting the Company’s financial condition or results of operations, changes to U.S. tax laws and regulations in general or specifically related to REITs or real estate, changes to laws and regulations in jurisdictions in which communities the Company owns are located, and other information that is not historical information.

While the Company's management believes the assumptions underlying its forward-looking statements are reasonable, such forward-looking statements involve known and unknown risks, uncertainties and other factors, many of which are beyond the Company’s control, which could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The Company cannot assure the future results or outcome of the matters described in these statements; rather, these statements merely reflect the Company’s current expectations of the approximate outcomes of the matters discussed. Factors that might cause the Company’s actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to, the following: the Company may fail to achieve its business objectives; the actual completion of development and redevelopment projects may be subject to delays; the stabilization dates of such projects may be delayed; the Company may abandon or defer development or redevelopment projects for a number of reasons, including changes in local market conditions which make development less desirable, increases in costs of development, increases in the cost of capital or lack of capital availability, resulting in losses; the total projected costs of current development and redevelopment projects may exceed expectations; such development and redevelopment projects may not be completed; development and redevelopment projects and acquisitions may fail to meet expectations; estimates of future income from an acquired property may prove to be inaccurate; occupancy rates and rental demand may be adversely affected by competition and local economic and market conditions; there may be increased interest rates and operating costs; the Company may be unsuccessful in the management of its relationships with its co-investment partners; future cash flows may be inadequate to meet operating requirements and/or may be insufficient to provide for dividend payments in accordance with REIT requirements; there may be a downturn in general economic conditions, the real estate industry, and the markets in which the Company's communities are located; 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, quarterly reports on Form 10-Q, and other reports that the Company files with the SEC from time to time. All forward-looking statements are made as of the date hereof, the Company assumes no obligation to update or supplement this information for any reason, and therefore, they may not represent the Company’s estimates and assumptions after the date of this press release.

DEFINITIONS AND RECONCILIATIONS

Non-GAAP financial measures and certain other capitalized terms, as used in this earnings release, are defined and further explained on pages S-17.1 through S-17.4, "Reconciliations of Non-GAAP Financial Measures and Other Terms," of the accompanying supplemental financial information. The supplemental financial information is available on the Company's website at www.essex.com.

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