filings.toolsEssex Property Trust 10-Q 2022-09-30
Filed 2022-10-27. 8 sections, 254K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
001-13106 (Essex Property Trust, Inc.)
333-44467-01 (Essex Portfolio, L.P.)
(Commission File Number)
ESSEX PROPERTY TRUST, INC.
ESSEX PORTFOLIO, L.P.
(Exact name of Registrant as Specified in its Charter)
| Maryland | 77-0369576 | |||||||
| (Essex Property Trust, Inc.) | (Essex Property Trust, Inc.) | |||||||
| California | 77-0369575 | |||||||
| (Essex Portfolio, L.P.) | (Essex Portfolio, L.P.) | |||||||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
1100 Park Place, Suite 200
San Mateo, California 94403
(Address of Principal Executive Offices, Including Zip Code)
(650) 655-7800
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, $.0001 par value (Essex Property Trust, Inc.) | ESS | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| Essex Property Trust, Inc. | Yes | ☒ | No | ☐ | Essex Portfolio, L.P. | Yes | ☒ | No | ☐ |
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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
| Essex Property Trust, Inc. | Yes | ☒ | No | ☐ | Essex Portfolio, L.P. | Yes | ☒ | No | ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Essex Property Trust, Inc.:
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||||||||||
| Emerging growth company | ☐ |
Essex Portfolio, L.P.:
| Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer | ☒ | Smaller reporting company | ☐ | ||||||||||||||||
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
| Essex Property Trust, Inc. | ☐ | Essex Portfolio, L.P. | ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Essex Property Trust, Inc. | Yes | ☐ | No | ☒ | Essex Portfolio, L.P. | Yes | ☐ | No | ☒ |
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 64,753,812 shares of Common Stock ($.0001 par value) of Essex Property Trust, Inc. were outstanding as of October 25, 2022.
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EXPLANATORY NOTE
This report combines the reports on Form 10-Q for the three and nine month periods ended September 30, 2022 of Essex Property Trust, Inc., a Maryland corporation, and Essex Portfolio, L.P., a Delaware limited partnership of which Essex Property Trust, Inc. is the sole general partner.
Unless stated otherwise or the context otherwise requires, references to the "Company," "we," "us" or "our" mean collectively Essex Property Trust, Inc. and those entities/subsidiaries owned or controlled by Essex Property Trust, Inc., including Essex Portfolio, L.P., and references to the "Operating Partnership" mean Essex Portfolio, L.P. and those entities/subsidiaries owned or controlled by Essex Portfolio, L.P. Unless stated otherwise or the context otherwise requires, references to "Essex" mean Essex Property Trust, Inc., not including any of its subsidiaries.
Essex operates as a self-administered and self-managed real estate investment trust ("REIT"), and is the sole general partner of the Operating Partnership. As the sole general partner of the Operating Partnership, Essex has exclusive control of the Operating Partnership's day-to-day management.
The Company is structured as an umbrella partnership REIT ("UPREIT") and Essex contributes all net proceeds from its various equity offerings to the Operating Partnership. In return for those contributions, Essex receives a number of Operating Partnership limited partnership units ("OP Units," and the holders of such OP Units, "Unitholders") equal to the number of shares of common stock it has issued in the equity offerings. Contributions of properties to the Company can be structured as tax-deferred transactions through the issuance of OP Units, which is one of the reasons why the Company is structured in the manner outlined above. Based on the terms of the Operating Partnership's partnership agreement, OP Units can be exchanged into Essex common stock on a one-for-one basis. The Company maintains a one-for-one relationship between the OP Units issued to Essex and shares of common stock.
The Company believes that combining the reports on Form 10-Q of Essex and the Operating Partnership into this single report provides the following benefits:
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enhances investors' understanding of Essex and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
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eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure applies to both Essex and the Operating Partnership; and
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creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.
Management operates Essex and the Operating Partnership as one business. The management of Essex consists of the same members as the management of the Operating Partnership.
All of the Company's property ownership, development, and related business operations are conducted through the Operating Partnership and Essex has no material assets, other than its investment in the Operating Partnership. Essex's primary function is acting as the general partner of the Operating Partnership. As general partner with control of the Operating Partnership, Essex consolidates the Operating Partnership for financial reporting purposes. Therefore, the assets and liabilities of Essex and the Operating Partnership are the same on their respective financial statements. Essex also issues equity from time to time and guarantees certain debt of the Operating Partnership, as disclosed in this report. The Operating Partnership holds substantially all of the assets of the Company, including the Company's ownership interests in its co-investments. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for the net proceeds from equity offerings by the Company, which are contributed to the capital of the Operating Partnership in exchange for OP Units (on a one-for-one share of common stock per OP Unit basis), the Operating Partnership generates all remaining capital required by the Company's business. These sources of capital include the Operating Partnership's working capital, net cash provided by operating activities, borrowings under its revolving credit facilities, the issuance of secured and unsecured debt and equity securities and proceeds received from disposition of certain properties and co-investments.
The Company believes it is important to understand the few differences between Essex and the Operating Partnership in the context of how Essex and the Operating Partnership operate as a consolidated company. Stockholders' equity, partners' capital and noncontrolling interest are the main areas of difference between the condensed consolidated financial statements of Essex and those of the Operating Partnership. The limited partners of the Operating Partnership are accounted for as partners' capital in the Operating Partnership's condensed consolidated financial statements and as noncontrolling interest in Essex’s condensed consolidated financial statements. The noncontrolling interest in the Operating Partnership's condensed consolidated financial statements include the interest of unaffiliated partners in various consolidated partnerships and co-investment partners. The noncontrolling interest in Essex's condensed consolidated financial statements include (i) the same noncontrolling interest as
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presented in the Operating Partnership’s condensed consolidated financial statements and (ii) OP Unitholders. The differences between stockholders' equity and partners' capital result from differences in the equity issued at Essex and Operating Partnership levels.
To help investors understand the significant differences between Essex and the Operating Partnership, this report on Form 10-Q provides separate condensed consolidated financial statements for Essex and the Operating Partnership; a single set of consolidated notes to such financial statements that includes separate discussions of stockholders' equity or partners' capital, and earnings per share/unit, as applicable; and a combined Management's Discussion and Analysis of Financial Condition and Results of Operations.
This report on Form 10-Q also includes separate Part I, Item 4. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for each of Essex and the Operating Partnership in order to establish that the requisite certifications have been made and that Essex and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 (the "Exchange Act") and 18 U.S.C. §1350.
In order to highlight the differences between Essex and the Operating Partnership, the separate sections in this report on Form 10-Q for Essex and the Operating Partnership specifically refer to Essex and the Operating Partnership. In the sections that combine disclosure of Essex and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of the Company. Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and co-investments and holds assets and debt, reference to the Company is appropriate because the Company is one business and the Company operates that business through the Operating Partnership. The separate discussions of Essex and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company on a consolidated basis and how management operates the Company.
The information furnished in the accompanying unaudited condensed consolidated balance sheets, statements of income and comprehensive income, equity, capital, and cash flows of the Company and the Operating Partnership reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the aforementioned condensed consolidated financial statements for the interim periods and are normal and recurring in nature, except as otherwise noted.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the notes to such unaudited condensed consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations herein. Additionally, 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, 2021.
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ESSEX PROPERTY TRUST, INC.
ESSEX PORTFOLIO, L.P.
FORM 10-Q
TABLE OF CONTENTS
Part I – Financial Information
Item 1. Condensed Consolidated Financial Statements
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except parenthetical and share amounts)
| ASSETS | September 30, 2022 | December 31, 2021 | |||||||||
| Real estate: | |||||||||||
| Rental properties: | |||||||||||
| Land and land improvements | $ | 3,059,246 | $ | 3,032,678 | |||||||
| Buildings and improvements | 12,912,359 | 12,597,249 | |||||||||
| 15,971,605 | 15,629,927 | ||||||||||
| Less: accumulated depreciation | (5,047,880) | (4,646,854) | |||||||||
| 10,923,725 | 10,983,073 | ||||||||||
| Real estate under development | 23,752 | 111,562 | |||||||||
| Co-investments | 1,145,345 | 1,177,802 | |||||||||
| 12,092,822 | 12,272,437 | ||||||||||
| Cash and cash equivalents-unrestricted | 42,711 | 48,420 | |||||||||
| Cash and cash equivalents-restricted | 10,858 | 10,218 | |||||||||
| Marketable securities, net of allowance for credit losses of zero as of both September 30, 2022 and December 31, 2021 | 141,699 | 191,829 | |||||||||
| Notes and other receivables, net of allowance for credit losses of $0.8 million as of both September 30, 2022 and December 31, 2021 (includes related party receivables of $6.7 million and $176.9 million as of September 30, 2022 and December 31, 2021, respectively) | 197,543 | 341,033 | |||||||||
| Operating lease right-of-use assets | 66,531 | 68,972 | |||||||||
| Prepaid expenses and other assets | 72,166 | 64,964 | |||||||||
| Total assets | $ | 12,624,330 | $ | 12,997,873 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Unsecured debt, net | $ | 5,312,131 | $ | 5,307,196 | |||||||
| Mortgage notes payable, net | 635,389 | 638,957 | |||||||||
| Lines of credit | 219,481 | 341,257 | |||||||||
| Accounts payable and accrued liabilities | 222,328 | 180,751 | |||||||||
| Construction payable | 25,729 | 29,136 | |||||||||
| Dividends payable | 149,685 | 143,213 | |||||||||
| Distributions in excess of investments in co-investments | 38,394 | 35,545 | |||||||||
| Operating lease liabilities | 68,043 | 70,675 | |||||||||
| Other liabilities | 42,715 | 39,969 | |||||||||
| Total liabilities | 6,713,895 | 6,786,699 | |||||||||
| Commitments and contingencies | |||||||||||
| Redeemable noncontrolling interest | 29,238 | 34,666 | |||||||||
| Equity: | |||||||||||
| Common stock; $0.0001 par value, 670,000,000 shares authorized; 64,753,312 and 65,248,393 shares issued and outstanding, respectively | 6 | 7 | |||||||||
| Additional paid-in capital | 6,775,872 | 6,915,981 | |||||||||
| Distributions in excess of accumulated earnings | (1,123,215) | (916,833) | |||||||||
| Accumulated other comprehensive income (loss), net | 50,769 | (5,552) | |||||||||
| Total stockholders' equity | 5,703,432 | 5,993,603 | |||||||||
| Noncontrolling interest | 177,765 | 182,905 | |||||||||
| Total equity | 5,881,197 | 6,176,508 | |||||||||
| Total liabilities and equity | $ | 12,624,330 | $ | 12,997,873 | |||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited)
(In thousands, except share and per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Rental and other property | $ | 406,862 | $ | 360,620 | $ | 1,183,318 | $ | 1,062,253 | |||||||||||||||
| Management and other fees from affiliates | 2,886 | 2,237 | 8,313 | 6,707 | |||||||||||||||||||
| 409,748 | 362,857 | 1,191,631 | 1,068,960 | ||||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Property operating, excluding real estate taxes | 73,450 | 69,537 | 212,069 | 197,880 | |||||||||||||||||||
| Real estate taxes | 46,593 | 45,802 | 137,594 | 135,408 | |||||||||||||||||||
| Corporate-level property management expenses | 10,184 | 9,060 | 30,532 | 27,135 | |||||||||||||||||||
| Depreciation and amortization | 135,511 | 130,564 | 403,561 | 387,887 | |||||||||||||||||||
| General and administrative | 15,172 | 12,712 | 40,541 | 34,746 | |||||||||||||||||||
| Expensed acquisition and investment related costs | 230 | 108 | 248 | 164 | |||||||||||||||||||
| 281,140 | 267,783 | 824,545 | 783,220 | ||||||||||||||||||||
| Gain on sale of real estate and land | — | 42,897 | — | 142,993 | |||||||||||||||||||
| Earnings from operations | 128,608 | 137,971 | 367,086 | 428,733 | |||||||||||||||||||
| Interest expense | (51,645) | (50,019) | (152,499) | (152,639) | |||||||||||||||||||
| Total return swap income | 1,882 | 2,660 | 6,709 | 8,137 | |||||||||||||||||||
| Interest and other (loss) income | (6,796) | 11,998 | (31,571) | 48,756 | |||||||||||||||||||
| Equity income from co-investments | 10,985 | 25,433 | 23,756 | 60,692 | |||||||||||||||||||
| Deferred tax (expense) benefit on unconsolidated co-investments | (1,755) | (3,041) | 7,863 | (5,391) | |||||||||||||||||||
| Loss on early retirement of debt, net | (2) | — | (2) | (18,982) | |||||||||||||||||||
| Gain on remeasurement of co-investment | 17,423 | — | 17,423 | 2,260 | |||||||||||||||||||
| Net income | 98,700 | 125,002 | 238,765 | 371,566 | |||||||||||||||||||
| Net income attributable to noncontrolling interest | (5,858) | (6,612) | (15,615) | (19,886) | |||||||||||||||||||
| Net income available to common stockholders | $ | 92,842 |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and accompanying Notes thereto included elsewhere herein and with the Company’s 2021 annual report on Form 10-K for the year ended December 31, 2021. Capitalized terms not defined in this section have the meaning ascribed to them elsewhere in this quarterly report on Form 10-Q. The Company makes statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Form 10-Q entitled "Forward-Looking Statements."
Essex is a self-administered and self-managed REIT that acquires, develops, redevelops, and manages apartment communities in selected residential areas located on the West Coast of the United States. Essex owns all of its interests in its real estate investments, directly or indirectly through the Operating Partnership. Essex is the sole general partner of the Operating Partnership and, as of September 30, 2022, had an approximately 96.6% general partnership interest in the Operating Partnership.
The Company’s investment strategy has two components: constant monitoring of existing markets, and evaluation of new markets to identify areas with the characteristics that underlie rental growth. The Company’s strong financial condition supports its investment strategy by enhancing its ability to quickly shift acquisition, development, redevelopment, and disposition activities to markets that will optimize the performance of the Company's portfolio.
As of September 30, 2022, the Company owned or had ownership interests in 253 operating apartment communities, comprising 62,397 apartment homes, excluding the Company’s ownership interest in preferred equity co-investments, loan investments, three operating commercial buildings, and a development pipeline comprised of one unconsolidated joint venture project.
The Company’s apartment communities are located in the following major regions:
Southern California (primarily Los Angeles, Orange, San Diego, and Ventura counties)
Northern California (the San Francisco Bay Area)
Seattle Metro (the Seattle metropolitan area)
As of September 30, 2022, the Company’s development pipeline was comprised of one unconsolidated joint venture project under development, and various predevelopment projects aggregating 264 apartment homes, with total incurred costs of $97.0 million, and estimated remaining project costs of approximately $29.0 million, $14.8 million of which represents the Company's share of estimated remaining costs, for total estimated project costs of $126.0 million.
The Company’s consolidated apartment communities are as follows:
| As of September 30, 2022 | As of September 30, 2021 | ||||||||||||||||||||||
| Apartment Homes | % | Apartment Homes | % | ||||||||||||||||||||
| Southern California | 22,401 | 43 | % | 22,190 | 43 | % | |||||||||||||||||
| Northern California | 19,230 | 37 | % | 19,123 | 37 | % | |||||||||||||||||
| Seattle Metro | 10,341 | 20 | % | 10,218 | 20 | % | |||||||||||||||||
| Total | 51,972 | 100 | % | 51,531 | 100 | % |
Co-investments, including Wesco I, Wesco III, Wesco IV, Wesco V, Wesco VI, BEXAEW, BEX II, BEX IV and 500 Folsom communities, developments under construction, and preferred equity interest co-investment communities are not included in the table presented above for both periods.
Market Considerations, including the COVID-19 Pandemic
Though diminishing, the COVID-19 pandemic and its related variants continue to impact the U.S. and world economies. In an effort to mitigate its impact on affected populations, federal, state and local jurisdictions implemented varying forms of requirements which may continue to negatively affect profitability. While the California eviction moratorium sunsetted during the third quarter of 2021, other state and local eviction moratoriums and laws that limit rent increases during times of emergency and impair the ability to collect unpaid rent during certain timeframes continue to be in effect in various formats at
various regions in which our communities are located, impacting the Company and its properties. The Company continues to work to comply with the stated intent of local, county, state and federal laws.
While COVID-19’s impact begins to dissipate, geopolitical tensions between Russian and Ukraine increased uncertainty during 2022. Inflation has caused an increase in consumer prices, thereby reducing purchasing power and elevating the risks of a recession. At the same time, the labor market remains historically tight and companies continue to look to add employees, pushing unemployment lower.
The long-term impact of these developments will largely depend on new information which may emerge concerning the severity of COVID-19 and related variants, future laws that may be enacted, the impact on job growth and the broader economy, and reactions by consumers, companies, governmental entities and capital markets.
Primarily as a result of the impact of the COVID-19 pandemic, the Company's cash delinquencies as a percentage of scheduled rental income for the Company’s stabilized apartment communities or "Same-Property" (stabilized properties consolidated by the Company for the quarters ended September 30, 2022 and 2021) have generally remained higher than the pre-pandemic historical range of 0.3% to 0.4% since the second quarter of 2020. Cash delinquencies remained elevated at 1.5% for the three months ended September 30, 2021 but decreased slightly to 1.4% for the three months ended September 30, 2022, however, current tenant delinquencies remain above pre-pandemic levels. The Company continues to work with residents to collect such cash delinquencies. As of September 30, 2022, delinquencies have not had a material adverse impact on the Company's liquidity position. The Company's average financial occupancy for the Company’s Same-Property portfolio slightly decreased from 96.4% for the three months ended September 30, 2021 to 96.0% for the three months ended September 30, 2022.
The COVID-19 pandemic has not negatively impacted the Company's ability to access traditional funding sources on the same or reasonably similar terms as were available in recent periods prior to the pandemic, as demonstrated by the Company's financing activity during the three months ended September 30, 2022 discussed in the "Liquidity and Capital Resources" section below. The Company is not at material risk of not meeting the covenants in its credit agreements and is able to timely service its debt and other obligations.
Comparison of the Three Months Ended September 30, 2022 to the Three Months Ended September 30, 2021
The Company’s average financial occupancy for the Company’s Same-Property portfolio was 96.0% and 96.4% for the three months ended September 30, 2022 and 2021, respectively. Financial occupancy is defined as the percentage resulting from dividing actual rental income by total scheduled rental income. Actual rental income represents contractual rental income pursuant to leases without considering delinquency and concessions. Total scheduled rental income represents the value of all apartment homes, with occupied apartment homes valued at contractual rental rates pursuant to leases and vacant apartment homes valued at estimated market rents. The Company believes that financial occupancy is a meaningful measure of occupancy because it considers the value of each vacant apartment home at its estimated market rate.
Market rates are determined using the recently signed effective rates on new leases at the property and are used as the starting point in the determination of the market rates of vacant apartment homes. The Company may increase or decrease these rates based on a variety of factors, including overall supply and demand for housing, concentration of new apartment deliveries within the same submarket which can cause periodic disruption due to greater rental concessions to increase leasing velocity, and rental affordability. Financial occupancy may not completely reflect short-term trends in physical occupancy and financial occupancy rates, and the Company's calculation of financial occupancy may not be comparable to financial occupancy disclosed by other REITs.
The Company does not take into account delinquency and concessions to calculate actual rent for occupied apartment homes and market rents for vacant apartment homes. The calculation of financial occupancy compares contractual rates for occupied apartment homes to estimated market rents for unoccupied apartment homes, and thus the calculation compares the gross value of all apartment homes excluding delinquency and concessions. For apartment communities that are development properties in lease-up without stabilized occupancy figures, the Company believes the physical occupancy rate is the appropriate performance metric. While an apartment community is in the lease-up phase, the Company’s primary motivation is to stabilize the property, which may entail the use of rent concessions and other incentives, and thus financial occupancy, which is based on contractual income, is not considered the best metric to quantify occupancy.
The regional breakdown of the Company’s Same-Property portfolio for financial occupancy for the three months ended September 30, 2022 and 2021 is as follows:
| Three Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Southern California | 96.2 | % | 97.1 | % | |||||||
| Northern California | 96.0 | % | 95.9 | % | |||||||
| Seattle Metro | 95.4 | % | 95.8 | % |
The following table provides a breakdown of revenues amounts, including revenues attributable to the Same-Properties:
| Number of Apartment | Three Months Ended September 30, | Dollar | Percentage | |||||||||||||||||||||||||||||
| Property Revenues ($ in thousands) | Homes | 2022 | 2021 | Change | Change | |||||||||||||||||||||||||||
| Same-Property Revenues: | ||||||||||||||||||||||||||||||||
| Southern California | 21,256 | $ | 161,479 | $ | 145,253 | $ | 16,226 | 11.2 | % | |||||||||||||||||||||||
| Northern California | 17,895 | 150,768 | 136,211 | 14,557 | 10.7 | % | ||||||||||||||||||||||||||
| Seattle Metro | 10,218 | 68,315 | 60,280 | 8,035 | 13.3 | % | ||||||||||||||||||||||||||
| Total Same-Property Revenues | 49,369 | 380,562 | 341,744 | 38,818 | 11.4 | % | ||||||||||||||||||||||||||
| Non-Same Property Revenues | 26,300 | 18,876 | 7,424 | 39.3 | % | |||||||||||||||||||||||||||
| Total Property Revenues | $ | 406,862 | $ | 360,620 | $ | 46,242 | 12.8 | % |
Same-Property Revenues increased by $38.8 million or 11.4% to $380.6 million in the third quarter of 2022 from $341.7 million in the third quarter of 2021. The increase was primarily attributable to an increase of 8.9% in average rental rates from $2,328 in the third quarter of 2021 to $2,535 in the third quarter of 2022 and 2.5% of the increase was attributable to a decrease in cash concessions in the third quarter of 2022 compared to the third quarter of 2021.
Non-Same Property Revenues increased by $7.4 million or 39.3% to $26.3 million in the third quarter of 2022 from $18.9 million in the third quarter of 2021. The increase was primarily due to the acquisition of Canvas in 2021, acquisitions of Regency Palm Court and Windsor Court in 2022, and an increase in average rental rates.
Management and other fees from affiliates increased by $0.7 million or 31.8% to $2.9 million in the third quarter of 2022 from $2.2 million in the third quarter of 2021. The increase was primarily due to the addition of Martha Lake Apartments, Monterra in Mill Creek, The Rexford, and Silver communities to the Company's joint venture portfolio in 2021 and Vela in 2022.
Property operating expenses, excluding real estate taxes increased by $4.0 million or 5.8% to $73.5 million for the third quarter of 2022 compared to $69.5 million for the third quarter of 2021, primarily due to increases of $1.9 million in maintenance and repairs expenses, $1.7 million in utilities expenses, and $0.3 million in administrative expenses. Same-Property operating expenses, excluding real estate taxes, increased by $3.0 million or 4.5% to $69.8 million in the third quarter of 2022 compared to $66.8 million in the third quarter of 2021, primarily due to increases of $1.6 million in maintenance and repairs expenses and $1.3 million in utilities expenses.
Real estate taxes increased by $0.8 million or 1.7% to $46.6 million for the third quarter of 2022 compared to $45.8 million for the third quarter of 2021, primarily due to real estate taxes from the completion of development properties Wallace on Sunset in 2021 and Station Park Green (Phase IV) in 2022, as well as the acquisitions of Regency Palm Court and Windsor Court in the third quarter of 2022. Same-Property real estate taxes remained consistent at $41.6 million in the third quarter of 2022 and 2021.
Corporate-level property management expenses increased by $1.1 million or 12.1% to $10.2 million for the third quarter of 2022 compared to $9.1 million for the third quarter of 2021 due to costs pertaining to the centralization of certain property level functions.
Depreciation and amortization expense increased by $4.9 million or 3.8% to $135.5 million for the third quarter of 2022 compared to $130.6 million for the third quarter of 2021, primarily due to an increase in depreciation expense from the completion of development properties Wallace on Sunset in 2021 and Station Park Green (Phase IV) in 2022, as well as the acquisition of Canvas in 2021, and the purchase of the Company's joint venture partners's 49.8% interest in Essex JV LLC co-investment that owned Regency Palm Court and Windsor Court, in 2022.
Interest expense increased by $1.6 million or 3.2% to $51.6 million for the third quarter of 2022 compared to $50.0 million for the third quarter of 2021, primarily due to an increase in borrowing on the Company's unsecured lines of credit which resulted in an increase in interest expense of $1.0 million for the third quarter of 2022. Additionally, there was an $0.9 million decrease in capitalized interest in the third quarter of 2022, due to a decrease in development activity as compared to the same period in 2021. These increases to interest expense were partially offset by various debt that was paid off, matured, or regular principal amortization during and after the third quarter of 2021, which resulted in a decrease in interest expense of $0.3 million for the third quarter of 2022.
Total return swap income of $1.9 million in the third quarter of 2022 consists of monthly settlements related to the Company's total return swap contracts with an aggregate notional amount of $223.8 million.
Interest and other (loss) income decreased by $18.8 million or 156.7% to a loss of $6.8 million for the third quarter of 2022 compared to an income of $12.0 million for the third quarter of 2021, primarily due to unrealized losses resulting from a decrease in the fair value of marketable securities.
Equity income from co-investments decreased by $14.4 million or 56.7% to $11.0 million for the third quarter of 2022 compared to $25.4 million for the third quarter of 2021, primarily due to decreases of $12.4 million in equity income from non-core co-investments and $1.3 million in income from preferred equity investments.
Deferred tax expense on unconsolidated co-investments of $1.8 million for the third quarter of 2022 is primarily due to net realized gains on deemed sales from non-core unconsolidated co-investments.
Gain on remeasurement of co-investment of $17.4 million for the third quarter of 2022 resulted from the Company's purchase of its joint venture partner’s 49.8% membership interest in Essex JV, LLC co-investment that owned Regency Palm Court and Windsor Court.
Comparison of the Nine Months Ended September 30, 2022 to the Nine Months Ended September 30, 2021
The Company's average financial occupancy for its stabilized apartment communities or "Same-Property" (stabilized properties consolidated by the Company for the nine months ended September 30, 2022 and 2021) was 96.1% and 96.6% for the nine months ended September 30, 2022 and 2021, respectively.
The regional breakdown of the Company's Same-Property portfolio for financial occupancy for the nine months ended September 30, 2022 and 2021 is as follows:
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Southern California | 96.1 | % | 96.9 | % | |||||||
| Northern California | 96.3 | % | 96.3 | % | |||||||
| Seattle Metro | 95.9 | % | 96.4 | % |
| Number of Apartment | Nine Months Ended September 30, | Dollar | Percentage | |||||||||||||||||||||||||||||
| Property Revenues ($ in thousands) | Homes | 2022 | 2021 | Change | Change | |||||||||||||||||||||||||||
| Same-Property Revenues: | ||||||||||||||||||||||||||||||||
| Southern California | 21,256 | $ | 470,246 | $ | 421,791 | $ | 48,455 | 11.5 | % | |||||||||||||||||||||||
| Northern California | 17,895 | 440,968 | 407,431 | 33,537 | 8.2 | % | ||||||||||||||||||||||||||
| Seattle Metro | 10,218 | 198,952 | 178,180 | 20,772 | 11.7 | % | ||||||||||||||||||||||||||
| Total Same-Property Revenues | 49,369 | 1,110,166 | 1,007,402 | 102,764 | 10.2 | % | ||||||||||||||||||||||||||
| Non-Same Property Revenues | 73,152 | 54,851 | 18,301 | 33.4 | % | |||||||||||||||||||||||||||
| Total Property Revenues | $ | 1,183,318 | $ | 1,062,253 | $ | 121,065 | 11.4 | % |
Same-Property Revenues increased by $102.8 million or 10.2% to $1.1 billion in the nine months ended September 30, 2022 from $1.0 billion in the nine months ended September 30, 2021. The increase was primarily attributable to an increase of 6.8% in average rental rates from $2,308 per apartment home in the nine months ended September 30, 2021 to $2,466 per apartment
home in the nine months ended September 30, 2022 and 2.7% of the increase was attributable to a decrease in cash concessions in 2022 compared to the prior year.
Non-Same Property Revenues increased by $18.3 million or 33.4% to $73.2 million in the nine months ended September 30, 2022 from $54.9 million in the nine months ended September 30, 2021. The increase was primarily due to the acquisitions of The Village at Toluca Lake and Canvas in 2021, acquisitions of Regency Palm Court and Windsor Court in 2022, and an increase in average rental rates.
Management and other fees from affiliates increased by $1.6 million or 23.9% to $8.3 million in the nine months ended September 30, 2022 from $6.7 million in the nine months ended September 30, 2021. The increase was primarily due to the addition of Martha Lake Apartments, Monterra in Mill Creek, The Rexford, and Silver communities to the Company's joint venture portfolio in 2021 and Vela in 2022, partially offset by the Company's purchases of BEX III, LLC's 50.0% interest in The Village at Toluca Lake in 2021, and its joint venture partner's 49.8% interest in Essex JV LLC co-investment that owned Regency Palm Court and Windsor Court, in 2022.
Property operating expenses, excluding real estate taxes increased by $14.2 million or 7.2% to $212.1 million for the nine months ended September 30, 2022 compared to $197.9 million for the nine months ended September 30, 2021, primarily due to increases of $6.3 million in utilities expenses, $6.2 million in maintenance and repairs expenses, and $1.6 million in administrative expenses. Same-Property operating expenses, excluding real estate taxes, increased by $11.9 million or 6.3% to $202.1 million in the nine months ended September 30, 2022 compared to $190.2 million in the nine months ended September 30, 2021, primarily due to increases of $5.5 million in maintenance and repairs expenses, $5.4 million in utilities expenses, and $0.7 million in administrative expenses.
Real estate taxes increased by $2.2 million or 1.6% to $137.6 million for the nine months ended September 30, 2022 compared to $135.4 million for the nine months ended September 30, 2021, primarily due to real estate taxes from the completion of development properties Wallace on Sunset in 2021 and Station Park Green (Phase IV) in 2022, as well as the acquisitions of The Village at Toluca Lake, Canvas, and 7 S Linden Commercial properties during 2021. Same-Property real estate taxes decreased by $0.1 million or 0.1% to $123.4 million in the nine months ended September 30, 2022 compared to $123.5 million in the nine months ended September 30, 2021, primarily due to a decrease in assessed valuations and tax rates in the Seattle metro region.
Corporate-level property management expenses increased by $3.4 million or 12.5% to $30.5 million for the nine months ended September 30, 2022 compared to $27.1 million for the nine months ended September 30, 2021 due to costs pertaining to the centralization of certain property level functions.
Depreciation and amortization expense increased by $15.7 million or 4.0% to $403.6 million for the nine months ended September 30, 2022 compared to $387.9 million for the nine months ended September 30, 2021, primarily due to an increase in depreciation expense from the completion of development properties Mylo, Wallace on Sunset in 2021, and Station Park Green (Phase IV) in 2022, as well as the acquisitions of The Village at Toluca Lake and Canvas during 2021, and Regency Palm Court and Windsor Court in 2022.
Interest expense decreased by $0.1 million or 0.1% to $152.5 million for the nine months ended September 30, 2022 compared to $152.6 million for the nine months ended September 30, 2021, primarily due to various debt that was paid off, matured, or regular principal payments during and after the third quarter of 2021, which resulted in a decrease in interest expense of $9.7 million from the third quarter of 2021. These decreases in interest expense were partially offset by the issuance of new senior unsecured notes which resulted in an increase of $6.5 million interest expense for the nine months ended September 30, 2022. Additionally, there was a $3.1 million decrease in capitalized interest in the nine months ended September 30, 2022, due to a decrease in development activity as compared to the same period in 2021.
Total return swap income of $6.7 million for the nine months ended September 30, 2022 consists of monthly settlements related to the Company's total return swap contracts with an aggregate notional amount of $223.8 million.
Interest and other (loss) income decreased by $80.4 million or 164.8% to a loss of $31.6 million for the nine months ended September 30, 2022 compared to an income of $48.8 million for the nine months ended September 30, 2021, primarily due to unrealized losses resulting from a decrease in the fair value of marketable securities.
Equity income from co-investments decreased by $36.9 million or 60.8% to $23.8 million for the nine months ended September 30, 2022 compared to $60.7 million for the nine months ended September 30, 2021, primarily due to decreases of $50.4 million
in equity income from non-core co-investments and $3.4 million in income from preferred equity investments including income from early redemptions. The decreases were partially offset by an increase of $17.1 million in co-investment promote income.
Deferred tax benefit on unconsolidated co-investment of $7.9 million for the nine months ended September 30, 2022 is primarily due to net unrealized losses of $46.3 million from non-core unconsolidated co-investments.
Gain on remeasurement of co-investment of $17.4 million for the nine months ended September 30, 2022 resulted from the Company's purchase of its joint venture partner’s 49.8% membership interest in Essex JV, LLC co-investment that owned Regency Palm Court and Windsor Court.
Liquidity and Capital Resources
As of September 30, 2022, the Company had $42.7 million of unrestricted cash and cash equivalents and $141.7 million in marketable securities, all of which were equity securities or available for sale debt securities. The Company believes that cash flows generated by its operations, existing cash and cash equivalents, marketable securities balances and availability under existing lines of credit are sufficient to meet all of its anticipated cash needs during the next twelve months. Additionally, the capital markets continue to be available and the Company is able to generate cash from the disposition of real estate assets to finance additional cash flow needs, including continued development and select acquisitions. In the event that conditions become further exacerbated due to the COVID-19 pandemic and related economic disruptions, the Company may further utilize other resources such as its cash reserves, lines of credit, or decreased investment in redevelopment activities to supplement operating cash flows. The Company is carefully monitoring and managing its cash position in light of ongoing conditions and levels of operations. The timing, source and amounts of cash flows provided by financing activities and used in investing activities are sensitive to changes in interest rates and other fluctuations in the capital markets environment, which can affect the Company's plans for acquisitions, dispositions, development and redevelopment activities.
As of September 30, 2022, Moody’s Investor Service, and Standard and Poor's credit agencies rated the Company and the Operating Partnership, Baa1/Stable, and BBB+/Stable, respectively.
As of September 30, 2022, the Company had two unsecured lines of credit aggregating $1.24 billion. As of September 30, 2022, there was $190.0 million outstanding on the Company's $1.2 billion unsecured line of credit. The underlying interest rate is based on a tiered rate structure tied to the Company's credit ratings, adjusted for the Company's sustainability metric grid, and was at Adjusted SOFR plus 0.75% as of September 30, 2022. This facility is scheduled to mature in January 2027, with two six-month extensions, exercisable at the Company's option. As of September 30, 2022, there was $29.5 million outstanding on the Company's $35.0 million working capital unsecured line of credit. The underlying interest rate on the $35.0 million line is based on a tiered rate structure tied to the Company's credit ratings, adjusted for the Company's sustainability metric grid, and was at Adjusted SOFR plus 0.75% as of September 30, 2022. This facility is scheduled to mature in July 2024.
In September 2021, the Company entered into a new equity distribution agreement pursuant to which the Company may offer and sell shares of its common stock having an aggregate gross sales price of up to $900.0 million (the “2021 ATM Program”). In connection with the 2021 ATM Program, the Company may also enter into related forward sale agreements, and may sell shares of its common stock pursuant to these agreements. The use of a forward sale agreement would allow the Company to lock in a share price on the sale of shares of its common stock at the time the agreement is executed, but defer receipt of the proceeds from the sale of shares until a later date should the Company elect to settle such forward sale agreement, in whole or in part, in shares of common stock.
During the nine months ended September 30, 2022, the Company did not sell any shares of its common stock through the 2021 ATM Program. As of September 30, 2022, there are no outstanding forward purchase agreements, and $900.0 million of shares remains available to be sold under the 2021 ATM Program.
In December 2015, the Company’s Board of Directors authorized a stock repurchase plan to allow the Company to acquire shares in an aggregate of up to $250.0 million. In February 2019, 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 stock repurchase plan. In each of May and December 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. As of June 30, 2022, the Company had $153.6 million of purchase authority remaining under the stock repurchase plan. In September 2022, the Company's Board of Directors approved a new stock repurchase plan to allow the Company to acquire common stock up to an aggregate value of $500.0 million. The plan supersedes the Company's previous common stock repurchase plan announced in December 2015. During the nine months ended September 30, 2022, the Company repurchased and retired 590,844 shares of its common stock totaling $158.0 million, including commissions, at an average price of $267.33 per share, of which 271,397 shares totaling $69.9 million were repurchased under the new plan after its approval. As of September 30, 2022, the Company had $430.1 million of purchase authority remaining under the new stock repurchase plan.
Essex pays quarterly dividends from cash available for distribution. Until it is distributed, cash available for distribution is invested by the Company primarily in investment grade securities held available for sale or is used by the Company to reduce balances outstanding under its line of credit.
Development and Predevelopment Pipeline
The Company defines development projects as new communities that are being constructed, or are newly constructed and are in a phase of lease-up and have not yet reached stabilized operations. As of September 30, 2022, the Company’s development pipeline was comprised of one unconsolidated joint venture project under development and various consolidated predevelopment projects, aggregating 264 apartment homes, with total incurred costs of $97.0 million, and estimated remaining project costs of approximately $29.0 million, $14.8 million of which represents the Company's share of estimated remaining costs, for total estimated project costs of $126.0 million.
The Company defines predevelopment projects as proposed communities in negotiation or in the entitlement process with an expected high likelihood of becoming entitled development projects. The Company may also acquire land for future development purposes or sale.
The Company expects to fund the development and predevelopment communities by using a combination of some or all of the following sources: its working capital, amounts available on its lines of credit, construction loans, net proceeds from public and private equity and debt issuances, and proceeds from the disposition of assets, if any.
Derivative Activity
The Company uses interest rate swaps, interest rate caps, and total return swap contracts to manage certain interest rate risks. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps and total return swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
Alternative Capital Sources
The Company utilizes co-investments as an alternative source of capital for acquisitions of both operating and development communities. As of September 30, 2022, the Company had an interest in 264 apartment homes in a community actively under development with a joint venture for total estimated costs of $102.0 million. Total estimated remaining costs are approximately $29.0 million, of which the Company estimates its remaining investment in these development joint ventures will be approximately $14.8 million. In addition, the Company had an interest in 10,425 apartment homes of operating communities with joint ventures for a total book value of $509.4 million as of September 30, 2022.
Off-Balance Sheet Arrangements
The Company has various unconsolidated interests in certain joint ventures. The Company does not believe that these unconsolidated investments have a materially different impact on its liquidity, cash flows, capital resources, credit or market risk than its consolidated operations. See Note 4, Co-investments, in the Notes to Condensed Consolidated Financial Statements, for carrying values and combined summarized financial information of these unconsolidated investments.
Critical 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. The Company defines critical accounting estimates as those accounting policies that require the Company’s management to exercise their most difficult, subjective and complex judgments. The Company’s critical accounting estimates relate principally to the evaluation of events and changes in circumstances indicating whether the Company’s rental properties may be impaired. 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 differ from those estimates made by management.
The Company’s critical accounting policies and estimates have not changed materially from the information reported in Note 2, Summary of Critical and Significant Accounting Policies, in the Company’s annual report on Form 10-K for the year ended December 31, 2021.
Forward-Looking Statements
Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this quarterly report on Form 10-Q which are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Exchange Act, including statements regarding the Company's expectations, estimates, assumptions, hopes, intentions, beliefs and strategies regarding the future. Words such as "expects," "assumes," "anticipates," "may," "will," "intends," "plans," "projects," "believes," "seeks," "future," "estimates," and variations of such words and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements include, among other things, statements regarding the Company’s expectations related to the continued impact of the COVID-19 pandemic and related variants on the Company’s business, financial condition and results of operations and the impact of any additional measures taken to mitigate the impact of the pandemic, the Company's intent, beliefs or expectations with respect to the timing of completion of current development and redevelopment projects and the stabilization of such projects, the timing of lease-up and occupancy of its apartment communities, the anticipated operating performance of its apartment communities, the total projected costs of development and redevelopment projects, co-investment activities, qualification as a REIT under the Internal Revenue Code of 1986, as amended, the real estate markets in the geographies in which the Company’s properties are located and in the United States in general, the adequacy of future cash flows to meet anticipated cash needs, its financing activities and the use of proceeds from such activities, the availability of debt and equity financing, general economic conditions including the potential impacts from such economic conditions, including as a result of the COVID-19 pandemic and related variants and governmental measures intended to prevent its spread, 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: the continued impact of the COVID-19 pandemic and related variants, which remains inherently uncertain as to duration and severity, and any additional governmental measures taken to limit its spread and other potential future outbreaks of infectious diseases or other health concerns, which could continue to adversely affect the Company’s business and its tenants, and cause a significant downturn in general economic conditions, the real estate industry, and the markets in which the Company's communities are located; the Company may fail to achieve its business objectives; the actual completion of development and redevelopment projects may be subject to delays; the stabilization dates of such projects may be delayed; the Company may abandon or defer development or redevelopment projects
for a number of reasons, including changes in local market conditions which make development less desirable, increases in costs of development, increases in the cost of capital or lack of capital availability, resulting in losses; the total projected costs of current development and redevelopment projects may exceed expectations; such development and redevelopment projects may not be completed; development and redevelopment projects and acquisitions may fail to meet expectations; estimates of future income from an acquired property may prove to be inaccurate; occupancy rates and rental demand may be adversely affected by competition and local economic and market conditions; there may be increased interest rates and operating costs; the Company may be unsuccessful in the management of its relationships with its co-investment partners; future cash flows may be inadequate to meet operating requirements and/or may be insufficient to provide for dividend payments in accordance with REIT requirements; changes in laws or regulations; the terms of any refinancing may not be as favorable as the terms of existing indebtedness; unexpected difficulties in leasing of development projects; volatility in financial and securities 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 this quarterly report on Form 10-Q, in the Company's annual report on Form 10-K for the year ended December 31, 2021, and those risk factors and special considerations set forth in the Company's other filings with the Securities and Exchange Commission (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. Additionally, the risks, uncertainties and other factors set forth above or otherwise referred to in the reports that the Company has filed with the SEC may be further amplified by the global impact of the COVID-19 pandemic and related variants and uncertainties regarding ongoing hostilities between Russia and the Ukraine and the related impacts on macroeconomic conditions, including, among other things, interest rates and inflation. 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 report.
Funds from Operations Attributable to Common Stockholders and Unitholders
Funds from Operations Attributable to Common Stockholders and Unitholders ("FFO") is a financial measure that is commonly used in the REIT industry. The Company presents FFO and FFO excluding non-core items (referred to as "Core FFO") as supplemental operating performance measures. FFO and Core FFO are not used by the Company as, nor should they be considered to be, alternatives to net income computed under U.S. GAAP as an indicator of the Company’s operating performance or as alternatives to cash from operating activities computed under U.S. GAAP as an indicator of the Company’s ability to fund its cash needs.
FFO and Core FFO are not meant to represent a comprehensive system of financial reporting and do not present, nor do they intend to present, a complete picture of the Company's financial condition and operating performance. The Company believes that net income computed under U.S. GAAP is the primary measure of performance and that FFO and Core FFO are only meaningful when they are used in conjunction with net income.
The Company considers FFO and Core FFO to be useful financial performance measurements of an equity REIT because, together with net income and cash flows, FFO and Core FFO provide investors with additional bases to evaluate 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. The Company believes that its condensed consolidated financial statements, prepared in accordance with U.S. GAAP, provide the most meaningful picture of its financial condition and its operating performance.
In calculating FFO, the Company follows the definition for this measure published by the National Association of Real Estate Investment Trusts ("NAREIT"), which is the leading REIT industry association. The Company believes that, under the NAREIT FFO definition, the two most significant adjustments made to net income are (i) the exclusion of historical cost depreciation and (ii) the exclusion of gains and losses from the sale of previously depreciated properties. The Company agrees that these two NAREIT adjustments are useful to investors for the following reasons:
(a)historical cost accounting for real estate assets in accordance with U.S. GAAP assumes, through depreciation charges, that the value of real estate assets diminishes predictably over time. NAREIT stated in its White Paper on
Funds from Operations "since real estate asset values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves." Consequently, NAREIT’s definition of FFO reflects the fact that real estate, as an asset class, generally appreciates over time and depreciation charges required by U.S. GAAP do not reflect the underlying economic realities.
(b)REITs were created as a legal form of organization in order to encourage public ownership of real estate as an asset class through investment in firms that were in the business of long-term ownership and management of real estate. The exclusion, in NAREIT’s definition of FFO, of gains and losses from the sales of previously depreciated operating real estate assets allows investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT’s activity and assists in comparing those operating results between periods.
Management believes that it 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 disclosure of FFO may not be comparable to the Company’s calculation.
The following table is a reconciliation of net income available to common stockholders to FFO and Core FFO for the three and nine months ended September 30, 2022 and 2021 (in thousands, except share and per share amounts):
Essex Property Trust, Inc.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income available to common stockholders | $ | 92,842 | $ | 118,390 | $ | 223,150 | $ | 351,680 | |||||||||||||||
| Adjustments: | |||||||||||||||||||||||
| Depreciation and amortization | 135,511 | 130,564 | 403,561 | 387,887 | |||||||||||||||||||
| Gains not included in FFO | (17,423) | (42,897) | (17,423) | (145,253) | |||||||||||||||||||
| Depreciation and amortization from unconsolidated co-investments | 18,288 | 15,044 | 54,532 | 44,592 | |||||||||||||||||||
| Noncontrolling interest related to Operating Partnership units | 3,247 | 4,168 | 7,800 | 12,403 | |||||||||||||||||||
| Depreciation attributable to third party ownership and other (1) | (357) | (145) | (1,064) | (412) | |||||||||||||||||||
| Funds from operations attributable to common stockholders and unitholders | $ | 232,108 | $ | 225,124 | $ | 670,556 | $ | 650,897 | |||||||||||||||
| Funds from operations attributable to common stockholders and unitholders per share - diluted | $ | 3.45 | $ | 3.34 | $ | 9.93 | $ | 9.67 | |||||||||||||||
| Non-core items: | |||||||||||||||||||||||
| Expensed acquisition and investment related costs | $ | 230 | $ | 108 | $ | 248 | $ | 164 | |||||||||||||||
| Deferred tax expense (benefit) on unconsolidated co-investments (2) | 1,755 | 3,041 | (7,863) | 5,391 | |||||||||||||||||||
| Gain loss on sale of marketable securities | — | — | (12,430) | (2,499) | |||||||||||||||||||
| Change in unrealized losses (gains) on marketable securities, net | 17,115 | (7,091) | 63,556 | (23,772) | |||||||||||||||||||
| Provision for credit losses | (1) | (3) | (64) | (110) | |||||||||||||||||||
| Equity loss (income) from non-core co-investments (3) | 1,563 | (10,868) | 31,117 | (19,266) | |||||||||||||||||||
| Loss on early retirement of debt, net | 2 | — | 2 | 18,982 | |||||||||||||||||||
| Loss on early retirement of debt from unconsolidated co-investments | 1 | 15 | 988 | 18 | |||||||||||||||||||
| Co-investment promote income | — | — | (17,076) | — | |||||||||||||||||||
| Income from early redemption of preferred equity investments and notes receivable | — | — | (858) | (8,260) | |||||||||||||||||||
| General and administrative and other, net | 882 | 252 | 2,327 | 765 | |||||||||||||||||||
| Insurance reimbursements, legal settlements, and other, net | (5,069) | (4) | (5,077) | (190) | |||||||||||||||||||
| Core Funds from Operations attributable to common stockholders and unitholders | $ | 248,586 | $ | 210,574 | $ | 725,426 | $ | 622,120 | |||||||||||||||
| Core Funds from Operations attributable to common stockholders and unitholders per share-diluted | $ | 3.69 | $ | 3.12 | $ | 10.75 | $ | 9.24 | |||||||||||||||
| Weighted average number of shares outstanding, diluted (4) | 67,341,189 | 67,391,333 | 67,503,403 | 67,324,087 |
(1) The Company consolidates certain co-investments. The noncontrolling interest's share of net operating income in these investments for the three and nine months ended September 30, 2022 was $0.9 million and $2.5 million, respectively.
(2) Represents deferred tax expense (benefit) related to net unrealized gains or losses on technology co-investments.
(3) Represents the Company's share of co-investment loss (income) from technology co-investments.
(4) Assumes conversion of all outstanding limited partnership units in the Operating Partnership into shares of the Company's common stock and excludes DownREIT limited partnership units.
Net Operating Income
Net operating income ("NOI") and Same-Property NOI are considered by management to be important supplemental performance measures to earnings from operations included in the Company’s condensed consolidated statements of income and comprehensive income. The presentation of Same-Property NOI assists with the presentation of the Company’s operations prior to the allocation of depreciation and any corporate-level or financing-related costs. NOI reflects the operating performance of a community and allows for an easy comparison of the operating performance of individual communities or groups of communities. In addition, because prospective buyers of real estate have different financing and overhead structures, with varying marginal impacts to overhead by acquiring real estate, NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset or group of assets. The Company defines Same-Property NOI as Same-Property revenues less Same-Property operating expenses, including property taxes. Please see the reconciliation of earnings from operations to NOI and Same-Property NOI, which in the table below is the NOI for stabilized properties consolidated by the Company for the periods presented ($ in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Earnings from operations | $ | 128,608 | $ | 137,971 | $ | 367,086 | $ | 428,733 | |||||||||||||||
| Adjustments: | |||||||||||||||||||||||
| Corporate-level property management expenses | 10,184 | 9,060 | 30,532 | 27,135 | |||||||||||||||||||
| Depreciation and amortization | 135,511 | 130,564 | 403,561 | 387,887 | |||||||||||||||||||
| Management and other fees from affiliates | (2,886) | (2,237) | (8,313) | (6,707) | |||||||||||||||||||
| General and administrative | 15,172 | 12,712 | 40,541 | 34,746 | |||||||||||||||||||
| Expensed acquisition and investment related costs | 230 | 108 | 248 | 164 | |||||||||||||||||||
| Gain on sale of real estate and land | — | (42,897) | — | (142,993) | |||||||||||||||||||
| NOI | 286,819 | 245,281 | 833,655 | 728,965 | |||||||||||||||||||
| Less: Non-Same Property NOI | (17,631) | (11,942) | (49,031) | (35,293) | |||||||||||||||||||
| Same-Property NOI | $ | 269,188 | $ | 233,339 | $ | 784,624 | $ | 693,672 |
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Interest Rate Hedging Activities
The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company uses interest rate swaps as part of its cash flow hedging strategy.
All of the Company's interest rate swaps are designated as cash flow hedges as of September 30, 2022. The following table summarizes the notional amount, carrying value, and estimated fair value of the Company’s cash flow hedge derivative instruments used to hedge interest rates as of September 30, 2022. The notional amount represents the aggregate amount of a particular security that is currently hedged at one time, but does not represent exposure to credit, interest rates or market risks. The table also includes a sensitivity analysis to demonstrate the impact on the Company’s derivative instruments from an increase or decrease in 10-year Treasury bill interest rates by 50 basis points, as of September 30, 2022.
| Notional Amount | Maturity Date Range | Carrying and Estimated Fair Value | Estimated Carrying Value | ||||||||||||||||||||||||||
| +50 | -50 | ||||||||||||||||||||||||||||
| ($ in thousands) | Basis Points | Basis Points | |||||||||||||||||||||||||||
| Cash flow hedges: | |||||||||||||||||||||||||||||
| Interest rate swaps | $ | 300,000 | 2026 | $ | 6,166 | $ | 1,533 | $ | 10,680 | ||||||||||||||||||||
| Total cash flow hedges | $ | 300,000 | 2026 | $ | 6,166 | $ | 1,533 | $ | 10,680 |
Additionally, the Company has entered into four total return swap contracts, with an aggregate notional amount of $223.8 million that effectively convert $223.8 million of fixed mortgage notes payable to a floating interest rate based on the SIFMA plus a spread and have a carrying value of zero at September 30, 2022. The Company is exposed to insignificant interest rate risk on these swaps as the related mortgages are callable, at par, by the Company, co-terminus with the termination of any related swap. These derivatives do not qualify for hedge accounting.
Interest Rate Sensitive Liabilities
The Company is exposed to interest rate changes primarily as a result of its lines of credit and long-term debt used to maintain liquidity and fund capital expenditures and expansion of the Company's real estate investment portfolio and operations. The Company’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company borrows primarily at fixed rates and may enter into derivative financial instruments such as interest rate swaps, caps, and treasury locks in order to mitigate its interest rate risk on a related financial instrument. The Company does not enter into derivative or interest rate transactions for speculative purposes.
The Company’s interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows.
| For the Years Ended | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | Fair value | |||||||||||||||||||||||||||||||||||||||
| ($ in thousands, except for interest rates) | |||||||||||||||||||||||||||||||||||||||||||||||
| Fixed rate debt | $ | 40,238 | 302,092 | 402,177 | 632,035 | 548,291 | 3,836,558 | $ | 5,761,391 | $ | 5,193,400 | ||||||||||||||||||||||||||||||||||||
| Average interest rate | 3.6 | % | 3.4 | % | 4.0 | % | 3.5 | % | 3.5 | % | 3.2 | % | 3.2 | % | |||||||||||||||||||||||||||||||||
| Variable rate debt (1) | $ | 201 | 853 | 30,413 | 1,019 | 1,114 | 409,666 | $ | 443,266 | $ | 439,930 | ||||||||||||||||||||||||||||||||||||
| Average interest rate | 2.5 | % | 2.5 | % | 3.1 | % | 2.5 | % | 2.5 | % | 2.7 | % | 2.7 | % |
(1) $223.8 million is subject to total return swaps.
The table incorporates only those exposures that exist as of September 30, 2022. It does not consider those exposures or positions that could arise after that date. As a result, the Company's ultimate realized gain or loss, with respect to interest rate fluctuations and hedging strategies would depend on the exposures that arise prior to settlement.
Item 4. Controls and Procedures
Essex Property Trust, Inc.
As of September 30, 2022, Essex carried out an evaluation, under the supervision and with the participation of management, including Essex’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Essex's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, Essex’s Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2022, Essex's disclosure controls and procedures were effective to ensure that the information required to be disclosed by Essex in the reports that Essex files or submits under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such disclosure controls and procedures were also effective to ensure that information required to be disclosed in the reports that Essex files or submits under the Exchange Act is accumulated and communicated to Essex’s management, including Essex’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
There were no changes in Essex's internal control over financial reporting, that occurred during the quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, Essex’s internal control over financial reporting.
Essex Portfolio, L.P.
As of September 30, 2022, the Operating Partnership carried out an evaluation, under the supervision and with the participation of management, including Essex's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Operating Partnership's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2022, the Operating Partnership's disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Operating Partnership in the reports that the Operating Partnership files or submits under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such disclosure controls and procedures were also effective to ensure that information required to be disclosed in the reports that the Operating Partnership files or submits under the Exchange Act is accumulated and communicated to the Operating Partnership’s management, including Essex's Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
There were no changes in the Operating Partnership's internal control over financial reporting, that occurred during the quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.
Part II -- Other Information
Item 1: Legal Proceedings
The Company is subject to various lawsuits in the normal course of its business operations. While the resolution of any such matter cannot be predicted with certainty, the Company is not currently a party to any legal proceedings nor is any legal proceeding currently threatened against the Company that the Company believes, individually or in the aggregate, would have a material adverse effect on the Company's financial condition, results of operations or cash flows.
Item 1A. Risk Factors
In addition to the other information set forth in this quarterly report on Form 10-Q, you should carefully consider the factors discussed in "Part I. Item 1A. Risk Factors" in the Company's annual report on Form 10-K for the year ended December 31, 2021, which could materially affect the Company's financial condition, results of operations or cash flows. There have been no material changes to the Risk Factors disclosed in Item 1A of the Company's annual report on Form 10-K for the year ended December 31, 2021, as filed with the SEC and available at www.sec.gov. The risks described in the Company's annual report on Form 10-K and subsequent quarterly reports on Form 10-Q are not the only risks facing the Company. Additional risks and uncertainties not currently known or that the Company currently deems to be immaterial may also materially adversely affect the Company's financial condition, results of operations or cash flows.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities; Essex Portfolio, L.P.
During the three months ended September 30, 2022, the Operating Partnership issued OP Units in private placements in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act, in the amounts and for the consideration set forth below:
During the three months ended September 30, 2022, Essex issued an aggregate of 841 shares of its common stock upon the exercise of stock options. Essex contributed the net proceeds of $0.2 million from the option exercises during the three months ended September 30, 2022 to the Operating Partnership in exchange for an aggregate of 841 OP Units, as required by the Operating Partnership’s partnership agreement. Furthermore, for each share of common stock issued by Essex in connection with vesting of restricted stock awards and the exchange of OP units, the Operating Partnership issued OP Units to Essex, as required by the partnership agreement. During the three months ended September 30, 2022, zero OP Units were issued to Essex pursuant to this mechanism.
Stock Repurchases
The following table summarizes the Company's purchases of its common stock during the three months ended September 30, 2022.
| Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of a Publicly Announced Program**(1)** | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program (in millions)****(1) | |||||||||||||||||||||||
| August 1, 2022 - August 31, 2022 | 51,445 | $ | 274.23 | 51,445 | $ | 139.5 | ||||||||||||||||||||
| September 1, 2022 - September 30, 2022 | 320,439 | $ | 259.06 | 320,439 | $ | 430.1 | ||||||||||||||||||||
| Total | 371,884 | $ | 261.16 | 371,884 | $ | 430.1 |
(1) In September 2022, the Board of Directors approved a new stock repurchase plan to allow the Company to acquire common stock up to an aggregate of $500.0 million. The plan supersedes the Company's previous common stock repurchase plan announced in December 2015. Following the approval of the new plan, 271,397 shares totaling $69.9 million were repurchased under the new plan.
Item 3: Defaults Upon Senior Securities
None.
Item 4: Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
- Filed or furnished herewith.
** In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
| ESSEX PROPERTY TRUST, INC. | |||||
| (Registrant) | |||||
| Date: October 27, 2022 | |||||
| By: /s/ BARBARA PAK | |||||
| Barbara Pak | |||||
| Executive Vice President and Chief Financial Officer (Authorized Officer, Principal Financial Officer) |
| Date: October 27, 2022 | |||||
| By: /s/ JOHN FARIAS | |||||
| John Farias | |||||
| Senior Vice President and Chief Accounting Officer |
| ESSEX PORTFOLIO, L.P. By Essex Property Trust, Inc., its general partner | |||||
| (Registrant) | |||||
| Date: October 27, 2022 | |||||
| By: /s/ BARBARA PAK | |||||
| Barbara Pak | |||||
| Executive Vice President and Chief Financial Officer (Authorized Officer, Principal Financial Officer) |
| Date: October 27, 2022 | |||||
| By: /s/ JOHN FARIAS | |||||
| John Farias | |||||
| Senior Vice President and Chief Accounting Officer |