Essex Property Trust, Inc. (NYSE: ESS) is a self-administered and self-managed real estate investment trust (REIT) that acquires, develops, redevelops, and manages apartment communities in selected residential areas located on the West Coast of the United States. As of March 31, 2024, the company owned or had ownership interests in 253 operating apartment communities, comprising 62,271 apartment homes, excluding the company's ownership interest in preferred equity co-investments, loan investments, and three operating commercial buildings.

Business Overview

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. Essex'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.

Financials

For the full year 2023, Essex reported annual net income of $405.8 million, annual revenue of $1.67 billion, annual operating cash flow of $980.1 million, and annual free cash flow of $839.7 million. In the first quarter of 2024, the company reported net income of $285.1 million, revenue of $426.9 million, operating cash flow of $314.9 million, and free cash flow of $305.5 million.

Portfolio Distribution

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), and the Seattle metropolitan area. As of March 31, 2024, the company's consolidated apartment communities were distributed as follows: Southern California (44%), Northern California (36%), and Seattle Metro (20%).

First Quarter 2024 Performance

In the first quarter of 2024, Essex achieved a 2.2% growth in blended lease rates, which consists of 10 basis points on new leases and 3.9% on renewals. The company's same-property portfolio had an average financial occupancy of 96.3% for the quarter. Financial occupancy is defined as the percentage resulting from dividing actual rental income by total scheduled rental income.

The company's same-property revenues increased by $14.3 million, or 3.6%, to $409.8 million in the first quarter of 2024 compared to the first quarter of 2023. The increase was primarily attributable to a 2.1% increase in average rental rates from $2,576 in the first quarter of 2023 to $2,631 in the first quarter of 2024, and a 0.8% decrease in delinquencies.

Non-same property revenues increased by $0.3 million, or 1.8%, to $14.4 million in the first quarter of 2024 compared to the first quarter of 2023. The increase was primarily due to the acquisition of Hacienda at Camarillo Oaks in 2023 and the consolidation of four apartment home communities as part of the company's purchase of its joint venture partner's 49.9% interest in the BEXAEW portfolio in 2024, partially offset by the sale of CBC and The Sweeps in the first quarter of 2023.

Operating Expenses

Property operating expenses, excluding real estate taxes, increased by $5.0 million, or 6.8%, to $78.9 million for the first quarter of 2024 compared to the first quarter of 2023, primarily due to increases in utilities, insurance, personnel costs, and administrative expenses. Same-property operating expenses, excluding real estate taxes, increased by $5.7 million, or 7.8%, to $78.6 million in the first quarter of 2024 compared to the first quarter of 2023.

Real estate taxes increased by $0.4 million, or 0.9%, to $46.9 million for the first quarter of 2024 compared to the first quarter of 2023, primarily due to a net increase of approximately 2% in California real estate taxes, partially offset by a slight decrease in real estate taxes in the Seattle metro region. Same-property real estate taxes increased by $0.3 million, or 0.6%, to $44.9 million for the first quarter of 2024 compared to the first quarter of 2023.

Depreciation and amortization expense increased by $3.4 million, or 2.5%, to $139.7 million for the first quarter of 2024 compared to the first quarter of 2023, primarily due to the acquisition of Hacienda at Camarillo Oaks in 2023 and the consolidation of four apartment home communities as part of the company's purchase of its joint venture partner's 49.9% interest in the BEXAEW portfolio in 2024, partially offset by the sale of CBC and The Sweeps in the first quarter of 2023.

Interest Expense and Income

Interest expense increased by $4.9 million, or 9.6%, to $55.9 million for the first quarter of 2024 compared to the first quarter of 2023, primarily due to borrowing on the $300.0 million unsecured term loan in April 2023, the $298.0 million of 10-year secured loans closed in July 2023, and the issuance of $350.0 million senior unsecured notes due April 2034 in March 2024, partially offset by the payoff of the $300.0 million of senior unsecured notes due May 1, 2023.

Interest and other income increased by $44.8 million, or 358.4%, to $57.3 million for the first quarter of 2024 compared to the first quarter of 2023, primarily due to increases in legal settlements and interest income. Equity income from co-investments increased by $1.5 million, or 13.8%, to $12.4 million for the first quarter of 2024 compared to the first quarter of 2023, primarily due to increases in equity income from non-core technology co-investments and co-investment promote income, partially offset by a non-cash impairment loss from an unconsolidated preferred equity co-investment and a decrease in income from preferred equity investments.

The company reported a gain on remeasurement of co-investment of $138.3 million resulting from the acquisition of its joint venture partner's 49.9% co-investment interest in the BEXAEW portfolio comprised of four apartment home communities.

Liquidity

As of March 31, 2024, the company had $499.0 million of unrestricted cash and cash equivalents and $91.3 million in marketable securities, all of which were equity 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.

Recent Developments

In March 2024, the company issued $350.0 million of senior unsecured notes due on April 1, 2034 with a coupon rate of 5.500% per annum. The company intends to use the net proceeds of this offering to repay upcoming debt maturities, including to fund a portion of the repayment of its outstanding 3.875% senior unsecured notes due May 2024 and for other general corporate and working capital purposes, including funding of potential acquisition opportunities.

The company's development pipeline was comprised of various consolidated predevelopment projects, with total incurred costs of $24.6 million as of March 31, 2024. The company expects to fund the development and predevelopment communities by using a combination of 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.

Conclusion

Essex Property Trust, Inc. is a well-positioned REIT with a strong presence in the West Coast apartment market. The company's focus on maintaining a disciplined capital allocation strategy and generating accretive growth through its joint venture platform has allowed it to navigate the current market environment effectively. With a healthy balance sheet, diversified portfolio, and strategic initiatives, Essex is poised to continue delivering value for its shareholders.