ESSEX PROPERTY TRUST, INC. 
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 2019 annual report on Form 10-K for the year endedDecember 31, 2019 . 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 theWest Coast ofthe United States .Essex owns all of its interests in its real estate investments, directly or indirectly through theOperating Partnership .Essex is the sole general partner of theOperating Partnership and, as ofSeptember 30, 2020 , had an approximately 96.6% general partnership interest in theOperating 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 portfolio. As ofSeptember 30, 2020 , the Company owned or had ownership interests in 247 operating apartment communities, comprising 60,387 apartment homes, excluding the Company's ownership interest in preferred equity co-investments, loan investments, one operating commercial building, and a development pipeline comprised of three consolidated projects and three unconsolidated joint venture projects.
The Company's apartment communities are located in the following major regions:
Southern California (primarilyLos Angeles ,Orange ,San Diego , andVentura counties)Northern California (theSan Francisco Bay Area )Seattle Metro (Seattle metropolitan area) As ofSeptember 30, 2020 , the Company's development pipeline was comprised of three consolidated projects under development, three unconsolidated joint venture projects under development, and various predevelopment projects aggregating 1,853 apartment homes, with total incurred costs of$0.9 billion , and estimated remaining project costs of approximately$178.0 million ,$125.0 million of which represents the Company's share of estimated remaining costs, for total estimated project costs of$1.1 billion .
The Company's consolidated apartment communities are as follows:
As of September 30, 2020 As of September 30, 2019
Apartment Homes % Apartment Homes %
Southern California 22,675 43 % 22,674 45 %
Northern California 19,319 37 % 17,556 35 %
Seattle Metro 10,217 20 % 10,238 20 %
Total 52,211 100 % 50,468 100 %
Co-investments, including Wesco I, Wesco III, Wesco IV, Wesco V, BEXAEW, BEX II ,
BEX III , and BEX IV communities, developments under construction, and preferred
equity interest co-investment communities are not included in the table
presented above for both periods.
The United States and other countries around the world are continuing to experience an unprecedented health pandemic related to COVID-19, which has created considerable instability, disruption, and uncertainty. Governmental authorities in impacted regions are taking dramatic and unpredictable actions in an effort to slow COVID-19's spread. Federal, state and local jurisdictions have issued and revised varying forms of "Shelter-in-Place" orders, halted or restricted public gatherings and restricted business to only those that are considered "essential" or requiring businesses to make changes to their operations in a 39 -------------------------------------------------------------------------------- Table of Contents manner that negatively affects profitability, resulting in extraordinary job losses and related financial impacts that will affect future operations to an unknown extent. Moreover, eviction moratoriums and, laws that limit rent increases during times of emergency and prohibit the ability to collect unpaid rent during certain timeframes, have been enacted in various formats at various levels of government, including regions in whichEssex's communities are located, impactingEssex properties. The Company is working to comply with the stated intent of local, county, state and federal laws. In that regard, the Company has implemented a wide range of practices to protect and support its employees and residents. Such measures include: •closing the Company's corporate offices and instituting "work from home" measures for corporate associates; •closing leasing offices to non-Essex personnel, reducing on-site staff so that hygiene and "social distancing" standards can be effectively managed and applied, and requiring face coverings to be worn; •transitioning most public interactions with leasing staff to on-line and telephonic communications; •increasing cleaning practices for common areas and community amenities and temporarily closing common areas and community amenities or opening with limited hours, limited capacity or by reservation only, depending in part on jurisdictional requirements; and •delaying the response to maintenance orders in certain circumstances in order to promote the protection of our employees and residents. Due to the COVID-19 pandemic, some of the Company's residents, their health, their employment, and, thus, their ability to pay rent, have been and may continue to be impacted. To support residents, the Company has implemented the following steps, including, but not limited to: •assembling aResident Response Team to effectively and efficiently respond to resident needs and concerns with respect to the pandemic; •structuring payment plans for residents who are unable to pay their rent as a result of the outbreak and waiving late fees for those residents; and •establishing the Essex Cares fund for the purpose of supporting the Company's residents and communities that are experiencing financial hardships caused by the COVID-19 pandemic. The impact of the COVID-19 pandemic on theU.S. and world economies generally, and on the Company's future results in particular, has been, and may continue to be significant. The long-term impact will largely depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, when a vaccine is developed and can be safely and widely distributed and whether employees and employers will continue to promote remote work if and when the pandemic concludes. This includes new information which may emerge concerning the severity of COVID-19, the success of actions taken to contain or treat COVID-19, 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 endedSeptember 30, 2020 and 2019) increased from 0.4% for the three months endedSeptember 30, 2019 to 2.7% for the three months endedSeptember 2020 . The Company has executed some payment plans and will continue to work with residents to execute payment plans related to such cash delinquencies. As part of this process, the Company assessed the collectability reserve attributable to those deferred payments and the anticipated execution of payment plans in the future, which partially mitigated the delinquencies resulting in actual delinquencies as a percentage of scheduled rent for the Company's Same-Property portfolio of 2.0% for the three months endedSeptember 30, 2020 . As ofSeptember 30, 2020 , the increase in delinquencies has not had a material adverse impact to the Company's liquidity position. The Company's average financial occupancy for the Company's Same-Property portfolio remained consistent at 96.0% for the three months endedSeptember 30, 2020 and 2019. 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 nine months endedSeptember 30, 2020 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
The Company's average financial occupancy for the Company's Same-Property portfolio was 96.0% for the three months endedSeptember 30, 2020 and 2019. 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 40 -------------------------------------------------------------------------------- Table of Contents 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 endedSeptember 30, 2020 and 2019 is as follows: Three Months Ended September 30, 2020 2019 Southern California 95.9 % 96.1 % Northern California 96.2 % 95.9 % Seattle Metro 95.9 % 95.9 %
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 2020 2019 Change Change Same-Property Revenues: Southern California 21,239$ 133,422 $ 143,877 $ (10,455) (7.3) % Northern California 15,638 121,474 132,763 (11,289) (8.5) % Seattle Metro 10,112 60,062 61,051 (989) (1.6) % Total Same-Property Revenues 46,989 314,958 337,691 (22,733) (6.7) % Non-Same Property Revenues 53,506 26,813 26,693 99.6 % Total Property Revenues$ 368,464 $ 364,504 $ 3,960 1.1 % Same-Property Revenues decreased by$22.7 million or 6.7% to$315.0 million in the third quarter of 2020 from$337.7 million in the third quarter of 2019. The decrease was primarily attributable to an additional$16.8 million of cash concessions compared to the prior year period and a decrease of 0.4% in average rental rates from$2,346 per apartment home in the third quarter of 2019 to$2,336 per apartment home in the third quarter of 2020. Additionally, delinquencies as a percentage of scheduled rent increased from 0.4% in the third quarter of 2019 to 2.0% in the third quarter of 2020. Non-Same Property Revenues increased by$26.7 million or 99.6% to$53.5 million in the third quarter of 2020 from$26.8 million in the third quarter of 2019. The increase was primarily due to revenues generated from the six communities that were consolidated as part of the Company's purchase of CPPIB's 45.0% co-investment interests in the first quarter of 2020, slightly offset by the sale of One South Market in the second quarter of 2020. Management and other fees from affiliates decreased by$0.1 million or 4.2% to$2.3 million in the third quarter of 2020 from$2.4 million in the third quarter of 2019. 41 -------------------------------------------------------------------------------- Table of Contents Property operating expenses, excluding real estate taxes increased$5.1 million or 8.1% to$68.0 million for the third quarter of 2020 compared to$62.9 million for the third quarter of 2019, primarily due to an increase of$1.9 million in maintenance and repairs expenses, an increase of$1.5 million in utilities expenses, and an increase of$1.8 million in administrative expenses. The increases were primarily due to expenses generated from the six communities that were consolidated as part of the Company's purchase of CPPIB's 45.0% co-investment interests in the first quarter of 2020. Same-Property operating expenses, excluding real estate taxes, increased by$1.5 million or 2.5% to$60.5 million in the third quarter of 2020 compared to$59.0 million in the third quarter of 2019, primarily due to an increase of$1.0 million in maintenance and repairs expenses and an increase of$0.6 million in utilities expenses offset by a decrease of$0.2 million in administrative expenses. Real estate taxes increased$5.1 million or 13.0% to$44.4 million for the third quarter of 2020 compared to$39.3 million for the third quarter of 2019, primarily due to the additions of six communities that were consolidated in the first quarter of 2020 as part of the Company's purchase of CPPIB's 45.0% co-investment interests, and due to increase in property valuations and tax rates in the Seattle Metro region. Same-Property real estate taxes increased by$2.0 million or 5.6% to$37.6 million in the third quarter of 2020 compared to$35.6 million in the third quarter of 2019, primarily due to an increase in property valuations and tax rates in the Seattle Metro region.
Corporate-level property management expenses remained relatively flat at
Depreciation and amortization expense increased by$9.4 million or 7.8% to$130.2 million for the third quarter of 2020 compared to$120.8 million for the third quarter of 2019, primarily due to the additions of six communities that were consolidated in the first quarter of 2020 as part of the Company's purchase of CPPIB's 45.0% co-investment interests. Interest expense increased by$0.5 million or 0.9% to$55.4 million for the third quarter of 2020 compared to$54.9 million for the third quarter of 2019, primarily due to an increase in average outstanding debt primarily as a result of the issuance of$400.0 million of senior unsecured notes dueJanuary 15, 2030 inAugust 2019 ,$650 million of senior unsecured notes dueMarch 15, 2032 in February andJune 2020 , and$600 million of senior unsecured notes dueJanuary 15, 2031 andSeptember 1, 2050 inAugust 2020 , which resulted in an increase of$9.2 million interest expense for the third quarter of 2020. Additionally, there was a$3.5 million decrease in capitalized interest in the third quarter of 2020, due to a decrease in development activity as compared to the same period in 2019. These increases to interest expense were partially offset by debt that was paid off or matured, regular principal amortization during and after the third quarter of 2019, and lower average interest rates, which resulted in a decrease in interest expense of$12.2 million for the third quarter of 2020. Total return swap income of$3.0 million in the third quarter of 2020 consists of monthly settlements related to the Company's total return swap contracts that were entered into during 2015 in connection with issuing fixed rate tax-exempt mortgage notes. Interest and other income decreased by$2.2 million or 25.3% to$6.5 million for the third quarter of 2020 compared to$8.7 million for the third quarter of 2019, primarily due to a$5.3 million decrease in marketable securities and other income offset by a$3.5 million increase in unrealized gains on marketable securities. Equity income from co-investments decreased by$6.7 million or 30.9% to$15.0 million for the third quarter of 2020 compared to$21.7 million for the third quarter of 2019, primarily due to a decrease in net unrealized gain of$4.5 million from an unconsolidated co-investment, a decrease of$3.4 million in equity income from co-investments, and a decrease of$1.1 million in income from preferred equity investments including income from early redemptions. The decrease was partially offset by an increase of$2.2 million in gain on sale of co-investment communities. Loss on early retirement of debt, net of$19.1 million for the third quarter of 2020 was due to the early repayment of$300.0 million of senior unsecured notes, due inAugust 2022 , during the third quarter of 2020.
Comparison of the Nine Months Ended
Our average financial occupancy for the Company's stabilized apartment
communities or "Same-Property" (stabilized properties consolidated by the
Company for the nine months ended
The regional breakdown of the Company's Same-Property portfolio for financial
occupancy for the nine months ended
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Nine Months Ended September 30,
2020 2019
Southern California 95.7 % 96.5 %
Northern California 96.0 % 96.5 %
Seattle Metro 96.0 % 96.4 %
The following table provides a breakdown of revenues amounts, including revenues attributable to the Same-Properties:
Nine Months Ended
Number of Apartment September 30, Dollar Percentage
Property Revenues ($ in thousands) Homes 2020 2019 Change Change
Same-Property Revenues:
Southern California 21,239 $ 415,366 $ 430,055 $ (14,689) (3.4) %
Northern California 15,638 383,485 395,236 (11,751) (3.0) %
Seattle Metro 10,112 182,586 180,941 1,645 0.9 %
Total Same-Property Revenues 46,989 981,437 1,006,232 (24,795) (2.5) %
Non-Same Property Revenues 144,926 71,535 73,391 102.6 %
Total Property Revenues $ 1,126,363 $ 1,077,767 $ 48,596 4.5 %
Same-Property Revenues decreased by $24.8 million or 2.5% to $981.4 million in
the nine months ended September 30, 2020 from $1.0 billion in the nine months
ended September 30, 2019 . The decrease was primarily attributable to an increase
in delinquencies as a percentage of scheduled rent from 0.3% for the nine months
ended September 30, 2019 as compared to 1.9% for the nine months ended September
30, 2020 and a decrease of 0.6% in financial occupancy from 96.5% in the nine
months ended September 30, 2019 to 95.9% in the nine months ended September 30,
2020
Non-Same Property Revenues increased by $73.4 million or 102.6% to $144.9
million in the nine months ended September 30, 2020 from $71.5 million in the
nine months ended September 30, 2019 . The increase was primarily due to revenues
generated from the six communities that were consolidated as part of the
Company's purchase of CPPIB's 45.0% co-investment interests in the first quarter
of 2020, slightly offset by the sale of One South Market in the second quarter
of 2020.
Management and other fees from affiliates increased by $0.3 million or 4.3% to
$7.3 million in the nine months ended September 30, 2020 compared to $7.0
million in the nine months ended September 30, 2019 . The increase was primarily
due to the addition of The Courtyards at 65th Street , 777 Hamilton, and Velo and
Ray communities to the Company's joint venture portfolio in 2019, offset
slightly by the disposition of Mosso joint venture community in the fourth
quarter of 2019, and by the consolidation of six communities as part of the
Company's purchase of CPPIB's 45.0% co-investment interests.
Property operating expenses, excluding real estate taxes increased $16.9 million
or 9.4% to $197.3 million for the nine months ended September 30, 2020 compared
to $180.4 million for the nine months ended September 30, 2019 , primarily due to
an increase of $7.1 million in maintenance and repairs expenses, an increase of
$5.2 million in utilities expenses, and an increase of $4.6 million in
administrative expenses. The increases were primarily due to expenses generated
from the six communities that were consolidated as part of the Company's
purchase of CPPIB's 45.0% co-investment interests in the first quarter of 2020.
Same-Property operating expenses, excluding real estate taxes, increased by $5.0
million or 2.9% to $176.0 million in the nine months ended September 30, 2020
compared to $171.0 million in the nine months ended September 30, 2019 ,
primarily due to an increase of $3.3 million in maintenance and repairs expenses
and an increase of $1.9 million in utilities expenses.
Real estate taxes increased $17.4 million or 15.1% to $132.4 million for the
nine months ended September 30, 2020 , compared to $115.0 million for the nine
months ended September 30, 2019 , primarily due to the additions of six
communities that were consolidated in the first quarter of 2020 as part of the
Company's purchase of CPPIB's 45.0% co-investment interests. Same-Property real
estate taxes increased by $5.3 million or 4.9% to $111.7 million in the nine
months ended September 30, 2020 from $106.4 million in the nine months ended
September 30, 2019 , primarily due to an increase in property valuations and tax
rates in Seattle Metro region.
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Corporate-level property management expenses increased $0.5 million or 2.0% to
$26.0 million in the nine months ended September 30, 2020 compared to $25.5
million in the nine months ended September 30, 2019 , primarily due to an
increase in corporate-level property management and staffing costs supporting
the communities.
Depreciation and amortization expense increased by $34.6 million or 9.6% to
$395.4 million for the nine months ended September 30, 2020 compared to $360.8
million for the nine months ended September 30, 2019 , primarily due to the
additions of six communities that were consolidated in the first quarter of 2020
as part of the Company's purchase of CPPIB's 45.0% co-investment interests.
Interest expense increased by $2.3 million or 1.4% to $165.0 million for the
nine months ended September 30, 2020 compared to $162.7 million for the nine
months ended September 30, 2019 , primarily due to an increase in average
outstanding debt primarily as a result of the issuance of $500.0 million of
senior unsecured notes due March 1, 2029 in February and March 2019 , $550.0
million of senior unsecured notes due January 15, 2030 in August and October
2019 , and $650 million of senior unsecured notes due March 15, 2032 in February
and June 2020 , and $600 million of senior unsecured notes due January 15, 2031
and September 1, 2050 in August 2020 , which resulted in an increase of $28.9
million interest expense for the nine months ended September 30, 2020 .
Additionally, there was a $6.8 million decrease in capitalized interest in the
nine months ended September 30, 2020 , due to a decrease in development activity
as compared to the same period in 2019. These increases to interest expense were
partially offset by debt that was paid off or matured, regular principal
amortization during and after the nine months ended September 30, 2019 , and
lower average interest rates, which resulted in a decrease in interest expense
of $33.4 million for the nine months ended September 30, 2020 .
Total return swap income of $7.7 million for the nine months ended September 30,
2020 consists of monthly settlements related to the Company's total return swap
contracts that were entered into during 2015 in connection with issuing fixed
rate tax-exempt mortgage notes.
Interest and other income decreased by $16.6 million or 56.7% to $12.7 million
for the nine months ended September 30, 2020 compared to $29.3 million for the
nine months ended September 30, 2019 , primarily due to a $13.5 million decrease
in marketable securities and other income and a $2.1 million decrease in
unrealized gains on marketable securities.
Equity income from co-investments decreased by $1.4 million or 2.6% to $53.5
million for the nine months ended September 30, 2020 compared to $54.9 million
for the nine months ended September 30, 2019 , primarily due to a decrease of
$10.2 million in equity income from co-investments. The decrease was offset by
an increase of $5.6 million in co-investment promote income, and increase of
$2.0 million in income from preferred equity investments including income from
early redemptions, and an increase of $1.4 million in gain on sale of
co-investment communities.
Deferred tax expense on unrealized gain on unconsolidated co-investment of
Loss on early retirement of debt, net of$23.8 million for the nine months endedSeptember 30, 2020 was due to the early repayment of$297.7 million of secured mortgage notes payable in the first and second quarters of 2020 and the early repayment of$300.0 million of senior unsecured notes during the third quarter of 2020. Gain on remeasurement of co-investment of$234.7 million for the nine months endedSeptember 30, 2020 resulted from the Company's purchase of CPPIB's 45.0% co-investment interests.
Liquidity and Capital Resources
As ofSeptember 30, 2020 , the Company had$558.4 million of unrestricted cash and cash equivalents and$135.0 million in marketable securities, of which$105.4 million 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 44 -------------------------------------------------------------------------------- Table of Contents 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
As ofSeptember 30, 2020 , the Company had two unsecured lines of credit aggregating$1.24 billion . As ofSeptember 30, 2020 , there was no amount 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 and was LIBOR plus 0.825% as ofSeptember 30, 2020 . This facility is scheduled to mature inDecember 2023 , with one 18-month extension, exercisable at the Company's option. As ofSeptember 30, 2020 , there was no amount 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 and was LIBOR plus 0.825% as ofSeptember 30, 2020 . This facility is scheduled to mature inFebruary 2021 . InAugust 2020 , theOperating Partnership issued$600.0 million of senior unsecured notes, consisting of$300.0 million aggregate principal amount due onJanuary 15, 2031 with a coupon rate of 1.650% (the "2031 Notes") and$300.0 million aggregate principal amount due onSeptember 1, 2050 with a coupon rate of 2.650% (the "2050 Notes" and together with the 2031 Notes, the "Notes"). The 2031 Notes were offered to investors at a price of 99.035% of par value and the 2050 Notes at 99.691% of par value. Interest is payable on the 2031 Notes semiannually onJanuary 15 andJuly 15 of each year, beginningJanuary 15, 2021 . Interest is payable on the 2050 Notes semiannually onMarch 1 andSeptember 1 of each year, beginningMarch 1, 2021 . The Notes are general unsecured senior obligations of theOperating Partnership , rank equally in right of payment with all other senior unsecured indebtedness of theOperating Partnership and are unconditionally guaranteed byEssex . The Company used the net proceeds of this offering to repay debt maturities, including certain unsecured private placement notes, secured mortgage notes, and to fund the redemption of$300.0 million aggregate principal amount of its outstanding 3.625% senior unsecured notes dueAugust 2022 , and for other general corporate and working capital purposes.
In
InFebruary 2020 , theOperating Partnership issued$500.0 million of senior unsecured notes due onMarch 15, 2032 , with a coupon rate of 2.650% (the "2032 Notes"), which are payable onMarch 15 andSeptember 15 of each year, beginning onSeptember 15, 2020 . The 2032 Notes were offered to investors at a price of 99.628% of par value. The 2032 Notes are general unsecured senior obligations of theOperating Partnership , rank equally in right of payment with all other senior unsecured indebtedness of theOperating Partnership and are unconditionally guaranteed byEssex . The Company used the net proceeds of this offering to repay indebtedness under its unsecured lines of credit, which had been used to fund the buyout of CPPIB's 45.0% joint venture interests, as well as repay$100.3 million of secured debt during the quarter that endedMarch 31, 2020 . InJune 2020 , theOperating Partnership issued an additional$150.0 million of the 2032 Notes at a price of 105.660% of par value, plus accrued interest fromFebruary 2020 up to, but not including, the date of delivery of the additional notes, with an effective yield of 2.093%. These additional notes have substantially identical terms as the 2032 Notes issued inFebruary 2020 . The proceeds were used to repay indebtedness under the Company's unsecured credit facilities and for other general corporate and working capital purposes. InSeptember 2018 , the Company entered into an 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 "2018 ATM Program"). In connection with the 2018 ATM Program, the Company may also enter into related forward sale agreements whereby, at the Company's discretion, it may sell shares of its common stock under the 2018 ATM Program under forward sales agreements. The use of a forward sales 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 receiving the proceeds from the sale of shares until a later date. During the nine months endedSeptember 30, 2020 , the Company did not issue any shares of common stock through the 2018 ATM Program. As ofSeptember 30, 2020 , there are no outstanding forward purchase agreements, and$826.6 million of shares remain available to be sold under this program. 45 -------------------------------------------------------------------------------- Table of Contents InDecember 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 . InFebruary 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. InMay 2020 , the board of directors approved the replenishment of the stock repurchase plan such that, as of such date, the Company had$250.0 million of purchase authority remaining under the replenished plan. During the nine months endedSeptember 30, 2020 , the Company repurchased and retired 985,509 shares of its common stock totaling$223.0 million , including commissions, at an average price of$226.27 per share. As ofSeptember 30, 2020 , the Company had$203.3 million of purchase authority remaining under the 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 ofSeptember 30, 2020 , the Company's development pipeline was comprised of three consolidated projects under development, three unconsolidated joint venture projects under development and various consolidated predevelopment projects, aggregating 1,853 apartment homes, with total incurred costs of$0.9 billion , and estimated remaining project costs of approximately$178.0 million ,$125.0 million of which represents the Company's share of estimated remaining costs, for total estimated project costs of$1.1 billion . 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 pipeline 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. Redevelopment Pipeline The Company defines redevelopment communities as existing properties owned or recently acquired, which have been targeted for additional investment by the Company with the expectation of increased financial returns through property improvement. During redevelopment, apartment homes may not be available for rent and, as a result, may have less than stabilized operations. As ofSeptember 30, 2020 , the Company had ownership interests in three major redevelopment communities aggregating 1,112 apartment homes with estimated redevelopment costs of$109.1 million , of which approximately$5.9 million remains to be expended. The Company has the ability to cease funding of the redevelopment pipeline as needed. Derivative Activity The Company uses interest rate swaps 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 ofSeptember 30, 2020 , the Company had an interest in 1,070 apartment homes in communities actively under development with joint ventures for total estimated costs of$0.7 billion . Total estimated remaining costs are approximately$108.0 million , of which the Company estimates its remaining investment in these development joint ventures will be approximately$55.0 million . In addition, the Company had an interest in 8,652 apartment homes of operating communities with joint ventures for a total book value of$363.6 million as ofSeptember 30, 2020 . 46
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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 Policies and Estimates
The preparation of condensed consolidated financial statements, in accordance withU.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 policies as those accounting policies that require the Company's management to exercise their most difficult, subjective and complex judgments. The Company's critical accounting policies and estimates relate principally to the following key areas: (i) accounting for the acquisition of investments in real estate (specifically, the allocation between land and buildings); and (ii) 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
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 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 inthe 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 governmental measures intended to prevent its spread, trends affecting the Company's financial condition or results of operations, changes toU.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, 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 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 47 -------------------------------------------------------------------------------- Table of Contents 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 endedDecember 31, 2019 , and those risk factors and special considerations set forth in the Company's other filings with theSecurities 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 theSEC may be further amplified by the global impact of the COVID-19 pandemic. 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
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
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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
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--------------------------------------------------------------------------------Table of ContentsEssex Property Trust, Inc. Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019
Net income available to common stockholders $ 73,661
130,202 120,809 395,370 360,842
Gains not included in FFO attributable to common
stockholders and unitholders (24,879) - (276,170) (32,405)
Depreciation and amortization from unconsolidated
co-investments 12,883 15,483 38,191 45,304
Noncontrolling interest related to Operating
Partnership units 2,593 3,464 16,543 10,863
Depreciation attributable to third party ownership and other
(134) (242) (407) (708)
Funds from operations attributable to common
stockholders and unitholders $ 194,326
2.88 $ 3.50 $ 9.53 $ 10.19 Non-core items:
Expensed acquisition and investment related costs 2 13 104 69 Deferred tax expense on unrealized gain on unconsolidated co-investment (1) - 1,457 1,636 1,457 Gain on sale of marketable securities (91) (239) (124) (737) Unrealized (gains) losses on marketable securities (3,288) 174 (2,215) (4,280) Provision for credit losses 3 - 100 - Equity income from non-core co-investment (2) 213 (4,247) (4,373) (4,561) Interest rate hedge ineffectiveness (3) - - - 181 Loss (gain) on early retirement of debt, net 19,114 (5,475) 23,820 (7,143) Gain on early retirement of debt from unconsolidated co-investment - - (38) - Co-investment promote income - - (6,455) (809) Income from early redemption of preferred equity investments - (1,699) (210) (2,531) General and administrative and other, net 2,510 - 5,642 - Insurance reimbursements, legal settlements, and other, net 132 (15) 69 (263) Core Funds from Operations attributable to common stockholders and unitholders $ 212,921
3.15 $ 3.35 $ 9.80 $ 9.92
Weighted average number shares outstanding,
diluted (4) 67,495,286 68,229,823 67,837,336 68,117,569
(1) A deferred tax expense was recorded during the second quarter of 2020
related to the $4.7 million net unrealized gain on the Real Estate Technology
Ventures, L.P. co-investment.
(2) Represents the Company's share of co-investment income from Real Estate
Technology Ventures, L.P. Income for the second quarter of 2020 includes a net
unrealized gain of $4.7 million .
(3) 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 approximately $181,000 from
interest expense to accumulated other comprehensive income. As a result of the
adoption of this standard, the Company recognizes
qualifying hedge ineffectiveness through accumulated other comprehensive income
as opposed to current earnings.
(4) Assumes conversion of all outstanding Operating Partnership limited
partnership units ("OP Units") into shares of the Company's common stock and
excludes all DownREIT units for which the Operating Partnership has the ability
and intention to redeem the units for cash and does not consider them to be
common stock equivalents.
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Net Operating Income
Net operating income ("NOI") and Same-Property NOI are considered by management
to be important supplemental performance measures to earnings from operations
included in the Company's condensed consolidated statements of income and
comprehensive income. The presentation of Same-Property NOI assists with the
presentation of the Company's operations prior to the allocation of depreciation
and any corporate-level or financing-related costs. NOI reflects the operating
performance of a community and allows for an easy comparison of the operating
performance of individual communities or groups of communities. In addition,
because prospective buyers of real estate have different financing and overhead
structures, with varying marginal impacts to overhead by acquiring real estate,
NOI is considered by many in the real estate industry to be a useful measure for
determining the value of a real estate asset or group of assets. The Company
defines Same-Property NOI as Same-Property revenues less Same-Property operating
expenses, including property taxes. Please see the reconciliation of earnings
from operations to NOI and Same-Property NOI, which in the table below is the
NOI for stabilized properties consolidated by the Company for the periods
presented ($ in thousands):
Three Months Ended
2020 2019 2020 2019
Earnings from operations $ 128,937 $ 124,039 $ 379,510 $ 364,294
Adjustments:
Corporate-level property management expenses 8,619 8,553 26,024 25,451
Depreciation and amortization 130,202 120,809 395,370 360,842
Management and other fees from affiliates (2,347) (2,428) (7,312) (7,023)
General and administrative 13,310 11,345 42,244 38,731
Expensed acquisition and investment related costs 2 13 104 69
Gain on sale of real estate and land (22,654) - (39,251) -
NOI 256,069 262,331 796,689 782,364
Less: Non-Same Property NOI (39,196) (19,196) (102,881) (53,575)
Same-Property NOI $ 216,873 © Edgar Online, source
