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 2021 annual report on Form 10-K for the year endedDecember 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 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 ofMarch 31, 2022 , 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 Company's portfolio. As ofMarch 31, 2022 , the Company owned or had ownership interests in 253 operating apartment communities, comprising 62,290 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 consolidated project and one unconsolidated joint venture project.
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 ofMarch 31, 2022 , the Company's development pipeline was comprised of one consolidated project under development, one unconsolidated joint venture project under development, and various predevelopment projects aggregating 371 apartment homes, with total incurred costs of$162.0 million , and estimated remaining project costs of approximately$55.0 million ,$29.0 million of which represents the Company's share of estimated remaining costs, for total estimated project costs of$217.0 million .
The Company's consolidated apartment communities are as follows:
As of March 31, 2022 As of March 31, 2021
Apartment Homes % Apartment Homes %
Southern California 22,190 43 % 22,121 43 %
Northern California 19,230 37 % 19,123 37 %
Seattle Metro 10,341 20 % 10,218 20 %
Total 51,761 100 % 51,462 100 %
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. The community previously
held in the BEX III co-investment, which was consolidated in the second quarter
of 2021, is excluded from the March 31, 2021 table, but included in the
March 31, 2022 table.
The COVID-19 Pandemic
The COVID-19 pandemic and its related variants continues to create considerable instability, disruption, and uncertainty. In an effort to slow down the spread of the viruses and mitigate its impact on affected populations, federal, state and local jurisdictions have implemented varying forms of requirements which may continue to negatively affect profitability. While theCalifornia 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 30 -------------------------------------------------------------------------------- Table of Contents continue to be in effect in various formats at various regions in whichEssex's communities are located, impactingEssex and its properties. The Company continues to work to comply with the stated intent of local, county, state and federal laws. The long-term impact of the COVID-19 pandemic on theU.S. and world economies generally, and on the Company's results in particular will largely depend on uncertain future developments, including 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 endedMarch 31, 2022 and 2021) remained higher than the pre-pandemic period typical range of 0.3% to 0.4% and remained elevated at 2.1% for the three months endedMarch 31, 2021 and 2.2% for the three months endedMarch 31, 2022 . The Company has executed some payment plans and will continue to work with residents to collect such cash delinquencies. As ofMarch 31, 2022 , the increase in delinquencies has 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 96.7% for the three months endedMarch 31, 2021 to 96.3% for the three months endedMarch 31, 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 endedMarch 31, 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
The Company's average financial occupancy for the Company's Same-Property portfolio was 96.3% and 96.7% for the three months endedMarch 31, 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
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Three Months Ended March 31,
2022 2021
Southern California 96.3 % 96.7 %
Northern California 96.5 % 96.7 %
Seattle Metro 95.9 % 96.6 %
The following table provides a breakdown of revenues amounts, including revenues attributable to the Same-Properties:
Number of Apartment Three Months Ended March 31, Dollar Percentage
Property Revenues ($ in thousands) Homes 2022 2021 Change Change Same-Property Revenues: Southern California 21,256$ 150,653 $ 138,418 $ 12,235 8.8 % Northern California 17,895 142,002 137,386 4,616 3.4 % Seattle Metro 10,218 63,618 58,633 4,985 8.5 % Total Same-Property Revenues 49,369 356,273 334,437 21,836 6.5 % Non-Same Property Revenues 22,943 18,439 4,504 24.4 % Total Property Revenues$ 379,216 $ 352,876 $ 26,340 7.5 % Same-Property Revenues increased by$21.8 million or 6.5% to$356.3 million in the first quarter of 2022 from$334.4 million in the first quarter of 2021. The increase was primarily attributable to an increase of 4.5% in average rental rates from$2,299 in the first quarter of 2021 to$2,402 in the first quarter of 2022 and decreased cash concessions in the first quarter of 2022 compared to the first quarter of 2021.
Non-Same Property Revenues increased by
Management and other fees from affiliates increased by$0.5 million or 22.7% to$2.7 million in the first quarter of 2022 from$2.2 million in the first quarter of 2021. The increase was primarily due to the addition ofMartha Lake Apartments , Monterra inMill 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 purchase ofBEX III's 50.0% interest in TheVillage at Toluca Lake . Property operating expenses, excluding real estate taxes increased by$3.8 million or 5.8% to$68.9 million for the first quarter of 2022 compared to$65.1 million for the first quarter of 2021, primarily due to increases of$3.0 million in utilities expense and$1.0 million in maintenance and repairs expenses, offset by a decrease of$0.2 million in administrative expenses. Same-Property operating expenses, excluding real estate taxes, increased by$3.6 million or 5.8% to$65.7 million in the first quarter of 2022 compared to$62.1 million in the first quarter of 2021, primarily due to increases of$2.7 million in utilities expense, and$0.9 million in maintenance and repairs expenses. Real estate taxes increased by$1.9 million or 4.2% to$47.2 million for the first quarter of 2022 compared to$45.3 million for the first quarter of 2021, primarily due to real estate taxes for development properties StationPark Green (Phase II and III) and Wallace on Sunset, that were completed in 2021 and the acquisition of TheVillage at Toluca Lake during 2021, as well as an increase in assessed valuation and tax rates. Same-Property real estate taxes increased by$1.3 million or 3.2% to$42.8 million in the first quarter of 2022 compared to$41.4 million in the first quarter of 2021, primarily due to an increase in assessed valuations and tax rates. Corporate-level property management expenses increased by$1.2 million or 13.3% to$10.2 million for the first quarter of 2022 compared to$9.0 million for the first 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$133.5 million for the first quarter of 2022 compared to$128.6 million for the first quarter of 2021, primarily due an increase in depreciation expense from the completion of the development properties Mylo, StationPark Green (Phase II and Phase III), and Wallace on Sunset as well as the acquisitions of TheVillage at Toluca Lake and Canvas during 2021. 32
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Interest expense decreased by$1.2 million or 2.3% to$50.4 million for the first quarter of 2022 compared to$51.6 million for the first quarter of 2021, primarily due to various debt that was paid off, matured, or regular principal amortization during and after the first quarter of 2021, which resulted in a decrease in interest expense of$5.8 million for the first quarter of 2022. These decreases to interest expense were partially offset by senior unsecured notes issued during and after the first quarter of 2021, which resulted in an increase of$3.5 million interest expense for the first quarter of 2022. Additionally, there was a$1.1 million decrease in capitalized interest in the first quarter of 2022, due to a decrease in development activity as compared to the same period in 2021. Total return swap income of$2.5 million in the first quarter of 2022 consists of monthly settlements related to the Company's total return swap contracts with an aggregate notional amount of$224.2 million . Interest and other (loss) income decreased by$22.0 million or 152.8% to$7.6 million loss for the first quarter of 2022 compared to$14.4 million income for the first quarter of 2021, primarily due to a decrease in the fair value of marketable securities. Equity income from co-investments increased by$4.2 million or 24.7% to$21.2 million for the first quarter of 2022 compared to$17.0 million for the first quarter of 2021, primarily due to$17.1 million in co-investment promote income. The increase was offset by decreases of$10.5 million in equity income from non-core co-investments and$2.3 million in income from preferred equity investments including income from early redemptions. Deferred tax benefit (expense) on unconsolidated co-investments of$2.8 million for the first quarter of 2022 due to a net unrealized loss of$7.7 million from non-core unconsolidated co-investments.
Liquidity and Capital Resources
As ofMarch 31, 2022 , the Company had$98.1 million of unrestricted cash and cash equivalents and$169.7 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
As ofMarch 31, 2022 , the Company had two unsecured lines of credit aggregating$1.24 billion . As ofMarch 31, 2022 , there was$98.0 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 and sustainability-linked metrics and was LIBOR plus 0.775% as ofMarch 31, 2022 . This facility is scheduled to mature inSeptember 2025 , with three 6-month extensions, exercisable at the Company's option. Subsequent to quarter end, the borrowing spread on this facility will be reduced by 2.5 basis points to LIBOR plus 0.75% as a result of achieving the Enhanced Sustainability Metric Target for 2021 as defined by the facility's sustainability-linked pricing component. As ofMarch 31, 2022 , 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 sustainability-linked metrics and was LIBOR plus 0.775% as ofMarch 31, 2022 . This facility is scheduled to mature inFebruary 2023 . 33 -------------------------------------------------------------------------------- Table of Contents InSeptember 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 three months ended
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. In each of May andDecember 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 three months endedMarch 31, 2022 , the Company did not repurchase any shares. As ofMarch 31, 2022 , the Company had$214.5 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 ofMarch 31, 2022 , the Company's development pipeline was comprised of one consolidated project under development, one unconsolidated joint venture project under development and various consolidated predevelopment projects, aggregating 371 apartment homes, with total incurred costs of$162.0 million , and estimated remaining project costs of approximately$55.0 million ,$29.0 million of which represents the Company's share of estimated remaining costs, for total estimated project costs of$217.0 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 ofMarch 31, 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$53.0 million , of which the Company estimates its remaining investment in these development joint ventures will be 34 -------------------------------------------------------------------------------- Table of Contents approximately$27.0 million . In addition, the Company had an interest in 10,636 apartment homes of operating communities with joint ventures for a total book value of$601.7 million as ofMarch 31, 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 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 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
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 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 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 could continue to adversely affect the Company's business and its tenants, and cause a significant downturn in general economic conditions, the 35 -------------------------------------------------------------------------------- Table of Contents 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 endedDecember 31, 2021 , 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 and related variants and uncertainties regarding ongoing hostilities betweenRussia and theUkraine and the related impacts on macroeconomic conditions, including, among other things, interest rates. 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:
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(a)historical cost accounting for real estate assets in accordance withU.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 byU.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 months ended
Essex Property Trust, Inc. Three Months Ended March 31, 2022 2021 Net income available to common stockholders$ 73,254 $ 168,444 Adjustments: Depreciation and amortization 133,533 128,587 Gains not included in FFO - (100,096) Depreciation and amortization from unconsolidated co-investments 18,115 14,729
Noncontrolling interest related to
2,563 5,947
Depreciation attributable to third party ownership and other (1)
(353) (129)
Funds from operations attributable to common stockholders and unitholders
$
227,112
$ 3.36 $ 3.23
Non-core items:
Expensed acquisition and investment related costs $ 8 $ 15
Deferred tax (benefit) expense on unconsolidated
co-investments (2) (2,754) 508
Gain on sale of marketable securities (12,171) (2,611)
Change in unrealized losses (gains) on marketable securities, net
24,585 (6,276)
Provision for credit losses (62) 38
Equity loss (income) from non-core co-investments (3) 8,844 (1,627)
Loss on early retirement of debt, net - 2,517
Loss on early retirement of debt from unconsolidated co-investments
86 3
Co-investment promote income (17,076) -
Income from early redemption of preferred equity investments and notes receivable
(858) (3,513)
General and administrative and other, net 448 257
Insurance reimbursements, legal settlements, and other, net - (182)
Core Funds from Operations attributable to common
stockholders and unitholders $ 228,162 $ 206,611
Core Funds from Operations attributable to common
stockholders and unitholders per share-diluted $ 3.37 $ 3.07
Weighted average number shares outstanding, diluted (4) 67,621,842 67,272,839
37-------------------------------------------------------------------------------- Table of Contents (1) The Company consolidates certain co-investments. The noncontrolling interest's share of net operating income in these investments for the three months endedMarch 31, 2022 was$0.7 million . (2) Represents deferred tax (benefit) expense related to net unrealized gains or losses on technology co-investments. (3) Represents the Company's share of co-investment loss (income) from technology co-investments. (4) Assumes conversion of all outstanding limited partnership units in theOperating Partnership into shares of the Company's common stock and excludes DownREIT limited partnership units.
Net Operating Income
Net operating income ("NOI") and Same-Property NOI are considered by management
to be important supplemental performance measures to earnings from operations
included in the Company's condensed consolidated statements of income and
comprehensive income. The presentation of Same-Property NOI assists with the
presentation of the Company's operations prior to the allocation of depreciation
and any corporate-level or financing-related costs. NOI reflects the operating
performance of a community and allows for an easy comparison of the operating
performance of individual communities or groups of communities. In addition,
because prospective buyers of real estate have different financing and overhead
structures, with varying marginal impacts to overhead by acquiring real estate,
NOI is considered by many in the real estate industry to be a useful measure for
determining the value of a real estate asset or group of assets. The Company
defines Same-Property NOI as Same-Property revenues less Same-Property operating
expenses, including property taxes. Please see the reconciliation of earnings
from operations to NOI and Same-Property NOI, which in the table below is the
NOI for stabilized properties consolidated by the Company for the periods
presented ($ in thousands):
Three Months Ended
2022 2021
Earnings from operations $ 109,850 $ 197,381
Adjustments:
Corporate-level property management expenses 10,172 9,013
Depreciation and amortization 133,533 128,587
Management and other fees from affiliates (2,689) (2,249)
General and administrative 12,242 9,812
Expensed acquisition and investment related costs 8 15
Gain on sale of real estate and land - (100,096)
NOI 263,116 242,463
Less: Non-Same Property NOI (15,355) (11,580)
Same-Property NOI $
247,761
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