Essex Property Trust reported last week its third-quarter 2016 earnings results and related business activities. The REIT's NOI met Sandler O'Neill's expectations:

NOI met our model and thus beat was driven by finance income. Not totally surprising that management dialed back growth expectations given weakening demand and generous concessions from developers. ESS has been vocal for several quarters now about the impact concessions are having on Northern California while our recent meeting with them showed a team more subdued than we're accustomed to.

Here's the Essex release:

Net Income and Funds from Operations ("FFO") per diluted share for the quarter ended September 30, 2016 are detailed below. Core FFO excludes acquisition and investment related costs and certain non-routine items.

Three Months Ended
September 30,
Nine Months Ended
September 30,
Per Diluted Share
Net Income$1.00$0.6553.8%$3.29$2.2744.9%
Total FFO$2.81$2.5311.1%$8.27$7.1915.0%
Core FFO$2.81$2.4912.9%$8.23$7.1914.5%

Third Quarter Highlights

  • Net Income per diluted share for the third quarter of 2016 was $1.00 compared to $0.65 in the third quarter of 2015. The increase is primarily due to higher earnings from operations in the third quarter of 2016.
  • Grew Core FFO per diluted share by 12.9% compared to Q3 2015, which exceeded the high-end of the Company's guidance range.
  • Achieved same-property gross revenues and net operating income ("NOI") growth of 6.9% and 8.3%, respectively, compared to Q3 2015.
  • Realized a sequential quarterly increase in same-property revenue growth of 2.4%.
  • Provided Core FFO guidance range for the fourth quarter of 2016 of $2.77 to $2.83 per diluted share.
  • Increased the full-year Core FFO guidance range to $11.00 to $11.06 per diluted share, increasing the midpoint by $0.05 per share.
  • Narrowed the full-year guidance range of same-property growth assumptions, leaving the midpoint unchanged.

"We are pleased that the Essex portfolio achieved our key
targets during the third quarter, leading to healthy revenue, NOI and Core FFO per share growth rates. We expect continued apartment supply deliveries and deceleration in employment trends, both nationally and in several west coast submarkets, to moderate pricing power given aggressive rental concessions offered at newly developed communities. As a result, going forward, we expect rental growth rates to return to longer-term averages, as compared to the exceptional rental growth generated in the past several years," commented Michael Schall, President and CEO of the Company.

Same-Property Operations

Same-property operating results exclude any properties that are not comparable for the periods presented. The table below illustrates the percentage change in same-property gross revenues for the quarter ended September 30, 2016 compared to the quarter ended September 30, 2015, and the sequential percentage change for the quarter ended September 30, 2016 versus the quarter ended June 30, 2016 by submarket for the Company:

Sequential Growth
Q3 2016 compared to Q2 2016
Gross RevenuesOperating ExpensesNOI
Southern California2.3%3.2%1.9%
Northern California1.8%4.8%0.7%
Seattle Metro3.7%1.4%4.8%
Same-Property Portfolio2.4%3.3%2.0%
Financial Occupancies
Quarter Ended
Southern California96.6%96.0%95.7%
Northern California96.5%96.2%96.2%
Seattle Metro96.1%95.9%96.1%
Same-Property Portfolio96.5%96.0%96.0%
Year-Over-Year GrowthYear-Over-Year Growth
Q3 2016 compared to Q3 2015YTD 2016 compared to YTD 2015
Gross RevenuesOperating ExpensesNOIGross RevenuesOperating ExpensesNOI
Southern California6.5%1.4%9.0%6.2%2.4%8.1%
Northern California6.5%5.1%7.0%7.7%4.2%9.0%
Seattle Metro8.5%6.9%9.3%7.7%7.2%8.0%
Same-Property Portfolio6.9%3.7%8.3%7.0%3.9%8.4%
Q3 2016 vs. Q3 2015Q3 2016 vs. Q2 2016% of Total
Gross RevenuesGross RevenuesQ3 2016 Revenues
Southern California
Los Angeles County6.5%2.3%17.5%
Orange County5.6%2.2%12.2%
San Diego County8.4%3.2%9.4%
Ventura County5.8%2.3%5.2%
Other Southern California3.4%-6.1%0.9%
Total Southern California6.5%2.3%45.2%
Northern California
Santa Clara County5.9%1.3%16.3%
Alameda County7.3%1.7%7.3%
San Mateo County7.6%3.2%4.5%
Contra Costa County7.1%2.6%5.4%
San Francisco3.1%1.5%2.0%
Other Northern California10.0%2.2%0.3%
Total Northern California6.5%1.8%35.8%
Seattle Metro8.5%3.7%19.0%
Same-Property Portfolio6.9%2.4%100%

Other Investments

In August, the Company originated an $11.6 million preferred equity investment in a multifamily development located in Santa Ana, CA. The investment will be funded in installments through the fourth quarter of 2016. As of September 30, 2016, the Company had funded $1.9 million. The investment has a preferred return of 12.0% and matures in 2020.

In September, the Company originated a $26.3 million loan in a multifamily development project located in Long Beach, CA. The investment will be funded in installments through the first quarter of 2017. As of September 30, 2016, the Company had funded $4.4 million. The total investment has a return of 10.8% and matures in 2020.

Development Activity

The table below represents the development communities in lease-up during the third quarter and the current leasing status as of October 24, 2016.

Project NameLocationTotal Apartment HomesESS Ownership% Leased as of 10/24/16Status
AgoraWalnut Creek, CA4951%100%Stabilized
The Galloway (at Owens)Pleasanton, CA25555%64%In Lease-Up
Total/Average % Leased30470%

Liquidity and Balance Sheet

Common Stock

The Company did not issue any shares of common stock through its equity distribution program in the third quarter of 2016 or subsequent to quarter-end. Year-to-date the Company has not issued any common stock through its equity distribution program.

Balance Sheet

During the quarter, the Company repaid $55.0 million in secured mortgages with an effective interest rate of 4.4%.

In October, Moody's upgraded the Company's senior unsecured debt to Baa1 from Baa2. The outlook is stable. Also in October, Standard & Poor's upgraded the Company's corporate credit rating to BBB+ from BBB. The outlook is stable.

As of October 24, 2016, the Company had $1.025 billion in undrawn capacity on its unsecured credit facilities.

Quarterly Guidance

For the third quarter, the Company exceeded the midpoint of the guidance range provided in its second quarter 2016 earnings release by $0.05 per share. The following table provides a reconciliation of third quarter Core FFO per share to the midpoint of the guidance provided in the second quarter 2016 earnings release distributed in July 2016.

Per Diluted Share
Projected midpoint of Core FFO per share for Q3 2016$2.76
NOI from consolidated communities0.03
FFO from Co-Investments0.01
G&A and other income0.01
Core FFO per share for Q3 2016 reported$2.81

The table below provides our updated 2016 full-year same-property growth assumptions and Core FFO per diluted share range. The same-property guidance range was narrowed, leaving the midpoint unchanged while guidance for Core FFO per diluted share was increased by $0.05 at the midpoint. For additional details regarding our 2016 assumptions, please see page S-14 of the Supplemental Financial Information. For the fourth quarter of 2016, the Company has established a range for Core FFO per diluted share of $2.77 to $2.83.

2016 Full-Year Guidance

Same-Property Growth
Gross Revenues6.7% to 6.9%6.8%
Operating Expenses3.5% to 4.0%3.8%
NOI7.9% to 8.3%8.1%
Core FFO per diluted share$11.00 to $11.06$11.03

Conference Call with Management

The Company will host an earnings conference call with management to discuss its quarterly results on Friday, October 28, 2016 at 11 a.m. PT (2 p.m. ET), which will be broadcast live via the Internet at, and accessible via phone by dialing toll-free, (877) 407-0784, or toll/international, (201) 689-8560. No passcode is necessary.

A rebroadcast of the live call will be available online for 90 days and digitally for 7 days. To access the replay online, go to and select the third quarter earnings link. To access the replay digitally, dial (844) 512-2921 using the replay pin number 13646070. If you are unable to access the information via the Company's website, please contact the Investor Relations Department at [email protected] or by calling (650) 655-7800.

Corporate Profile

Essex Property Trust, Inc., an S&P 500 company, is a fully integrated real estate investment trust (REIT) that acquires, develops, redevelops, and manages multifamily residential properties in selected West Coast markets. Essex currently has ownership interests in 243 apartment communities with an additional 6 properties in various stages of active development. Additional information about Essex can be found on the Company's website at

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

Funds from Operations ("FFO") Reconciliation

FFO, as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), is generally considered by industry analysts as an appropriate measure of performance of an equity REIT. Generally, FFO adjusts the net income of equity REITs for non-cash charges such as depreciation and amortization of rental properties, impairment charges, gains/losses on sales of real estate and extraordinary items.

Management considers FFO and FFO which excludes merger, integration and acquisition costs and items that are not routine or not related to the Company's core business activities, which is referred to as "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 the operating performance and ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures and the ability to pay dividends.

FFO and Core FFO do not represent net income or cash flows from operations as defined by U.S. generally accepted accounting principles ("GAAP") and are not intended to indicate whether cash flows will be sufficient to fund cash needs. These measures should not be considered as an alternative to net income as an indicator of the REIT's operating performance or to cash flows as a measure of liquidity.

FFO and Core FFO do not measure whether cash flow is sufficient to fund all cash needs including principal amortization, capital improvements and distributions to shareholders. FFO and Core FFO also do not represent cash flows generated from operating, investing or financing activities as defined under GAAP. Management has consistently applied the NAREIT definition of FFO to all periods presented. However, there is judgment involved and other REITs' calculation of FFO may vary from the NAREIT definition for this measure, and thus their disclosures of FFO may not be comparable to the Company's calculation.

The following table sets forth the Company's calculation of diluted FFO and Core FFO for the three and nine months ended September 30, 2016 and 2015: