Essex Flags 10 To 12 Cents Of Higher 2027 Interest Costs As Joint-Venture Swaps Reset
CFO Barbara Pak said new swaps fixed at 5.3% on most joint-venture debt will lift interest expense, and called the rate pressure not company-specific.
Essex Property Trust, the apartment landlord focused on West Coast markets, expects resetting interest-rate swaps to add 10 to 12 cents a share to its 2027 interest expense, CFO Barbara Pak told analysts on the company's third-quarter earnings call.
Where the 10 to 12 cents comes from
Answering a Wells Fargo analyst, Pak said three swaps in the joint-venture portfolio mature, one on December 1 and two at the end of March. Essex has already fixed new swaps on 80% of that exposure at an all-in 5.3%, which adds $0.09 of interest expense at pro rata share.
The other 20% is unhedged and will float, adding "a couple more pennies" depending on the SOFR rate assumed, she said. That brings the total to 10 to 12 cents next year.
Pak said the higher rate is "not an ethics-specific issue," a transcript rendering of her point that it is not an Essex-specific problem; rates are simply higher. Had Essex waited to hedge, she said, the rate would be "in the high fives." CEO Angela Kleiman made the same point later, saying rate pressure hits all companies and is no reason to doubt the West Coast story.
A term loan left unhedged
Asked about the $275 million term loan Essex took in September, Pak said swapping it made no sense. It was "very prohibitive," she said, because Essex would be paying up for rate increases that may or may not happen.
Essex's exposure to SOFR is 7% at pro rata share, including that loan. She said the company would hedge the unprotected joint-venture portion only if an opportunistic window opens.
Balance sheet and the quarter
Pak said Essex executed about $600 million of swaps this year at pro rata share, at an all-in fixed rate of 4.9%, to replace swaps expiring over the next six months. Floating-rate exposure is about 12% on a pro rata basis, just over 40% of it tied to the SIFMA index, which floats at a cheaper rate than SOFR.
Debt maturing in 2027 is about $575 million at pro rata share, most of it $350 million of bonds due in May. Net debt to EBITDA is 5.4 times, with well over $1 billion of available liquidity.
On operations, Pak said third-quarter core FFO, a standard REIT earnings measure, was $4 a share, a cent above the midpoint of guidance, with same-property revenue up 3% year over year. Essex raised its full-year same-property revenue growth midpoint by 10 basis points to 2.9% and lifted its core FFO midpoint by $0.02. Northern California led, with blended rent growth of 7.3%, Kleiman said. The company missed analyst estimates, according to Yahoo Finance.
Essex also said it closed on a 474-unit East Bay community priced above $200 million, with an expected yield in the mid-5% range.
Sources
- ESS Q3 FFO & Revenues Miss Estimates Amid Rising Property Expenses — Yahoo Finance
- https://www.sec.gov/Archives/edgar/data/920522/000114036126040903/ef20084268_ex99-1.htm — sec.gov
- Essex Property Trust (ESS) Q3 Earnings: Taking a Look at Key Metrics Versus Estimates — Yahoo Finance
- Essex Property Trust (ESS) Q3 FFO and Revenues Miss Estimates — Yahoo Finance
- Essex Property Stock Pre-Q3 Earnings: Smart Buy or Risky Move? — Yahoo Finance
