Key Factors to Impact Essex Property's (ESS) Q4 Earnings

Zacks Equity Research

Essex Property Trust, Inc. ESS is scheduled to report fourth-quarter and full-year 2019 results on Jan 29, after the closing bell. The company’s performance will likely display year-over-year growth in funds from operations (FFO) per share and revenues.

In the last reported quarter, this San Mateo, CA-based residential real estate investment trust (REIT) reported a negative surprise of 0.3% in terms of FFO per share. Results reflected improved net operating income (NOI) from its communities, while occupancy level moderated sequentially and year over year.

Over the trailing four quarters, the company beat the Zacks Consensus Estimate on two occasions, met in another and missed in the other, the average beat being 0.78%. This is depicted in the graph below:
 

Essex Property Trust, Inc. Price and EPS Surprise
 

Essex Property Trust, Inc. Price and EPS Surprise

Essex Property Trust, Inc. price-eps-surprise | Essex Property Trust, Inc. Quote

Let’s see how things have shaped up for this announcement.

Factors at Play

Following a robust prime leasing season in 2019, the U.S. apartment rental market put up a decent show in the December-end quarter, despite demand for apartments generally slowing down during the colder months as renters usually prefer less to move in winters.

Per the latest report from real estate technology and analytics firm RealPage, Inc., occupancy at the end of fourth-quarter 2019 remained as high as 95.8%, reflecting an expansion of 40 basis points (bps), year on year. Moreover, rents for new-resident leases were up 2.8% in 2019, hovering around the 3% level that the apartment market has been witnessing since late 2016.

With a solid balance sheet, Essex Property is likely to leverage on favorable demographic trends, household formation and job-market growth in its markets. Substantial exposure to the West Coast market, which is home to several innovation and technology companies, is anticipated to have provided ample scope to bolster its top-line growth in the quarter under review.

In fact, the region has been witnessing solid job growth, higher wages, increased percentage of renters than owners and favorable migration trends. Further, transition from renter to homeowner is difficult in its markets due to high cost of homeownership. These are likely to have favorably impacted rental housing demand during the period under consideration.

As such, the Zacks Consensus Estimate for fourth-quarter revenues of $373.8 million indicates a 5.8% improvement, year on year. In addition, the company estimates core FFO per share of $3.36-$3.46 for the quarter. The Zacks Consensus Estimate for the same is currently pinned at $3.42. It reflects 7.2% growth from the prior-year quarter’s reported tally.

Moreover, Essex Property maintains a solid balance sheet and enjoys financial flexibility. As of Oct 22, 2019, the company had $1 billion in undrawn capacity on its unsecured credit facilities. This healthy financial position is likely to have helped the company strengthen and expand its business. Also, management noted that decrease in cost of capital since last January has helped it exceed high-end of its acquisition targets and it is seeking out accretive opportunities.

Nevertheless, apartment deliveries are expected to be elevated in a number of the company’s markets in the near term. This high supply is a concern because it curtails landlords’ ability to command more rent and result in lesser absorption. Additionally, in this seasonally-slower demand period, occupancy and rent growth are likely to have been limited.

In addition to the above, Essex Property’s activities during the October-December period were inadequate to gain analyst confidence. Consequently, the Zacks Consensus Estimate for FFO per share for the fourth quarter remained unchanged in the past two months.

For 2019, the company expects its core FFO per share in the $13.28-$13.38 range. The full-year outlook is backed by the same-property gross revenue growth guidance of 3.1-3.4%, and NOI increase of 3.4-3.9%. The Zacks Consensus Estimate for 2019's FFO per share is currently pinned at $13.35, indicating 6.2% increase year over year on revenues of $1.46 billion.

Here is What Our Quantitative Model Predicts

Our proven model predicts a beat in terms of FFO per share for Essex Property this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of a beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Essex Property currently carries a Zacks Rank of 3 and has an Earnings ESP of +0.09%.

Other Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Apartment Investment and Management Company AIV, slated to release fourth-quarter earnings on Jan 30, has an Earnings ESP of +0.77% and carries a Zacks Rank of 2, at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Boston Properties, Inc. BXP, set to report quarterly numbers on Jan 28, has an Earnings ESP of +1.08% and carries a Zacks Rank of 2, currently.

AvalonBay Communities, Inc. AVB, scheduled to release October-December quarter results on Feb 5, has an Earnings ESP of +0.46% and currently holds a Zacks Rank #3.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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