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Essex Property (ESS) Beats Q2 FFO Estimates, Raises Outlook

Zacks Equity Research

Backed by improved net operating income from its communities, Essex Property Trust Inc. ESS delivered a better-than-expected performance for second-quarter 2019. The company reported core funds from operations (FFO) per share of $3.33 for the quarter, surpassing the Zacks Consensus Estimate of $3.26. Core FFO per share not only improved 6.1% from the year-ago quarter figure of $3.14, it also exceeded the mid-point of the company’s guidance range by 11 cents.

Results of this residential real estate investment trust (REIT) were supported by favorable market conditions. Fundamentals of the Northern California and Seattle regions are backed by the technology sector and job growth continues to outpace national average. With improved market conditions, favorable cost of capital as well as tax assessments, the company has also considerably raised its outlook for the ongoing year.

Total revenues of $361.6 million were up 3.7% year over year in the reported quarter. The figure, in addition, outpaced the Zacks Consensus Estimate of $358.1 million.

Quarter in Detail

During the second quarter, Essex Property’s same-property gross revenues grew 3.5% from the prior-year quarter, while same-property NOI improved 4.1% year over year. However, financial occupancies of 96.6% shrunk 30 basis points (bps) sequentially and 10 bps year over year.

Essex Property exited second-quarter with cash and cash equivalents, including restricted cash, of nearly $55 million, down from the $151.4 million recorded at the end of 2018. As of Jul 22, the company had around $1 billion in undrawn capacity on its unsecured credit facilities.

These apart, the company did not issue any shares of common stock under the equity distribution program in the second quarter.

Notably, this June, Essex Property acquired a 300 unit apartment home community in Walnut Creek, CA, for $164.9 million in a DownREIT structure. Moreover, simultaneously with the acquisition closing, the company assumed a $98.7-million mortgage loan, having an effective interest rate of 3.2% and a maturity date in 2025.

Outlook

For 2019, the company raised its core FFO per share projections by 20 cents at the mid-point to $13.19-$13.37. This is above the Zacks Consensus Estimate of $13.13.

The company also raised the mid-point of its full-year guidance for same-property gross revenues and NOI by 0.25% and 0.65%, respectively. Same-property expense guidance for the year has been reduced by 0.8% at the mid-point, mainly due to favorable tax assessments in Washington. Particularly, the company expects same-property gross revenue growth of 3-3.5%, NOI increase of 3.2-4.1% and operating expenses growth of 2-2.4%.

For third-quarter 2019, the company projects core FFO per share at $3.26-$3.36. The Zacks Consensus Estimate for the same is currently pinned at $3.30.

Conclusion

We are encouraged with Essex Property’s impressive performance in the second quarter. The company is benefiting from increase in personal income in its regions that is surpassing rents and improving rental affordability. With a solid balance sheet, Essex Property is likely to leverage on favorable demographic trends, household formation, stable economy and job-market growth in its markets.

Its substantial exposure to the West Coast market, which is home to several innovation and technology companies, offers ample scope to boost the top line over the long haul. The region is witnessing solid job growth, higher wages, increased percentage of renters than owners, and favorable migration trends.

Nevertheless, apartment deliveries are expected to remain elevated in a number of its markets in the near future. Aggressive rental concessions and moderate pricing power amid high supply are concerns.

Essex Property currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Essex Property Trust, Inc. Price, Consensus and EPS Surprise
 

Essex Property Trust, Inc. Price, Consensus and EPS Surprise

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

We now look forward to the earnings releases of other residential REITs like UDR Inc. UDR, Mid-America Apartment Communities, Inc. MAA and AvalonBay Communities, Inc. AVB. While UDR is slated to report second-quarter earnings on Jul 30, Mid-America and AvalonBay are scheduled to release the same on Jul 31.

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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