Essex Property (ESS) to Post Q3 Earnings: What's in the Cards?
Essex Property Trust ESS is scheduled to report third-quarter 2023 results on Oct 26 after the closing bell. The company’s quarterly results are likely to reflect year-over-year growth in revenues and core funds from operations (FFO) per share.
In the last reported quarter, this San Mateo, CA-based residential real estate investment trust (REIT) delivered a surprise of 1.07% in terms of core FFO per share. Its quarterly results reflected better-than-anticipated revenues.
Over the trailing four quarters, Essex Property’s core FFO per share surpassed the Zacks Consensus Estimate on each occasion, the average surprise being 0.74%. The graph below depicts the surprise history of the company:
Essex Property Trust, Inc. Price and EPS Surprise
Essex Property Trust, Inc. price-eps-surprise | Essex Property Trust, Inc. Quote
Factors to Note
U.S. Apartment Market in Q3
Per a recent RealPage report, apartment demand in the United States during the third quarter continued to show signs of solid rebound even though rent growth was somewhat flat.
The U.S. apartment market absorbed 90,827 units per the RealPage Market Analytics. Although the figure does not compare to the historically robust demand of 2021, it still marks the largest quarterly tally in nearly two years and is in sync with the long-term seasonal norms.
However, the quarter saw the highest levels of apartment completions since the 1980s, with more than 128,000 units coming online nationally, shifting the balance of power in the rental market back to renters.
The effective asking rents fell 0.3% in September. As a result, year-over-year rent growth was just 0.1% during the quarter. This compares with 9% recorded a year ago. The key reason behind this is that apartment operators are prioritizing occupancy rates over rents to safeguard cash flow, leading to more options for renters and putting downward pressure on rent growth.
Speaking of the U.S. apartment occupancy, despite the supply surge, the solid demand helped maintain occupancy levels near the long-term average. After slipping only 10 basis points in September, occupancy at the end of the third quarter was 94.4%.
ESS’ Portfolio & Q3 Performance Through August
Essex Property has a sturdy property base in the West Coast market of the United States and a strong management team. The markets are characterized by higher median household incomes, an increased percentage of renters and favorable demographic trends.
This residential REIT is also banking on technology, scale and organizational capabilities to drive margin expansion in its portfolio. It is making steady progress on the technology front, and leasing agents are becoming more productive by leveraging these tools. Such efforts are likely to have aided ESS’ quarterly performance.
Per the company’s September Investor Presentation, it observed healthy rent growth during peak leasing, with blended net effective rents displaying continued sequential improvement through August.
Same-property revenue year-over-year growth through August was in line with the company’s revised guidance as of Jul 27, 2023. Specifically, the preliminary July-August operating update shows 2.4% year-over-year growth in same-property revenues, slightly down from 4% recorded in the second quarter. The moderation resulted mainly due to lower net delinquency in the prior period, which benefited from the Emergency Rental Assistance funds received.
Preliminary blended rates of 2.2% and 2.3% in July and August, respectively, remained relatively flat compared with the second quarter’s 2.2%. Further, August’s preliminary financial occupancy of 96.5% was slightly lower than 96.6% witnessed in the second quarter.
However, per the RealPage report, the West Coast is witnessing lackluster demand and large metros are seeing rent cuts except for San Diego and Orange County. For the second half of 2023, ESS anticipates a typical seasonal slowdown per the Investor Presentation.
Also, the elevated supply of rental units in some of the company’s markets may have limited rent growth, impeding the company’s quarterly performance to a certain extent. A high interest rate environment is likely to have acted as a spoilsport. We expect interest expenses to increase 7.2% year over year in the third quarter.
Projections for Q3
The Zacks Consensus Estimate for quarterly revenues is pegged at $419.3 million, suggesting a 2.3% increase year over year. The consensus estimate for same-property revenues is pegged at $397.2 million, up from $394.2 million in the prior quarter and $380.6 million in the year-ago period. Our estimate is pegged at $397.4 million.
The consensus mark for same-property financial occupancy is expected to be 95.1% in the quarter, down from 96.6% sequentially and 96% year over year. We expect the metric at 96.8%.
Essex Property projected core FFO per share in the range of $3.69-$3.81 for the third quarter, with the midpoint being $3.75.
The company’s activities during the to-be-reported quarter were adequate to garner analysts’ confidence. The Zacks Consensus Estimate for the quarterly FFO per share has been revised marginally upward in the past two months to $3.77. Moreover, the figure suggests a year-over-year increase of 2.2%.
What Our Quantitative Model Predicts
Our proven model does not conclusively predict a surprise in terms of FFO per share for ESS this season. The right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — increases the odds of a beat. However, that is not the case here.
Earnings ESP: ESS has an Earnings ESP of -0.31%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: ESS currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stocks That Warrant a Look
Here are some other stocks that are worth considering from the residential REIT sector, as our model shows that these have the right combination of elements to deliver a surprise this reporting cycle:
AvalonBay Communities AVB is slated to report quarterly numbers on Oct 25. AVB has an Earnings ESP of +0.69% and carries a Zacks Rank #2 (Buy) presently.
United Dominion Realty Trust UDR is slated to report quarterly numbers on Oct 26. UDR has an Earnings ESP of +0.16% and carries a Zacks Rank #3 presently.
Equity Residential EQR is slated to report quarterly numbers on Oct 31. EQR has an Earnings ESP of +0.50% and carries a Zacks Rank of 3 presently.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.
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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AvalonBay Communities, Inc. (AVB) : Free Stock Analysis Report
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Essex Property Trust, Inc. (ESS) : Free Stock Analysis Report
