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Key Factors to Impact Essex Property's (ESS) Q1 Earnings

Zacks Equity Research

Essex Property Trust, Inc. ESS is scheduled to report first-quarter 2019 results on Apr 24, after the market closes. The company’s results 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) delivered an in line performance in terms of FFO per share. However, results improved on a year-over-year basis, indicating growth in same-property net operating income (NOI).

Over the trailing four quarters, the company beat the Zacks Consensus Estimate in three occasions and met in the other, the average beat being 0.73%. 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. Quote

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

Factors at Play

According to a recent study by the real estate technology and analytics firm — RealPage, Inc. — although new supply volumes remained elevated in the Jan-Mar quarter, the U.S. apartment market managed to continue the rent momentum which was achieved in the later part of 2018. Apartment rents were up 3.2% on an annual basis as of the first quarter of 2019. In fact, for six straight months, annual rent growth exceeded the 3% mark. In addition, occupancy came in at 95.2% in the quarter, expanding 10 basis points year on year.

Amid these, with a sturdy property base and strong management team, Essex Property is likely to have leveraged on favorable demographic trends, household formation, healthy economy and job-market growth in its markets.

Particularly, the West Coast market, where the company has a substantial exposure, is likely to have offered ample scope to boost its top line. The West Coast, home to several innovation and technology companies, is witnessing solid job growth, higher wages, increased percentage of renters than owners, and favorable migration trends with the influx of workers to its markets, mainly from major East Coast markets. Moreover, due to high cost of homeownership, transition from renter to homeowner is difficult in its markets. These are likely to have favorably impacted rental housing demand in the to-be-reported quarter.

As such, the Zacks Consensus Estimate for first-quarter revenues is pegged at $353.6 million, marking an expected increase of 1.8% year over year. Further, the company estimates core FFO per share of $3.14-$3.24 for the quarter. The Zacks Consensus Estimate for the same is currently pinned at $3.19. It reflects 3.2% growth from the prior-year quarter.

In addition, Essex Property maintains a solid balance sheet and enjoys financial flexibility. As of Jan 28, 2019, the company had around $1.2 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.

However, the struggle to lure renters is feared to have continued in the first quarter as well, since supply volumes were aggressive. In fact, per the above-mentioned study by RealPage, over the past six months, demand could not keep up with new product deliveries that aggregated 127,121 market-rate units in fourth-quarter 2018 and first-quarter 2019. Also, the study pointed out that market-rate apartment properties, under construction, have more than 403,000 units which will be completed over the next 18 months.

Particularly, for Essex Property, apartment deliveries are expected to have remained elevated in a number of its markets. This high supply is a concern because it curtails landlords’ ability to command more rent and result in lesser absorption.

Here is what our quantitative model predicts:

Essex Property does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
 
Earnings ESP: The Earnings ESP for Essex Property is -0.05%.

Zacks Rank: Essex Property carries a Zacks Rank #3 (Hold), currently.

Although a favorable Zacks Rank increases the predictive power of ESP, we also need a positive ESP to be confident of a positive surprise in terms of FFO per share.

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:

Digital Realty Trust, Inc. DLR, slated to release first-quarter earnings on Apr 25, has an Earnings ESP of +1.27% and a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Alexandria Real Estate Equities, Inc. ARE, scheduled to release earnings on Apr 29, has an Earnings ESP of +0.3% and a Zacks Rank #2.

Public Storage PSA, set to report quarterly numbers on May 1, has an Earnings ESP of +0.88% and a Zacks Rank of 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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Essex Property Trust, Inc. (ESS) : Free Stock Analysis Report
 
Digital Realty Trust, Inc. (DLR) : Free Stock Analysis Report
 
Alexandria Real Estate Equities, Inc. (ARE) : Free Stock Analysis Report
 
Public Storage (PSA) : Free Stock Analysis Report
 
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