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Key Factors to Impact Essex Property's (ESS) Q3 Earnings

Zacks Equity Research

Essex Property Trust, Inc. ESS is scheduled to report third-quarter 2019 results on Oct 23, after the market closes. 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) delivered a positive surprise of 2.15% in terms of FFO per share. Results reflected growth in same-property net operating income (NOI).

Over the trailing four quarters, the company beat the Zacks Consensus Estimate on three occasions and met in the other, the average beat being 0.93%. 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

The U.S. apartment market has put up an impressive performance in the past few months, successfully banking on the stellar rental-unit demand. While occupancy is hovering at a near-record level, rents continue to register a steady rise.

Per the latest report from real estate technology and analytics firm, RealPage, occupancy reached 96.3% as of third-quarter 2019, with an impressive leasing activity. The figure is not only up from the prior-year period’s 95.9%, but is also close to the all-time high of 96.4% attained almost two decades ago in late 2000. The warmer months definitely witness an uptick in apartment leasing activity. However, this year, the performance was robust, as demand was particularly strong.

With an uptick in occupancy, rent growth also seems to be steady. For new leases, rents were up 1.2% during the third quarter, driving the annual rent growth pace to 3% and monthly rents averaging $1,416. This comes after a solid performance in the April-June quarter.

Backed by a sturdy property base and strong management team, Essex Property too is likely to have leveraged on favorable demographic trends, household formation and job-market growth in its markets. The company has a notable exposure to the West Coast market, which is anticipated to have provided ample scope to bolster its top-line growth in the quarter under review.

In fact, the West Coast is home to several innovation and technology companies. The region is witnessing solid job growth, higher wages, increased percentage of renters than owners, and favorable migration trends. 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 third-quarter revenues of $365.5 million indicates a 4.2% improvement, year on year. Further, the company estimates core FFO per share of $3.26-$3.36 for the quarter. The Zacks Consensus Estimate for the same is currently pinned at $3.36. It reflects 6.7% growth from the prior-year quarter’s reported tally.

Essex Property maintains a solid balance sheet and enjoys financial flexibility. As of Jul 22, the company had around $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.

In addition to the above, Essex Property’s activities during the July-September quarter were adequate to gain analyst confidence. Consequently, the Zacks Consensus Estimate for FFO per share for the third quarter gained by 2 cents in the past two months.

Nevertheless, apartment deliveries are expected to have remained elevated in a number of the company’s markets in the quarter. 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:

Our proven model does not conclusively predict a positive surprise 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 odds of a FFO beat. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Although Essex Property carries a Zacks Rank of 3, its Earnings ESP of -0.02% makes surprise prediction difficult.

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:

Public Storage PSA, set to report quarterly results on Oct 29, has an Earnings ESP of +1.50% and carries a Zacks Rank of 2, currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

Realty Income O, scheduled to release earnings on Nov 4, has an Earnings ESP of +0.3% and currently carries a Zacks Rank of 2.

Digital Realty Trust, Inc. DLR, slated to report third-quarter results on Oct 29, has an Earnings ESP of +0.78% and currently carries 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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