What's in Store for Essex Property (ESS) in Q4 Earnings?
Essex Property Trust, Inc. ESS is scheduled to report its fourth-quarter and full-year 2023 results on Feb 6 after market close. 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 0.27% in terms of core FFO per share. Results reflected favorable growth in same-property revenues, though higher same-property operating expenses partly acted as a dampener.
Over the trailing four quarters, Essex Property 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
Let’s see how things have shaped up before this announcement.
US Apartment Market in Q4
Per RealPage data, although there was a significant recovery in apartment demand in the fourth quarter, it was not enough to keep up with the huge amounts of new supply, with the onslaught affecting occupancy and rent growth.
There was demand for 58,200 units in the fourth quarter, pushing the total demand figure to 233,741 units in the 12-month period, which marked a considerable change from net move-outs from 123,290 units recorded in 2022. However, there were massive amounts of new supply, with 129,015 units being delivered in the fourth quarter across the top 150 markets tracked by RealPage, bringing the total number of units delivered to 439,394 in 2023.
With supply outpacing demand, the occupancy level was 94.2%, contracting 30 basis points (bps) in the quarter and 90 points year over year. Apart from the occupancy rate, operators’ pricing power was also affected, with fourth-quarter rents contracting 1.3% but increasing 0.2% in the year. The monthly rent was $1,805, while the rent per square foot was $1.986.
Projections
Essex Property has a good property base and substantial exposure to the West Coast market. ESS banks on its technology, scale and organizational capabilities to drive innovation and margin expansion in the portfolio.
However, the struggle to lure renters will persist as supply volumes are likely to have remained elevated in some of its markets. Such a competitive landscape limits the company’s ability to increase rents, restricting its growth momentum to some extent.
Also, a high interest rate is a concern for Essex Property. Elevated rates imply higher borrowing costs for the company, which will affect its ability to purchase or develop real estate. We expect interest expenses to have increased 6.4% year over year in the fourth quarter.
Per the November investor presentation, Essex Property’s preliminary October 2023 data reveals blended rates of 2.9%, up from 2.1% in the third quarter and financial occupancy of 95.9%, lower than the 96.4% witnessed in the third quarter. However, the company noted that the reduction in October occupancy is because of the company’s recapturing of delinquent units.
The Zacks Consensus Estimate of $419.68 million for fourth-quarter revenues calls for a 1.08% increase year over year. The consensus estimate for same-property revenues is pegged at $400.34 million, up from $398.46 million in the prior quarter and $381.38 million in the year-ago period. Same-property financial occupancy is expected to decline to 96.17%, down from 96.40% in the third quarter.
For the fourth quarter of 2023, Essex Property projected core FFO per share in the range of $3.73-$3.85, with the midpoint being $3.79.
Before the fourth-quarter earnings release, Essex Property’s activities were not adequate to gain analysts’ confidence. The Zacks Consensus Estimate for the quarterly core FFO per share has been revised a cent south in the past week to $3.81. However, it suggests a year-over-year increase of 1.06%.
For the full year 2023, Essex Property expected core FFO per share in the band of $14.94-$15.06, with the midpoint being $15. This is based on the company’s projection for same-property revenue growth of 4.2%-4.6%, same-property operating expenses increase of 3.75%-4.25% and same-property NOI expansion of 4.1%-4.9%.
For the year, we expect same-store property revenue growth of 4.4%, operating expenses to increase 4% and, consequently, net operating income to increase 4.5% year over year. For the fourth quarter, we project an occupancy of 96.2%.
For the full year, the Zacks Consensus Estimate for core FFO per share is pegged at $15.02. The figure indicates a 3.51% increase year over year on 3.61% year-over-year growth in revenues to $1.66 billion.
Here Is What Our Quantitative Model Predicts:
Our proven model does not conclusively predict a 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 chances of an FFO beat, which is not the case here.
Essex Property currently carries a Zacks Rank of 3 and has an Earnings ESP of -1.20%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Stocks That Warrant a Look
Here are two stocks from the residential REIT sector — Mid-America Apartment Communities, Inc. MAA and American Homes 4 Rent AMH — you may want to consider as our model shows that these have the right combination of elements to report a surprise this quarter.
Mid-America Apartment Communities, scheduled to report quarterly numbers on Feb 7, has an Earnings ESP of +0.53% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.
American Homes 4 Rent, slated to release quarterly numbers on Feb 22, has an Earnings ESP of +0.80% and carries a Zacks Rank of 3 at present.
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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Mid-America Apartment Communities, Inc. (MAA) : Free Stock Analysis Report
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American Homes 4 Rent (AMH) : Free Stock Analysis Report
