What's in Store for Essex Property (ESS) in Q2 Earnings?
Essex Property Trust ESS is scheduled to report second-quarter 2023 results on Jul 27 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 0.83% in terms of core FFO per share. Results reflected favorable same-property revenues.
Over the trailing four quarters, Essex Property surpassed the Zacks Consensus Estimate on each occasion, the average surprise being 1.39%. 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.
Factors to Consider
Despite cooling rent growth, apartment demand is showing signs of a solid rebound, with net absorption in the second quarter of 2023 nearing surging new supply levels. This stabilizes occupancy rates after a steep decline in 2022.
Per RealPage data, in the second quarter, net demand registered at 83,449 units, and this marked a five-quarter high. While this is still below the record numbers seen during the 2021 boom, it indicates a normalization of apartment demand. This demand rebound coincides with a 50-year high in apartment construction starting to convert into peak completions, with more than 107,000 units completed in the second quarter of this year itself.
However, despite the supply surge, this solid demand is aiding in the mitigation of vacancy spikes in most markets, with U.S. apartment occupancy coming at 94.7% as of June, marking only a 0.1 percentage point decline since January. It marks a notable improvement compared to the occupancy fall of 1.2 percentage points in the first half of 2022 and then an additional 1.4 percentage points in the second half of the year.
However, rent growth remains below normal in 2023, with year-over-year effective asking rent growth at just 1.5%. This is due to apartment operators prioritizing occupancy rates over rents, leading to more options for renters and putting downward pressure on rent growth. Same-store effective asking rents increased only 0.46% between May and June 2023.
Essex Property has a sturdy 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, more constrained net demand was observed across a significant portion of the West Coast.
In the June investor presentation, Essex Property reported that in May, new lease rents and occupancy showed a recovery following the strategic implementation of concessions to boost occupancy in April. The impact of concessions has resulted in modest new lease growth to start the second quarter.
Essex Property’s preliminary April-May 2023 data reveals 4.2% growth in same-property revenues, down from 7.6% in the first quarter. Moreover, preliminary April-May 2023 data reveals blended rates of 2.1%, down from 2.9% in the first quarter and financial occupancy of 96.6%, slightly lower than the 96.7% witnessed in the first quarter.
The Zacks Consensus Estimate of $414.7 million for second-quarter revenues calls for a 3.7% increase year over year. The consensus estimate for same-property revenues is pegged at $391.96 million, up from $388.90 million in the prior quarter and $373.33 million in the year-ago period. Same-property financial occupancy is expected to remain unchanged sequentially at 96.7%.
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 would affect its ability to purchase or develop real estate. We expect interest expenses to increase 2.8% year over year.
For the second quarter of 2023, Essex Property projected core FFO per share in the range of $3.63-$3.75, with the midpoint being $3.69.
Before the second-quarter earnings release, Essex Property’s activities were not adequate to gain analysts’ confidence. The Zacks Consensus Estimate for the quarterly FFO per share has been unrevised in the past month at $3.73. However, it suggests a year-over-year increase of 1.36%.
Here Is What Our Quantitative Model Predicts:
Our proven model predicts 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 the case here.
Essex Property currently carries a Zacks Rank of 3 and has an Earnings ESP of +0.29%. 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 — Invitation Homes Inc. INVH and American Homes 4 Rent AMH — you may want to consider as our model shows that these also have the right combination of elements to report a surprise this quarter.
Invitation Homes, scheduled to report quarterly numbers on Jul 26, has an Earnings ESP of +0.90% and carries a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.
American Homes 4 Rent is slated to report quarterly numbers on Jul 27. AMH has an Earnings ESP of +3.24% 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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Essex Property Trust, Inc. (ESS) : Free Stock Analysis Report
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