Essex Property (ESS) Q4 Earnings: What's in the Cards?

Essex Property Trust, Inc.ESS is slated to report fourth-quarter 2016 results on Feb 2, after the market closes .

This residential real estate investment trust ("REIT") has a decent earnings surprise history. It reported a positive surprise of 1.81% in the prior quarter and has, in fact, beaten the Zacks Consensus Estimate in each of the trailing four quarters, with an average positive surprise of 1.99%.

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

The company projects core FFO per share in the range of $2.77-$2.83 for the fourth quarter. The Zacks Consensus Estimate for the same is currently pegged at $2.82.

Is the company poised for a winning quarter? Or will a challenging backdrop in the residential real estate market hurt its financials this earnings season? Let's see how things have shaped up for this announcement.

Factors to Consider

Essex has a strong property base and a sturdy balance sheet. In fact, it also enjoys a solid scale in the West Coast market. Moreover, demographic growth continues to be robust in the young adult age cohort, which has a higher propensity to rent. These are expected to drive demand for apartments in the company's markets in the to-be-reported quarter.

However, the national apartment market has been experiencing moderation over the past few quarters, after posting robust results in previous years, thanks to the new supply in the high-rent metros. In fact, per an early apartment data from the AXIOMetrics, national effective rent growth was 2.3% for fourth-quarter 2016. This was over 2 percentage points lower than the 4.6% rent growth experienced a year ago. In addition, occupancy of 94.7% in the fourth quarter was down from 95.1% in the third quarter and 95.0% in fourth-quarter 2015.

In fact, there have been consistent apartment deliveries and a slowdown in employment trends nationwide, particularly in west coast submarkets. Also, there is aggressive rental concessions provided at newly developed communities.

This is expected to continue and moderate pricing power, as well as hinder growth in occupancies. Overall, it is also anticipated to restrict growth of the company in the to-be-reported quarter.

Earnings Whispers

Our proven model does not conclusively show that Essex Property will beat on earnings this season. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. However, that is not the case here as you will see below.

Zacks ESP: The Earnings ESP, which represents the percentage difference between the Most Accurate estimate of $2.81 and the Zacks Consensus Estimate of $2.82, is -0.36%. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank: Essex Property currently has a Zacks Rank #3. Though a favorable Zacks Rank increases the predictive power of ESP, the company's negative ESP makes our surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks that Warrant a Look

Here are a few other stocks in the REIT sector that you may want to consider, as our model shows that they have the right combination of elements to report a positive surprise this quarter:

Ashford Hospitality Prime, Inc.AHP , likely to release earnings results around Feb 22, has an Earnings ESP of +16.67% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here .

CubeSmartCUBE , expected to release earnings results around Feb 16, has an Earnings ESP of +2.70% and a Zacks Rank #3.

STAG Industrial, Inc.STAG , likely to come up with its earnings release around Feb 16, has an Earnings ESP of +2.50% and a Zacks Rank #3.

Note: All EPS numbers presented in this write up represent funds from operations (FFO) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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