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

Essex Property Trust, Inc. ESS is scheduled to report third-quarter 2020 earnings on Oct 28, after market close.While the company’s results will likely reflect year-over-year marginal growth in revenues, funds from operations (FFO) per share might display a decline.

In the last reported quarter, this San Mateo, CA-based residential real estate investment trust (REIT) reported a negative surprise of 4.24% in terms of FFO per share. Results reflected a tepid environment with a “sharp decline” in rental demand early in the quarter due to the coronavirus pandemic and shelter-in-place ordinances.

Over the trailing four quarters, the company beat the Zacks Consensus Estimate on two occasions for as many misses, the average negative surprise being 0.33%. 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 to Consider

The U.S. apartment leasing rebounded during the third quarter, primarily aided by an increase in leasing activity in the Sun Belt region. It also indicates the occurrence of job growth after the slump earlier this year, which facilitated new household formation reappearance in several markets.

Per the latest report from real estate technology and analytics firm RealPage RP, across the 150 largest U.S. markets, the occupied apartment count climbed 146,517 units, on net, during the July-September quarter. This marks the largest third-quarter demand figure since before the Great Recession. Moreover, product absorption pace in the to-be-reported quarter was more than four times the minimal demand for about 34,000 apartments recorded in the second quarter, according to the report.

However, this bouncing back has not been uniform. Though the Sun Belt markets staged a recovery, a number of gateway markets suffered net move-outs during the period in discussion, and urban core neighborhoods still struggled.

Notably, Essex Property has a sturdy property base, substantial exposure to the West Coast market and a robust management team. The company is also banking on its technology, scale and organizational capabilities to drive innovation and margin expansion in the portfolio. This has become all the more essential in this social-distancing era, as the pandemic needed a quick shift to virtual operations for the continuity of normal business operations. These are likely to have provided the company a competitive edge during the September-end quarter.

However, with California and Washington having implemented more restrictive lockdown policies than the rest of the country to curb the spread of coronavirus, the West Coast’s economic recovery has been delayed. Loss of leisure and hospitality and other service jobs is thwarting demand in the company’s markets.

Apart from these, a number of factors are affecting rental demand, including work-from-home flexibility that is resulting in a shift of some renter demand away from higher cost and urban/infill markets. In addition, record-low mortgage rates and the desire for space are driving homes sales. Furthermore, use of concessions is likely to be rampant amid a slowdown in demand. Amid these, the company’s rental rates, occupancy and same-property revenue growth might have been affected.

The Zacks Consensus Estimate of $368.6 million for third-quarter revenues calls for a 0.5% improvement year on year. The company is also expected to have maintained decent balance sheet and financial flexibility.

Prior to the third-quarter earnings release, there is lack of any solid catalyst to become optimistic about the company’s prospects as the Zacks Consensus Estimate for the FFO per share moved three cents south to $3.15 over the past month. Also, it suggests a year-over year decline of nearly 6%.

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.

Essex Property currently carries a Zacks Rank #4 (Sell) and has an Earnings ESP of -1.27%.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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:

EastGroup Properties, Inc. EGP, slated to release third-quarter earnings on Oct 27, has an Earnings ESP of +0.43% and carries a Zacks Rank of 2, at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

National Storage Affiliates Trust NSA, scheduled to report quarterly numbers on Nov 5, currently has an Earnings ESP of +4.88% and 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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Essex Property Trust, Inc. (ESS): Free Stock Analysis Report
 
RealPage, Inc. (RP): Free Stock Analysis Report
 
EastGroup Properties, Inc. (EGP): Free Stock Analysis Report
 
National Storage Affiliates Trust (NSA): Free Stock Analysis Report
 
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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.

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