What's in Store for Essex Property (ESS) in Q1 Earnings?

Essex Property Trust, Inc. ESS is scheduled to report its first-quarter 2024 results on Apr 30 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 0.52% in terms of core FFO per share. Results reflected favorable growth in same-property revenues and net operating income (NOI).

Over the trailing four quarters, Essex Property surpassed the Zacks Consensus Estimate on each occasion, the average surprise being 0.67%. The graph below depicts the surprise history of the company:

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 before this announcement.

US Apartment Market in Q1

Per RealPage data, although there was a significant recovery in apartment demand in the first quarter, it was not enough to keep up with the huge amounts of new supply, with the onslaught affecting occupancy and rent growth.

The United States absorbed 103,826 apartment units on net in the first quarter, pushing the annual demand figure to 317,241 units in the 12-month period. This is about 20% higher than a typical annual absorption rate from the 2010s decade, the report noted. A combination of elements like continuing wage increases, solid job growth and favorable demographic trends is driving this surge in demand. Moreover, move-outs from apartment units into single-family homes remain much lower.

However, there were massive amounts of new supply, with 135,652 apartment units being completed in the first quarter, bringing the total number of new multifamily units delivered to 479,367 in the year-ending first quarter of 2024.

With supply outpacing demand, apartment occupancy averaged 94.1% nationwide as of March, down 0.6% year over year, though lower than typical but not significantly down. Apart from the occupancy rate, operators’ pricing power was also affected, with the first-quarter annual effective rent change being up 0.2% and the monthly effective rent change being north 0.4%.  The average effective rent was $1,813.

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 and occupancy levels, restricting its growth momentum to some extent. Moreover, outmigration and job losses are expected to affect apartment demand.

Also, a high interest rate is a concern for Essex Property. Elevated rates imply higher borrowing costs for the company, which is likely to have affected its ability to purchase or develop real estate. We expect interest expenses to increase 3.1% year over year in the first quarter.

Per the March investor presentation, for the first two months of 2024, Essex Property experienced healthy same-property revenue growth, which is consistent with the company’s expectations. For the first quarter of 2024, ESS expects same-property revenue growth in the low-3% range.

Its preliminary January-February 2024 data reveals new lease rates of a negative 0.1% compared with a negative 1.7% in the fourth quarter of 2023. Renewal rates are up 4.3% compared with 4.9% in the fourth quarter, while blended rates climbed 2.4% compared with 1.7% in the prior quarter. Financial occupancy for the January-February period is 96.3%, up from 96.1% in the fourth quarter. ESS also noted that following the usual post-holiday spike in January, a quick improvement in delinquency has been experienced in February and is in line with its expectations to start the year.

The Zacks Consensus Estimate of $422.38 million for first-quarter revenues calls for a 2.41% increase year over year. The consensus estimate for same-property revenues is pegged at $400.53 million, slightly up from $400.33 million in the prior quarter and $388.90 million in the year-ago period.

For the first quarter of 2024, Essex Property projected core FFO per share in the range of $3.68-$3.80, with the midpoint being $3.74.

Before the first-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 two months to $3.74. However, it suggests a year-over-year increase of 2.47%.

For the first quarter, we expect same-store property revenue growth of 3.4%, operating expenses to increase 4.5% and, consequently, net operating income to rise 3% year over year. For the first quarter, we project financial occupancy of 96%, down 10 basis points sequentially.

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 +0.16%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Other Stocks That Warrant a Look

Here are two other stocks from the broader REIT sector — Public Storage PSA and Invitation Homes Inc. INVH — you may want to consider as our model shows that these also have the right combination of elements to report a surprise this quarter.

Public Storage is slated to report quarterly numbers on Apr 30. PSA has an Earnings ESP of +0.50% and carries a Zacks Rank of 3 presently. You can see the complete list of today’s Zacks #1 Rank stocks here.

Invitation Homes Inc. is scheduled to report quarterly numbers on Apr 30. INVH has an Earnings ESP of +0.77% and 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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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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