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

Essex Property's (ESS) Q3 performance likely to reflect improving market conditions, and declining same-property cash delinquencies as well as high occupancy.

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This story originally appeared on Zacks

Essex Property Trust, Inc. ESS is scheduled to report third-quarter 2021 results on Oct 26, after the closing bell. The company’s results will likely reflect year-over-year declines in revenues and 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 1.67% in terms of FFO per share. Results highlighted better-than-anticipated revenues in the quarter. With relaxation in the Covid-19 restrictions, the company’s markets witnessed decent recovery in fundamentals.



Over the trailing four quarters, the company beat the Zacks Consensus Estimate on two occasions for as many misses, the average negative surprise being 0.22%. This is depicted in the graph below:

- Zacks

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 prior to this announcement.

Factors to Consider

For the U.S. apartment market, the third quarter appeared to be robust this year, with renter demand continuing to surge significantly. The number of occupied apartments was up 255,094 units, per a report depicting preliminary calculations from the real estate technology and analytics firm RealPage. This marked the biggest quarterly product absorption figure observed in the database that go back to the early 1990s. As of third-quarter 2021, the annual demand volume reached a whopping 597,354 units. Increase in occupied apartments over the past year surpassed the previous results.



After living with parents during the initial days of the pandemic, young adults are now forming new households. A better job market, particularly for the high-paying employment sectors than in the low-wage positions, is triggering demand for luxury units. Moreover, rising home prices and limited inventory levels in the for-sale sector are hindering the conversions to homeownership and aiding rental housing demand. In terms of markets, product absorption continued in the Sun Belt and other non-gateway metros. What’s grabbing attention is the large product absorption in the gateway metros, highlighting healthy rental demand.



The current favorable environment is boosting the occupancy levels and in turn, pushing up rents. Rent growth has also been widespread.



Essex Property has a sturdy property base, substantial exposure to the West Coast market, and is also banking on its technology, scale and organizational capabilities to drive innovation and margin expansion in the portfolio. The residential REIT is also likely to have benefited from its improving fundamentals.



In September, Essex Property issued an operating update for the third quarter. Also, the residential REIT reaffirmed its third-quarter and full-year 2021 guidance ranges. The company’s preliminary August 2021 update noted that the same-property cash delinquencies stood at 0.8% for the month compared with July’s 2.2% and the second quarter’s 2.6%, while financial occupancy was 96.4% in August compared with July’s 96.5%.



For the preliminary July-to-August period, total same-property revenues increased 2.6% year on year, as against the 3% decline seen in the second quarter. In addition, according to the company’s preliminary August results, for the total same-property portfolio, the percentage change of new lease rates on a net effective basis, including the impact of leasing incentives, is 17% compared to December 2020 and 4.7% compared to March 2020 (pre-COVID-19).



This comprised a 26% increase in new lease rates on a net effective basis, including the impact of leasing incentives, from December 2020 for the Seattle same-property portfolio, 12.7% for the Northern California portfolio and 17.1% for the Southern California portfolio.



During its second-quarter earnings release, the company projected the third-quarter core FFO per share at $2.98-$3.10.



The Zacks Consensus Estimate of $359.93 million for third-quarter revenues calls for a 2.9% decline, year on year. The Zacks Consensus Estimate for the quarterly same-property occupancy currently is pinned at 97%, up from the 96% reported in the prior-year quarter, while the consensus estimate for same property-revenues is presently pegged at $323 million.



The residential REIT is also likely to have maintained a decent balance sheet and financial flexibility during the quarter under review.



Prior to the quarterly earnings release, analysts seem to be optimistic about the company’s prospects as the Zacks Consensus Estimate for the July-September quarter’s FFO per share moved a cent north to $3.10 over the past month. However, it still suggests a year-over year decline of 1.59%.



Essex Property’s earnings might reflect the adverse impact of the pandemic on its business, year over year, though the gap is expected to have narrowed. The outmigration trend of population and business has emerged as a concern. Oversupply in its urban markets adds to its woes.

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 a FFO beat. 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 of 2 and has an Earnings ESP of +0.27%.

Other 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 these too have the right combination of elements to report a positive surprise this quarter:



Equity Residential EQR, scheduled to report third-quarter earnings on Oct 26, currently has an Earnings ESP of +1.19% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.



Camden Property Trust CPT, slated to release quarterly numbers on Oct 28, has an Earnings ESP of +0.43% and has a Zacks Rank of 2, at present.



Public Storage PSA, scheduled to report quarterly numbers on Nov 1, currently has an Earnings ESP of +1.50% and carries a Zacks Rank of 2.



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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