Essex Property (ESS) Q2 FFO And Revenues Beat Estimates

Residential real estate investment trust (“REIT”) Essex Property Trust Inc. (NYSE:ESS) reported second-quarter 2016 core funds from operations (“FFO”) of $2.74 per share, beating the Zacks Consensus Estimate of $2.70. Core FFO per share also improved 14.2% from the year-ago quarter figure of $2.40. Results were driven by growth in same-property net operating income (“NOI”).

Moreover, total revenue of $321.6 million in the quarter beat the Zacks Consensus Estimate of $320 million and surged 8.6% year over year. The outperformance reflects solid rental and other property revenues.

Essex Property benefited from decent performance of its Seattle, Los Angeles and San Diego portfolios. However, it experienced lower-than-expected revenue growth, mainly in the San Jose and San Francisco metro areas as a result of high-apartment deliveries in 2016.

Quarter in Detail

During the quarter, Essex Property’s same-property gross revenues grew 6.9% from the prior-year quarter, while same- property NOI improved 8.2% year over year. However, financial occupancies of 96.0% remained flat both sequentially and year over year.

During the second quarter, Essex property sold Canyon Creek, owned by BEXAEW, LLC. Notably, the company has a 50% ownership stake in the BEXAEW, LLC joint venture. The total proceeds from the sale of the apartment community that is located in Northridge, CA were $53.5 million, of which $26.3 million were utilized for repaying loan on the community. Essex’s share of the gain on sale was $5.6 million.

Liquidity

Essex Property exited second-quarter 2016 with cash and cash equivalents, including restricted of $215.4 million, up from $123.1 million at the end of 2015. As of Jul 25, 2016, the company had $1.025 billion in undrawn capacity on its unsecured credit facilities.

Outlook

Essex Property has upgraded its 2016 core FFO guidance range per share to $10.90–$11.06 from $10.72–$11.12, reflecting a 6 cent rise at the midpoint. The Zacks Consensus Estimate currently stands at $10.98.

However, it has narrowed the same-property revenue growth range to 6.6%–7.0% from the prior guided 6.50%–7.50%. The mid-point of the new range is 6.8% and it reflects a 20 bps reduction from the prior guidance. Prior expense growth guidance was reaffirmed at the midpoint.

For third-quarter of 2016, the company expects core FFO per share in the $2.73–$2.79 range. The Zacks Consensus Estimate is currently pegged at $2.77.

Conclusion

With a solid property base and healthy management team, we believe Essex Property is capable of efficiently leveraging the attractive market fundamentals in many of the West-Coast markets. However, elevated deliveries in San Jose and San Francisco markets remain a cause of concern. Also, any rise in interest rate will add to its woes.

Essex Property currently carries a Zacks Rank #3 (Hold).

Investors interested in the residential REIT industry may also consider stocks like Armada Hoffler Properties, Inc. (NYSE:AHH) , Avalonbay Communities Inc. (NYSE:AVB) and American Campus Communities, Inc. (NYSE:ACC) . Each of these stocks has a Zacks Rank #2 (Buy).

Note: 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. All EPS numbers presented in this write up represent FFO per share.