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Essex Property (ESS) Q3 Earnings: What's in the Offing?

Essex Property Trust, Inc. ESS is scheduled to report third-quarter 2017 results on Nov 1, after the market closes.

In the prior quarter, this San Mateo, CA-based residential real estate investment trust (REIT) generated a positive surprise of 1.71% in terms of funds from operations (FFO) per share. Results reflected solid growth in revenues.

Over the trailing four quarters, the company beat the Zacks Consensus Estimate in three occasions — the average beat being 1.23%. This is depicted in the graph below:

Note: The EPS numbers presented in the above chart represent funds from operations (“FFO”) per share.

For third-quarter 2017, the company estimates core FFO per share in the $2.88-$2.98 range. The Zacks Consensus Estimate for the same is currently pegged at $2.97.

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. The company’s substantial exposure to the West Coast market, which is home to several innovation and technology companies, is likely to offer scope to boost its top line in the to-be-reported quarter. Improved economy and job market strengths are anticipated to act as a catalyst and drive demand for apartments in the company’s markets in the quarter.

Notably, per a study by the real estate technology and analytics firm, RealPage, Inc. RP, the U.S. apartment market reported stable rent growth, while occupancy remained healthy in the third quarter. However, the levels of rent growth have moderated from the previous years. For new leases, effective rents moved up 0.9% during the quarter and 2.6%, annually. Further, apartment occupancy came in at 95.5% for the third quarter across the country’s top 100 metros.

However, although apartment deliveries have not yet reached peak levels due to delay in delivery, the supply remained elevated in the third quarter. This elevated supply is a concern because it curbs landlords’ ability to command more rent and results in lesser absorption.

As such, in the to-be-reported quarter, occupancy is likely to remain nearly unchanged. Furthermore, escalating supply in certain submarkets is expected to result in aggressive rental concessions and moderate pricing power of landlords.

Amid these, the Zacks Consensus Estimate for third-quarter revenues is pegged at $342.1 million, marking an expected increase of 3.9% year over year.

Moreover, in a week’s time, the Zacks Consensus Estimate of FFO per share for the third quarter inched up 0.3% to $2.97, highlighting analysts’ bullish sentiments.

Essex Property’s shares have rallied 12.9% year to date, outperforming the industry’s gain of 5.1%.

Earnings Whispers

Our proven model does not conclusively show that Essex Property will likely beat estimates 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 at least 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 and the Zacks Consensus Estimate, is pegged at -0.18%. 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 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:

Regency Centers Corporation REG, slated to release third-quarter results on Nov 1, has an Earnings ESP of +2.96% and a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Extra Space Storage Inc. EXR, scheduled to release earnings on Nov 1, has an Earnings ESP of +1.19% and a Zacks Rank of 2.

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.

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RealPage, Inc. (RP): Free Stock Analysis Report
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