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Key Factors to Impact Essex Property's (ESS) Q4 Earnings

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Essex Property Trust, Inc. (ESS - Free Report) is scheduled to report fourth-quarter and full-year 2020 results on Feb 4, after the market close. 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) reported a negative surprise of 0.32% in terms of FFO per share. Results reflected a dismal scenario due to the pandemic and subsequent economic recession that prevailed throughout the third quarter. Cash concessions and delinquencies affected same-property revenues during the quarter.

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 market witnessed solid leasing activity in the fourth quarter of 2020, per a report from the real estate technology and analytics firm RealPage (RP - Free Report) . Typically, demand remains low during the October-December quarter, but thanks to the pandemic that pushed this demand to the latter half of the year from the usually strong second quarter. Particularly, in the last three months of 2020, absorptions amounted to about 79,000 units.

However, this demand rebound has not been even, rather, it has been varied across markets. Demand in the Sun Belt markets and the sub-urban ones remained strong, while considerable move-outs and sluggish demand were noticed in gateway markets.

Though occupancy level held up well in December, rent changes varied across metros, with select big cities witnessing significant price reductions, while in a number of individual metros rents continue to rise or have been steady, per a report from RealPage. Particularly, in the country’s 150 largest metros, December occupancy came in at 95.5%, which is just a tad below the year-earlier figure of 95.6%. Effective asking rents, on a nation-wide basis, as of December were off 1% from the 2019-end tally, with the December price point coming at $1,410 per month.

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

However, the pandemic’s adverse impact on economy and the job-market environment is resulting in household contraction and consolidation. Loss of leisure and hospitality and other services jobs has been dampening demand in the company’s markets.

In fact, the REIT has significant exposure to urban residential assets and this portfolio has been feeling the brunt. 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 are spurring demand for existing and new-home purchases, mainly for young-age cohorts, where homeownership rates have started to shoot up. In the near term, same-store revenues are likely to be strained amid pressure on rental rates. Furthermore, amid a slowdown in demand, concession activity is likely to be high.

The Zacks Consensus Estimate of $366.03 million for fourth-quarter revenues calls for a 2.5% decline year on year. The Zacks Consensus Estimate for quarterly same-property occupancy currently stands at 96%, while the consensus estimate for same property-revenues is presently pegged at $312 million, down from the prior quarter’s $338 million and the year-ago period’s $348 million.

Prior to the fourth-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 $3.12 over the past month. Also, it suggests a year-over year decline of 9.6%.

For the full year, the Zacks Consensus Estimate for FFO per share has been revised marginally south over the past month to $12.92. The figure also indicates a 3.4% decrease year over year on revenues of $1.5 billion.

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 -0.39%.

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:

Rexford Industrial Realty, Inc. (REXR - Free Report) , slated to release fourth-quarter earnings on Feb 10, has an Earnings ESP of +2.13% and carries a Zacks Rank of 2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Healthpeak Properties, Inc. (PEAK - Free Report) , scheduled to report earnings figures on Feb 9, has an Earnings ESP of +4.40% and holds a Zacks Rank of 3 at present.

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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