Essex Property Trust (ESS) Up 0.4% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Essex Property Trust (ESS). Shares have added about 0.4% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Essex Property Trust due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Essex Property Q2 FFO and Revenues Miss Estimates

Essex Property reported second-quarter 2020 core FFO per share of $3.16, missing the Zacks Consensus Estimate of $3.30. The figure also fell 5.1% from the year-ago quarter’s $3.33.

Results reflect a tepid environment with a “sharp decline” in rental demand early in the quarter due to the coronavirus pandemic and shelter-in-place ordinances. Nevertheless, management witnessed improvements in employment trends at the end of the quarter and is “cautiously optimistic” about the continuation of these trends.

Total revenues of $370.5 million missed the Zacks Consensus Estimate of $382.2 million. However, the figure was up 2.5% year over year.

The company did not reinstate the full-year 2020 guidance due to the pandemic’s uncertain nature as well as the evolving re-opening plans of the economy. However, the company, in its operational update, noted that in the same-property portfolio, cash delinquencies as percentage of scheduled rent was 2.7% in July compared with the 4.3% witnessed in the second quarter.

New lease rates declined 5.8% in July compared with a fall of 1.9% for the second quarter, while renewal rates slipped 1.9% in the month as against a rise of 0.4% during the quarter. However, financial occupancy improved to 96.2% in July, up from the June-end quarter’s 94.9%.

Quarter in Detail

During the April-June quarter, Essex Property’s same-property gross revenues declined 3.8% from the prior-year period. The company recorded an additional $9.7 million of delinquencies in the quarter compared with the year-ago period.

Moreover, same-property operating expenses flared up 6% year on year, reflecting a 9.6% increase in real estate taxes on higher taxes in Seattle. Consequently, same-property NOI dropped 7.4% year over year. Financial occupancies of 94.9% contracted 190 basis points (bps) sequentially and 170 bps year over year.

During the reported quarter, the company disposed two apartment communities — One South Market and Museum Park — located in San Jose, CA, for a total contract price of $232.0 million.

Balance Sheet

Essex Property exited the June-end quarter with cash and cash equivalents, including restricted cash, of $256.5 million, up from the $81.1 million recorded at the end of 2019. As of Jul 31, Essex Property had $1.2 billion in undrawn capacity on its unsecured credit facilities and the company’s immediate available liquidity surpassed $1.4 billion.

Notably, in June, the company issued $150 million of 12-year senior unsecured notes due in March 2032, having an interest rate per annum of 2.65% and an effective yield of 2.09%. Also, in April 2020, Essex Property originated a $200-million unsecured term loan, priced at LIBOR + 1.20%, with a one-year maturity and two 12-month extension options, which are exercisable at the company’s option. It used the proceeds to repay all residual consolidated debt having maturity this year.

During the reported quarter, the company repurchased 87,988 shares of its common stock amounting to $20.1 million at an average price of $228.36 per share. As of Jul 31, the company had $203.3 million of purchase authority remaining under the stock-repurchase plan.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

At this time, Essex Property Trust has a subpar Growth Score of D, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Essex Property Trust has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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