Essex Property Trust Earnings: Higher-Than-Anticipated Revenue Growth Leads to Guidance Raise

Essex Property Trust ESS reported second-quarter results that were relatively in line with our expectations, leading us to reaffirm our $317 fair value estimate for the no-moat company. Same-store occupancy fell 10 basis points sequentially to 96.6%, but is up 50 basis points year-over-year and is better than our estimate of 96.0% occupancy for the second quarter. However, average rental rates improved 5.3% year over year, which is below our estimate of 8.1% rate growth. Same-store revenue was up only 4.0% in the second quarter as growth saw a negative 150-basis-point impact due to increased delinquencies, though that is because 2022 saw a $13 million benefit from the Emergency Rental Assistance program that has since rolled off. Same-store operating expenses increased 5.3% in the second quarter, slightly above our estimate of 5.0% growth, and led to same-store net operating income growth of 3.6%. Essex reported core funds from operations growth of 2.4% in the second quarter to $3.77 per share, a penny better than our $3.76 estimate.

Second-quarter results were better than management anticipated and, combined with strong leasing trends heading into the third quarter, led management to raise its 2023 guidance. Same-store revenue growth was raised 75 basis points on the low end to a new range of 4.00%-4.75%. Meanwhile, same-store operating expenses were lowered by 100 basis points at the midpoint to a new range of 3.75%-4.25%. As a result, same-store net operating income is now expected to grow between 3.9% and 5.1%, an increase of 90 basis points at the midpoint. Additionally, management raised core FFO guidance to a range of $14.88-$15.12 from a prior range of $14.59-$14.97, which moves our $14.90 estimate for 2023 from the high end of management’s guidance range to the low end. While we might make small changes to our estimates, the revised guidance ranges give us confidence that apartments should continue to see solid growth for several more quarters.