Essex Property's Q1 FFO Beats - Analyst Blog

The residential real estate investment trust – Essex Property Trust Inc. ESS – reported first-quarter 2014 funds from operations (FFO) of $2.02 per share, exceeding the Zacks Consensus Estimate of $2.00 by 1.0% as well as the year-ago quarter figure of $1.87 by 8.0%. Results were driven by improving market fundamentals along its footprints.

Including merger expenses, acquisition costs and non-recurring items, the company reported FFO per share of $1.68, depicting a fall of 14.6% year over year from $1.97. Notably, in the quarter under review, the company had incurred $16.1 million in merger related expenses.

Total revenue came in at $161.6 million in first-quarter 2014, up 9.2% from the prior-year quarter and also ahead of the Zacks Consensus Estimate of $160 million.

This REIT, which accomplished the merger with BRE Properties on Apr 1, thereby creating the premium West Coast multifamily REIT, was also added to the S&P 500 Index on the same day.

During the quarter, the company's same-property gross revenues increased 7.2% from the prior-year quarter, while net operating income (NOI) advanced 8.3% year over year. The legacy BRE portfolio generated a 5.6% increase in same-property revenues in the first quarter.

The company completed the lease-up of Connolly Station (a 309 unit community) in Dublin, CA. The community was 99% occupied as of the end of April. It also commenced the lease-up of two additional development communities.

Essex Property exited the quarter with cash and cash equivalents of $48.7 million, down from $53.8 million. Notably, on Mar 31, 2014, contribution of $888 million was made in BRE properties to 3 new co-investment entities as part of financing a substantial part of the cash consideration of the BRE merger.

For second-quarter 2014, Essex Property expects core FFO per share in the range of $1.96 – $2.04. This includes the impact of the BRE portfolio and recent financing deals. The Zacks Consensus Estimate of $2.03 per share also falls within this range.

For full-year 2014, the company guided for core FFO per share in the range of $8.15 – $8.45, reflecting a rise of the mid-point by 5 cents. The Zacks Consensus Estimate of $8.26 per share lies within this range.

In Conclusion

We believe that with a solid property base, significant geographic overlap and strong management team at Essex, this combined entity can efficiently leverage on the attractive market fundamentals, synergies and reward shareholders accordingly.

As a matter of fact, in the West Coast, strong growth in jobs amid a lower supply of properties in the market (both new rental as well as for-sale housing) keeps the demand momentum robust. And Essex, which presently enjoys ownership interests in 234 apartment communities with an additional 14 properties in different phases of active development, is expected to benefit from this going forward.

Essex Property currently has a Zacks Rank #3 (Hold).  Investors interested in the REIT industry may also consider stocks like Equity LifeStyle Properties, Inc. ELS, Cousins Properties Incorporated CUZ and Duke Realty Corporation DRE. All these stocks carry 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.