Essex Property Q2 FFO Beats on Solid NOI Growth, Guides Up

Well in tune with our expectations, the residential real estate investment trust – Essex Property Trust Inc. ESS – reported encouraging second-quarter 2014 results. Core funds from operations (FFO) of $2.08 per share exceeded the Zacks Consensus Estimate of $1.70 by 22.4% and the year-ago quarter figure by 11.1%. The company has also raised its outlook for full year 2014 on the back of solid same-property net operating income growth (NOI).

Further, the core FFO per share came 8 cents above the midpoint of its guidance range. Results are driven by healthy economic conditions in Northern California and Seattle as well as continued improvements in Southern California.

Including merger expenses, acquisition costs and non-recurring items, the company reported FFO per share of $1.72, reflecting a fall of 9.8% year over year from $1.91. Notably, the company had incurred $26.5 million as merger-related expenses in the quarter under review.

Total revenue came in at $259.5 million in second-quarter 2014, ahead of the Zacks Consensus Estimate of $258 million. Total revenue soared 72.0% year over year, mainly on the back of the BRE acquisition as well as growth in same-property revenue.

Quarter in Detail

During the quarter, the company's same-property gross revenues increased 7.2% from the prior-year quarter, while NOI advanced 9.1% year over year. Moreover, pro forma same-property revenue growth in the legacy BRE portfolio was 6.7%. Notably, revenue growth differential to the Essex portfolio narrowed to 0.5% from 1.6% in the prior quarter.

Financial occupancy in the same-property portfolio was 96.1% in the second quarter, up 10 basis points year over year. In the legacy BRE same-property portfolio, financial occupancy increased by 92 basis points from the prior-year period to 95.3%.

Notable Portfolio Activity

In May, Essex Property acquired Piedmont Apartments in Bellevue, WA for $76.8 million. Moreover, the company purchased Collins on Pine, a 76 unit community in Seattle, WA, for $29.2 million.   

During the quarter, Essex Property stabilized four development communities. Following the quarter end, the company started the lease-up of two additional properties, Radius and Mosso I.

Liquidity

Essex Property exited the quarter with cash and cash equivalents of $47.5 million, down from $53.8 million at the prior-year end. Moreover, the company had $855 million available on its $1.025 billion revolving lines of credit at July-end.    

Outlook Raised

For full-year 2014, the company's guidance for core FFO per share ranges from $8.31 to $8.47, denoting a mid-point rise of 9 cents. This is also well above the Zacks Consensus Estimate of $7.40 per share.

Notably, this increase is backed by improved same-property NOI growth. The company now expects Essex portfolio full-year same-property revenue to grow 6.4% to 6.8%, increasing the midpoint by 100 basis points and raising the same-property NOI growth range to 7.7%–8.4%.

For third-quarter 2014, Essex Property expects core FFO per share in the range of $2.05 – $2.11, well above the Zacks Consensus Estimate of $1.96 per share.

In Conclusion

California-based Essex Property completed the merger with BRE Properties on Apr 1, thereby creating a premium West Coast multifamily REIT. It was also added to the S&P 500 Index on the same day. The company now enjoys ownership interests in 240 apartment communities with an additional 11 properties in different phases of active development.

In the West Coast, strong job growth amid a lower supply of properties in the market keeps the demand momentum robust. With an enhanced property base and strong management team, we believe that Essex can efficiently leverage on attractive market fundamentals and reward its shareholders accordingly.

Essex Property currently has a Zacks Rank #3 (Hold).  Investors interested in the residential REIT industry may also consider stocks like American Campus Communities, Inc. ACC, Avalonbay Communities Inc. AVB and Equity LifeStyle Properties, Inc. ELS. 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.