Essex Earnings: Net Operating Income Growth a Little Weak as West-Coast Metro Markets Struggle

Third-quarter results for Essex Property Trust ESS were slightly below our estimates, though we didn’t see anything in the quarter that would materially change our $305 fair value estimate for the no-moat company. Same-store occupancy fell 20 basis points sequentially to 96.4%, slightly worse than our estimate of flat occupancy growth. Average rental rates increased 3.3% year over year, in line with our 3.4% growth estimate. Combined, same-store revenues were up 3.2% in the third quarter. However, same-store operating expenses were up 4.4% as utility costs were up 7.0% and personnel costs were up 5.1%. As a result, same-store net operating income only increased 2.7% in the quarter, slightly below our estimate of a 4.1% increase. This led to Essex reporting core funds from operations of $3.78 per share for the quarter, which is 2.4% above the $3.69 core FFO figure reported in the third quarter of 2022 but $0.07 below our $3.85 estimate for the quarter.

Many of the metropolitan markets in Essex’s portfolio underperformed the company’s suburban markets. San Francisco saw the worst performance with revenues falling 1.9% as the local economy, and thus the commercial real estate market, continues to struggle. Fortunately, that market represents only a little over 2% of Essex’s portfolio. Los Angeles was negatively affected by the Writers Guild of America strike and thus saw revenue increase only 1.2% in the quarter. Seattle also continues to deal with weakness in the tech sector and thus saw revenues up just 2.3%. However, three of Essex’s suburban markets (Orange County, Ventura County, and Santa Clara County) that combine to represent approximately a third of Essex’s portfolio saw revenue growth above 4%. Additionally, San Diego did really well in the quarter as Essex reported 8.7% revenue growth for the market. We believe each of these markets will normalize over the next few quarters and approach the company’s historical average growth of around 3% annual rent growth.