Essex Property Trust Earnings: Expense Growth Lower Than Anticipated Despite Flood Cleanup Costs

First-quarter results for no-moat Essex Property Trust ESS were relatively in line with our expectations, leading us to reaffirm our $317 fair value estimate. Same-store occupancy improved 70 basis points sequentially to 96.7%, better than our estimate of flat growth. Average rental rates improved 6.8% year over year with the Northern California markets being a slight drag on performance, only up 5.3% in the quarter. While same-store revenue growth of 7.6% underperformed our estimate of 9.3% growth, same-store operating expenses were only up 4.0% compared with our estimate of 5.5% expense growth. As a result, same-store net operating income improved by 9.2%, relatively in line with our estimate of 9.8% growth. Essex reported core funds from operations of $3.65 per share in the first quarter, which was 4 cents better than our $3.61 estimate and 8.3% higher than the $3.37 figure reported in the first quarter of 2022.

While same-store operating expenses were only up 4.0% in the first quarter, there was a wide disparity across the company’s expense line items and the company’s markets. Essex’s three largest expense items were real estate taxes, utility costs, and personal cost—and those items fell 1.6%, grew 2.8%, and grew 1.6% year over year, respectively. However, maintenance and repairs saw a 24.5% jump in the first quarter due to slightly higher-than-average turnover but also due to flood damage clean-up expenses in Southern California. As a result, the Southern California markets saw expenses grow 9.2% in the first quarter while Northern California only grew 2.4% and Seattle fell 3.6%. While we anticipate that expense growth will be higher than normal in 2023 due to continued high inflation, we recognize that some of the growth seen in the first quarter is due to a nonrecurring event, which makes the 4.0% reported figure even more impressive.