Riding on strong growth, the residential real estate investment trust Essex Property Trust Inc. (ESS) reported encouraging third-quarter 2014 results. Core funds from operations (FFO) of $2.16 per share were higher than the Zacks Consensus Estimate and the year-ago quarter figure of $1.91 by 13.1%. The company has also raised its outlook for full-year 2014 core FFO, backed by solid same-property net operating income (NOI) growth.
Including merger expenses, acquisition costs and non-routine items such as cyber-intrusion expenses, the company reported FFO per share of $2.08, reflecting a 9.1% year-over-year rise from $1.91. Notably, the company had incurred $3.9 million as merger-related expenses in the quarter under review.
Total revenue came in at $270.5 million in third-quarter 2014, ahead of the Zacks Consensus Estimate of $262 million and soared 75.7% year over year, mainly on the back of the BRE acquisition and growth in same-property revenues.
Quarter in Detail
During the quarter, the company’s same-property gross revenues increased 7.4% from the prior-year quarter, while NOI advanced 9.4% year over year. Moreover, pro forma same-property revenue growth in the legacy BRE portfolio was 7.1%. Notably, revenue growth differential to the Essex portfolio fell to 0.3% in the third quarter from 1.6% in the first quarter.
In the legacy BRE same-property portfolio, the company enhanced financial occupancy to 95.9% in the third quarter. This is consistent with the financial occupancy in the ESS same-property portfolio. Following the closure of the merger, the financial occupancy in the legacy BRE portfolio improved by around 140 basis points (bps).
Notable Portfolio Activity
Essex Property acquired three communities (887 multifamily units) for a total investment value of $319.8 million. The company also commenced leasing and pre-leasing activities at five communities. On the other hand, the company sold two communities for a total of $49.0 million, realizing a total gain of $31.4 million.
Liquidity
Essex Property exited the third quarter with cash and cash equivalents of $88.0 million, up from $47.5 million at the prior quarter-end. Moreover, the company issued 801,909 shares of common stock at an average price of $190.06, reaping net proceeds of $151.4 million in the third quarter.
Outlook Raised
Essex Property has raised the full-year 2014 core FFO per share guidance to $8.43–$8.52, denoting a mid-point rise of 9 cents. This is also well above the Zacks Consensus Estimate of $7.32 per share.
This increase is backed by improved same-property NOI growth. The company now expects Essex portfolio full-year same-property revenues to grow 6.7% to 7.1%, increasing the midpoint by 30 bps and raising the same-property NOI growth range to 8.3%–8.7%.
In Conclusion
With an enhanced property base and strong management team, we believe that Essex Property can efficiently leverage on attractive market fundamentals and reward its shareholders accordingly. In the West Coast, strong job growth amid a lower supply of properties in the market keeps up the demand momentum. The company is also well on track in integrating the BRE portfolio.
Essex Property currently has a Zacks Rank #3 (Hold). Investors interested in the residential REIT industry may consider stocks like Equity Residential (EQR), Post Properties Inc. (PPS) and UDR, Inc. (UDR). All of these 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.
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