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Morningstar | Essex Delivers Stronger-Than-Expected Revenue Growth but Misses on Higher G&A Costs

Results for no-moat Essex Property Trust were slightly below our estimates in the first quarter. However, there was nothing reported that changes our long-term outlook for the company, so we don't anticipate a material change to our $276 fair value estimate. Same-store results were better than we expected. Year-over-year rate growth was up 3.3%, and occupancy was down only 20 basis points to 96.9%, leading to same-store revenue being up 3.1% and beating our estimate by 40 basis points. Operating expenses were higher than expected due to high real estate tax growth and utility cost growth, but net operating income still beat our estimate by 40 basis points with 2.8% growth for the quarter.

Despite the solid fundamental growth from the portfolio, general and administrative costs came in higher than we expected and led to core funds from operations of $3.23 per share, $0.05 below our estimate. Essex did raise its 2019 core FFO guidance to $12.90-$13.25 from $12.83-$13.23, which is still well below our estimate of $13.81 for the year. Given that Essex just beat the first-quarter guidance given by management last quarter and that companies tend to shy away from raising full-year guidance in the first quarter, we think that there is a good chance the updated guidance is still quite conservative and that management will move closer to our estimate over the course of the year.

Same-store revenue forecasts remained constant as management sees underperformance in its Southern California portfolio being offset by growth in the tech sectors in Northern California and Seattle. Job growth nationally decelerated in the first quarter due to the government shutdown and was particularly lower than management expected in Los Angeles due to job losses resulting from the merger of Disney and Fox. However, Essex points to a large number of job openings by the largest tech companies and outstanding office construction projects in San Francisco of 14 million square feet and in Seattle of 8 million square feet, both more than 5% of outstanding office stock, as signs that both markets will soon be adding jobs. While lower job creation hurts the ability to sustain high occupancy, income growth in Essex's markets has grown approximately 6% over the past year, which increases rent affordability and allows Essex to pass along higher rent bumps. Despite supply remaining elevated in 2019 and 2020, we think strength in the tech markets should allow Essex to continue to deliver revenue growth higher than peers over the next few years.