Morningstar | West Coast Strength Continues to Deliver for Essex in Fourth Quarter and Into 2019
Fourth-quarter results for no-moat Essex Property Trust were generally in line with our expectations, and there doesn't appear to be anything reported this quarter that would lead to a material change to our $273 fair value estimate. Rental rate growth was 2.9%, beating our 2.3% estimate, and occupancy held up better than expected, remaining flat compared with our estimate of down 40 basis points, so same-store revenue did better at 2.9% than we had anticipated. However, expenses grew 3.8% in the same-store portfolio, driven by 4.8% real estate tax growth and 6.5% repair and maintenance cost growth, which was above our estimate of 3.1% growth. As a result, net operating income was up 2.5%, a solid number that was in line with our estimate. Core funds from operations came in at $3.19, a slight miss of 1.7% to our estimate for the quarter due to Essex executing fewer acquisitions and more dispositions than we had assumed in the quarter.2019 guidance looks reasonable given the continued strength of the West Coast apartment markets compared with the rest of the United States. At the midpoint, Essex expects Southern California to grow 3.0%, Northern California to grow 3.1%, and Seattle to grow 2.8%, leading to a total company same-store revenue growth projection of 2.5% to 3.5%. While we are at the lower end of this range as we are concerned with supply issues in 2019, we think Essex has set an achievable goal for the year. Operating expense guidance was set at a range of 2.5% to 3.5%, with our 2019 estimate landing right at the midpoint, and thus NOI growth expected to be between 2.1% to 3.9% with our 2.3% toward the lower end of the range. This sets Essex up to deliver $12.83 to $13.23 in core FFO per share for 2019, which we think is slightly conservative if it is able to quickly lease-up the development pipeline that delivers in 2019. Overall, we think Essex should continue to demonstrate the strength of its markets and its portfolio in 2019.
Essex Property Trust operates as a self-administered and self-managed real estate investment trust. The company owns all of its interest in its real estate and other investments directly or indirectly through Essex Portfolio, L.P. (the Operating Partnership). The company is the sole general partner of the Operating Partnership. The company is engaged primarily in the ownership, operation, management, acquisition, development and redevelopment of primarily apartment communities, located along the West Coast. The company owns or has an interest in various operating apartment communities, consisting of apartment homes, operating commercial building and a development pipeline.
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