With favorable same-property revenue growth of 3.5%, Essex Property Trust exceeded the midpoint of the guidance range for core funds from operation by $0.04 per diluted share in the third quarter.
With that performance, the Palo Alto, California-based REIT raised its 2024 revenue guidance by 0.25% and net operating income guidance by 0.30%, according to the firm’s third-quarter earnings report, which was released last week.
“Fundamentals continue to improve, with ESS increasing the bottom-end of core guidance while keeping the top-end unchanged,” Alexander Goldfarb, managing director and senior research analyst for investment bank and financial services company Piper Sandler, said in a report.
Essex, which operates on the West Coast, saw new rents increase 0.5% and renewals rise 3.8% for a blended 2.5% year-over-year gain in Q3.
“In the third quarter, rents peaked in July and remained resilient through August before moderating in September,” CEO Angela Kleiman said on the earnings call last week. “As we expected, the blended rate growth of 2.5% for the quarter was tempered by the combination of seasonal moderation in rents, which started in September, and [a] difficult year-over-year comparison, especially since last year, our rents did not moderate until late October.”
Seattle strength
Seattle was Essex’s top market in Q3, with 3.8% blended rent growth. However, that metro could cool. “For the rest of the year, we anticipate a heavier supply delivery and thus more concessions usage in this region,” Kleiman said.
In Northern California, Essex saw 2.3% blended rent growth in Q3. “The overall supply for this region remains very low but we anticipate most of the deliveries for San Jose this year to occur in the fourth quarter,” Kleiman said. “Therefore, we plan for higher concessions to address this short-term impact.”
Southern California provided Essex with 2.1% blended lease rate growth in Q3. The REIT’s delinquency fell from almost 5% last December to 1.6% today, providing one reason for optimism in Los Angeles.
“We have, of course, the World Cup coming and the Olympics,” Kleiman said. “So what we are anticipating is that there will be benefits from economic investments, both domestically and internationally, to this region.”
Future outlook
Although Essex’s West Coast markets are stable going into Q4, the firm is changing focus for the winter months.
“We shifted our operating strategy to focus on occupancy, as we've done in prior years, in anticipation of slower demand characteristics of normal seasonality,” Kleiman said.
BY THE NUMBERS
| Category | Q3 | YOY Change |
| Revenue | $413.2 million | 3.5% |
| Net operating income | $287.5 million | 2.6% |
| Operating expenses | $125.8 million | 5.5% |
| Funds from operations | $3.81 | 3.3% |
| Average rent | $2,669 | 1.8% |
| Occupancy rate | 96.2% | -20 bps |
SOURCE: Essex
Essex executives began to paint a picture of what they expect in 2025, with rent growth expected to exceed 2024 by 80 to 100 basis points. They also anticipate a 40- to 60-bps tailwind from delinquency improvement. Together, these two things should produce 120 to 160 bps of same-property revenue growth in 2025.
“As for market rent growth, supply and demand will ultimately be the key building blocks,” Kleiman said. “The fundamental backdrop remains stable and continues to gradually improve.”
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