In the second quarter, Essex was able to improve BRE’s occupancy 92 basis points on a year-over-year basis and 76 basis points versus the first quarter of 2014. Now, that the company has improved occupancy and rents, it’s on to the second stage of the integration—capital allocation. On its second quarter call, Essex announced it will halt all planned BRE redevelopments as it filters them under its return-on-investment criteria. The move met with applause in the analyst community.
“Essex has one the best capital allocation models out there,” says Alexander D. Goldfarb, managing director at Sandler O'Neill + Partners. “When you have that spirit of discipline, you can say, ‘OK, let’s take the portfolio that we’re acquiring and run it through our systems.’”
Dave Bragg, a managing director with research firm Green Street Advisors, thinks the decision to halt redevelopments is another sign the Essex-BRE marriage is going well, so far. But it’s early still.
“So far, so good,” he says. “There aren’t a lot of reasons to be concerned. But the MAA integration of Colonial is a reminder that these things aren’t easy.”
Memphis-based MAA, which closed on Birmingham-based Colonial Property Trust in Birmingham, Ala., last October has encountered more issues with its integration, according to analysts.
“The process of integrating Colonial caused MAA to be distracted and caused their forecast and reporting systems to be temporarily impaired,” Bragg says.“They suggested better revenue growth for the second quarter than what was achieved.”
But as Bragg and others note, there’s still time for MAA to make improvements. In fact, more than a year after its purchase of a portion of the Denver-based Archstone properties closed, Chicago-based Equity Residential continues to enjoy efficiencies from the transaction, according to Sandler.
“EQR is the most efficient operator in the space,” Goldfarb says. “It did a great job streamlining the combined EQR/Archstone portfolios.”
Analysts remain optimistic that Essex will continue enjoying efficiencies from BRE since the operating gap between the California REITs is considered wider than it was between EQR and Archstone.
“Not to miss a beat, management's comments on the call about the focus on integration plus the team's long-track record of performing give us comfort that Essex won't be taking its eyes off of the integration prize,” Sandler O'Neill + Partners said in a recent analyst’s note.