Essex Property (ESS) Up 11.6% in 3 Months: Will the Trend Last?
Shares of Essex Property Trust, Inc. ESS have gained 11.6% in the past three months against the industry’s decline of 0.8%.
The company has a sturdy property base in the West Coast market of the United States. It has continued to benefit from the healthy demand for its residential properties. Also, efforts to leverage technology to drive innovation and margin expansion have been another positive for this residential real investment trust (REIT).
This July, ESS posted solid second-quarter 2023 results, aided by favorable same-property revenue growth. Management also raised its core funds from operations (FFO) per share outlook for the year to $14.88-$15.12 from $14.59-$14.97 projected earlier following the better-than-anticipated performance in the second quarter.
Analysts, too, seem bullish on this Zacks Rank #3 (Hold) company. The Zacks Consensus Estimate for its 2023 FFO per share indicates a favorable outlook, with estimates having been revised marginally upward over the past week to $14.97.
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Let us now decipher the factors behind the rally in the stock price.
Essex Property has a sturdy property base in the West Coast market of the United States and a strong management team. The markets are characterized by higher median household incomes, an increased percentage of renters and favorable demographic trends. This has enabled the company to capture renter demand in these markets, setting the ground for stable rental revenue generation.
In addition, with high-interest rates in place, elevated home ownership costs have made renting apartment units a viable option in this scenario.
The company is likely to have capitalized on these positive trends, contributing to the increased optimism surrounding its stock.
For 2023, we expect the company’s total revenues to grow 3.2% year over year. The same-store property revenue growth is anticipated to be 4.4%.
This residential REIT is also leveraging technology, scale and organizational capabilities to drive innovation and margin expansion in its portfolio. It is making steady progress on the technology front, and leasing agents are becoming more productive by leveraging these tools. The trend is expected to continue in the upcoming period and have an incremental effect on the company’s top-line and bottom-line growth.
Essex Property maintains a robust balance sheet with ample liquidity. It had $1.6 billion of liquidity as of Jul 26, 2023. Also, taking advantage of the low interest-rate environment prevalent in 2020, ESS refinanced part of its debt, reducing its weighted average interest rate and extending its maturity profile.
With manageable debt maturities and investment grade credit ratings of Baa1/Stable from Moody’s and a BBB+/Stable from both Fitch and S&P, ESS remains well-positioned to capitalize on long-term growth opportunities.
Moreover, the company’s trailing 12-month return on equity is 9.10% compared with the industry’s average of 4.35%. This reflects that the company is more efficient in using shareholders’ funds than its peers.
Solid dividend payouts are arguably the biggest attraction for REIT investors, and Essex Property has remained committed to that. In February 2023, the company announced a 5% hike in its annual cash dividend to $2.31 per share from $2.20 paid out earlier. Moreover, it has increased its dividend five times in the last five years, and its five-year annualized dividend growth rate is 4.20%. Such efforts boost investors’ confidence in the stock.
Also, considering its low dividend payout ratio and decent balance-sheet strength, the company is likely to maintain its dividend payout in the forthcoming quarters.
Nonetheless, stiff competition from other housing alternatives and elevated supply in some of the company’s markets are concerning. Also, high-interest rates are likely to increase the company's borrowing costs, affecting its ability to purchase or develop real estate.
Stocks to Consider
Some better-ranked stocks from the residential REIT sector are Invitation Home INVH and American Homes 4 Rent AMH. Each of these companies presently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Invitation Home’s 2023 FFO per share has moved marginally upward in the past month to $1.79.
The consensus mark for American Homes’ current-year FFO per share has been raised 1.2% northward in the past month to $1.65.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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