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Essex Property Sells Assets, Plans to Fund Buyout, Repay Debt

Zacks Equity Research

Essex Property Trust, Inc. ESS has enhanced its flexibility by disposing three properties during the current quarter for a total contract price of $285.3 million. Moreover, since the beginning of the year through Dec 20, the company has sold assets worth $417.3 million. This came in above the high-end of the guided range offered during the third-quarter 2018 earnings call.

The move is a strategic fit as it offers the company the scope to use the proceeds to support its development requirements, acquire, as well as pay back debt and buyback shares. In particular, the company plans to use a significant part of the net proceeds to finance the buyout of Meridian that was accomplished in the fourth quarter of 2018.

Among the properties that were disposed in the ongoing quarter were two communities located in Chino Hills, CA, that were owned as part of the co-investment platform, in which Essex has a 50% ownership stake. One of these was Enclave at Town Square which was sold for a total contract price of $30.5 million. The other was The Summit that was disposed for $34.8 million.

Furthermore, in December, the company sold 8th and Hope for $220.0 million, denoting $739,000 per apartment home. Having luxury apartment homes and retail space, this property is situated in downtown Los Angeles, CA.

Going forward, with a strong property base in the West Coast market and solid balance-sheet strength, Essex Property is likely to bank on job growth, higher wages, increased percentage of renters than owners, and favorable migration trends with the influx of workers to its markets, mainly from major East Coast markets. Moreover, due to high cost of homeownership, transition from renter to homeowner is difficult in its markets. As a result of for-sale housing shortages and tax reform, the premium to own a home versus rent an apartment has increased significantly from the historical average, thereby favorably impacting rental housing demand.

But, apartment deliveries are expected to remain elevated in a number of its markets in the near term. Aggressive rental concessions and moderate pricing power amid high supply remain concerns.

In fact, not only Essex Property, other residential REITS, like AvalonBay Communities Inc. AVB, Equity Residential EQR and UDR Inc. UDR, have been plagued as well with elevated deliveries in their markets. Although the prime leasing season this year, i.e. between April and September, was impressive, with demand surging and majority markets reporting solid absorption, the unhealthy environment is unlikely to dissipate any time soon, with aggressive deliveries feared to continue into next year as well. Also, the fourth and first quarters mark slow leasing periods, thanks to the cold weather that inhibits shift of households and limits growth in demand.

Essex Property currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. The company’s shares have gained 4.6% in the past three months, as against the industry’s decline of 1.3%.



 

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