Essex Property Trust ESS has a sturdy property base and a strong management team. This residential REIT’s substantial exposure to the West Coast market offers ample scope to boost its top line over the long term. However, the coronavirus pandemic’s impact on the economy and the job market will likely keep affecting demand in the near term.
The West Coast is home to several innovation and technology companies. The region has been witnessing solid job growth, higher median household incomes, increased percentage of renters than owners, and favorable migration trends with the influx of workers to its markets. Moreover, transition from renter to homeowner is difficult in its markets due to high cost of homeownership, thereby favorably impacting rental housing demand.
The company is also banking on its technology, scale and organizational capabilities to drive innovation and margin expansion in the portfolio. This has become all the more essential in this social-distancing era, as the virus outbreak needed a quick shift to virtual operations for the continuity of business operations.
Essex Property maintains a solid balance sheet and enjoys financial flexibility. As of May 4, the company had $885 million in undrawn capacity in its unsecured credit facilities and the available liquidity surpassed $1 billion for the company. Moreover, over the years, the company has made efforts to increase its unencumbered NOI to total NOI. Finally, with no debt maturities in 2020 and funding commitments well covered, and investment grade ratings, the company remains well poised to sail through the challenging times.
Additionally, the company’s ROE of 9.94% compares favorably with the ROE of 4.98% for the industry, highlighting that it is more efficient in using shareholders’ funds compared to its peers. This healthy financial position will likely help the company strengthen its business and counter the headwinds.
Nonetheless, the pandemic has been wreaking havoc, and resulting in macroeconomic uncertainty and a tepid job-market environment. This is likely to affect demand in the prime leasing season. Moreover, the rent-paying capability of tenants is likely to get maimed.
The top line is likely to bear the brunt in the near term, with adverse impact on rental rates and occupancy. Furthermore, concession activity is likely to be high despite a decline in new apartment deliveries amid a demand slowdown.
Also, Essex Property has a significant concentration of assets in Southern California, Northern California and the Seattle metropolitan area. This makes the company’s operating results and financial conditions susceptible to any unfavorable fluctuations in local markets.
The company’s shares have lost 16.4% in the year-to-date period compared with the industry’s decline of 13.7%. The trend in estimate revisions of 2020 FFO per share does not indicate a favorable outlook for the company. The Zacks Consensus Estimate for this year’s FFO per share has been revised nearly 1% downward in a month’s time.
Essex currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stocks to Consider
Alexander Baldwin Holdings, Inc.’s ALEX Zacks Consensus Estimate for 2020 funds from operations (FFO) per share has remained unrevised at 83 cents over the past month. The company currently flaunts a Zacks Rank of 1.
Farmland Partners Inc.’s FPI Zacks Consensus Estimate for the current-year FFO per share has been unchanged at 24 cents over the past month. The stock currently sports a Zacks Rank of 1.
Gladstone Land Corporation’s LAND FFO per share estimate for the ongoing year moved 9.7% upward to 68 cents over the past two months. Further, it currently carries a Zacks Rank of 2 (Buy).
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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Essex Property Trust, Inc. (ESS) : Free Stock Analysis Report
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