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Here's Why You Should Hold Essex Property Stock Right Now

Zacks Equity Research

Essex Property ESS is well poised to leverage on favorable demographic trends, household formation, healthy economy and job-market growth. Substantial exposure to the West Coast market, which is home to several innovation and technology companies, offers ample scope to boost the top line over the long term. However, high apartment deliveries in a number of its markets and significant concentration of assets are concerns for the company.

Particularly, the company’s substantial exposure to the West Coast market offers ample scope to bolster its top line over the long term. The West Coast is home to several innovation and technology companies. The region is witnessing solid 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, which favorably impacts rental housing demand.

This apart, demographic growth continues to be strong in the young-adult age cohort, which has a higher propensity to rent. In fact, a significant change in lifestyle has taken place and life-cycle events are getting delayed. This is leading to an extension of the average age of first-time homeownership. This age cohort also experiences a considerable part of the net job growth and provides a significant source of pent-up demand.

Essex Property maintains a solid balance sheet and enjoys financial flexibility. In fact, the company exited first-quarter 2019 with cash and cash equivalents, including restricted cash, of $124.1 million, down from $151.4 million recorded at the end of 2018. As of Apr 22, 2019, the company had around $1.1 billion in undrawn capacity on its unsecured credit facilities. This healthy financial position is likely to help the company strengthen and expand its business.

Additionally, the company’s ROE of 6.50% compares favorably with ROE of 3.68% 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 and expand its business.

Solid dividend payouts are arguably the biggest attraction for REIT investors and Essex Property has been steadily raising its payout. In fact, this February, the company announced a 4.8% hike in its quarterly dividend. The company has raised its dividend every year since the IPO in 1994, and the latest hike marked the company’s 25th consecutive annual dividend increase.

Nonetheless, apartment deliveries are anticipated to remain elevated in a number of the company’s markets in the upcoming period. This high supply is a concern because it curtails landlords’ ability to command more rent and result in lesser absorption. Furthermore, it results in aggressive rental concessions and moderate pricing power of the company.

In fact, not only Essex Property, other residential REITS, like Equity Residential EQR, AvalonBay AVB and UDR Inc. UDR, have also been plagued with elevated deliveries in their markets.

Moreover, Essex Property has a significant concentration of assets in Southern California, Northern California, and the Seattle metropolitan area. Specifically, 83% of the company’s rental revenues were generated from communities located in California for the year ended Dec 31, 2018. This makes the company’s operating results and financial conditions susceptible to any unfavorable fluctuations in local markets.

Essex 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 23.5% in the year-to-date period compared with the industry’s growth of 21.3%.

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