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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 might keep affecting demand in the near term.
The West Coast is home to several innovation and technology companies that drive job creation and income growth. Moreover, the region has higher median household incomes, increased percentage of renters than owners, and favorable demographics. Also, due to high cost of homeownership, transition from renter to homeowner is difficult in its markets, making renting of apartments units as a viable option.
The company is also banking on its technology, scale and organizational capabilities to drive innovation and margin expansion in its portfolio. In fact, it is making steady progress on the technology front and leasing agents are becoming more productive by leveraging on these tools.
Essex Property maintains a solid balance sheet and enjoys financial flexibility. As of Apr 23, the company had $1.4 billion in liquidity through undrawn capacity on its unsecured credit facilities and cash and marketable securities. The company has minimal near-term funding needs. Also, over the years, it has made concerted efforts to increase its unencumbered net operating income (NOI) to adjusted total NOI, which stood at 94% in the first quarter. Finally, with 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 6.58% compares favorably with the ROE of 2.43% 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 any headwinds.
However, though the West Coast market enjoyed favorable fundamentals over the years, headwinds have cropped up as the outmigration trend of population and business gained pace amid the pandemic. This is likely to result in West Coast witnessing a sluggish recovery.
In addition, tenants’ rent-paying capabilities have been affected amid this. The stressful financial condition of the company’s tenants, together with regulations that limit its ability to quickly evict tenants, is likely to affect its cash flows. Particularly, delinquencies will likely remain elevated through 2021 due to eviction moratoriums and regulations.
Furthermore, the struggle to lure renters is here to stay now, as supply volumes will likely remain elevated, particularly in the urban central business districts (CBD) markets. In fact, following delays in project timelines, completions bounced back in the last half of 2020 and a significant number of new units are slated for completion this year. Therefore, as a result of a greater concentration of supply deliveries in the urban CBD markets, the recovery is likely to be moderated with elevated level of concessions.
The company’s shares have gained 21.4% in the year-to-date period compared with the industry’s rally of 18.9%. However, the Zacks Consensus Estimate for this year’s FFO per share has been revised marginally south in a month’s time.
Essex Property currently carries a Zacks Rank #3 (Hold).
Stocks to Consider
Industrial Logistics Properties Trust’s ILPT FFO per share estimate for the current year moved up 4.5% to $1.87 in the past month. The company currently carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
OUTFRONT Media Inc.’s OUT Zacks Consensus Estimate for 2021 FFO per share has moved marginally north to 89 cents over the past month. The company carries a Zacks Rank of 2, currently.
Braemar Hotels & Resorts Inc. BHR carries a Zacks Rank of 2, at present. The Zacks Consensus Estimate for the ongoing year’s FFO per share has been revised significantly upward to 44 cents from 13 cents over the past month.
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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