Here's Why You Should Retain Essex Property (ESS) Stock Now
Essex Property Trust ESS has a sturdy property base in the West Coast market of the United States, which offers ample scope to enhance its top line. These markets are home to several innovation and technology companies that drive job creation and income growth.
The residential REIT is also banking on its technology, scale and organizational capabilities to drive innovation and margin expansion. However, an elevated supply in some markets, the lack of rent relief and high interest rates are concerning.
The West Coast markets enjoy higher median household incomes, an increased percentage of renters than owners and favorable demographics. Also, higher home ownership costs in these areas are making renting apartment units a viable option. These factors are likely to aid demand, enabling the company to generate steady rental revenues in the upcoming period. For 2023, we expect total revenues to grow 3.2% year over year. The same-store property revenue growth is anticipated to be 4%.
Moreover, the company is leveraging its 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. These efforts are likely to have an incremental effect on the top-line and bottom-line growth, poising Essex Property well to ride the growth curve.
On the balance sheet front, the company had $1.2 billion of liquidity through an undrawn capacity on its unsecured credit facility, cash, cash equivalents and marketable securities as of Mar 31, 2023. Moreover, the company has increased its dividend five times in the last five years and its five-year annualized dividend growth rate is 4.16%.
Shares of this Zacks Rank #3 (Hold) company have gained 8.9% in the past three months compared with the industry’s rise of 5%.
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However, a flexible working environment is resulting in a shift in renter demand from higher cost and urban/infill markets. Also, layoffs in technology companies have recently amplified. These factors are likely to adversely impact the demand for some of the companies’ residential properties in the urban markets. Further, the lack of rent relief in 2023 might impede revenue growth to a certain extent. We project core FFO to exhibit just a marginal improvement in 2023.
Moreover, the struggle to lure renters will persist, as supply volumes will likely remain elevated in some of its markets in the upcoming period. Specifically, the company expects the supply outlook for Seattle to be more challenging in the second half of 2023.
A high interest rate environment is another concern for Essex Property. Elevated rates imply high borrowing costs for it, which would affect its ability to purchase or develop real estate. Moreover, the company has a substantial debt burden and its total debt (net) as of Mar 31, 2023, was $5.9 billion. We expect net interest expense to rise 3.2% year over year.
Stocks to Consider
Some better-ranked stocks from the residential REIT sector are Independence Realty Trust IRT and Elme Communities ELME, carrying 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 Independence Realty Trust’s 2023 funds from operations (FFO) per share has been revised 0.9% north over the past three months to $1.16.
The Zacks Consensus Estimate for Elme Communities’ 2023 FFO per share has been revised 1% north over the past month to 99 cents.
Note: Anything related to earnings presented in this write-up represents FFO — a widely used metric to gauge the performance of REITs.
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