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. It has a healthy balance sheet and is leveraging technology, scale and organizational capabilities to drive growth. However, an elevated supply in some markets and high interest rates are concerning.
The West Coast markets are characterized by higher median household incomes, an increased percentage of renters and favorable demographic trends. In addition, with high interest rates in place, elevated home ownership costs have made renting apartment units a viable option in this scenario.
With a portfolio of well-located residential properties in the region, Essex Property remains well-poised to capture renter demand in these markets, setting the ground for stable rental revenue generation. For 2023, we expect the company’s total revenues to grow 3.2% year over year. The same-store property revenue growth is anticipated to be 4.4%.
The residential REIT is also banking on 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. Such efforts are expected to have an incremental effect on the top-and-bottom-line growth, poising Essex Property well to ride the growth curve.
Essex Property maintains a robust balance sheet with ample liquidity. It had $1.6 billion of liquidity as of Jul 26, 2023. Its unencumbered net operating income (NOI) to an adjusted total NOI stood at 95% in the second quarter of 2023. With a high percentage of such assets, the company can access secured and unsecured debt markets and maintain availability on the line.
With manageable debt maturities and investment-grade credit ratings, ESS remains well-positioned to capitalize on long-term growth opportunities. Moreover, the company’s trailing 12-month return on equity is 9.10% compared with the industry’s average of 4.25%. This reflects that the company is more efficient in using shareholders’ funds than its peers.
Solid dividend payouts are arguably the biggest attraction for REIT investors, and Essex Property has been steadily raising its payout. ESS has increased its dividend five times in the last five years, and its five-year annualized dividend growth rate is 4.20%. Such efforts boost investors’ confidence in the stock. Considering its low dividend payout ratio and decent balance-sheet strength, the company is likely to maintain its dividend payout in the forthcoming quarters.
Shares of this Zacks Rank #3 (Hold) company have risen 10.5% in the past three months against the industry’s decline of 0.7%.
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However, the continuation of the flexible working environment is leading to a shift in renter demand from higher cost and urban/infill markets. As such, the demand for some of the company’s properties is likely to be hurt and result in pressure on occupancy levels. Also, contemplating a moderating economy by 2023-end, management expects modest market rent growth for the remainder of the year. We project the core FFO to exhibit a 1.4% year-over-year improvement in 2023.
The struggle to lure renters will persist as supply volumes are likely to remain elevated in some of its markets in the upcoming period. Furthermore, the company faces stiff competition from other housing alternatives, such as rental apartments, condominiums and single-family homes. Such a competitive landscape limits ESS’ ability to increase rents, thereby restricting its growth momentum to some extent.
Another concern for Essex Property is the high interest rate. Elevated rates imply high borrowing costs for the company, which would affect its ability to purchase or develop real estate. We expect the interest expense to rise 6.5% year over year. Further, the dividend payout might become less attractive than the yields on fixed-income and money-market accounts due to high interest rates.
Stocks to Consider
Some better-ranked stocks from the residential REIT sector are Invitation Home INVH and American Homes 4 Rent AMH. Each of these companies presently carries 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 Invitation Home’s 2023 FFO per share has moved marginally upward in the past month to $1.79.
The consensus mark for American Homes’ current-year FFO per share has been raised 1.2% northward in the past month to $1.65.
Note: Anything related to earnings presented in this write-up represents 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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