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Why Should You Add Essex Property (ESS) to Your Portfolio?

Zacks Equity Research

The U.S. apartment market reported a stable rent growth, while occupancy remained healthy in the third quarter, per a study by the real estate technology and analytics firm — RealPage, Inc. RP. For new leases, effective rents inched up 0.9% during the quarter and 2.6% annually. Also, apartment occupancy came in at 95.5% for the third quarter across the country’s top 100 metros.

However, not all residential REITs are equally poised to gain, as location of properties play a crucial role in determining the demand of properties.

Nonetheless, one such residential REIT stock which has been displaying strength is Essex Property Trust, Inc. ESS. This Zacks Rank #2 (Buy) stock has gained 11.3% year to date, outperforming 5.4% growth recorded by the industry it belongs to.

This San Mateo, CA-based residential REIT is likely to well leverage on favorable demographic trends in its markets. In fact, demographic growth continues to be strong in the young-adult age cohort, which has a higher propensity to rent. This age cohort also experiences a considerable part of the net job growth and provides a significant source of pent-up demand. Moreover, despite the supply issue plaguing the market currently, the company continues to exhibit robust fundamentals and improving prospects.

Why a Solid Choice?

Same Property NOI Growth: Essex Property has been experiencing solid growth in same property NOI. In fact, per a presentation by the company, since 2012 through 2016, its same property NOI witnessed a compound annual growth rate (CAGR) of 8.9%, well ahead of 5.7% growth recorded by the peer average. This trend is likely to continue in 2017 as well, with the company raising the NOI expectation for the current year.

FFO Per share Growth: Essex Property delivered an earnings surprise of 1.71% in the last reported quarter. In three of the trailing four quarters, the company delivered a positive surprise, the average beat being 1.23%. In addition, its historical FFO per share growth (3-5 years) of 13% comes above the industry average of 6.3%.

Estimate Revisions: The stock has also seen the Zacks Consensus Estimate for current-year funds from operations (FFO) per share being revised 0.3% upward in two months’ time, reflecting analysts’ bullish sentiments. Given its progress on fundamentals, the stock is likely to keep performing well in the quarters ahead.

Dividend Payout: Solid dividend payouts are arguably the biggest attraction for REIT investors and Essex Property has been steadily raising its payout. In fact, the company has raised the dividend every year since the IPO in 1994, thereby generating a compound annual dividend per share growth of 6.4%. These moves boost investors’ confidence on the stock.

Superior ROE: Essex Property’s Return on Equity (ROE) is 8.03% compared with the industry’s average of 3.48%. This reflects that the company reinvests more efficiently compared to the industry.

Strong Leverage: The debt-to-equity ratio for Essex Property is 0.88 compared with the industry average of 0.98. This mirrors the financial stability of the company and lesser risk for shareholders.

Other Key Picks

Other similarly-ranked stocks in the Residential REIT industry are Equity LifeStyle Properties, Inc. ELS and Starwood Waypoint Homes SFR. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Both Equity LifeStyle and Starwood Waypoint Homes have expected long-term growth rate for FFO per share of 5.1%.

Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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