Essex Property’s ESS is well poised to ride on growth curve, backed by its solid West Coast property base and favorable demographic conditions. However, high apartment deliveries in a number of its markets and significant concentration of assets are concerns for the company.
Particularly, Essex Property’s substantial exposure to the West Coast market offers ample scope to boost its top line, over the long term. There are several innovation and technology companies in this region. Notably, the region has been witnessing impressive job growth, higher wages, increased percentage of renters than owners and favorable migration trends, with the influx of workers to its markets, primarily from the 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.
In addition, demographic growth continues to be solid 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. Further, the company can quickly adjust to rate hikes as it leases its properties on a short-term basis.
Essex Property also maintains a solid balance sheet and enjoys financial flexibility. It exited 2018 with cash and cash equivalents, including restricted cash, of $151.4 million, up from $61.1 million recorded at the end of 2017. Additionally, as of Jan 28, 2019, the company had around $1.2 billion in undrawn capacity on its unsecured credit facilities. Also, the company’s ROE of 5.74% compares favorably with ROE of 3.41% for the industry, highlighting that it is more efficient in using shareholders’ funds compared to its peers. This healthy financial position is likely to help the company strengthen and expand its business.
Furthermore, 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. This marked the company’s 25th consecutive annual dividend increase. This also means Essex Property qualifies to become a “Dividend Aristocrat”.
Also, on Jan 30, Essex Property reported fourth-quarter 2018 core fund from operation (FFO) per share of $3.19, in line the Zacks Consensus Estimate. Core FFO per share improved 6% from the year-ago quarter figure of $3.01. Results reflect growth in same-property net operating income (NOI). Improving economic environment and job growth helped spur housing demand in the Oct-Dec quarter.
Nonetheless, apartment deliveries are anticipated to remain elevated in a number of the company’s markets in the near term. This high supply is a concern because it curtails landlords’ ability to command more rent and result in lesser absorption. Further, it results in aggressive rental concessions and moderate pricing power of the company.
Moreover, Essex Property’s assets are concentrated in Southern California, Northern California, and the Seattle metropolitan area. In fact, 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.
Shares of Essex Property Trust have outperformed its industry in the past six months. Its shares have gained 19.5% in the past six months compared to the industry’s rise of 13.3%.
Currently, Essex Property has a Zacks Rank #3 (Hold).
Stocks to Consider
Government Properties Income Trust’s OPI shares have gained 3.5%, over the past three months. At present, the stock flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Hunt Companies Finance Trust, Inc.’s HCFT shares have increased 19.9%, in three months’ time. The stock currently sports a Zacks Rank of 1.
Equity Lifestyle Properties, Inc’s ELS shares have gained 22.2%, in the past three months. Currently, the stock carries a Zacks Rank #2 (Buy).
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Essex Property Trust, Inc. (ESS) : Free Stock Analysis Report
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