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

Zacks

The third quarter of this year proved to be an encouraging one for the U.S. apartment market with accelerating rent growth and increasing occupancy level. In fact, rents grew at an annual pace of 2.9% in the quarter and reversed the pattern of slowing price hikes since late 2015, per a study by the real estate technology and analytics firm — RealPage, Inc. (RP Free Report) . Also, occupancy came in at 95.8%, up from 95.4% reported in the previous quarter.

For residential REITs, including Essex Property Trust, Inc. (ESS Free Report) , AvalonBay Communities, Inc. (AVB Free Report) , Equity Residential (EQR Free Report) , UDR Inc. (UDR Free Report) , this, indeed, comes as a breather as high apartment deliveries had curtailed landlords’ ability to command more rents, and resulted in aggressive rental concessions and moderate pricing power of landlords.

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

Nonetheless, one such residential REIT stock, which has been displaying strength is Essex Property Trust. This Zacks Rank #2 (Buy) stock has gained 2.1% in the past three months, outperforming 0.6% growth recorded by the industry it belongs to. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


 

The San Mateo, CA-based residential REIT’s substantial exposure to the West Coast market offers the company ample scope to enhance its top line over the long term. Notably, the West Coast is home to several innovation and technology companies. The region is witnessing solid job growth, higher wages, increased percentage of renters than owners, and favorable migration trends with the influx of workers to its markets, mainly from major East Coast markets.

Therefore, despite the supply issue plaguing the market, currently, the company continues to display robust fundamentals and improving prospects, as these factors are likely to spur demand for renting units in the market and help boost the company’s top line.

Essex Property delivered an earnings surprise of 1.29% in the last reported quarter. In three of the trailing four quarters, it delivered a positive surprise, the average beat being 0.82%. In addition, its historical FFO per share growth (3-5 years) of 12.05% comes above the industry average of 4.7%. Moreover, the projected FFO per share growth of 5.6% is ahead of the industry average of 4.3%.

In addition, the trend in current-year funds from operations (FFO) per share estimate revisions indicates a favorable outlook for the company. In fact, the stock has seen the Zacks Consensus Estimate for 2018 FFO per share being revised marginally upward in a month’s time. Given its progress on fundamentals, the stock is likely to keep performing well in the quarters ahead.

Essex Property maintains a solid balance sheet and enjoys financial flexibility. In fact, the company exited second-quarter 2018 with cash and cash equivalents, including restricted cash of $177.6 million, up from $61.1 million recorded at the end of 2017. As of Jul 30, 2018, the company had $1.2 billion in undrawn capacity on its unsecured credit facilities. This healthy financial position is likely to help the company strengthen and expand its business.

The company’s Return on Equity (ROE) is 5.52% compared with the industry’s average of 3.57%. This reflects that the company reinvests more efficiently compared to the industry.

Also, 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 in the stock.

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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