The current year’s prime leasing period proved to be an encouraging one for the U.S. apartment market with decent rent growth and increasing occupancy level. Per the latest report from real estate technology and analytics firm RealPage, with an impressive leasing activity in 2019’s peak season, occupancy rate in July reached 96.2%. The figure is not only up 0.4 points year on year, but also marks the highest rate since 2000.
With occupancy pushing up, rent growth also seems to be steady at 3.1%. Annual rent growth in July 2019 was approximately 40 basis points (bps) higher year over year and apartment rents averaged $1,414 across the United States. This comes after a solid performance in the April-June quarter.
For residential REITs, including Essex Property Trust, Inc. ESS, AvalonBay Communities, Inc. AVB, Equity Residential EQR, UDR Inc. UDR, this, indeed, came 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 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 around 12.4% over the past six months, outperforming 9.8% growth recorded by the industry. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Backed by improved net operating income from its communities, Essex Property delivered a better-than-expected performance for second-quarter 2019. The company reported core funds from operations (FFO) per share of $3.33 for the quarter, surpassing the Zacks Consensus Estimate of $3.26. With improved market conditions, favorable cost of capital as well as tax assessments, the company also considerably raised its outlook for the ongoing year.
Notably, Essex Property has a number of aspects that make it a solid investment choice.
Why Essex Property is an Attractive Pick
West Coast Exposure: Essex Property’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 favorable demographics trends, 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. Moreover, due to high cost of homeownership, transition from renter to homeowner is difficult in its markets. In fact, as a result of for-sale housing shortages and tax reform, the premium to own a home versus rent an apartment has increased significantly from the historical average, thereby, favorably impacting rental housing demand.
Balance sheet Strength and High ROE: Essex Property maintains a solid balance sheet and has financial flexibility. In fact, the company exited second-quarter 2019 with cash and cash equivalents, including restricted cash, of nearly $55 million. As of Jul 22, the company had around $1 billion in undrawn capacity on its unsecured credit facilities. This healthy financial position is likely to help the company strengthen and expand its business. Moreover, Essex Property’s trailing 12-month return on equity (ROE) of 6.43% compares favorably with the industry’s 3.76%. This indicates the company’s growth potential and reflects its superior efficiency in using shareholders’ funds.
Dividend Payouts: Solid dividend payouts are arguably the biggest attraction for REIT investors and Essex Property has been steadily raising its payout. In February, the company announced a 4.8% hike in its quarterly dividend. The company has raised its dividend every year since the IPO in 1994 and the latest hike marked the company’s 25th consecutive annual dividend increase. This also means Essex Property qualifies to become a “Dividend Aristocrat”. In fact, since its IPO, the company has generated compound annual dividend per share growth of 6.4%.
Estimate revisions: In addition, the trend in current-year 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 1.1% upward in a month’s time. Given its progress on fundamentals and positive estimate revisions, the stock is likely to keep performing well in the quarters ahead.
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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AvalonBay Communities, Inc. (AVB): Free Stock Analysis Report
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