Essex Property Trust, Inc. ESS is well-poised to gain from a robust property base in the West Coast market with several demand drivers. Efforts to leverage technology and a healthy balance sheet bode well. However, the elevated supply of rental units and a concentrated portfolio in certain markets are a concern.
In October, Essex Property reported third-quarter 2024 core funds from operations (FFO) per share of $3.91, which beat the Zacks Consensus Estimate of $3.88. The figure improved 3.4% from the year-ago quarter. Results reflected favorable growth in same-property revenues and net operating income (NOI). ESS raised its full-year 2024 guidance.
Shares of this residential REIT, carrying a Zacks Rank #3 (Hold), have risen 14.1%, outperforming the industry’s growth of 10.1% in the past six months.
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What’s Aiding ESS?
Essex Property enjoys a robust property base in the West Coast market, which has ample scope to enhance its top line. The West Coast is home to several innovation and technology companies that drive job creation and income growth. With layoffs in the tech industry slowing and return to office gaining momentum, the West Coast markets are likely to see an increase in renter demand in the near term. Against this backdrop, we expect rental and other property revenues for ESS to increase 5.7% and 3.9% year over year in 2024 and 2025, respectively.
ESS is banking on its technology, scale and organizational capabilities to drive margin expansion across its portfolio and bring about operational efficiency by lowering costs. These efforts are likely to have an incremental effect on top and bottom-line growth, positioning the company to ride the growth curve.
Essex Property maintains a healthy balance sheet and enjoys financial flexibility. As of Sept. 30, 2024, the company had $1.2 billion of liquidity through an undrawn capacity on its unsecured credit facilities, cash, cash equivalents and marketable securities. In the third quarter of 2024, its net debt-to-adjusted EBITDAre was 5.5X, and its unencumbered NOI to adjusted total NOI stood at 93%. With a high percentage of such assets, the company can access secured and unsecured debt markets and maintain the availability of required funds on the line.
Solid dividend payouts are arguably the biggest attraction for REIT investors, and ESS has been steadily raising its payout. The company has increased its dividend five times in the last five years, and its five-year annualized dividend growth rate is 4.35%. With a low dividend payout ratio and decent balance sheet strength, the dividend payment is expected to be sustainable over the long run.
What’s Hurting ESS?
The struggle to lure renters will persist, as supply volumes are likely to remain elevated in some of the markets where the company operates in the upcoming period. Essex Property faces competition from other housing alternatives, such as rental apartments, condominiums and single-family homes. Such a competitive landscape limits the company’s ability to increase rents, restricting its growth momentum to some extent.
ESS has a significant concentration of assets in Southern California, Northern California and the Seattle metropolitan area. The company derived 42% and 38% of its portfolio NOI from Southern California and Northern California, respectively, as of Sept. 30, 2024. This makes the company’s operating results and financial conditions susceptible to unfavorable fluctuations in local markets.
Stocks to Consider
Some better-ranked stocks from the broader REIT sector are Cousins Properties CUZ and Veris Residential VRE, each carrying 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 Cousins Properties’ current-year FFO per share has been raised marginally over the past month to $2.68.
The Zacks Consensus Estimate for Veris Residential’s current-year FFO per share of 58 cents suggests an increase of 9.4% year over year.
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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