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Growth & Income

Estimates have been rising for Essex Property Trust, Inc. (ESS - Analyst Report) after the company delivered strong third quarter financial results and management raised its guidance for the remainder of the year.

It is a Zacks #2 Rank (Buy) stock.

Analysts project strong growth for Essex over the next few years as the apartment REIT continues to benefit from a decrease in homeownership rates. The company also pays a dividend that yields a solid 3.2%, which it has steadily increased over the last decade.

Apartment REIT

Essex Property Trust, Inc. is an apartment real estate investment trust (REIT). It currently has ownership interests in 155 apartment communities (32,076 units) primarily in the West Coast in Southern California, the San Francisco Bay Area, and Seattle.

The abysmal housing market has led to a steady decline in homeownership rates, leading more people to rent rather than buy. This is a trend that should continue for quite some time, and apartment REITs like Essex stand to benefit from this surge in demand.

Essex is located in Palo Alto, California and has a market cap of $4.5 billion.

Third Quarter Results

Essex delivered strong financial results for the third quarter of 2011 on November 2. Same-property revenues rose 4.1% year-over-year driven by a stellar 5.3% increase in rental rates. Same-property rental rates also climbed 2.4% from the previous quarter. This marked the highest quarter-over-quarter rental rate increase in over 3 years.

The occupancy rate declined from 96.7% in the third quarter of last year to 95.4%. However, the company noted that its strategy was to aggressively push for higher rental rates during its peak leasing season, while focusing on occupancy toward the end of the third quarter. Management noted that the benefits of higher rents and occupancy rates will be apparent in future quarters.

Funds from operations (FFO) came in at $1.42, in-line with the Zacks Consensus Estimate. It was a solid 14% increase over the same quarter in 2010 as the company leveraged its fixed costs.

Raised Guidance

Management raised its guidance for the remainder of the year based primarily on the strength of recent investments in apartment acquisition and development opportunities. The company now expects 2011 FFO between $5.66 and $5.74 per share, up from previous guidance of $5.58 to $5.73.

This prompted analysts to revise their estimates higher for both 2011 and 2012, sending the stock to a Zacks #2 Rank (Buy). The 2011 Zacks Consensus Estimate is now $5.70, in-line with guidance, and representing 14% growth over 2010. The 2012 consensus estimate is currently $6.51, corresponding with another 14% increase in FFO per share.

As you can see in the company's Price & Consensus chart, consensus estimates have been steadily rising over the last several months as Essex continues to deliver excellent results:

ESS: Essex Property Trust, Inc.

Solid Income

In addition to strong growth potential, Essex pays a dividend that yields a stellar 3.2%. The company has consistently increased its dividend over the last several years, at an average annual rate of 5% since 2000:

ESS: Essex Property Trust, Inc.


The valuation picture looks reasonable for Essex. Shares trade at 20.4x 12-month forward FFO, in-line with the peer group. Competitors Avalonbay Communities (AVB) and Post Properties (PPS) trade at 22.8x and 19.5x, respectively.

The Bottom Line

With strong growth potential and steadily rising income, Essex offers growth and income investors attractive total return potential.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.