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Is it Wise to Retain Essex Property (ESS) in Your Portfolio?
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Essex Property Trust (ESS - Free Report) owns a robust property base in the West Coast market of the United States. It has a healthy balance sheet and is leveraging technology, scale and organizational capabilities to drive growth. However, an elevated supply in some markets and high interest rates are concerning.
What’s Aiding It?
The West Coast markets are characterized by higher median household incomes, an increased percentage of renters and favorable demographic trends. In addition, with high interest rates still in place, elevated home ownership costs have made renting apartment units a viable option.
These factors are likely to aid demand, enabling the company to generate steady rental revenues in the upcoming period. We expect a year-over-year increase of 1.3% in the company’s rental and other property revenues in 2024.
Essex Property is also banking on its technology, scale and organizational capabilities to drive margin expansion in its portfolio. It is making good progress on the technology front and leasing agents are becoming more productive by leveraging these tools. Such efforts are expected to have an incremental effect on the top-line and bottom-line growth, positioning the company to ride the growth curve.
Essex Property maintains a healthy balance sheet with ample liquidity. It had $1.6 billion of liquidity as of Feb 2, 2024. Its unencumbered net operating income (NOI) to an adjusted total NOI stood at 92% in the fourth quarter of 2023. With a high percentage of such assets, the company can access secured and unsecured debt markets and maintain availability on the line.
With solid liquidity position, manageable debt maturities and investment-grade credit ratings, Essex Property remains well-poised to bank on its growth opportunities. Moreover, the company’s trailing 12-month return on equity is 7.10% compared with the industry’s average of 4.54%. This reflects that the company is more efficient in using shareholders’ funds than its peers.
Solid dividend payouts are arguably the biggest attraction for REIT investors and Essex Property has been steadily increasing its payouts. ESS has increased its dividend six times in the last five years, and its five-year annualized dividend growth rate is 3.89%. Considering its low dividend payout ratio and decent balance sheet strength, the company is likely to maintain its dividend payout over the long run.
Shares of this Zacks Rank #3 (Hold) company have gained 8.1% in the past three months compared with the industry’s rise of 5%.
Image Source: Zacks Investment Research
What’s Hurting It?
The continuation of the flexible working environment is leading to a shift in renter demand from higher cost and urban/infill markets. As such, the demand for some of the company’s properties in these markets is likely to be hurt and result in pressure on occupancy levels. The macroeconomic environment is expected to remain choppy in 2024, which will lead to below-average rent growth. The company has projected same-property revenue growth of 0.70-2.70% and net operating income to be within negative 1.10-2.30% growth in 2024.
The struggle to lure renters will persist as supply volumes are likely to remain elevated in some of its markets in the upcoming period. Furthermore, the company faces competition from other housing alternatives, such as rental apartments, condominiums and single-family homes. Such a competitive landscape limits ESS’ ability to increase rents, thereby restricting its growth momentum to some extent.
Another concern for Essex Property is the high interest rate. Elevated rates imply high borrowing costs for the company, which would affect its ability to purchase or develop real estate. For the first and second quarters of 2024, we expect interest expenses to rise 2.9% and 1.1%, respectively, on a year-over-year basis. Further, the dividend payout might seem less attractive than the yields on fixed-income and money-market accounts due to high interest rates in the near term.
The Zacks Consensus Estimate for UMH’s 2024 FFO per share has moved 2.2% upward in the past week to 95 cents.
The consensus mark for IRM’s current-year FFO per share has been raised 3.5% northward in the past month to $4.38.
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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Is it Wise to Retain Essex Property (ESS) in Your Portfolio?
Essex Property Trust (ESS - Free Report) owns a robust property base in the West Coast market of the United States. It has a healthy balance sheet and is leveraging technology, scale and organizational capabilities to drive growth. However, an elevated supply in some markets and high interest rates are concerning.
What’s Aiding It?
The West Coast markets are characterized by higher median household incomes, an increased percentage of renters and favorable demographic trends. In addition, with high interest rates still in place, elevated home ownership costs have made renting apartment units a viable option.
These factors are likely to aid demand, enabling the company to generate steady rental revenues in the upcoming period. We expect a year-over-year increase of 1.3% in the company’s rental and other property revenues in 2024.
Essex Property is also banking on its technology, scale and organizational capabilities to drive margin expansion in its portfolio. It is making good progress on the technology front and leasing agents are becoming more productive by leveraging these tools. Such efforts are expected to have an incremental effect on the top-line and bottom-line growth, positioning the company to ride the growth curve.
Essex Property maintains a healthy balance sheet with ample liquidity. It had $1.6 billion of liquidity as of Feb 2, 2024. Its unencumbered net operating income (NOI) to an adjusted total NOI stood at 92% in the fourth quarter of 2023. With a high percentage of such assets, the company can access secured and unsecured debt markets and maintain availability on the line.
With solid liquidity position, manageable debt maturities and investment-grade credit ratings, Essex Property remains well-poised to bank on its growth opportunities. Moreover, the company’s trailing 12-month return on equity is 7.10% compared with the industry’s average of 4.54%. This reflects that the company is more efficient in using shareholders’ funds than its peers.
Solid dividend payouts are arguably the biggest attraction for REIT investors and Essex Property has been steadily increasing its payouts. ESS has increased its dividend six times in the last five years, and its five-year annualized dividend growth rate is 3.89%. Considering its low dividend payout ratio and decent balance sheet strength, the company is likely to maintain its dividend payout over the long run.
Shares of this Zacks Rank #3 (Hold) company have gained 8.1% in the past three months compared with the industry’s rise of 5%.
Image Source: Zacks Investment Research
What’s Hurting It?
The continuation of the flexible working environment is leading to a shift in renter demand from higher cost and urban/infill markets. As such, the demand for some of the company’s properties in these markets is likely to be hurt and result in pressure on occupancy levels. The macroeconomic environment is expected to remain choppy in 2024, which will lead to below-average rent growth. The company has projected same-property revenue growth of 0.70-2.70% and net operating income to be within negative 1.10-2.30% growth in 2024.
The struggle to lure renters will persist as supply volumes are likely to remain elevated in some of its markets in the upcoming period. Furthermore, the company faces competition from other housing alternatives, such as rental apartments, condominiums and single-family homes. Such a competitive landscape limits ESS’ ability to increase rents, thereby restricting its growth momentum to some extent.
Another concern for Essex Property is the high interest rate. Elevated rates imply high borrowing costs for the company, which would affect its ability to purchase or develop real estate. For the first and second quarters of 2024, we expect interest expenses to rise 2.9% and 1.1%, respectively, on a year-over-year basis. Further, the dividend payout might seem less attractive than the yields on fixed-income and money-market accounts due to high interest rates in the near term.
Stocks to Consider
Some better-ranked stocks from the broader REIT sector are UMH Properties (UMH - Free Report) and Iron Mountain (IRM - Free Report) , each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for UMH’s 2024 FFO per share has moved 2.2% upward in the past week to 95 cents.
The consensus mark for IRM’s current-year FFO per share has been raised 3.5% northward in the past month to $4.38.
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.