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Is it Wise to Retain Essex Property Stock in Your Portfolio for Now?
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Key Takeaways
ESS benefits from West Coast exposure, favorable renter trends and tech-led margin improvements.
$1.4B in liquidity and a 92% unencumbered NOI ratio underscore ESS' financial flexibility.
Elevated apartment supply and $6.79B debt burden challenge ESS' pricing power and growth outlook.
Essex Property Trust, Inc. (ESS - Free Report) is well-poised to gain from a sturdy property base in the West Coast market with favorable demand drivers. Technology initiatives to drive margins and a healthy balance sheet bode well for long-term growth.
However, the elevated supply of apartment units in some of the company’s markets is likely to fuel competition and curb pricing power. A high debt burden adds to its woes.
Last April, ESS reported first-quarter 2025 core funds from operations (FFO) per share of $3.97, beating the Zacks Consensus Estimate of $3.92. The figure also improved 3.7% from the year-ago quarter. Results reflected favorable growth in same-property revenues and net operating income (NOI). However, the same-property operating expenses partly acted as a dampener.
What’s Aiding ESS?
Essex Property’s substantial exposure to the West Coast market has offered 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. This region has higher median household incomes, an increased percentage of renters than owners, and favorable demographics.
Also, due to the high cost of homeownership amid still elevated interest rates, the transition from renter to homeowner is difficult, making renting apartment units a more flexible and viable option. Against this backdrop, we expect the rental and other property revenues to increase 5.5% and 3.3% year over year in 2025 and 2026, 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-line 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 March 31, 2025, the company had $1.4 billion of liquidity through an undrawn capacity on its unsecured credit facilities, cash, cash equivalents and marketable securities. In the first quarter of 2025, its net debt-to-adjusted EBITDAre was 5.6X, and its unencumbered NOI to adjusted total NOI stood at 92%. 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 4.65%. 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 remain elevated in some of the markets where the company operates. 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.
Despite the Federal Reserve announcing rate cuts late in 2024, the interest rate is still high and is a concern for Essex Property in the near term. The company has a substantial debt burden, and its total debt as of March 31, 2025 was $6.79 billion. For 2025, we expect interest expenses to rise 7.5% on a year-over-year basis.
Shares of this residential REIT, carrying a Zacks Rank #3 (Hold), have fallen 5.7%, narrower than the industry’s decline of 7.7% over the past six months. Analysts seem bearish on this stock, with the Zacks Consensus Estimate for its 2025 FFO per share being lowered marginally to $15.92 over the past month.
Image: Shutterstock
Is it Wise to Retain Essex Property Stock in Your Portfolio for Now?
Key Takeaways
Essex Property Trust, Inc. (ESS - Free Report) is well-poised to gain from a sturdy property base in the West Coast market with favorable demand drivers. Technology initiatives to drive margins and a healthy balance sheet bode well for long-term growth.
However, the elevated supply of apartment units in some of the company’s markets is likely to fuel competition and curb pricing power. A high debt burden adds to its woes.
Last April, ESS reported first-quarter 2025 core funds from operations (FFO) per share of $3.97, beating the Zacks Consensus Estimate of $3.92. The figure also improved 3.7% from the year-ago quarter. Results reflected favorable growth in same-property revenues and net operating income (NOI). However, the same-property operating expenses partly acted as a dampener.
What’s Aiding ESS?
Essex Property’s substantial exposure to the West Coast market has offered 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. This region has higher median household incomes, an increased percentage of renters than owners, and favorable demographics.
Also, due to the high cost of homeownership amid still elevated interest rates, the transition from renter to homeowner is difficult, making renting apartment units a more flexible and viable option. Against this backdrop, we expect the rental and other property revenues to increase 5.5% and 3.3% year over year in 2025 and 2026, 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-line 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 March 31, 2025, the company had $1.4 billion of liquidity through an undrawn capacity on its unsecured credit facilities, cash, cash equivalents and marketable securities. In the first quarter of 2025, its net debt-to-adjusted EBITDAre was 5.6X, and its unencumbered NOI to adjusted total NOI stood at 92%. 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 4.65%. 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 remain elevated in some of the markets where the company operates. 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.
Despite the Federal Reserve announcing rate cuts late in 2024, the interest rate is still high and is a concern for Essex Property in the near term. The company has a substantial debt burden, and its total debt as of March 31, 2025 was $6.79 billion. For 2025, we expect interest expenses to rise 7.5% on a year-over-year basis.
Shares of this residential REIT, carrying a Zacks Rank #3 (Hold), have fallen 5.7%, narrower than the industry’s decline of 7.7% over the past six months. Analysts seem bearish on this stock, with the Zacks Consensus Estimate for its 2025 FFO per share being lowered marginally to $15.92 over the past month.
Image Source: Zacks Investment Research
Stocks to Consider
Some better-ranked stocks from the broader REIT sector are VICI Properties (VICI - Free Report) and W.P. Carey (WPC - 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 VICI Properties’ 2025 FFO per share has been raised marginally over the past month to $2.34.
The consensus estimate for W.P. Carey’s current-year FFO per share has moved northward by 1% in the past month to $4.88.
Note: Anything related to earnings presented in this write-up represents FFO, a widely used metric to gauge the performance of REITs.