Shares of Essex Property Trust, Inc. (ESS - Free Report) have outperformed its industry in the past three months. Its shares have gained 6.9% in the past three months, while the industry edged down 0.7%. Moreover, the trend in current-year funds from operations (FFO) per share estimate revisions indicates a favorable outlook for the company. In fact, the stock has seen the Zacks Consensus Estimate for current-year FFO per share being revised marginally upward in a month’s time.
Late this October, the company reported third-quarter 2018 core FFO per share of $3.15, beating the Zacks Consensus Estimate by a penny. Core FFO per share improved 5.7% from the year-ago quarter figure of $2.98. Results reflect growth in same-property NOI. Improving economic environment and job growth helped spur housing demand. Specifically, apartment fundamentals were healthy in the coastal metros of California and Washington. Moreover, Essex Property raised its guidance for 2018.
With a strong property base in the West Coast market and solid balance-sheet strength, Essex Property is likely to leverage on favorable demographic trends, household formation, recovering economy and job-market growth in its markets.
Its substantial exposure to the West Coast market, which is home to several innovation and technology companies, offers ample scope to boost its top line, over the long term. The region is witnessing 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 the major East Coast markets. Moreover, due to high cost of homeownership, transition from renter to homeowner is difficult in its markets.
The company also maintains a solid balance sheet and enjoys financial flexibility. It exited third-quarter 2018 with cash and cash equivalents, including restricted cash, of $174.6 million, up from $61.1 million recorded at the end of 2017. As of Oct 22, 2018, the company had $1.2 billion in undrawn capacity on its unsecured credit facilities. This healthy financial position is likely to help the company strengthen and expand its business.
Further, solid dividend payouts are arguably the biggest attraction for REIT investors and Essex Property has been steadily raising its payout. In fact, in February 2018, the company announced a 6.3% hike in its quarterly dividend. The company has raised the dividend every year since its IPO in 1994, thereby generating a compound annual dividend per share growth of 6.4%.
However, apartment deliveries are expected to remain elevated in a number of the company’s markets in the near term. This high supply is a concern because it curtails landlords’ ability to command more rent and result in lesser absorption. In addition, periodic disruptions to pricing takes place with multiple apartment lease-ups occurring within a submarket. Such environments are predicted to continue in the near term, and result in aggressive rental concessions and moderate pricing power of the company.
Also, a hike in interest rates can also pose a challenge for Essex Property. Essentially, rising rates imply higher borrowing cost for the company, which would affect its ability to purchase or develop real estate.
As such, currently, Essex Property has a Zacks Rank #3 (Hold).
Stocks to Consider
A few better-ranked stocks from the REIT industry are Alexandria Real Estate Equities, Inc. (ARE - Free Report) , PS Business Parks, Inc. (PSB - Free Report) and Bluerock Residential Growth REIT, Inc. (BRG - Free Report) . All three stocks carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Alexandria Real Estate Equities’ FFO per share estimates for 2018 has been revised marginally upward to $6.61 in 60 days’ time.
PS Business Parks’ Zacks Consensus Estimate for 2018 FFO per share inched up 1.3% to $6.45 in the last month.
Bluerock Residential’s Zacks Consensus Estimate for the current-year FFO per share remained unchanged at 69 cents, over the last 30 days. However, it indicates a projected increase of 23.2% year over year.
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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