Essex Property Rises 23.1% in 6 Months: Will the Trend Last?

Shares of Essex Property Trust, Inc. ESS have rallied 23.1% in the past six months, outperforming the industry's growth of 16.2%.

This residential REIT, which has a robust property base in the West Coast market, is poised to benefit from the healthy demand for its residential units. It is also banking on technology, scale and organizational capabilities to drive growth.

Analysts also seem bullish on this Zacks Rank #2 (Buy) stock. The Zacks Consensus Estimate for the company's 2024 FFO per share has been revised two cents upward over the past week to $15.53.

Image Source: Zacks Investment Research

Let us now decipher the factors behind the surge in the stock price.

This residential REIT'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. The West Coast region has higher median household incomes, an increased percentage of renters than owners and favorable demographics.

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. Also, due to the high cost of homeownership amid high interest rates, the transition from renter to homeowner is difficult in its markets, making renting apartment units a more flexible and viable option.

Essex Property is also banking on its technology, scale and organizational capabilities to drive margin expansion across its portfolio and bring about operational efficiency by lowering costs. It is making good progress on the technology front, and leasing agents are becoming more productive by leveraging these tools. These efforts are likely to have an incremental effect on the top-line and bottom-line growth, positioning Essex Property to ride the growth curve.

ESS' Balance Sheet Position

Essex Property maintains a healthy balance sheet and enjoys financial flexibility. As of July 26, 2024, the company had $1.1 billion of liquidity through an undrawn capacity on its unsecured credit facilities, cash, cash equivalents and marketable securities.

In the second quarter of 2024, its net debt-to-adjusted EBITDAre remained unchanged at 5.4X from the prior quarter. Over the years, it has made efforts to increase its unencumbered net operating income (NOI) to an adjusted total NOI, which stood at 93% at the end of the second quarter of 2024. With a high percentage of such assets, the company can access secured and unsecured debt markets and maintain availability on the line. With a solid liquidity position, the company is well-poised to ride its growth curve.

In addition, its trailing 12-month return on equity is 9.14% compared with the industry's average of 3.17%. This reflects that the company is more efficient in using shareholders' funds than its peers.

ESS' Dividend Payouts

Solid dividend payouts are arguably the biggest attraction for REIT investors, and Essex Property has been steadily raising its payout. ESS has increased its dividend five times in the last five years, and its five-year annualized dividend growth rate is 4.34%. With a low dividend payout ratio, a solid operating platform and decent balance sheet strength, the dividend payment is expected to be sustainable over the long run.

Negatives Likely to Affect ESS Stock

However, the elevated supply of apartment units in some of the company's markets is likely to fuel competition and curb pricing power. A flexible working environment and high interest rates add to its woes.

Other Stocks to Consider

Some other top-ranked stocks from the retail REIT sector are Modiv Industrial, Inc. MDV and Equity Lifestyle Properties ELS. While Modiv Industrial sports a Zacks Rank #1 (Strong Buy) at present, Equity Lifestyle carries a Zacks Rank #2.

The Zacks Consensus Estimate for MDV's current-year FFO per share has been raised 6.5% over the past month to $1.32.

The Zacks Consensus Estimate for ELS 2024 FFO per share has moved marginally northward over the past two months to $2.91.

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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