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Essex Property (ESS) Down 11% in a Month: Is it Worth a Look?

Undoubtedly, the broader market has been widely affected by geopolitical uncertainties, inflation and the consequent rate hikes. Essex Property ESS was not spared either.  

The stock has lost 10.9% in the past month compared with the industry’s decline of 7.4%.

However, the recent sell-off marks a good entry point for investors. We believe the Zacks Rank #2 (Buy) stock has strong growth potential and seems a solid choice for your portfolio.

Analysts too seem bullish on the stock. The Zacks Consensus Estimate for the company’s 2022 funds from operations (FFO) per share indicates a favorable outlook, with estimates having been revised 2.1% upward over the past two months to $14.48.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

What Makes Essex Property a Solid Pick?

Solid Industry Fundamentals: Essex Property has a sturdy property base in the West Coast market of the United States. The markets are characterized by higher median household incomes, an increased percentage of renters than owners and escalated home ownership costs.

In addition, it benefits from favorable demographic trends of the young adult age cohort, which has a higher propensity to rent.

This provides Essex Property ample opportunities to capitalize on the market recovery, thereby boosting its top line over the long term.

Healthy Operating Performance: Given the return-to-office programs and healthy year-over-year job growth in June 2022, outpacing the national average, Essex Property has been witnessing a robust operating platform. This has raised housing demand in the Northern California and Seattle markets, aiding the demand for ESS’ properties in these regions.

From the beginning of the year through Jul 26, 2022, Northern California and Seattle witnessed net effective rent growth of 18.1% and 19.9%, respectively. The positive momentum also led to the second largest year-over-year growth in core FFO in the company’s history.

Balance Sheet Strength: Essex Property has a decent balance sheet with ample liquidity. It had $1.3 billion of liquidity through an undrawn capacity on its unsecured credit facilities and cash and marketable securities as of Jul 22, 2022. Also, taking advantage of the low interest-rate environment prevalent in 2020, ESS refinanced part of its debt, reducing its weighted average interest rate and extending its maturity profile.

With manageable debt maturities and investment grade credit ratings of Baa1/Stable from Moody’s and a BBB+/Stable from both Fitch and S&P, ESS has enough financial flexibility to capitalize on growth opportunities.

FFO Growth: Backed by better-than-expected second-quarter results, this residential REIT raised the full-year 2022 guidance for the third time this year. It expects core FFO per share to lie in the range of $14.35-$14.55 compared with $14.00-$14.32 guided earlier. This implies a 29-cent-per-share increase at the midpoint to $14.45.

The Zacks Consensus Estimate for the 2022 FFO per share implies a rise of 15.93% for 2022 compared with the industry’s average of 12.60%.

Dividend: Solid dividend payouts are arguably the biggest attraction for REIT investors, and Essex Property remains committed to that. In February 2022, the company announced a 5.3% hike in its annual cash dividend to $2.20 per share from the $2.09 paid out earlier. This marked its 28th consecutive annual dividend increase since its IPO in 1994.

ESS has increased its dividend five times in the last five years, and the five-year annualized dividend growth rate is 4.57%. Considering its low dividend payout ratio and decent balance-sheet strength, the company is likely to maintain its dividend payout in the forthcoming quarters.

Other Stocks to Consider

Some top-ranked stocks from the residential REIT sector are Equity Residential EQR, Independence Realty Trust IRT and BRT Apartments BRT, each carrying a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Equity Residential’s 2022 FFO per share has moved 1.7% northward in the past two months to $3.51.

The Zacks Consensus Estimate for Independence Realty Trust’s current-year FFO per share has moved 1.9% northward in the past two months to $1.08.

The Zacks Consensus Estimate for BRT Apartments’ ongoing year’s FFO per share has been raised 5.8% over the past two months to $1.63.

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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