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Is it Wise to Retain Essex Property (ESS) Stock for Now?

Zacks Equity Research
·3-min read

Essex Property Trust, Inc. ESS is well-poised to gain from its 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.

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

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

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.

Moreover, Essex Property experienced robust net effective rent growth for new leases across its portfolio in second-quarter 2022. The positive momentum led to the second highest year-over-year growth in core funds from operations (FFO) in the company’s history.

To capitalize on tailwinds, the residential REIT is also banking on its technology, scale and organizational capabilities to drive innovation and margin expansion in its portfolio. It is making steady progress on the technology front, and leasing agents are becoming more productive by leveraging these tools.

On the balance sheet front, Essex Property 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.

The Zacks Consensus Estimate for the company’s 2022 FFO per share indicates a favorable outlook for the company as it has moved marginally upward over the past month to $14.48.

Although analysts seem bullish on the Zacks Rank #3 (Hold) stock, ESS has only gained 2.0% in the past three months compared with the industry's growth of 3.6%.

Health concerns of living in a dense environment and work-from-home flexibility have reduced the demand from the costlier urban/infill markets to suburban markets, adding to Essex Property’s woes. Further, rent growth is expected to moderate for the remainder of 2022.

Stiff competition from other housing alternatives like rental apartments, condominiums and single-family homes restricts Essex Property from raising rents, stalling its growth pace.

Interest rate hikes are likely to affect ESS’ ability to purchase or develop real estate. Its dividend payout might become less attractive than the yields on fixed-income and money market accounts.

Stocks to Consider

Some better-ranked stocks from the residential REIT sector are Spirit Realty Capital SRC, Independence Realty Trust IRT and BRT Apartments BRT, 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 Spirit Realty Capital’s 2022 FFO per share has moved marginally northward in the past month to $3.57.

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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Essex Property Trust, Inc. (ESS) : Free Stock Analysis Report
 
BRT Apartments Corp. (BRT) : Free Stock Analysis Report
 
Spirit Realty Capital, Inc. (SRC) : Free Stock Analysis Report
 
Independence Realty Trust, Inc. (IRT) : Free Stock Analysis Report
 
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