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Is it Wise to Retain Essex Property (ESS) in Your Portfolio?

Essex Property Trust ESS owns a robust property base in the West Coast market of the United States. It has a healthy balance sheet and is leveraging technology, scale and organizational capabilities to drive growth. However, elevated supply in some markets and high interest rates are concerning.

What’s Aiding it?

The West Coast markets are characterized by higher median household incomes, an increased percentage of renters and favorable demographic trends. In addition, with high interest rates still in place, elevated home ownership costs have made renting apartment units a viable option.

These factors are likely to aid demand, enabling the company to generate steady rental revenues in the upcoming period. We expect its rental and other property revenues to increase 2.4% and 2.3% year over year in 2024 and 2025, respectively.


Essex Property is also banking on its technology, scale and organizational capabilities to drive margin expansion in 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. Such efforts are expected to have an incremental effect on its 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. It had $1.5 billion of liquidity as of Apr 29, 2024. Its unencumbered net operating income (NOI) to an adjusted total NOI stood at 93% in the first 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, manageable debt maturities and investment-grade credit ratings, Essex Property remains well-poised to bank on its growth opportunities. Moreover, the company’s trailing 12-month return on equity is 9.22% compared with the industry’s average of 3.70%. This reflects that it is more efficient in using shareholders’ funds than its peers.

Solid dividend payouts are arguably the biggest attraction for REIT investors and Essex Property has been steadily increasing its payouts. ESS has increased its dividend five times in the last five years, and its five-year annualized dividend growth rate is 4.18%. Considering its low dividend payout ratio and decent balance sheet strength, the company is likely to maintain its dividend payout over the long run.

Shares of this Zacks Rank #3 (Hold) company have gained 19.1% in the past three months compared with the industry’s growth of 5.8%.


Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research


What’s Hurting it?

The continuation of the flexible working environment is leading to a shift in renter demand from higher cost and urban/infill markets. As such, the demand for some of the company’s properties in these markets is likely to be hurt and result in pressure on occupancy levels. The macroeconomic environment is expected to remain choppy in 2024, which will lead to below-average rent growth. The company has projected same-property revenue growth of 1.50-3.00% and NOI growth to be within 0.00-2.30% in 2024.

The struggle to lure renters will persist as supply volumes are likely to remain elevated in some of its markets in the upcoming period. Furthermore, the company faces competition from other housing alternatives, such as rental apartments, condominiums and single-family homes. Such a competitive landscape limits ESS’ ability to increase rents, thereby restricting its growth momentum to some extent.

Another concern for Essex Property is the high interest rate. Elevated rates imply high borrowing costs for the company, which would affect its ability to purchase or develop real estate.  It has a substantial debt burden and its total debt as of Mar 31, 2024, was $6.55 billion. For 2024, we expect interest expenses to rise 7.3% on a year-over-year basis. Further, the dividend payout might seem less attractive than the yields on fixed-income and money-market accounts due to high interest rates in the near term.

Stocks to Consider

Some better-ranked stocks from the broader REIT sector are Iron Mountain IRM and Lamar Advertising LAMR, 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 IRM’s 2024 FFO per share has increased marginally upward over the past month to $4.44.

The Zacks Consensus Estimate for LAMR’s current-year FFO per share has moved 3.7% northward in the past two months to $8.03.

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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Iron Mountain Incorporated (IRM) : Free Stock Analysis Report

Lamar Advertising Company (LAMR) : Free Stock Analysis Report

Essex Property Trust, Inc. (ESS) : Free Stock Analysis Report

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