Should Essex Property Stock Be Retained in Your Portfolio Now?

Essex Property Trust, Inc. ESS is well-poised to gain from a robust property base in the West Coast market with several demand drivers. Efforts to leverage technology, scale and organizational capabilities are expected to drive margin expansion. A healthy balance sheet augurs well. Solid dividends aid shareholder wealth.

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However, the rising supply of apartment units in some of the company’s markets is likely to fuel competition and curb pricing power. A concentrated portfolio and substantial debt burden remain a concern.

Essex Property enjoys a robust property base in the West Coast market, which is home to several innovation and technology companies that drive job creation and income growth. The region has higher median household incomes, an increased percentage of renters than owners and favorable demographics.

Also, due to the high cost of homeownership amid still elevated interest rates, the transition from renter to homeowner is difficult, making renting apartment units a more flexible and viable option. Against this backdrop, we expect rental and other property revenues for ESS to increase by 4.6% year over year in 2025.

ESS is banking on its technology, scale and organizational capabilities to drive margin expansion across its portfolio and bring about operational efficiency by lowering costs. These efforts are likely to have an incremental effect on 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. As of Sept. 30, 2024, the company had $1.2 billion of liquidity through an undrawn capacity on its unsecured credit facilities, cash, cash equivalents and marketable securities. In the third quarter of 2024, its net debt-to-adjusted EBITDAre was 5.5X, and its unencumbered NOI to adjusted total NOI stood at 93%. With a high percentage of such assets, the company can access secured and unsecured debt markets and maintain the availability of required funds on the line.

Solid dividend payouts are arguably the biggest attraction for REIT investors, and ESS has been steadily raising its payout. The company has increased its dividend five times in the last five years, and its five-year annualized dividend growth rate is 4.22%. With a low dividend payout ratio and decent balance sheet strength, the dividend payment is expected to be sustainable over the long run.

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Shares of this residential REIT, carrying a Zacks Rank #3 (Hold), have risen 9.8%, outperforming the industry’s growth of 5.8% in the past year.

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