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.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.What’s Aiding ESS?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.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.Image Source: Zacks Investment ResearchWhat’s Hurting ESS?The struggle to lure renters will persist, as supply volumes are likely to remain elevated in the upcoming period in some of the markets where the company operates. Essex Property faces competition from other housing alternatives, such as rental apartments, condominiums and single-family homes. Such a competitive landscape limits the company’s ability to increase rents, restricting its growth momentum to some extent.Essex Property has a significant concentration of assets in Southern California, Northern California and the Seattle metropolitan area. The company derived 42% and 38% of its portfolio NOI from Southern California and Northern California, respectively, as of Sept. 30, 2024. This makes the company’s operating results and financial conditions susceptible to any unfavorable fluctuations in local markets.Despite the Federal Reserve announcing rate cuts in recent times, the interest rate is still high and is a concern for Essex Property in the near term. The company has a substantial debt burden, and its total debt as of Sept. 30, 2024 was $6.37 billion. For 2024, we expect interest expenses to rise 10.6% year over year.Analysts seem bearish on this stock, with the Zacks Consensus Estimate for its 2025 funds from operations (FFO) per share being lowered marginally to $15.99 over the past month.Stocks to ConsiderSome better-ranked stocks from the residential REIT sector are Equity Lifestyle Properties ELS and Veris Residential VRE, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.The Zacks Consensus Estimate for Equity Lifestyle Properties’ 2024 FFO per share has been raised marginally over the past two months to $2.92.The Zacks Consensus Estimate for Veris Residential’s 2024 FFO per share has risen 7% over the past month to 61 cents.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.5 Stocks Set to DoubleEach was handpicked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2024. While not all picks can be winners, previous recommendations have soared +143.0%, +175.9%, +498.3% and +673.0%.Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.Today, See These 5 Potential Home Runs >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Equity Lifestyle Properties, Inc. (ELS): Free Stock Analysis Report Essex Property Trust, Inc. (ESS): Free Stock Analysis Report Veris Residential, Inc. (VRE): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks