Essex Property Trust, Inc. ESS has a solid real estate base in the West Coast market and will benefit from healthy demand for its residential units. The company also relies on technology, scale and organizational capabilities to drive growth.

In July, Essex Property reported second-quarter 2024 core funds operating (FFO) per share of $3.94, which beat the Zacks Consensus Estimate of $3.84. The figure also improved 4.5% from the year-ago quarter. The results reflected positive growth in consistent property revenue and net operating income (NOI). ESS also raised its full-year 2024 guidance.

Analysts also seem optimistic about this Zacks Rank #2 (Buy) stock. The Zacks Consensus Estimate for the company’s FFO per share in 2024 was revised 0.8% upward to $15.53 within the past month.

Essex Property shares have risen 21.1%, outperforming the industry’s 14% growth over the past six months. Given the favorable fundamentals, the stock has more room to grow.

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Factors that make Essex Property a solid choice

West Coast exposure and healthy fundamentals: Essex Property has a solid real estate base and a strong management team. This residential REIT’s strong presence in the West Coast market provides ample scope to grow its revenue.

The West Coast is home to several innovation and technology companies that create jobs and generate income growth. In addition, California has important life sciences clusters and is a major employment driver in San Francisco and San Diego. The West Coast region has higher median household incomes, a higher proportion of renters than homeowners, and favorable demographics.

As layoffs in the tech industry decline and the return to the office gains momentum, West Coast markets should see increased demand from renters in the near future. Additionally, the high cost of homeownership coupled with high interest rates makes the transition from renter to homeowner difficult in these markets, making leasing a more flexible and viable option.

Technology initiatives: Essex Property is also leveraging its technology, scale and organizational capabilities to drive margin expansion across its portfolio and improve operational efficiency through cost reduction. The company is making good progress in the technology space and leasing agents are becoming more productive by leveraging these tools. The next phase of expanding the company’s operating model to include the maintenance function is designed to optimize its employees’ workflow and reduce task time and supplier costs, among other things. These efforts are likely to have an incremental impact on revenue and profit growth and position ESS to ride the growth curve.

Balance sheet strength and high return on equity: Essex Property has a healthy balance sheet and enjoys financial flexibility. As of July 26, 2024, the Company had liquidity of $1.1 billion through undrawn capacity of its unsecured credit facilities, cash, cash equivalents and marketable securities.

In the second quarter of 2024, the net debt to adjusted EBITDA ratio remained unchanged from the previous quarter at 5.4X. Over the years, the company has made efforts to increase its unencumbered net operating income (NOI) to a total adjusted NOI that stood at 93% at the end of the second quarter of 2024. With a high proportion of such assets, the company can access secured and unsecured credit markets and maintain availability on the line.

As of June 30, 2024, this residential real estate REIT had ratings of Baa1/Stable and BBB+/Stable from Moody’s Investor Service and Standard and Poor’s, respectively. Therefore, the company is well positioned to continue its growth trajectory with a solid liquidity position, manageable debt maturities and investment grade ratings.

In addition, the return on equity (ROE) for the last 12 months is 9.14% compared to the industry average of 3.17%, which shows that the company is using its shareholders’ money more efficiently than its competitors.

Dividend: Solid dividend payouts are arguably the biggest draw for REIT investors, and Essex Property has been steadily increasing its payout. In February 2024, the company announced a 6.1% increase in its annual cash dividend from $2.31 per share to $2.45. The company has increased its dividend every year since its IPO in 1994, and the most recent increase was the 30th consecutive annual dividend increase.

ESS has increased its dividend five times in the last five years, and the annual dividend growth rate is 4.34%. With a low dividend payout ratio, a solid operating platform, and decent balance sheet strength, the dividend payment should be sustainable in the long term.

The story continues

Other stocks to consider

Some other highly valued stocks in the residential REIT sector are Invitation home INVH and Center room CSR. Invitation Home and Centerspace each have a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Centerspace’s current year FFO per share was raised slightly within the past month to $4.82.

The Zacks Consensus Estimate for Invitation Home’s current year FFO per share of $1.88 suggests an increase of 6.2% from the prior year.

Note: All earnings figures presented in this article represent funds from operations (FFO) – a widely used metric to assess the performance of REITs.

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