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Why Should You Add Essex Property (ESS) to Your Portfolio?

The rate hike and a cautious approach might have deterred you from making investments in the REIT industry. But make sure not to ignore the chances of scooping up big gains from this special hybrid asset class that also benefits from the favorable dynamics of the individual asset categories.

In fact, one such REIT stock which has been displaying strength is Essex Property Trust, Inc. ESS. This Zacks Rank #2 (Buy) stock has risen 7.2% in the past three months compared with 0.1% decline of the Zacks categorized REIT and Equity Trust – Residential industry. Furthermore, funds from operations (“FFO”) per share estimates for second-quarter and full-year 2017 moved north over the past 30 days.

This San Mateo, CA-based residential REIT is expected to well leverage on favorable demographic trends in its markets. In fact, demographic growth continues to be strong in the young adult age cohort, which has a higher propensity to rent. This age cohort also experiences a considerable part of the net job growth and provides a significant source of pent-up demand.

Moreover, despite the supply issue plaguing the market earlier, the company continues to mirror robust fundamentals and improving prospects. In first-quarter 2017, Essex Property delivered a positive surprise of 1.73% in terms of core funds from operations (FFO) per share. The figure also came in 9.7% higher than the prior-year tally. Results highlight better-than-expected growth in revenues. The company raised its guidance for 2017 as well. Further, Essex has a 23-year history of increasing cash dividend.



Why a Solid Choice?

West Coast Exposure: Essex Property’s substantial exposure to the West Coast market provides the company ample scope to boost its top line over the long term. Notably, the West Coast is home to several innovation and technology companies. With the rising use of technology, this region is expected to experience growth in wage levels, moving ahead. Thus, in turn, apartments situated in the vicinity of technology and innovation centers are likely to gain from higher demand and poised to deliver decent growth in rent.

Same Property NOI Growth: Essex Property is experiencing solid growth in same property net operating (“NOI”). In fact, per a presentation by the company, since 2012 through 2016, its same property NOI witnessed a compound annual growth rate (CAGR) of 8.9%, well ahead of 5.5% growth recorded by the peer average. This trend is likely to continue in 2017 as well, with the company expecting to record 3.7% growth, as against 2.8% increase of the peer average.

FFO Per share Growth: Essex Property delivered an earnings surprise of 1.73% in the last reported quarter. In three of the trailing four quarters, the company has delivered a positive surprise, with an average beat of 1.17%.

Its historical FFO per share growth (3–5 years) of 6.99% comes above the industry average of 4.90%. This momentum is anticipated to continue in the near term as indicated by the company’s projected FFO per share growth (F1/F0) of 7.0% compared to the industry average rate of 4.77%. This, in turn, highlights Essex Property’s solid prospects.

Superior ROE: Essex Property’s Return on Equity (ROE) is 11.5% compared with the industry’s average of 10.5%. This indicates that the company reinvests more efficiently compared to the industry.

Strong Leverage: The debt-to-equity ratio for Essex Property is 0.88 compared with the industry average of 0.91. This highlights the financial stability of the company and lesser risk for shareholders.

Other Key Picks

Other similarly-ranked stocks in the Residential REIT industry are American Campus Communities, Inc. ACC, Equity LifeStyle Properties, Inc. ELS and UDR Inc. UDR. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

For American Campus Communities, the Zacks Consensus Estimate for full-year 2017 funds from operations (FFO) per share is expected to be up nearly 4.5% year over year to $2.37.

Equity LifeStyle and UDR have long-term growth rates of 4.7% and 5.9%, respectively.

Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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United Dominion Realty Trust, Inc. (UDR): Free Stock Analysis Report
 
Equity Lifestyle Properties, Inc. (ELS): Free Stock Analysis Report
 
Essex Property Trust, Inc. (ESS): Free Stock Analysis Report
 
American Campus Communities Inc (ACC): Free Stock Analysis Report
 
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