Posted on May 12th, 2021 by Bob Ciura
Essex Property Trust (ESS) isn’t exactly a household name when it comes to dividend stocks, but the Real Estate Investment Trust (REIT) has seen very impressive growth over the past two decades. The trust has managed to generate a soaring share price and rapidly increasing dividends since going public in 1994.
The final year marked the 25th straight year Essex increased its dividend payment, making it a relatively new addition to the respected Dividend Aristocrats, a group of S&P 500 stocks with at least 25 consecutive years of dividend increases.
There are now up to 65 companies on that list that have proven to investors that they can pay and grow their dividends in any economic climate. This trait is unusual for REITs, which is why Essex stands out from the herd.
You can download an Excel spreadsheet of all 65 Dividend Aristocrats, including key financial metrics like P / E and dividend yields, by clicking the link below:
Essex struggled during the coronavirus pandemic in 2020, but the company has already made great strides in its ongoing recovery. The stock has a return of nearly 3%, a leadership position in its core markets and a long period of growth ahead of it.
Essex is a real estate investment trust, or REIT. It started as a small real estate company in 1971 and eventually went public in 1994. By that time, Essex had grown as a fully integrated REIT to 16 multi-family communities acquiring, developing, redeveloping, and managing -restricted markets on offer.
Today Essex is focused on the west coast of the United States, including cities like Seattle and San Francisco.
Source: Investor Presentation
On April 27th20th21 Essex reported ffirst Quarterly results. Core FFO– –Per– –diluted share declined by 12% to $ 3.07 while Q.1. Equal– –Gross income from real estate fell over 8th.1% and equal– –propertyThe operating result decreased by 12.3%. by Q.1 20th20th. Three apartment communities were sold while the Quarter for a contract price of $275.5 Million.
The company also spent $ 450 million from 7– –Year senior unsecured notes maturing in 2028. Meanwhile, Essex confirmed its full– –Annual forecast for core FFO Forecast per share in a range of $ 11.86 to $ 12.46.
We see Essex delivering 4% annual FFO growth per share for the next five years. Essex has reached the point where it is a big player in the markets it is present in so it could be more difficult to grow.
However, we see that some catalysts continue to improve FFO over time.
Source: Investor Presentation
Essex is focused on the West Coast markets due to favorable long-term rental prospects. This area has very high economic productivity and strong employment growth, both of which are fueling demand for housing. In addition, single-family homes are very expensive in these markets, which makes renting more attractive.
These markets have strong demand for rental units but also limited new supply as undeveloped land is limited and construction is tedious and expensive.
Essex is present in two markets with chronic housing problems, which increases the demand for rental units over time. We anticipate this tailwind to be modest but steady, which will add to the trust’s FFO per share in the coming years through higher revenues on the same properties and higher NOI growth.
In addition, Essex was never afraid to acquire or invest in future growth. Essex has invested in real estate in a variety of ways in the past, but also has invested in financial instruments such as bonds and preferred stocks. Essex has invested its capital at its own discretion over time, regardless of method. We believe this has placed Essex well in the long run as it has had strong results over the past 25 years.
Competitive advantage and recession performance
Competitive advantages are difficult to achieve for a REIT because so many competitors use essentially identical business models. However, unlike other REITs, Essex is sized and sized in condominium and has a management team that is highly skilled at creating shareholder value through a variety of methods.
The company also has a strong financial position, which gives it a competitive advantage over colleagues who may be in poorer financial shape. Essex has a Solid BBB + credit rating from Standard & Poor’s and currently has an interest coverage ratio of over 450%, which gives a very good large margin compared to their Debt Covenant requirement of 150% or more.
The net debt to adjusted EBITDA is ~5.5x, Which is solid. To like lots Real estate business that Essex Property Trust uses a considerably but quite a bit of leverage and maintains a relatively secure record. It is weighted average interest rate is under4.0% which is pretty lowreflective the truststrong credit metrics.
Interestingly, Essex did very well during and after the Great Recession:
- 2007 FFO per share: $ 5.57
- 2008 FFO per share: $ 6.14
- 2009 FFO per share: $ 6.74
- 2010 FFO per share: $ 5.02
This speaks to the resilience of the markets in which it is present, as 2010 was the only year in the past decade that FFO per share fell. We view this recession resilience as extremely cheap and contribute to the attractiveness of the stock.
Valuation and expected return
At the midpoint of its 2021 FFO per share forecast ($ 12.28 per share), Essex is trading a multiple of 23. We’re seeing a fair value at 18 times the FFO per share, which is a potential headwind of 4.8 % means for the total annual return. As a result, Essex is currently overrated.
When we combine the unfavorable valuation, current dividend yield of 2.9%, and projected FFO per share growth of 4.1%, we have a projected total annual return for shareholders of just 2.2%.
Essex has paid rising dividends for 27 straight years. According to the company, it has increased its dividend by 400% cumulative since going public.
For obvious reasons, dividend growth investors likely find this to be an attractive quality, and we expect Essex to keep increasing the payout each year for the foreseeable future.
Unfortunately, this alone is not enough to justify a buy recommendation, as we are careful with the evaluation.
Essex has been undoubtedly a world-class REIT since it went public and began paying dividends over a quarter of a century ago. The trust has very favorable long-term demographics working in its favor and a management team keen to unlock shareholder value. We believe Essex will have moderate growth over the long term and will keep increasing its dividend every year.
In our view, however, stocks are overvalued, which means the overall return on the stock is expected to be modest. Value and income investors should therefore wait for a price that is closer to fair value before buying shares. However, the stock is attractive to investors looking for dividend security and steady dividend growth over time.
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