Why Hold Strategy Is Apt For Essex Property (ESS) Right Now

With a strong property base and solid balance sheet, Essex Property Trust (NYSE:ESS) is likely to leverage on favorable demographic trends in its markets. The company’s West Coast exposure offers ample scope to boost top line over the long term. Moreover, it has raised the dividend every year since its IPO in 1994. However, aggressive rental concessions and moderate pricing power amid high supply remain concerns. Also, rate hike adds to its woes for this Zacks Rank #3 (Hold) company.

Essex’s Zacks Consensus Estimate for FFO per share for full-year 2017 has been revised upward by one cent per share, in the last 60 days.

Shares of Essex have outperformed the industry it belongs to, so far this year. The company’s shares have gained 4.5%, while the industry has recorded growth of 2.5%.

The company’s substantial exposure to the West Coast market, which is home to several innovation and technology companies, bodes well for its top line. Though there are near-term concerns about potential slowdown in the technology industries, with the growing use of technology in every sphere of life, the region is expected to experience growth in wage levels over the long term. Therefore, apartments situated in the centers of technology and innovations are likely to gain from higher demand and poised to deliver decent growth in rent over the long term.

Further, solid dividend payouts are arguably the biggest attraction for REIT investors and Essex Property has been steadily raising its payout. In fact, the company has raised its dividend every year since the IPO in 1994, thereby generating a compound annual dividend per share growth of 6.4%. These moves instill investors’ confidence on the stock.

However, the company has a significant concentration of assets in Southern California, Northern California and the Seattle metropolitan area. Specifically, 83% of the company’s rental revenues were generated from communities located in California for the year ended Dec 31, 2016. This makes the company’s operating results and financial conditions susceptible to any unfavorable fluctuation in local markets.

Also, a hike in interest rates can pose a challenge for Essex. Essentially, rising rates imply higher borrowing costs for the company, which would affect its ability to purchase or develop real estate.

Better-ranked stocks in the real estate investment trust (REIT) space include BRT Realty Trust (NYSE:BRT) , Arbor Realty Trust (NYSE:ABR) and Reis (NASDAQ:REIS) . All three carry a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

BRT Realty’s FFO per share estimate for the current year has gone up 9.2% over the last 60 days. Over the past three months, the company’s shares have gained 7.9%.

Arbor Realty’s 2017 FFO per share estimate has gone up 8.7% over the last 60 days. The stock has been up 6.2% for the past three months.

Reis’ FFO per share estimate for 2017 has moved up 3.6% over the last 60 days. Its share price has increased 6.3% in three months’ time.

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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BRT Realty Trust (BRT): Free Stock Analysis Report

Arbor Realty Trust (ABR): Free Stock Analysis Report

Reis, Inc (REIS): Free Stock Analysis Report

Essex Property Trust, Inc. (ESS): Free Stock Analysis Report

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