Essex Property Trust is the most geographically focused multifamily real estate investment trust, with a portfolio of high-quality multifamily buildings

Business Strategy & Outlook

Essex Property Trust is the most geographically focused multifamily real estate investment trust, with a portfolio of high-quality multifamily buildings positioned entirely on the West Coast: Los Angeles, San Diego, San Francisco, San Jose, and Seattle. These markets should experience strong, long-term demographic trends like job growth, income growth, decreasing homeownership rates, high relative cost of single-family housing, and attractive urban centers that draw younger populations, which allows the company to maintain high occupancies and drive rent growth above the U.S. average. The company’s markets to see job and income growth above national average, which should continue to support above average net operating income growth. The company’s solid internal operating outlook should be supplemented by its small but opportunistic development pipeline to create value for shareholders.

While Essex’s portfolio focuses on markets with strong demand drivers, the pandemic caused many millennials to consider moving to the suburbs, either into suburban apartments or their own single-family homes, though demand for new urban apartments has remained relatively resilient. Additionally, the concentration of the Essex portfolio in tech-oriented West Coast markets leaves it exposed to the risk of a downturn and a resulting job/ income loss in the technology sector. High inflation has recently driven revenue significantly higher as apartment leases are generally only a year long, allowing Essex to push rate growth that has matched inflation. While revenue growth is to decelerate as inflation growth is brought under control and also expect a period of higher than normal expense growth, the company’s funds from operations per share are already above prepandemic levels and to continue same-store growth to push FFO even higher.

Financial Strengths

Essex Property Trust is in good financial shape from a liquidity and a solvency perspective. The company seeks to maintain a solid but flexible balance sheet, which will serve stakeholders well. Near-term debt maturities should be manageable through a combination of refinancing, asset sales, and free cash flow. The company should be able to access the capital markets when acquisition and development opportunities arise. The 2023 net debt/EBITDA and EBITDA/interest to be roughly 4.7 and 6.4 times, respectively, both of which are within the company’s targeted range and are, reasonable levels. As a REIT, Essex is required to pay out 90% of its income as dividends to shareholders, which limits its ability to retain its cash flow. However, the company’s current run-rate dividend is easily covered by the company’s cash flow from operating activities, providing Essex plenty of flexibility to make capital allocation and investment decisions. The company’s credit rating is to remain stable through steady rental income growth in its existing portfolio and the stabilization of the company’s current developments, which should allow the company to continue to access the debt market in combination with equity issuance and asset dispositions to fund its debt maturities, acquisitions, and new development activity.

Bulls Say

Essex’s portfolio benefits from strong job and income growth and limited supply growth in its attractive West Coast markets.
Essex’s high-quality assets should see relatively consistent long-term demand from high-income earners and will likely see just a small hit to fundamentals during the current pandemic, as most residents have not experienced job losses.
Supply growth should be kept in check as rising construction costs and tighter lending standards should reduce the number of projects that are started.

Company Description

Essex Property Trust owns a portfolio of 253 apartment communities with over 62,000 units and is developing three additional properties with 571 units. The company focuses on owning large, high-quality properties on the West Coast in the urban and suburban submarkets of Southern California, Northern California, and Seattle.

(Source: Morningstar)

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