1 Dividend Aristocrat To Be Wary Of
Residential real estate investment trust (REIT) Essex Property Trust, Inc. (NYSE:ESS) operates in West Coast markets, primarily acquiring, developing, and managing multifamily residential properties. It has a portfolio of more than 60,000 apartment units, primarily located in California and Seattle.
Founded in 1971 and going public in 1994, Essex is a Dividend Aristocrat. Thanks to its resilient business model, it has increased its dividends for 30 straight years.
While the share price has appreciated by more than 13% over the past year, it failed to follow the broader market’s uptrend since the beginning of the year. One of the reasons affecting its recent performance was a decline in its bottom line in the fourth quarter and a slowdown in rent growth. The company’s portfolio concentration in just one region puts it at a disadvantage.
Regardless of an unimpressive price performance over the past three years, the company’s long-term growth prospects are promising. Plus, Essex Property’s average dividend yield of about 3.5% is appealing enough for income investors.
Does Essex Property Trust Possess Core Business Strength?
Essex’s core funds from operation (FFO) per share exceeded expectations in the fiscal fourth quarter, driven by stable demand and supply dynamics in California, leading to modest rent growth.
Its core FFO per share was $3.83 in the quarter, higher than the analysts’ estimate of $3.81. Core FFO per share rose by 1.6% year over year for the quarter and 3.6% for the full year, surpassing the high end of the firm’s original guidance range.
However, the REIT reported a significant 64.3% year-over-year decrease in net income per share for the quarter. The full-year net income per share saw a marginal increase of 0.8% from the prior year.
Moreover, Essex’s same-property revenues and net operating income (NOI) grew by 2.9% and 2.3%, respectively, in the quarter compared to the fourth quarter of 2022. Also, Essex exceeded the midpoint of its guidance range for the full year, with same-property revenues and NOI growing by 4.4% and 4.3% year-over-year.
Management guided core FFO per share for the current year between $14.76 and $15.30, based on assumptions of a soft landing with 1.3% and 1.2% U.S. GDP and job growth, respectively. The company also expects 1.25% rent growth and 1.3% job growth in West Coast markets.
Essex Property’s Strategic Investments Yield Returns
Investments have been highly successful. Essex Property Trust received $72.3 million in redemption proceeds from four preferred equity investments at a weighted average return rate of 9.1% and committed $18.8 million to two preferred equity investments at a weighted average return rate of 12.6% for 2023.
Moreover, the firm maintains a strong liquidity position, with approximately $1.6 billion available as of February 2, 2024. Its strategic equity investments and liquidity position reflect its ability to expand its portfolio and ensure financial flexibility.
Is Essex Property’s Operating Region a Strength?
The company’s focus on the West Coast could bolster its long-term growth. The market is expected to see solid job and income growth, leading to high demand and limited supply. These dynamics should help the company achieve high occupancy rates and rent growth.
Nonetheless, the ongoing economic uncertainty has made management conservative; they forecast average rent growth of just 1.25% in this operating region.
Is Essex’s Dividend Payouts Sustainable?
Essex Property Trust has maintained a consistent dividend payment record since it went public in 1994. Essex pays a $9.80 per share dividend annually, translating to a 4.07% yield on the current share price. Its four-year average dividend yield is 3.39%.
Essex Property Trust’s annual dividend has grown at a rate of 3.6% over the past three years and 4.4% over the past five years. Over the past decade, its dividend has grown at a rate of 6.7%.
While its dividend payment history has been impressive, Essex’s high forward payout ratio of about 170% raises concerns about the sustainability of its dividend payments.
While management’s projected decline in net income by about 16% this year concerns dividend sustainability, the company’s $1.6 billion in liquidity as of February 2, 2024, offers enough flexibility to maintain its dividend payments.
Is Essex Property Trust Stock a Buy Now?
The company is poised for long-term growth due to rising demand for high-quality properties in the West Coast region. However, the sluggish rent growth remains a concern in the near term.
Moreover, the uncomfortable interest rate environment threatens the company’s occupancy rate. While the market anticipates a rate cut in June, the higher-than-expected inflation in February reduces the probability.
The average analyst price target of $243.87 indicates a marginal increase from its current price level. Among the 20 analysts recommending the stock, two suggested buying it, 17 advised holding it, and one suggested selling it.
