Dividend Aristocrats In Focus: Essex Property Trust

Revealed on Might twelfth, 2021 by Bob Ciura

Essex Property Belief (ESS) isn’t essentially a family identify in relation to dividend shares, however the true property funding belief, or REIT, has produced very spectacular progress prior to now 20 years. The belief has managed to supply a hovering share value and quickly rising dividends since its IPO in 1994.

Final 12 months marked the twenty fifth consecutive 12 months Essex boosted its dividend fee, making it a comparatively new addition to the celebrated Dividend Aristocrats, a gaggle of S&P 500 shares with a minimum of 25 consecutive years of dividend will increase.

That checklist is now as much as 65 corporations which have confirmed to buyers they will pay – and improve – their dividends in any financial local weather. That attribute is uncommon for REITs, so Essex has set itself aside from the herd.

You’ll be able to obtain an Excel spreadsheet of all 65 Dividend Aristocrats, together with necessary monetary metrics corresponding to P/E ratios and dividend yields, by clicking the hyperlink under:

Essex struggled in the course of the coronavirus pandemic of 2020, however the firm has already made huge strides in its ongoing restoration. The inventory has a virtually 3% yield, a management place in its core markets, and an extended runway of progress up forward.

Enterprise Overview

Essex is a Actual Property Funding Belief, or REIT. It began out in 1971 as a small actual property firm, and ultimately went public in 1994. At the moment, Essex had grown to 16 multifamily communities as a completely built-in REIT that acquires, develops, redevelops, and manages multifamily residence communities situated in supply-constrained markets.

Immediately, Essex is targeting the West Coast of the U.S., together with cities like Seattle and San Francisco.

Supply: Investor Presentation

On April 27th, 2021 Essex reported first quarter outcomes. Core FFO–per–diluted share declined by 12% to $3.07 throughout Q1. Identical–property gross income fell by 8.1% and identical–property internet working earnings fell by 12.3% from Q1 2020. Three residence communities had been bought throughout the quarter for a contract value of $275.5 million.

The corporate additionally issued $450 million of seven–12 months senior unsecured notes due in 2028. In the meantime, Essex reaffirmed its full–12 months steering for core FFO per share steering in a spread of $11.86 to $12.46.

Development Prospects

We see Essex producing 4% annual FFO-per-share progress within the subsequent 5 years. Essex has reached the purpose the place it’s a enormous participant within the markets the place it’s current, so progress may very well be tougher to return by.

Nonetheless, we see some catalysts as driving additional enchancment in FFO over time.

Supply: Investor Presentation

Essex concentrates on the markets on the West Coast due to favorable long-term rental prospects. That space has very excessive financial productiveness and robust charges of job progress, each of which gas demand for housing provide. As well as, single-family residences are very costly in these markets, making renting extra engaging.

These markets have sturdy demand for rental items, but additionally restricted new provide as undeveloped land is restricted, and development is prolonged and costly.

Essex is current in two markets with persistent housing scarcity issues, which drives demand for its rental items over time. We predict this tailwind can be modest however regular, including to the belief’s FFO-per-share within the years to return by way of larger same-property income and NOI progress.

As well as, Essex has by no means been afraid to accumulate or spend money on future progress. Essex has a historical past of investing in properties in quite a lot of methods, but additionally in monetary devices like bonds and most popular shares. Essex has, over time, invested its capital in the way in which it noticed match, no matter the strategy. We predict this units Essex up properly for the long-term, because it has produced sturdy outcomes for the previous 25 years.

Aggressive Benefits & Recession Efficiency

Aggressive benefits are troublesome to return by for a REIT, provided that so many rivals make use of primarily an identical enterprise fashions. Nonetheless, Essex has scale and dimension not like different residence REITs, and a administration staff that’s extremely expert when it comes to creating shareholder worth by way of quite a lot of strategies.

The corporate additionally has a powerful monetary place which gives it a aggressive benefit over its friends which may be in worse monetary form. Essex has a stable BBB+ credit standing from Commonplace & Poor’s, and at the moment has an curiosity protection ratio of over 450%, which gives a really giant margin in comparison with their debt covenant requirement of 150% or larger.

Web debt to adjusted EBITDA is ~5.5x, which is stable. Like many actual property companies, Essex Property Belief makes use of a substantial however honest quantity of leverage and maintains a comparatively secure steadiness sheet. Its weighted common rate of interest is below4.0%, which is sort of low, reflecting the belief’s sturdy credit score metrics.

Apparently, Essex carried out very properly throughout and after the Nice 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 the place it’s current, as 2010 was the one 12 months prior to now decade the place FFO-per-share declined. We see this recession resilience as highly-favorable and provides to the attractiveness of the inventory.

Valuation & Anticipated Returns

On the midpoint of 2021 FFO-per-share steering ($12.28 per share), Essex is buying and selling for a a number of of 23. We see honest worth at 18 occasions FFO-per-share, which introduces a 4.8% potential headwind to annual whole returns. As such, Essex is overvalued at current.

If we mix the unfavorable valuation, present dividend yield of two.9%, and 4.1% forecast FFO-per-share progress, we’ve got whole projected annual returns to shareholders of simply 2.2%.

Essex has paid rising dividends for 27 consecutive years. In accordance with the corporate, it has cumulatively raised its dividend by 400% since its IPO.

For apparent causes, dividend progress buyers seemingly discover this to be a pretty high quality, and we anticipate Essex will proceed to boost the payout annually for the foreseeable future.

Sadly, this alone shouldn’t be sufficient to warrant a purchase suggestion, as we’re cautious on the valuation.

Remaining Ideas

Essex has undoubtedly been a world-class REIT because it went public and commenced paying dividends over a quarter-century in the past. The belief has very favorable long-term demographics working in its favor, and a administration staff that’s eager to unlock shareholder worth. We predict Essex will produce average long-term progress and proceed to extend its dividend annually.

Nonetheless, shares are overvalued in our view, which implies the inventory’s whole returns are anticipated to be modest. Subsequently, worth and earnings buyers ought to anticipate a value nearer to honest worth earlier than shopping for shares. That mentioned, the inventory is interesting for buyers on the lookout for dividend security and regular dividend progress over time.