Updated on March 8th, 2022 by Quinn Mohammed
Essex Property Trust (ESS) isn’t necessarily a household name when it comes to dividend stocks, but the real estate investment trust, or REIT, has produced very impressive growth in the past two decades. The trust has managed to produce a soaring share price and rapidly increasing dividends since its IPO in 1994.
This year marks the 28th consecutive year Essex boosted its dividend payment, making it a relatively new addition to the prestigious Dividend Aristocrats, a group of S&P 500 stocks with at least 25 consecutive years of dividend increases.
That list is now up to 66 companies that have proven to investors they can pay – and increase – their dividends in any economic climate. That characteristic is unusual for REITs, so Essex has set itself apart from the herd.
You can download an Excel spreadsheet of all 66 Dividend Aristocrats, including important financial metrics such as P/E ratios and dividend yields, by clicking the link below:
Essex faced some headwinds during the coronavirus pandemic of 2020, but the company has already made big strides in its ongoing recovery. The stock has a 2.6% yield, a leadership position in its core markets, and a long runway of growth up ahead.
Essex is a Real Estate Investment Trust, or REIT. It started out in 1971 as a small real estate company, and eventually went public in 1994. At that time, Essex had grown to 16 multifamily communities as a fully integrated REIT that acquires, develops, redevelops, and manages multifamily apartment communities located in supply-constrained markets.
Today, Essex is concentrated on the West Coast of the U.S., including cities like Seattle and San Francisco.
Source: Investor Presentation
On February 2nd, 2022, Essex reported fourth quarter and full-year 2021 results. Core FFO per diluted share declined by 2.6% for the full year to $12.49. Same-property gross revenue fell by 1.2% and same-property net operating income fell by 2.7% from 2020. In 2021, Essex acquired or increased its ownership position in six apartment communities for $432 million, above its previously provided guidance.
Essex provided full-year 2022 guidance for core FFO per share guidance in a range of $13.46 to $13.94. The mid-point comes to $13.70 for 2022.
We see Essex producing 3.8% annual FFO-per-share growth in the next five years. Essex has reached the point where it is a huge player in the markets where it is present, so growth could be more difficult to come by.
However, we see some catalysts as driving further improvement in FFO over time.
Source: Investor Presentation
Essex concentrates on the markets on the West Coast because of favorable long-term rental prospects. That area has very high economic productivity and strong rates of job growth, both of which fuel demand for housing supply. In addition, single-family residences are very expensive in these markets, making renting more attractive.
These markets have strong demand for rental units, but also limited new supply as undeveloped land is limited, and construction is lengthy and expensive.
Essex is present in two markets with chronic housing shortage problems, which drives demand for its rental units over time. We think this tailwind will be modest but steady, adding to the trust’s FFO-per-share in the years to come via higher same-property revenue and NOI growth.
In addition, Essex has never been afraid to acquire or invest in future growth. Essex has a history of investing in properties in a variety of ways, but also in financial instruments like bonds and preferred stocks. Essex has, over time, invested its capital in the way it saw fit, irrespective of the method. We think this sets Essex up well for the long-term, as it has produced strong results for the past 28 years.
Competitive Advantages & Recession Performance
Competitive advantages are difficult to come by for a REIT, given that so many competitors employ essentially identical business models. However, Essex has scale and size unlike other apartment REITs, and a management team that is highly skilled in terms of creating shareholder value through a variety of methods.
The company also has a strong financial position which provides it a competitive advantage over its peers that may be in worse financial shape. Essex has a solid BBB+ credit rating from Standard & Poor’s, and currently has an interest coverage ratio of over 514%, which provides a very large margin compared to their debt covenant requirement of 150% or higher.
Net debt to adjusted EBITDA is ~6.3x, and has been coming down. Like many real estate businesses, Essex Property Trust uses a substantial but fair amount of leverage and maintains a relatively safe balance sheet. Its weighted average interest rate is under 3.5%, which is quite low, reflecting the trust’s strong credit metrics.
Interestingly, Essex performed 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 where it is present, as 2020 and 2021 were the only years in the past decade where FFO-per-share declined. We see this recession resilience as highly favorable and adds to the attractiveness of the stock.
Valuation & Expected Returns
At the midpoint of 2022 FFO-per-share guidance ($13.70 per share), Essex is trading for a multiple of 25. We see fair value at 18 times FFO-per-share, which introduces a 6.4% potential headwind to annual total returns. As such, Essex is overvalued at present.
If we combine the unfavorable valuation, current dividend yield of 2.6%, and 3.8% forecast FFO-per-share growth, we have total projected annual returns to shareholders of 0%.
Essex has paid increasing dividends for 28 consecutive years. According to the company, it has cumulatively raised its dividend by 427% since its IPO.
For obvious reasons, dividend growth investors likely find this to be an attractive quality, and we expect Essex will continue to raise the payout each year for the foreseeable future.
Unfortunately, this alone is not enough to warrant a buy recommendation, as we are cautious on the valuation.
Essex has undoubtedly been a world-class REIT since it went public and began paying dividends over a quarter-century ago. The trust has very favorable long-term demographics working in its favor, and a management team that is keen to unlock shareholder value. We think Essex will produce moderate long-term growth and continue to increase its dividend each year.
However, shares are overvalued in our view, which means the stock’s total returns are expected to be zero. Therefore, value and income investors should wait for a price closer to fair value before buying shares. That said, the stock is appealing for investors looking for dividend safety and steady dividend growth over time.
If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
- The 20 Highest Yielding Dividend Aristocrats
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 40 stocks with 50+ years of consecutive dividend increases.
- The 20 Highest Yielding Dividend Kings
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The 20 Highest Yielding Monthly Dividend Stocks
- The High Dividend Stocks List: high dividend stocks are suited for investors that need income now (as opposed to growth later) by listing stocks with 5%+ dividend yields.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: