Essex Property Trust: Buy This Top-Shelf, 3.1%-Yielding Apartment REIT For Income And Safety

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About: Essex Property Trust, Inc. (ESS)
by: Achilles Research
Summary

Essex Property Trust is a low-risk REIT choice for income investors.

Essex Property Trust provides income investors with high-quality, growing dividend income.

Shares are not cheap, but the price tag reflects the stability of the REIT's dividend stream.

An investment in ESS yields 3.1 percent.

Essex Property Trust, Inc. (ESS) provides income investors with growing dividend income and could be an anchor of stability for investors in times of market turmoil. Essex Property Trust is a leading apartment real estate investment trust in the U.S. with an attractive real estate portfolio and a strong balance sheet. Shares are not cheap but are worth the price tag, in my opinion. An investment in Essex Property Trust yields 3.1 percent.

Essex Property Trust - Portfolio Overview

Essex Property Trust is a West Coast-focused U.S. multi-family residential real estate investment trust with an equity value of $15.8 billion.

Essex Property Trust has a heavy presence in California and Seattle.

Here's a location map.

Source: Essex Property Trust Investor Presentation

A more detailed portfolio breakdown reveals that Los Angeles County and Santa Clara County, both counties in California, contribute the lion's share of the REIT's net operating income: 19.0 percent and 19.7 percent respectively. The Seattle Metro market is the second biggest market for Essex Property Trust, contribution 16.3 percent of total company NOI.

Here's a breakdown by region.

Source: Essex Property Trust Q3-2018 Earnings And Supplement

The West Coast is an attractive market for apartment REITs such as Essex Property Trust because of its attractive economic fundamentals: California has the world's 5th largest GDP, the population is growing rapidly, the housing market is characterized by limited supply, and employment opportunities are plentiful.

Source: Essex Property Trust

Housing/apartment demand exceeds supply in Essex Property Trust's core market, which bodes well for above-average NOI and cash flow growth.

Source: Essex Property Trust

Thanks to strong economic fundamentals in Essex Property Trust's anchor market, California, the company has produced above-average NOI- and FFO-growth since 2012. In fact, Essex Property Trust has outperformed its peer group by a considerable margin.

Source: Essex Property Trust

Balance Sheet

Essex Property Trust has an investment-grade rated balance sheet with a BBB+ credit rating from Standard & Poor's and Fitch as well as a Baa1 credit rating from Moody's. The majority of the REIT's capitalization is made up of equity (75 percent) which provides investors with a big capital cushion in the event of a market crash or a U.S. recession.

Source: Essex Property Trust

Essex Property Trust has very favorable credit metrics, too: The adjusted-debt-to-adjusted-total-asset-ratio is just 36 percent, well below what covenants would allow (65 percent).

Source: Essex Property Trust

Distribution Growth

Essex Property Trust has raised its dividend every year since 1994, making the REIT a preferred income vehicle for DGI investors that prefer low-risk, yet steadily growing dividends. The REIT's FFO/share and dividend/share have grown at impressive rates since the company's IPO in the early nineties: FFO/share has grown 8.5 percent annually whereas Essex's dividend/share has grown 6.4 percent each year. The multi-family apartment REIT has also more than doubled its funds from operations since the Great Recession.

Source: Essex Property Trust

Valuation

Essex Property Trust is not cheap, for obvious reasons: Investors reward REIT income vehicles with a high degree of consistency with premium multiples. Today, DGI investors can access Essex Property Trust's 3.1 percent covered dividend yield by paying ~19.0x Q3-2018 core funds from operations.

Apartment REITs are generally more expensive than commercial property REITs due to their more stable cash flow profiles which protect shareholders during a recession or industry downturn.

And here's how Essex Property Trust compares against other apartment REITs in the sector in terms of price-to-book ratio.

Chart ESS Price to Book Value data by YCharts

Risk Factors Investors Need To Consider

Apartment REITs are safer income vehicles than commercial property REITs which tend to have more valuation risk during an economic downturn. Essex Property Trust is active in a highly attractive market (i.e. California) with favorable economics (strong population growth, above-average household income) that make the multi-family apartment REIT a promising income vehicle for DGI investors. The dividend is very safe, in my opinion, and will most likely continue to rise throughout the next recession, too. Investors that want to play it safe in light of increasing recession fears may want to rotate funds out of commercial property REITs with cyclical earnings profiles and invest into apartment REITs such as Essex Property Trust.

Your Takeaway

Essex Property Trust affords investors with a promising apartment real estate portfolio on the West Coast, strong NOI and cash flow growth, an investment-grade rated balance sheet, and an exceptional dividend growth history. Essex Property Trust has raised its dividend throughout the Great Recession, making it an income vehicle of choice for dividend investors that seek income stability and safety during times of heightened market volatility. Shares aren't cheap, but the valuation is justified based on the strength of the investment proposition. Buy for income and stability.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.