2023-04-11 09:00:00 ET
Summary
- Essex Property is an impressive REIT that has increased its revenue, and FFO over the past decade while improving its FFO margin.
- Essex Property has also outpaced its growth in debt with growth in EBITDA and lowered its leverage ratio over the past decade.
- Throughout every crisis over the past 3 decades, Essex Property has provided shareholders with an annual dividend increase.
- As shares of Essex Property have fallen over -40% in the past year, I think its time to get on board, as shares could represent an opportunity for capital appreciation while generating a respectable yield.
Real Estate has suffered a major blow due to the rising rate environment and the emphasis on debt coming due in 2024. There are roughly $900 billion of commercial real estate loans coming due through 2024. Over the past year, the Vanguard Real Estate Index Fund ( VNQ ) has seen its share price decline by -25.57%. Market cycles continuously occur, and from February 5th, 2007, to February 16th, 2009, shares of VNQ fell -72.05% before staging a long-lasting rebound after the financial crisis. I think there is an opportunity to pick quality REITs, as it feels as if we’re at the point of massive fear in the market. While there are still questions about how much space companies will need in the future as office leases mature, nobody can deny that everyone needs a roof over their head. I think looking at beaten-down apartment community REITs is a great place to find hidden value among depressed REITs. During the financial crisis, shares of Essex Property Trust ( ESS ) fell -61.94% from January 22nd, 2007, to February 16th, 2009, declining from $145 to $55.19. Throughout the financial crisis, ESS continued to increase its dividend annually, and eventually, shares rebounded by over 500% as shares exceeded $350 at the end of 2021. Each time in the past ESS has rebounded and made higher highs, and I think there is an opportunity for capital appreciation while collecting a respectable dividend by investing in ESS as shares have declined -42.28% from its 52-week highs.
Essex Property is a fully integrated REIT with a long history behind it
ESS went public in 1994 with a portfolio of 16 multifamily communities. ESS has grown into a fully integrated REIT that acquires, develops, redevelops, and manages multifamily apartment communities located in supply-constrained markets. Over the years, ESS has grown into a residential powerhouse as it operates 252 apartment communities consisting of 62,000 apartments in 8 major markets. While companies can rethink their physical footprint, individuals still need shelter.
ESS has reported strong metrics in their operations, which makes a compelling case to consider their company as a REIT to invest in. ESS has strong YoY same-property revenue growth, which came in at 10.5% in Q4 of 2022. The preliminary numbers for January and February of 2023 were 7.8%. The financial occupancy of ESS properties was 96% in Q4 2022 and increased to 96.4% in January 2023. The preliminary February 2023 numbers were 97%. This is exactly what I want to see, additional revenue from rents, and increased occupancy.
ESS has done a spectacular job of increasing revenue over the past decade and generating larger amounts of Funds From Operations ((FFO)) from every additional dollar. Since the close of 2013, ESS has increased its annual revenue by 144.98% or $966.3 million. What I find more impressive is that ESS was able to increase its FFO by 208.11%, as it generated an additional $623.7 million in FFO throughout 2022, compared to 2013. ESS also improved its margins which is very important because it means they are efficient at allocating capital. In 2013, ESS produced $666.5 million in revenue and generated $299,7 million of FFO, placing its FFO margin at 44.97%. In 2022, ESS generated $1.63 billion in revenue and produced $923.4 million of FFO placing its FFO margin at 56.55%. Since 2013, ESS has grown its revenue by 144.98%, its FFO by 208.11%, and increased its FFO margin by 11.59%.
ESS’s growth didn’t come at the expense of overleveraging itself. Since the close of 2013, ESS’s EBITDA and total debt have both increased, but its leverage ratio decreased. ESS utilized debt to grow its business like most companies, and its debt increased by 98.69% ($2.3 billion) from $3.04 billion to $6.03 billion. By tapping the debt market to expand, ESS was able to increase the amount of EBITDA generated quicker than the pace they were adding debt. ESS’s EBITDA grew by 141.6% ($624.90 million) since 2013 to $1.07 billion in EBITDA. In 2013, ESS had a total debt to EBITDA ratio of 6.88x, as it produced $441.3 million of EBITDA and had $3.04 billion of total debt on the books. In 2022, ESS’s total debt to EBITDA ratio fell by -17.76% compared to 2013. ESS produced $1.07 billion of EBITDA and had $6.03 billion of total debt on the books, placing its total debt to EBITDA ratio at 5.66x.
ESS is a Dividend Aristocrat that continues to reward shareholders through annual dividend increases
The only thing that’s better than receiving a consistent dividend is getting an annual dividend increase. ESS may not have the largest dividend yield in the REIT space, but its dividend growth is undeniable. Since its IPO, ESS has increased its annual dividend by 453% as its provided shareholders with 29 consecutive years of dividend growth. This represents excellence in every way, as the dividend from ESS has been reliable throughout the worst of times. No matter what occurred, the dot com bubble, 911, the housing crash, the financial crisis, the pandemic, inflation, or the rising rate environment we’re currently in, ESS has increased its dividend and rewarded shareholders each year.
Recently, ESS provided shareholders with a 5% increase to its quarterly dividend. The most recent dividend being paid on 4/14/23 is $2.31 compared to $2.20 from the previous quarters. After 29 years, ESS is still providing shareholders with meaningful dividend increases. It’s very nice to receive a check each quarter, but it’s even nicer to get an annual raise for doing nothing except collecting dividend checks annually.
Compared to its peers, ESS is attractively valued
I always like to see how a REIT is valued compared to its peers, and I look at the price to FFO, total debt to EBITDA, dividend yield, and the FFO coverage ratio on the dividend. I will compare ESS to the following companies:
• UDR Inc ( UDR )
• Camden Property Trust ( CPT )
• Mid-American Apartment Communities ( MAA )
• Apartment Income REIT ( AIRC )
• AvalonBay Communities ( AVB )
ESS trades at the lowest price to FFO, which means I am paying the lowest multiple for their FFO compared to its peers. The peer group has an average price-to-FFO of 15.46x, and ESS is significantly lower at 14.13x.
ESS is right above the peer group average of 5.5x total debt to EBITDA with a ratio of 5.66x. For me, this is perfectly acceptable, as ESS has never had an issue with leverage.
ESS has the 2nd largest dividend of its peers at 4.41%, while the peer group average is 4.18%. Apartment REITs don’t have the largest yields, but a consistent 4.41% yield is a nice payment for doing nothing, especially as rates are expected to fall in 2024.
ESS isn’t over-extending itself as it has an FFO coverage ratio of the dividend by 160.61% compared to a peer group average of 156.4%. ESS has been able to increase the dividend by driving additional FFO from its operations, and there is enough room where continuous dividend increases should follow.
Conclusion
I think shares of ESS represent a value proposition while generating a modest yield. Every time ESS has declined, they have always bounced back, and I don’t see why this time would be different. Shares have declined -42.28% from their 52-week highs, but ESS hasn’t stumbled operationally. Unlike other sectors within the REIT space, everyone needs a roof over their heads, and ESS has seen its occupancy rate increase while driving revenue growth from its properties. With 29 consecutive annual increases under their belts, I think investors can rely on a growing dividend while waiting for shares of ESS to rebound. ESS looks attractively priced compared to its peers, and I wouldn’t be surprised to see at least a 20% rebound by this time next year.
For further details see:
Essex Property Looks Undervalued And Yields Over 4% With 29 Years Of Increases