Real estate investment trusts (commonly referred to as REITs) have become increasingly popular with income investors. REITs are a great way to invest passively in real estate, without having to actually buy physical properties. In this way, publicly-traded REITs provide investors the opportunity to invest in real estate with little to no money.
Essex Property Trust (ESS) stands out among REITs. Not only does the stock have an attractive 2.6% dividend yield, it also has a long history of steady dividend growth. Essex is on the exclusive Dividend Aristocrats list, a select group of 65 stocks in the S&P 500 Index that have increased their dividends for at least 25 consecutive years. The company also has an excellent balance sheet and a high-quality property portfolio.
Top-Quality Tenants Fuel Steady Growth
Essex Property Trust is a residential REIT that owns multi-family apartment communities located in West Coast markets, primarily California and Washington. The company has a focused strategy in which it seeks to target 8 coastal markets in these two states which have high barriers to entry, large populations and strong economic growth.
In fact, Washington and California combined have the 8th largest gross domestic product (GDP) in the world. These markets feature strong economic fundamentals including severe supply constraints. In all, Essex has ownership interests in nearly 250 apartment communities consisting of over 60,000 apartment homes.
There remains limited supply in these core markets. Permitting activity in Essex’s California markets remains well below the U.S. average, keeping pricing high. According to Essex, home prices in California and Seattle have increased by 13% and 14%, respectively, in 2021.
This has led to stable results for Essex, even in the current challenging environment. In the 2021 second quarter, Essex’s core FFO-per-diluted share declined 3.8% to $3.04 from $3.16 year-over-year. Same-property gross revenue fell by 3.0% and same-property net operating income fell by 4.2% from Q2 2020.
Declines in key metrics are never a welcome sign, but the continued impacts of the pandemic are having a lingering effect on Essex. That said, the company is seeing a recovery that is building momentum. Essex also announced that the company has achieved net effective market rents for its portfolio that are marginally ahead of pre-pandemic levels. Along with second-quarter financial results, Essex raised its forecast for same-property revenue growth and core FFO-per-share for the full year.
A continued recovery should lead the way to a return to growth over the long term for Essex in the years ahead.
Strong Balance Sheet With Excellent Dividend Safety
Dividend safety is a primary concern for income investors considering REITs, as their dividend yields are one of the biggest reasons to own them. Many REITs have significantly higher yields than Essex, but in return Essex has a high level of dividend safety. Ultimately, dividend safety should be considered more important than the yield itself, as many stocks with extremely high yields eventually cut their payouts.
Essex has increased its dividend for 27 consecutive years, giving it one of the longest streaks among REITs. It is on the list of Dividend Aristocrats and is one of the only REITs to have made the list.
A major factor underpinning Essex’s dividend safety is its strong balance sheet. Essex has a well-laddered maturity schedule with just $143 million in total debt maturing through 2023. The company’s weighted average interest rate on its debt is just 3.1%, making for a manageable level of interest expense each year.
Essex has a leverage ratio (as defined by net debt to adjusted EBITDAre) of 6.5x as of the most recent quarter. This is again indicative of a manageable level of debt that should not impair the company’s ability to invest in growth and return cash to shareholders. And, Essex has very strong credit ratings for a REIT, with BBB+ from Standard & Poor’s and Baa1 from Moody’s (with a positive outlook from both ratings agencies).
Essex Property Trust is one of the highest-quality REITs in the entire market. While some REITs might have much higher yields than Essex, investors should not focus solely on yield. In return for a lower current yield, Essex rewards long-term investors with steady dividend growth over time. With a high-quality property portfolio with growth potential, Essex is an appealing REIT for investors looking for a mix of dividend yield and growth.
Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.
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