Shares of Essex Property Trust ESS have rallied 16.7% over the past six months, outperforming the industry's upside of 10.6%.

This residential REIT is well-poised to gain from a robust property base in the West Coast market that has several demand drivers. A healthy balance sheet also augurs well.

Last October, ESS reported third-quarter 2024 core funds from operations (FFO) per share of $3.91, which beat the Zacks Consensus Estimate of $3.88. The figure also improved 3.4% from the year-ago quarter.

Results reflected favorable growth in same-property revenues and net operating income (NOI). ESS also raised its full-year 2024 guidance.

Analysts seem bullish on ESS, which carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for its 2024 FFO per share has moved northward over the past two months to $15.55.

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Factors Behind ESS Stock Price Surge: Will the Trend Last?

Essex Property’s substantial exposure to the West Coast market has offered ample scope to enhance its top line. The West Coast is home to several innovation and technology companies that drive job creation and income growth. The region has higher median household incomes, an increased percentage of renters than owners and favorable demographics.

With layoffs in the tech industry slowing and return to office gaining momentum, the West Coast markets are likely to see an increase in renter demand in the near term. Also, due to the high cost of homeownership, the transition from renter to homeowner is difficult in its markets, making renting apartment units a more flexible and viable option. All of these factors pave the way for healthy demand and strong revenue visibility for ESS in the future.

Essex Property maintains a healthy balance sheet and enjoys financial flexibility. As of Sept. 30, 2024, the company had $1.2 billion of liquidity through an undrawn capacity on its unsecured credit facilities, cash, cash equivalents and marketable securities. In the third quarter of 2024, its net debt-to-adjusted EBITDAre was 5.5X.

Over the years, it has made efforts to increase its unencumbered net operating income (NOI) to an adjusted total NOI, which stood at 93% at the end of the third quarter of 2024. With a high percentage of such assets, the company can access secured and unsecured debt markets and maintain availability on the line.

Solid dividend payouts are the biggest attraction for REIT investors, and Essex Property has been steadily raising its payout. The company has increased its dividend five times in the last five years, and its five-year annualized dividend growth rate is 4.35%. With a low dividend payout ratio and decent balance sheet strength, the dividend payment is expected to be sustainable over the long run.

Key Risks for ESS

The rising supply of apartment units in some of the company’s markets is likely to fuel competition and curb pricing power.

ESS has a significant concentration of assets, with 42% and 38% of its portfolio NOI from Southern California and Northern California, respectively, as of Sept. 30, 2024. This makes the company’s operating results and financial conditions susceptible to any unfavorable fluctuations in local markets.

Stocks to Consider

Some better-ranked stocks from the broader REIT sector are Iron Mountain IRM and Welltower WELL, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Iron Mountain’s 2024 FFO per share is pegged at $4.49, up 8.98% year over year.

The Zacks Consensus Estimate for Welltower’s 2024 FFO per share is pegged at $4.26, up 17.03% year over year.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO), a widely used metric to gauge the performance of REITs.

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