Shares of Essex Property Trust ESS have rallied 9.2% over the past three months, outperforming the industry's upside of 3.5%.

This residential REIT is well-poised to gain from a robust West Coast property base with several demand drivers.Efforts to leverage technology, scale and organizational capabilities are expected to drive margin expansion and bring operational efficiency across the company's portfolio. A healthy balance sheet also augurs well for growth.

Last month, Essex Property Trust’s board of directors approved a 4.9% hike in the annual cash dividend for its common stock. ESS will now pay out a first-quarter cash dividend of $2.57 per share, up from $2.45 paid in the prior quarter. This marks the company’s 31st consecutive annual dividend increment.

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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. With layoffs in the tech industry slowing and return to office gaining momentum, West Coast markets are likely to see an increase in renter demand in the near term. All of these factors pave the way for healthy demand and strong revenue visibility for ESS in the future.

The company is also banking on its technology, scale and organizational capabilities to drive margin expansion across its portfolio and bring about operational efficiency by lowering costs. These efforts are likely to have an incremental effect on top-line and bottom-line growth, positioning Essex Property to ride the growth curve.

Essex Property maintains a healthy balance sheet and enjoys financial flexibility. As of Dec. 31, 2024, the company had $1.3 billion of liquidity through an undrawn capacity on its unsecured credit facilities, cash, cash equivalents and marketable securities. In the fourth quarter of 2024, its net debt-to-adjusted EBITDAre was 5.6X.

Over the years, it has made efforts to increase its unencumbered net operating income (NOI) to an adjusted total NOI, which stood at 92% at the end of the fourth quarter of 2024. As of the same date, this residential REIT had Baa1/Stable and BBB+/Stable ratings from Moody’s Investor Service and Standard and Poor's, respectively. With a solid liquidity position, manageable debt maturities and investment-grade ratings, the company is well poised to ride its growth curve.

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 six times in the last five years, and its five-year annualized dividend growth rate is 4.22%. With a low dividend payout ratio and decent balance sheet strength, the dividend payout 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 43.4% and 39.2% of its portfolio NOI from Southern California and Northern California, respectively, as of Dec. 31, 2024. This makes the company’s operating results and financial conditions susceptible to any unfavorable fluctuations in local markets.

Analysts seem bearish on ESS, which carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for its 2025 FFO per share has moved southward over the past week to $15.99.

Stocks to Consider

Some better-ranked stocks from the residential REIT sector are Modiv Industrial, Inc. MDV and Elme Communities ELME. While MDV sports a Zacks Rank #1 (Strong Buy) at present, ELME carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Modiv Industrial’s 2025 FFO per share stands at $1.36, implying year-over-year growth of 1.5%.

The Zacks Consensus Estimate for Elme Communities’ 2025 FFO per share is pegged at 95 cents, suggesting year-over-year growth of 1.1%.

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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This article originally published on Zacks Investment Research (zacks.com).

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