Essex Property Trust, Inc. ESS is well-poised to gain from a robust property base in the West Coast market with several demand drivers. Efforts to leverage technology, scale and organizational capabilities are expected to drive margin expansion. A healthy balance sheet augurs well. Solid dividends aid shareholder wealth.
However, the elevated supply of apartment units in some of the company’s markets is likely to fuel competition and curb pricing power. A concentrated portfolio and high interest expenses add to its woes.
Per the recent transaction activity update in April 2025, the company reallocated its investments to newer communities in the Northern California submarkets with potentially less supply and higher rental growth. It acquired three communities with 619 apartment units for $345.5 million. It disposed of two non-core assets in Southern California with 605 apartment units for $366.6 million.
What’s Aiding ESS?
Essex Property enjoys a robust property base in the West Coast market, which 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 a return to the 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 amid still elevated interest rates, the transition from renter to homeowner is difficult, making renting apartment units a more flexible and viable option. Moreover, California has key life science clusters and is a major employment driver in San Francisco and San Diego. Against this backdrop, we expect its rental and other property revenues to increase 4.4% and 3.5% year over year in 2025 and 2026, respectively.
ESS is 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 and bottom-line growth, positioning the company 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 was 92% at the end of the fourth 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 arguably the biggest attraction for REIT investors, and Essex Property has been steadily raising its payout. In February 2025, the company’s board of directors announced a 4.9% hike in its cash dividend to $2.57 per share from $2.45 paid out earlier. It has increased its dividend five times in the last five years, and its five-year annualized dividend growth rate is 4.65%. With a low dividend payout ratio and decent balance sheet strength, the dividend payment is expected to be sustainable over the long run.
What’s Hurting ESS?
The struggle to lure renters will persist, as supply volumes are likely to remain elevated in some of the markets where the company operates in the upcoming period, restricting its growth momentum to some extent.
Essex Property has a significant concentration of assets in Southern California, Northern California and the Seattle metropolitan area. The company derived 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.
Despite the Federal Reserve announcing rate cuts in recent times, the interest rate is still high and is a concern for Essex Property in the near term. The company has a substantial debt burden, and its total debt as of Dec. 31, 2024 was $6.60 billion. For 2025, we expect interest expenses to rise 7.1% on a year-over-year basis.
Shares of this residential REIT, carrying a Zacks Rank #3 (Hold), have fallen 6.9% in the past three months, underperforming the industry’s decline of 4.6%. Moreover, analysts seem bearish on this residential REIT, with the Zacks Consensus Estimate for its 2025 funds from operations (FFO) per share being revised marginally southward over the past week to $15.98.
Zacks Investment Research
Image Source: Zacks Investment Research
Stocks to Consider
Some better-ranked stocks from the broader REIT sector are Welltower WELL and W.P. Carey WPC, each carrying a Zacks Rank of #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 Welltower’s 2025 FFO has been moved marginally upward to $4.95 per share over the past month.
The Zacks Consensus Estimate for W.P. Carey’s full-year FFO has been revised marginally northward to $4.85 per share over the past two months.
Note: Anything related to earnings presented in this write-up represents FFO, a widely used metric to gauge the performance of REITs.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
