Essex Property Trust (ESS) was founded in 1971 and became a publicly traded REIT in 1994. The trust invests in west coast multifamily residential proprieties where it engages in development, redevelopment, management, and acquisition of apartment communities and a few other select properties, writes Ben Reynolds, editor of Top 10 REITs.

Essex has ownership interests in several hundred apartment communities consisting of over 60,000 apartment homes. The trust produces $1.6 billion in annual revenue.

Essex reported its earnings results for the third quarter of 2023 on October 26. For Q3 2023, the company reported Core Funds from Operations (FFO) per diluted share of $3.78, marking a 2.4% increase compared to Q3 2022. Same-property revenue for Q3 2023 increased 3.2% year-over-year. Essex narrowed its 2023 Core FFO per share guidance range to $14.94-$15.06.

ESS Properties
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The REIT did not make any share repurchases in its most recent quarter, but has repurchased $96 million worth of stock this year (0.7% of the current market cap) and has $303 million remaining under its repurchase plan.

ESS is a high-quality apartment REIT that has raised its dividend for 29 consecutive years. Real estate has a natural moat and Essex’s exposure to leading cities with strong technology cultures further widens that moat. However, apartments generally have a more elastic supply than single family homes, which offsets some of that protection. This was evident during the Great Recession when the trust’s FFO fell slightly.

Nevertheless, Essex Property Trust continued raising its dividend throughout that crisis. The trust has a BBB+ credit rating thanks to its solid financial position. Its weighted average cost of debt is quite low thanks to its strong credit metrics, giving it a lower cost of capital than some of its peers.

Essex Property Trust has an impressive growth record, growing its FFO per share every single year between 2012 and 2019. FFO per share fell by just 6.7% from 2019 through 2021 due to COIVD-19, before growing to reach record FFO per share in 2022. Another record FFO per share year is expected in 2023.

All told, Essex Property Trust has grown its FFO per share at a 7.5% CAGR over the past 10 years, on top of its attractive and growing dividend payout. We forecast 4.4% annual growth.

Based on expected 2023 FFO per share of $15.02, this REIT trades at a price-to-FFO ratio of 14.0. Our fair value estimate for this REIT is a price-to-FFO ratio of 16. An expanding P/FFO multiple could boost total returns by 2.6% per year. When combined with the 4.4% dividend yield and 4.4% growth rate, we expect 10.7% annual returns.

Recommended Action: Buy ESS.

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