Essex Property Trust (ESS 0.51%) is neither a high-profile operator in the real estate investment trust (REIT) world nor one of the more renowned Dividend Aristocrats. Yet the modest West Coast-based company has had a firm grip on its market for decades and has managed to boost its shareholder payout for nearly 30 years in a row.
These are both impressive feats, matched by very few of the many REITs on the market today. Let's take a look at how the company has managed to maintain its long winning streak.
Image source: Getty Images.
Prime locations
First and foremost, Essex has never abandoned its very strong core activity -- owning and renting multifamily homes on the West Coast. It operates 248 properties along that always-attractive stretch of America. The bulk of those (85 to be exact) are located in one of the hottest real estate markets in human history, the San Francisco Bay area.
Down the coast, 45 Essex properties house residents in the Los Angeles vicinity, and there is a nearly equal number split more or less evenly between the Orange County and San Diego areas. Like Los Angeles, these are two highly popular Southern California metro markets. Several buildings operated by the company dot the Santa Barbara vicinity and Ventura County, two relatively affluent communities north of L.A.
Rounding out the company's lineup is 59 properties in the Seattle metropolitan area, home to local economy-boosting corporate giants -- and fine sources of tenants -- Amazon, Starbucks, and Microsoft.
For real estate operators, all of these communities have several positive things in common. First of all, for the most part they are in sustainably high demand. Second, this high demand is married to limited supply -- San Francisco proper, for example, is small compared to other U.S. municipalities.
Finally, all are destinations for ambitious young people with money. Essex leases many studio and one-bedroom apartments, which are configurations this demographic tends to favor. It's also quite flexible with leasing terms, stating on its website that "You can move-in when you please and stay as long as you like."
The trajectory of Essex's fundamentals shows pronounced upward movement, particularly in the mid-2010s when the tech industry helped swell demand in the company's core markets. Here's how revenue and funds from operations (FFO, the most important profitability line item for REITs) have developed over time:
ESS Revenue (Annual) data by YCharts.
Note the slides in both at the end of the graph; these, it nearly goes without saying, are due to the coronavirus pandemic. Even in its prosperous markets, many renters were caught off guard with job cuts and layoffs. Cities like Los Angeles declared eviction moratoriums, and in response, Essex strategically lowered rents in order to maintain occupancy.
A solid core
That was then. This is now: In its fourth quarter of 2021, Essex's core (i.e., adjusted) FFO per share grew by nearly 8% to $3.25. That was thanks to "a remarkable year of rent growth for Southern California and solid positive momentum in Northern California and Seattle," CEO Michael Schall was quoted as saying in the company's Q4 earnings report.
Even though we just might be shifting out of the pandemic and the privation it brought, growth still seems to be in the cards for Essex. After all, people continue to hunger to live in Seattle, San Francisco, and L.A. and are willing to pay for the privilege. The company is guiding for full-year 2022 core FFO of $13.46 to $13.94 per share, which would represent annual growth of, again, almost 8% at the minimum.
That should keep the dividend train running for Essex. While the REIT's dividend yield of 2.7% is on the low side for a REIT, the company's rock-solid position in some of the strongest residential real estate markets in the country, plus its near-unmatched consistency with raising the payout, goes a long way to justifying this. For income investors that like a reliably rising dividend, this stock could be a very good and durable pick.
