The pandemic has had a lingering impact on the way people work. That, in turn, has been a problem for landlords that have focused around key business hubs. And yet Essex Property Trust (ESS -0.12%) just increased its full-year guidance on core funds from operations for 2023. Here's why that's even more impressive than it already sounds.
Essex is betting big on California
Most real estate investment trusts (REITs) build diversified portfolios in some manner. One way to do that is by owning multiple types of properties in one geographic region, and another way is to own a single type of property across multiple different geographic areas.
Essex doesn't do either of these things. All of its apartment properties are on the West Coast.
Image source: Getty Images.
But that's not the full story, either. The Seattle market made up around 18% of revenue in the second quarter. The rest came from California. One property type with 80% of revenue coming from a single state: That's an incredibly focused portfolio.
Adding to the risk is that Essex likes to focus on areas with a lot of technology companies, so there's even a bit of industry risk involved with the story (the benefit of the Seattle geographic diversification gets minimized to some degree because of this).
All of that focus came to the fore during the pandemic. The efforts to slow the spread of the illness involved asking people to maintain social distance and to work from home.
Some workers took the opportunity to move out of high-cost cities and their surrounding suburbs to find more space elsewhere. Although the world has largely moved past the pandemic, working from home has lingered.
West Coast cities remain attractive
Even though the work-from-home trend was embraced by technology companies, which support the jobs in the cities where Essex is focused, the REIT is still holding up very well. The fact that it increased 2023 guidance when it reported second-quarter earnings is proof of this.
But that outcome is really a culmination of other factors. For example, occupancy of 96.6% was up from 96.1% at the end of the second quarter of 2022. The company had more tenants in Northern California, Southern California, and in Seattle, so the year-over-year improvement was broad-based.
Revenue was higher year over year in each of its three regional divisions as well. That said, the 4% revenue advance has to be juxtaposed against the 5.3% increase in expenses, which is a negative.
However, Essex can't control inflation -- only what it does about it. On that score, costs fell 1.2% sequentially from the first quarter of 2023 while revenue increased 1.4%. In other words, Essex seems to be on the right path with both revenue and costs.
It looks like, despite work-from-home headwinds, people still want to be in and around large West Coast cities. In fact, the REIT seems very happy with its focus, buying a 73-unit apartment building in California for $23.1 million in the second quarter. That makes sense given the ongoing strength the company has seen despite the hit from the pandemic and the lingering impact of work-from-home trends.
A unique focus, if you dare
Given its highly focused portfolio, Essex probably isn't appropriate for more-conservative investors. There's always a risk that California breaks off and falls into the Pacific Ocean, to take an obviously extreme view of its geographic footprint. But for those with a bit more risk tolerance, the REIT's focus has worked out well over time, considering its recent strength despite notable headwinds.
The dividend has also trended generally higher for decades, even though it hasn't been increased every year. With a yield of around 4.1%, which is near the highest levels of the past decade, long-term dividend investors might want to take a deep dive today while Essex Property Trust's stock looks historically cheap.
