REITS: Two New Ideas For Your Retirement Portfolio

Essex Property Trust (ESS)

What’s the story?

ESS is a good example of an “educated guess." The REIT is going through a difficult year since demand for apartments is in freefall due to the recession. This was a bad quarter for Essex, as the REIT missed on both FFO and revenue growth expectations. Q2 same-property gross revenue declined by 3.8% and same-property net operating income fell by 7.4%, as ESS recorded an additional $9.7 million of delinquencies in Q2 2020 vs. the year-ago period.

Excluding those delinquencies, same-property revenue would have declined 0.9% and Net Operating Income (NOI) would have fallen 3.5%. Management is confident in the coming months as employment trends in their regions are improving. This should boost demand for apartments going forward.

Keep in mind ESS owns apartments spread across Southern California (40% of NOI), Northern California (43%), and Seattle (17%). Those regions should benefit from the tech industry explosion. Tech companies will employ more people (Amazon hired 175,000 new workers since March), and the need for quality apartments should remain solid going forward.

Business Model

Essex Property Trust owns a portfolio of 250 apartment communities with over 60,000 units, and is developing seven additional properties with 1,960 units. The company focuses on owning large, high-quality properties on the West Coast in the urban and suburban submarkets of Southern California, Northern California, and Seattle.

Investment Thesis

Essex Property Trust has everything a REIT should have: a dominating position in a rich market, a decent yield, and a stellar dividend growth history. Most income seeking investors are looking at REITs with poor growth vectors and high dividend yields. If you are willing to go under the 4% yield level, you will find this beauty. Your income will be safe and protected against inflation. Plus, you will likely enjoy some value appreciation over the long haul.

During the recession of 2008, ESS kept increasing its dividend while maintaining a strong FFO per share. The REIT positioned itself during the recession to make sure it thrives once the economy was ready to roll again. ESS regularly acquires multiple family REITs and successfully integrates them in their business model. Finally, Essex is well-established in rich and growing markets with the state of California and the city of Seattle. This REIT should ride on strong demographic and job growth tailwinds in the upcoming years.

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