The below graph shows the stock performance of 3 big apartment REIT’s vs REIT index and SP500. While overall REIT index has not done anything in the last 5 years, If you see the apartment REIT’s they are closer to pandemic low’s.

Of course REIT’s in general and housing/ apartment REIT’s in particular gained a lot due to low interest rates and asset price appreciation etc. All my posts on INVH are lost due to transition :frowning:

Anyways, ESS, is a $13 B market cap apartment REIT, primarily focuses on California and Washington market, a steady growth company, as the below graph shows.

The SS growth i.e., they are able to constantly increase rent, that translates into higher FFO and dividend and of course adding to the properties as they go along while not adding debt and increasing share count. In fact they have mildly bought back shares.

For those who are not familiar with REIT’s, REIT’s are mandated to pay 90% of their profits to the shareholders and most of them pay significant part of their FFO (Funds from Operations, i.e., profits + depreciation); so they have to issue new shares to raise capital. When you see a REIT that has not issued shares, but is buying back, while managing to grow and keep the debt same, that is a rare one.

On buybacks, last year they bought back 740 K shares at average price of $256 and between Jan 1st to Feb 6th another 64K shares and they have $385 million left on the authorization. Looks like they are buying back robustly.

On debt, the below graph shows their maturity and weighted average interest rate. So as the debt matures, they may have to refinance them at higher interest rates. Their current blended rate is 3.4% and if the entire debt is refinanced at 6% that would cost them additional $155 million or $2.5 per share. OOUCH. This is not just for REIT’s, but across the economy higher interest rate is going to hurt profitability, margin’s etc. But for now, they have pretty staggered maturity with good rates locked it.

On Dividends, they just did 29th consecutive annual dividend increase; In the world of holding periods of less than few months, the benefits of holding REIT’s for a long-time, with increasing dividends are, after few years, the dividend yield on your initial purchase price significantly increase; I think my longest record is CTRE (I purchased at the spin-off and sold recently) the steady dividend increase resulted in the dividend yield of 10%!!! on my original purchase price. That’s even if your stock price doesn’t do anything you are making 10% return.

The below table shows where their properties are located and some statistics.

Apartments are impacted by economy and employment situations; This is a double whammy coming at ESS; Economy is expected to go into recession and labor market which is pretty strong so far will get hit along with recession. ESS has higher exposure to IT workers/ market and the on-going Layoff’s in the IT sector will hit them at some point. But, given 96% occupancy they should be able to withstand it.

Also, COVID moratorium’s are set to expire, which should allow them to increase rents and reduce delinquencies, i.e., if you don’t pay rent they can kick you out now!!!

Redevelopment!! The main reason behind my BRX investment; Redevelopment allows the company an opportunity to develop with minimal risk and with higher return potential; They have the ability to develop anywhere from 500 to 1000 units; At mid point that could add (750 x 2500 x 12) $20 ~ $25 m income. Typically to get $2500 rent on a property, the company has to pay a purchase price of anywhere between $400 ~ $450 K, on redevelopment they can do it for $200 ~ $300K; So they can add about $25 m value per year over the next 10 years.

Guidance; They are guiding $14.75 FFO for next year; I use FFO for calculating cap-rate and at current price ESS is valued at 7% cap-rate, which I consider fairly valued. If you could buy this stock for $150, you are looking at a long-term holding.


During 3Q the company

Closed $298.0 million in 10-year secured loans priced at a 5.08% fixed interest rate. The proceeds are intended to repay a majority of the Company’s $400.0 million unsecured notes due in May 2024 upon maturity. In the interim, the Company has reinvested the proceeds in short term cash accounts

The higher interest expense on this debt is 4 million. Of course they will be paying $100 M out of the cash on hand so there is some interest savings. But that runway is limited. The higher interest rate will neutralize growth and also increase the discount the equity holders will demand. Still the price is pretty stable.

Now the company is guiding $15 Core FFO for 2023, and at current price the FFO multiple is 15x. I think post COVID rents are stabilizing, interest rate on their debt is raising, these are important drivers. I am not expecting the employment on their core markets (CA and WA) are not going to be impacted even in a recession as they are heavily tilted towards silicon valley and Seattle. If this stock sells off, a good candidate to pick up for declining interest rate scenario, where the cap rate will shrink and that should reflect in the stock price.

For now, just to keep an eye, I might sell a $200 or $175 Put, looking into that.

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So in 2023 they slightly beat the core FFO

However, 2024 they are actually guiding a decline at Total and flat at Core FFO.

Given the current interest rate I find 15.x FFO multiple a bit rich. I don’t think it will get to 10x FFO. However, we have seen Fed’s discussion on interest rate cuts’ are changing. If the FED rate cuts get delayed or further pushed out, expecting some market tantrum’s and that may offer an opportunity.