The pandemic and historically low interest rates have combined to trigger a housing market rally that has driven home prices and apartment rental rates to all-time highs. Today, rising interest rates and fears of recession have reversed this trend.
The stock market thrives on growth, of course, and the a sudden craving caused many investors to bail out, driving down the price of some real estate investment trusts (REITs) that now deserve special attention.
This group includes Essex Land Trust (HSE 0.40%), which has a portfolio of approximately 62,000 units in 253 apartment communities in and around San Francisco, Southern California, and Seattle, Washington. These are areas that have been among the most expensive housing markets in the country for years, and although sales prices and rental growth rates have slowed somewhat, properties in these markets are still in high demand.
Maintain some growth in rents in dynamic local markets
Management predicts rent growth of just 2% in 2023 but notes that unemployment in its local markets remains below the national average. He also noted that job growth in these markets also continues to outperform. For example, despite layoffs from some big tech companies, Essex points out that Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) began work on a new campus in San Jose – located near a number of Essex communities – which is expected to create 25,000 new jobs over the next 10 years.
And it’s still more than twice as expensive to buy as it is to rent in Essex Property Trust’s main markets, meaning the height of the hurdle to jump from renting to home ownership should help maintain demand for its apartments. While one would expect this to have helped support Essex’s share price, the opposite has happened. The stock is down more than a third from a year ago and to me it looks oversold.
Founded in 1971, Essex has increased its dividend every year since its IPO in 1994. Indeed, the value of resilience through economic cycles should be built into a provider of one of these life bases. – housing – and Essex did it well, outperforming the S&P 500 and crushing the industry benchmark Vanguard Real Estate ETF in total returns since the dawn of the Great Recession about 15 years ago.
Data by Y-Charts.
Bearing in mind that Essex Land Trustas a REIT, is a passive income game as much as a growth stock, it’s worth noting here that it’s also yielding around 4%, a bit more than the 3.6% of this Vanguard ETF – which typically holds around 160 REITs – and more than double the return of around 1.7% of the S&P 500.
As this graph shows, over the same 15 years, Essex not only more than doubled its dividend, but increased its operating funds (FFO) per share of a similar amount. FFO is considered the most valid measure of cash flow generated by a REIT and a testament to its ability to cover its payments – and better yet, to keep growing them.
Data by Y-Charts.
A solid long-time performer now on sale
FFO is also half of another key metric when reviewing a REIT: the stock price to FFO ratio. For Essex, this ratio is currently around 15.6. It’s in line with its peers. Largest public apartment REIT, Environment Apartment Communities Of America, trades at a share price to FFO ratio of 16.2.
I own shares of Mid America and was considering adding to this position since the stock is down about 25% in the last year, but am now leaning towards opening a position in Essex instead . With its beaten stock price, slow but steady dividend growth and strong presence in markets where demand remains strong among people who can pay its high rents, this REIT apartment is the best multifamily stock to buy in January.
Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Mark Report has positions in Alphabet, Mid-America Apartment Communities and Vanguard Specialized Funds – Vanguard Real Estate ETF. The Motley Fool holds and recommends Alphabet, Mid-America Apartment Communities and Vanguard Specialized Funds – Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.