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The combination of the pandemic and record-low interest rates has sparked a surge in housing prices, pushing home prices and apartment rents to unprecedented highs. Now, rising interest rates and fears of a recession are turning the tide.
Of course, the stock market has been fueled by growth, and the sudden lack of growth has bailed out many investors and is now depressing the prices of some real estate investment trusts (REITs) worth serious consideration. increase.
in that group Essex Property Trust (ESS -0.01%)owns a portfolio of approximately 62,000 units in 253 apartment communities in and around San Francisco, Southern California and Seattle, Washington. These areas have been one of the most expensive housing markets in the country for many years, and although sales price and rent growth have slowed somewhat, properties in these markets are still in high demand. .
Maintaining rent growth in strong local market
Management is targeting rent growth of just 2% in 2023, but notes that unemployment in the local market remains lower than the national average. It also notes that job growth in these markets remains strong. For example, despite layoffs by several major tech companies, Essex points out: alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) has begun work at its new San Jose campus near many Essex communities. This campus is projected to provide him 25,000 new jobs over the next decade.
Buying is more than twice as expensive as renting in Essex Property Trust’s core market. So the high hurdles to overcome to transition from renting to owning should help keep demand for apartments up. No, but the opposite happened. The stock has fallen by more than a third since last year and seems oversold to me.
Founded in 1971, Essex has increased its dividend every year since going public in 1994. Indeed, the value of resilience through the economic cycle should be built into one of life’s basics: shelter providers, and Essex does it well. , overtakes the S&P 500 and crushes sector benchmarks Vanguard Real Estate ETF Total return since the dawn of the Great Recession about 15 years ago.
Keep in mind that Essex Property Trust as a REIT is as much a passive source of income as a growth stock. Also note here that its yield is around 4%, slightly above the 3.6% of its Vanguard ETF. He typically holds about 160 of his REITs, more than double the S&P 500’s yield of around 1.7%.
As this chart shows, over the same 15-year period, Essex not only more than doubled its dividend, but also increased its funds-per-share (FFO) by a similar amount. FFO is considered the most valid measure of the cash flow a REIT generates and speaks to its ability to cover its payments.
A long-selling talented group is now on sale
FFO is also half of the share price to FFO ratio, another important metric when considering REITs. For Essex, that ratio is currently around 15.6. It is in line with its peers. The largest public condominium REIT, mid apartment communities in america, It trades at a stock-to-FFO ratio of 16.2.
I own a Mid-America stock and I was considering adding that position as the stock has fallen about 25% over the past year, but I’m leaning toward opening a position in Essex instead. . With a crashing stock price, slow but steady dividend growth, and a strong presence in a market where demand remains strong among those who can afford higher rents, this apartment REIT is the top multifamily stock to buy in January. .
Alphabet executive Suzanne Frey is a member of The Motley Fool’s board of directors. Marc Rapport holds positions in Alphabet, Mid-America Apartment Communities, and Vanguard Specialized Funds – Vanguard Real Estate ETF. The Motley Fool invests in and recommends Alphabet, Mid-America Apartment Community, and Vanguard Specialized Funds – Vanguard Real Estate ETF. The Motley Fool’s U.S. headquarters has a disclosure policy.
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