There's a lot of concern that a recession could be right around the corner. The Federal Reserve has pushed interest rates to their highest level in years to slow inflation. The worry is that the Fed might have gone too far and could drive the economy into a recession.
Economic downturns can have a meaningful impact on corporate profits and cash flows. Many companies have cut their dividends during past recessions.
However, that hasn't been the case for Essex Property Trust (ESS -1.14%). It has been a haven for income investors over the years. The real estate investment trust (REIT) has an unbroken track record of increasing its dividend since its initial public offering in 1994. That streak seems likely to continue through the next recession.
A recession-proof REIT
According to the National Bureau of Economic Research (NBER), the U.S. has experienced three recessions since Essex Properties Trust completed its IPO in 1994. The REIT's dividend hasn't skipped a beat during those periods:
ESS Dividend data by YCharts
As that chart shows, the residential REIT has increased its dividend payment in each of the last three recessions. Overall, Essex Property Trust has grown its payout every year since its IPO, with this year's raise pushing its streak to 29 straight years, one of the longest in the REIT sector. It has increased its payout by an impressive 453% over that period.
A few factors have driven the REIT's resilient dividend. The bedrock is its investment focus. It concentrates on owning multifamily properties in high-barrier-to-entry markets along the West Coast. Apartments tend to be relatively durable investments because people still need a place to live in a recession. Meanwhile, housing markets on the West Coast have benefited from strong and sustainable demand due to limited new housing supply. That has kept occupancy rates high, allowing landlords to steadily increase rents. These factors have enabled Essex Property to generate steadily rising rental income and cash flow to support a growing dividend.
The REIT also has a strong financial foundation. It has a solid investment-grade balance sheet. It primarily uses long-term, fixed-rate debt to finance its apartment portfolio and maintains lots of liquidity. These factors give it the financial flexibility to weather economic storms.
Why Essex Property's dividend should keep thriving in the next recession
Demand for apartments in Essex Property's markets should hold up well during the next economic downturn. Affordability is a big driving factor. It's currently 2.5 times cheaper to rent an apartment than buy a home in its markets. That's higher than in East Coast markets (1.7 times cheaper to rent than own) and those across the Sunbelt region (1.6 times). Because of that, even if interest rates and home prices decline during a recession, they likely won't tumble far enough to make buying cheaper than renting. That should keep occupancy and rental rates at healthy levels across its portfolio.
Meanwhile, Essex Property is entering a potential recession from a position of financial strength. It has a relatively low dividend payout ratio. Its current annual dividend payment of $9.24 per share per share is well below the mid-point of its projected core funds from operations (FFO) for 2023 of $15.00 per share. That gives the REIT a nice cushion while allowing it to retain cash to fund new investments and maintain a strong balance sheet.
Finally, speaking of the balance sheet, Essex has one of the strongest in the REIT sector. Its current leverage ratio of 5.6 times is its lowest in years (and well below the 6.6 times ratio it had during the last recession in 2020). The REIT also has well-staggered debt maturities, including less than $400 million of debt maturing next year (6.8% of its total debt). It has ample liquidity to address that maturity ($1.7 billion of cash and borrowing capacity) while also financing new investments to expand its apartment portfolio. The company's strong balance sheet limits the impact of higher rates and a potential dislocation in the credit markets.
A recession-resistant dividend
Essex Property Trust's dividend has proven very durable over the years. The REIT has increased its payout throughout each of the last three recessions. It should be able to continue growing its dividend through the next downturn. Demand from rental properties in its market remains resilient due to limited supply. Meanwhile, it has a strong financial profile. That continued income growth amid economic storms makes Essex Property an ideal dividend stock to buy for those concerned we could be about to enter another recession.
