Stifel: Costa-Hawkins Concerns Are 'Overblown,' Market Conditions Will Carry Essex Property Trust

Essex Property Trust Inc (NYSE: ESS) reported a strong second-quarter earnings beat Wednesday. Earnings per share came in at $1.52 versus the $1.13 analysts were expecting.

The Analyst

Stifel analyst John Guinee upgraded Exxes from Hold to Buy and raised his price target from $235 to $260.

The Thesis

“We view Essex Property Trust as the primary way for investors to gain exposure to a West Coast-only portfolio of multifamily assets in a publicly-traded REIT format,” said Guinee in a note.

Essex wholly owns approximately 50,000 apartments and another 10,000 in joint ventures located primarily in California. The company also owns two office buildings.

Guinee’s bullishness is grounded in Essex’s sound fundamentals, but driven by the housing market’s overall conditions.

Supply is Essex’s markets has not been keeping pace with demand — much like other parts of the country — and has driven prices upward.

Recently, there has been debate over whether California’s Costa-Hawkins Rental Housing Act should be repealed. The law prohibits cities from establishing rent control over certain kinds of residential units and blocks cities from enacting “vacancy control,” which would prevent landlords from raising the price on vacant units to match the market.

The act will be on Californians’ ballots in November. If voters choose to repeal, it would open the door for cities to enact vacancy control, hurting Essex’s growth prospects.

“Although not experts, our gut tells us that Costa-Hawkins concerns are overblown,” said Guinee.

Price Action

Essex Property Trust was trading 3 percent higher Friday at $241.44.

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