FIN 644 Project REITs | Axel Adriel Peluso Nieto

Essex Property Trust, Inc.

DESCRIPTION:
Essex Property Trust, Inc. is an Equity Residential REIT. Essex mainly focuses on acquiring,
developing, and managing multifamily residential properties. It owns 245 apartment communities and
60,270 apartment homes on the West Coast. Essex also has stakes in commercial buildings such as office
buildings in the state of California and Washington.
Essex is a secure and interesting investment. It is one of the largest owners of apartments and
property managers in the U.S. Primarily, Essex operates on the West Coast of the United States where
there is a limited supply of CRE and there is a big demand for housing and offices. Moreover, Essex has a
widely diversified portfolio of CRE properties in strong and attractive locations.
NEWS:
According to The Orange County Register News, Essex Property Trust states that new tenants
are willing to pay leases that are 13.5% more expensive than when the pandemic started1. Although it is
true that tenants are willing to pay more, it is also true that Essex audience target primarily caters to
well-paid renters on the West Coast.
EXECUTIVE NEWS:
According to Essex executives in the last earning call on the last Jul 30, 2021, the second-quarter
results were driven by a strengthening economy and positive and robust recovery on the West Coast2.
Because of the recovery, net effective rents on new leases have improved in a 4.7% compared to the
month of June. As a result, they now expect that the average 2021 net effective rent growth to improve.
They expect that delinquency rates to return to normal levels over time as more workers enter the
workforce and eviction protections labs on September 30 in both California and Washington.
REIT RETURNS:
This first table and graph compare the Actual Return on Essex to the required rate of return
according to CAPM. It is possible to appreciate in the graph the CAPM return worked as a kind of
minimum return. For most of the years, Essex has obtained annual returns equal to or bigger than the
CAPM. It only was negative for 2020 because of the effect of the COVID-19 on the economy.
Essex "CAPM" Return Actual Return on Essex
CAPM and Actual Returns on Essex
2010 9.41% 41.47%
60.00%
2011 7.37% 27.84%
50.00%
2012 5.95% 7.08%
40.00%
2013 9.22% -1.31%
30.00%
2014 5.24% 50.17%
20.00%
2015 5.14% 17.51%
10.00%
2016 5.43% 0.73%
0.00%
2017 3.94% 6.48%
-10.00%2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
2018 5.03% 3.65%
-20.00%
2019 3.59% 27.40%
-30.00%
2020 8.20% -18.75%
Essex "CAPM" Return Actual Return on Essex
2021 6.34% 52.5%

1
https://www.ocregister.com/2021/09/15/southern-california-apartment-rents-up-13-5-for-landlord-
essex/
2
https://seekingalpha.com/article/4443400-essex-property-trust-inc-ess-ceo-michael-schall-on-q2-2021-results-
earnings-call-transcript
 FIN 644 Project REITs | Axel Adriel Peluso Nieto

In this other graph, we can see that both curves don’t follow the same pattern. There has been a
big difference between the pattern return that you see the actual returns in Essex to from SPX’s,
indicating that there is an enormous diversification potential. Moreover, by computing the correlation
between both returns, it is possible to appreciate that the correlation between both is just 1%.
Therefore, this REIT provides a lot of diversification benefits to their investors.
Actual Return on Essex Actual Return on SPX
2010 41.47% 13.13%
Actual Return on Essex vs.Actual Return on SPX
2011 27.84% 3.77% 60.00%
2012 7.08% 19.53% 50.00%
2013 -1.31% 30.20% 40.00%
2014 50.17% 15.36% 30.00%
2015 17.51% 1.02% 20.00%
2016 0.73% 16.15% 10.00%
2017 6.48% 21.90% 0.00%
2018 3.65% -3.56% -10.00% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2019 27.40% 34.95% -20.00%

2020 -18.75% 19.50% -30.00%
2021 52.5% 24.3% Actual Return on Essex Actual Return on SPX
CORRELATION(rEssex, rSPX) 1%
Year T.Bond Rate Implied Premium (FCFE) Beta Essex "Expected" Return Beg Price End Price Dividend Annual Return on Essex "Excess" Return on PLD
2010 3.29% 5.20% 1.18 9.41% $84.21 $115.00 $4.13 41.47% 32.06%
2011 1.88% 6.01% 0.91 7.37% $115.00 $142.86 $4.16 27.84% 20.47%
2012 1.76% 5.78% 0.73 5.95% $142.86 $148.58 $4.40 7.08% 1.13%
2013 3.04% 4.96% 1.25 9.22% $148.58 $141.79 $4.84 -1.31% -10.53%
2014 2.17% 5.78% 0.53 5.24% $141.79 $207.82 $5.11 50.17% 44.93%
2015 2.27% 6.12% 0.47 5.14% $207.82 $238.45 $5.76 17.51% 12.37%
2016 2.45% 5.69% 0.52 5.43% $238.45 $233.80 $6.40 0.73% -4.69%
2017 2.41% 5.08% 0.30 3.94% $233.80 $241.96 $7.00 6.48% 2.55%
2018 2.68% 5.96% 0.40 5.03% $241.96 $243.35 $7.44 3.65% -1.38%
2019 1.92% 5.20% 0.32 3.59% $243.35 $302.23 $7.80 27.40% 23.81%
2020 0.93% 4.72% 1.54 8.20% $302.23 $237.25 $8.32 9 Month ↓ -18.75% -26.95%
2021 1.45% 4.61% 1.06 6.34% $237.25 $322.35 $8.34 39.38% 52.5% 46.18%
Average 17.90% 11.66%
Stdev 22.24%
Sharpe 0.80

Year T.Bond Rate Implied Premium (FCFE) S&P Beta atS&P

the Beginning
Predicted Return
of the Year Beg Price End Price Dividend Annual Return on SPX
2010 3.29% 5.20% 1.00 8.49% $1,892.90 $2,117.83 $23.59 13.13%
2011 1.88% 6.01% 1.00 7.89% $2,117.83 $2,171.11 $26.62 3.77%
2012 1.76% 5.78% 1.00 7.54% $2,171.11 $2,563.19 $31.97 19.53%
2013 3.04% 4.96% 1.00 8.00% $2,563.19 $3,302.30 $35.00 30.20%
2014 2.17% 5.78% 1.00 7.95% $3,302.30 $3,769.44 $40.16 15.36%
2015 2.27% 6.12% 1.00 8.39% $3,769.44 $3,763.99 $43.86 1.02%
2016 2.45% 5.69% 1.00 8.14% $3,763.99 $4,325.17 $46.73 16.15%
2017 2.41% 5.08% 1.00 7.49% $4,325.17 $5,221.79 $50.47 21.90%
2018 2.68% 5.96% 1.00 8.64% $5,221.79 $4,981.92 $53.86 -3.56%
2019 1.92% 5.20% 1.00 7.12% $4,981.92 $6,664.66 $58.69 34.95%
2020 0.93% 4.72% 1.00 5.65% $6,664.66 $7,905.28 $59.14 9 Month ↓ 19.50%
2021 1.45% 4.61% 1.00 6.06% $7,905.28 $9,301.49 $44.78 18.23% 24.3%
Average 16.36%
Stdev 11.49%
Sharpe 1.42
Based on the behavior of this REIT and the data obtained from Bloomberg, Essex is obtaining an
actual return over the expected by the CAPM. This may be explained because of the recovery of the
economy during this year. Finally, based on the Sharpe ratios, I would not recommend for an investor to
move their funds from S&P to invest in this REIT. On average, the historical return for Essex is 17.9% just
a little bigger compared to the 16.36% return for the S&P500. Nevertheless, Essex’s return is much more
volatile than S&P500. This is the reason why the Sharpe Ratio for our REITs is less than the Sharpe Ratio
of the S&P500. It does not make sense to take the risk for just a little bit more of a return.