Top 5 Apartment REITs + Overall Review (2020)
August 8, 2020
A real estate investment trust (REIT) is a type of mutual ownership, much like a mutual fund, in which a company offers shares in a pool of real estate assets. Apartment REITs (or multifamily REITs) specialize in residential apartments (five or more units, typically 50-1,000 units per apartment building complex) and other multifamily properties. They are part of the residential REIT sector. Apartment REITs earn revenue by renting out units in multifamily properties to tenants.
In this article, we review the top five publicly traded apartment REITs trading on the exchange.
Current Market Report
As of June 30, 2020, the FTSE NAREIT All REITs Index includes 15 apartment REITs. The group has a combined market capitalization of $109,385,389, making up 9.33% of the index. Year-to-date through the end of June, the impact of Covid-19 has resulted in apartment REITs returning negative numbers, specifically -21.49%, with a dividend yield of 4.01%. This compares to a combined positive return of 26.32% in 2019.
Apartment REITs in a Pre-Pandemic Economy
Typically, the primary economic factor affecting apartment REITs is interest rates. In fact, the correlation between REITs and interest rates is typically 47%. Rising interest rates typically don't do much damage to apartment equity REITs. Here's why:
Renting an apartment competes with homeownership. When interest rates rise, mortgage costs rise and potential homebuyers are unable to afford their monthly mortgage payments. Instead, these people are forced to live in rental properties, which increases the demand for rental properties and drives up rents.
Rising interest rates indicate a thriving economy and no job shortages, which in turn means more people can afford higher quality, more expensive, luxury rentals, leading to fewer vacancies and fewer evictions, which translates into higher profits for apartment REITs.
Conversely, a long, strong economic expansion can overstimulate apartment construction, driving up rent ceilings. Additionally, a recession can create an apartment market with an oversupply of rental units, causing rents to fall. In a recession, unemployment increases, and homeowners may lose their jobs and lose their homes. When this happens, homeowners magically become renters/renters instead of homeowners. People need a roof over their heads, and anything that impedes homeownership has the effect of driving up rents.
Therefore, unless circumstances such as a pandemic become extreme, apartment REITs can perform well in most interest rate environments.
How Assets America® Can Help You
REITs are constantly buying and selling real estate in their portfolios. These are often the perfect assets for investors to purchase. At Assets America®, we can arrange financing for these purchases, with minimum transaction amounts of Ten Million Dollars ($10M). Our network of private lenders and institutional investors provides financing for the acquisition of REIT assets and other real estate with efficiency, accuracy, speed, and highly competitive terms. Call us now at 206-622-3000 for a free consultation, or fill out the form below and we'll get back to you shortly.
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Apartment REITs During the COVID-19 Pandemic
The coronavirus pandemic has paralyzed economic activity around the world, especially in the United States. Record unemployment and falling GDP have left millions of Americans jobless. Initially, the Senate, led by the very good and well-meaning Mitch McConnell, was able to provide interim funding to supplement income. The act also prohibited banks from foreclosing on residential properties and landlords from evicting tenants.
A stalemate occurred when the bill lapsed in early August 2020. The President and Republican Senators could not agree with the far-left, politically-inclined House members to pass the HEROES Act. The House finally approved the bill three months ago. The bill extended unemployment insurance and housing protections for the remainder of 2020. It is hard to imagine the absolute disaster facing millions of Americans as House Democrats dither, deny and delay efforts to achieve their own selfish political agenda at the expense of hardworking American families.
Apartment REITs – Falling in Value
As a result, apartment REITs have plummeted in 2020, dropping 21.49% in the first half of the year. The country faces the prospect of millions of foreclosed homes and empty apartments. Experts explain that Democrats' indifference to America's suffering is because they recognize that they not only lost the White House and Senate again, but also the House of Representatives, and will not be in power until 2024 and likely beyond 2032. Thus, they continue to try to neutralize the current administration with patently false narratives, all while forcing incredible sacrifices on all Americans.
The outlook will change dramatically once an effective COVID-19 vaccine is developed. Given the time constraints, now may be a great time to invest in apartment REITs at deep discounts. In fact, there may never be a better opportunity to own a quality asset at a bargain price.
On the other hand, if your investment horizon is less than a year, you may need to consider the various risks posed by the COVID-19 outbreak in Wuhan, China. In the long term, apartment REITs appear to be a solid buy.
Video: REIT Investing 101 Why Multifamily Invest?
Top 5 Best Apartment REITs
Below are the top 5 apartment REITs. All snapshots are as of the end of May 2020.
Equity Residential
It is true that Equity Residential is the largest company in the apartment industry. The company focuses on acquiring, developing, and managing rental apartments. In terms of location, it favors urban and densely populated suburban markets. The properties are primarily located in Boston, New York, Washington DC, Seattle, San Francisco, Southern California, and Denver. The REIT owns 304 properties with over 78,000 apartment units. The company is currently facing a class action lawsuit for charging late fees in violation of California law.
FFO/share $3.34 FFO/share price 15 FFO growth 24% FFO payout ratio 67% Year-to-date total return -24.35% 1-year total return -18.35% Dividend yield 98% Market cap $23,278.5 million Debt-to-equity ratio 4% Long-term rating A-
Avalon Bay Community
Notably, AvalonBay Communities has 25 years of experience acquiring, developing, redeveloping and managing distinctive apartment properties in the most luxurious markets in the United States. The REIT owns 295 apartment properties consisting of 86,380 units. Primary markets include New England, the New York/New Jersey metropolitan area, the Mid-Atlantic region, California and the Pacific Northwest. It is the ninth largest publicly traded REIT. The company is currently fighting a class action lawsuit. Plaintiffs allege violations of Fair Labor Standards, New York State Labor Law, and numerous other state wage and hour laws.
FFO/Share $9.26 FFO/Share 85 FFO Growth 94% FFO Payout Ratio 64% Year to Date Total Return -24.83% 1-Year Total Return -20.63% Dividend Yield 08% Market Cap $21,749.5 Million Debt Ratio 7% Long-Term Rating A-
Essex Property Trust
Essex Property Trust is an equity REIT that acquires, develops, redevelops and manages apartment buildings. It maintains a dynamic portfolio of multifamily properties in the West Coast markets of California and Seattle. Founded in 1971, the company currently owns 250 apartment properties with a total of 60,570 apartment units. The Chairman of Essex is also involved in other real estate activities and investments that may lead to conflicts of interest.
FFO/share $13.30 FFO/share price 25 FFO growth 52% FFO payout ratio 69% Year-to-date total return -18.56% 1-year total return -14.39% Dividend yield 42% Market cap $16,512.2 million Debt-to-equity ratio 5% Long-term rating BBB+
Mid-America Apartment Communities
Memphis-based MidAmerica Apartment Communities invests in apartments throughout the Southeast and Southwestern U.S. The company owns 300 apartment communities with more than 100,000 units. In fact, it is the largest apartment REIT in the U.S. as measured by number of units. In November 2018, the company paid $11.3 million to settle complaints that it violated the Americans with Disabilities Act and the Fair Housing Act at 50 properties.
FFO/Share $6.03 FFO/Share Price 29 FFO Growth 22% FFO Payout Ratio 76% Total Return YTD -10.31% Total Return 17% Dividend Yield 44% Market Cap $13,742.2 Million Debt Ratio 1% Long-Term Rating BBB+
UDR Apartment
Founded 48 years ago, UDR is a leading multifamily REIT that manages, buys, sells, develops and redevelops desirable real estate. It owns 51,320 apartment units, including 819 units under development. It owns properties throughout the United States, including California, Florida, New York, Texas, Tennessee, Washington and Colorado. Tenants are suing UDR in New York County Supreme Court for alleged violations of rent stabilization laws.
FFO/share $2.10 FFO/share price 57 FFO growth 37% FFO payout ratio 24% Year-to-date total return -19.48% 1-year total return -14.81% Dividend yield 89% Market cap $11,684.7 million Debt-to-equity ratio 6% Long-term rating BBB+
How to Value Apartment REITs
Here are three tips to help you analyze and evaluate almost any type of REIT, including multifamily REITs.
Operating Cash Flow (FFO): REITs measure their operating cash flow with FFO. FFO is calculated by adding amortization and depreciation to earnings and subtracting gains on sales. Analysts prefer FFO per share instead of the more conventional earnings per share (EPS). It is a non-GAAP metric that corrects for overvalued depreciation of real estate, which actually increases in value over time. When comparing different REITs to each other, use FFO to measure REIT performance. Net Asset Value (NAV): This metric is an alternative to book value in estimating market value. Book value and price-to-book ratios are often misleading due to overvalued depreciation. To calculate NAV per share, capitalize operating income according to current market rates. First, divide operating income by the cap rate to get the market value of the building. Then subtract mortgage debt to get NAV. Finally, divide the common stock by the NAV to get the NAV per share, which is a good estimate of intrinsic value. If a REIT's stock price is above its NAV per share, the stock is likely undervalued. Bottom-Up Analysis: When analyzing individual REITs, look for strong growth in rental and service revenues and FFO. Good REITs have unique strategies for raising rents and improving occupancy rates.
Helpful resources
One of the best sources of information on REITs is the National Association of Real Estate Investment Trusts (Nareit). Another great website with lots of educational articles is the REIT Institute. Of course, you can always turn to Assets America® for accurate information on commercial real estate and commercial finance.
FAQ
How long do Apartment REITs last?
REITs have high dividend yields, making them comparable to bonds. Therefore, we can calculate a REIT's modified duration, which is the change in price due to changes in interest rates. Research has shown that REITs have a positive modified duration, indicating that rising interest rates can have a negative impact on REIT prices.
What property management software do the top apartment REITs use?
MRI Software offers property management software designed specifically for REITs. Other highly rated packages include Tenant Cloud, Buildum, and Appfolio. Some REITs develop their own systems to manage their properties.
Which multifamily REIT focuses on garden-style apartment communities?
Several of the 15 apartment REITs have made significant investments in garden-style apartment communities. The two big leaders in this style of apartment complex are Equity Residential and AvalonBay Communities. Mid-America Apartment Communities is also active in this space.
What are the largest multifamily REITs?
The five largest multifamily REITs are:
Equity Residential AvalonBay Communities Essex Property Trust Mid-America Apartment Communities UDR Apartments
Each of these REITs has a market capitalization of more than $10 billion.