This is part 2 to a 2-part analysis of residential REITs. This part will discuss residential REITs with a present market capitalization of over $3.2 billion. Part 1, here, discusses smaller residential REITs. Several non-REITs also compete in this industry. There are also probably other REITs that meet these criteria, and please let me know if you would like others in particular included in future analysis.
The REITs discussed in this part are, in alphabetical order:
AvalonBay Communities Inc. (AVB)
BRE Properties Inc. (BRE)
Camden Property Trust (CPT)
Equity Residential (EQR)
Essex Property Trust Inc. (ESS)
UDR, Inc. (UDR)
As explained earlier, many Americans believe that due to current economy, the dream of owning a home is no longer a sensible option. Owners are still walking away from real estate purchases made, or refinanced with pulled out equity, within the past decade. If these people aren’t going to buy a place, they are probably going to rent one (or move in with a relative). As a result, several investors have concluded that rental properties, especially if cash-flow positive, are a sensible investment. Additionally, rent tends to go up with inflation, so rental properties are one option for preparing for the believed coming inflation.
Residential REITs are a strong option for investing in rental apartments, student housing and other leased residential properties. These REITs usually pay healthy dividends and when rents go up with inflation, so should the dividends. Trustees also often believe that REIT exposure is necessary to maintain a prudently allocated portfolio of assets, and to ensure that there is income sufficient to meet any current obligations.
AvalonBay Communities Inc. (AVB)
Current Yield: 2.79%
Market Capitalization: $11.2 billion
Price to Cash-Flow: 33.1
Price to Book: 3.4
Short Position: 9.9%
Yield Growth Analysis: AVB’s payout was slowly growing over time, but has stabilized for a while now. In 2006, the payout was $3.12, which AVB raised by 8.9% to $3.40 in 2007. In 2008, AVP paid out a $5.3775, but that included a special dividend of $1.8075. If you back out that 1 dividend, AVB paid out $3.57, a 5% increase. Subsequently, AVB has maintained a $3.57 annual payout in 2009 and 2010, and maintained the $0.8925 quarterly dividend into 2011.
NOTE: AVB’s properties are located through New England, the Mid-Atlantic (including NY/NJ metro), the Midwest, the Pacific Northwest and California regions.
BRE Properties Inc. (BRE)
Current Yield: 2.98
Market Capitalization: $3.3 billion
Price to Cash-Flow: 22.3
Price to Book: 2.6
Short Position: 3.5%
Yield Growth Analysis: BRE’s payout experienced moderate, stable growth until 2009. In 2006, the total annual payout was $2.05, which was raised 4.8% to $2.15 in 2007. In 2008, the payout was raised 4.6% to $2.25. In 2009, BRE lowered the annual payout to $1.3125 (a 38% decrease). In 2010, BRE raised the annual payout 14.2% to $1.50, and has maintained a $0.375 quarterly dividend for the last 7 quarters, including into 2011.
NOTE: BRE’s properties are primarily located in California, Arizona and Washington State.
Camden Property Trust (CPT)
Current Yield: 3.22%
Market Capitalization: $4.5 billion
Price to Cash-Flow: 19.1
Price to Book: 2.7
Short Position: 3%
Yield Growth Analysis: CPT’s payout was stable and growing until 2008, but has since been under downward pressure, up until the latest quarter. In 2006, the payout was $2.64, which was raised to $2.76 in 2007 (a 4.5% increase). The 2007 payout was $2.80, after CPT raised the quarterly dividend from 69 cents to 70 cents. After another penny per quarter raise, CPT’s payout peaked in 2008 at $2.80. During 2009, the quarterly dividend was cut from 70 cents to 45 cents (a 35.7% decrease) for a total of $2.05. CPT maintained the 45-cent quarterly dividend in 2010, and paid out $1.80, but raised the quarterly dividend to 49 cents to start off 2011. Annualized, the current dividend would equal a payout of $1.96 (a an 8.89% increase).
NOTE: Rental properties are primarily located in the south-east, south-west and D.C. areas.
Equity Residential (EQR)
Current Yield: 2.28%
Market Capitalization: $17.7 billion
Price to Cash-Flow: 23.2
Price to Book: 3.6
Short Position: 4.2%
Yield Growth Analysis: EQR has had a slowly down-sloping payout over the last few years, after a period of growth. In 2006, the total payout was $1.79, which was raised to $1.87 in 2007 (a 4.4% increase). The 2008 payout was $1.93 (a 3.2% increase), but EQR then lowered the payout to $1.64 (a 15% decrease). In 2010, the payout totaled $1.47 (a 10.3% decrease).
NOTE: One of the largest residential REITs, with properties in about half the states and the District of Columbia.
Essex Property Trust Inc. (ESS)
Current Yield: 3.11%
Market Capitalization: $4.4 billion
Price to Cash-Flow: 23.1
Price to Book: 3.9
Short Position: 7.9%
Yield Growth Analysis: ESS has maintained a stable and growing dividend through the real estate crisis. In 2006, ESS’ total payout was $3.36, which it raised to $3.72 in 2007 (a 10.7% increase), when it raised the quarterly dividend from 84 to 93 cents. During 2008, the quarterly dividend was raised to $1.02, for an annual payout that totaled $4.08 (a 9.6% increase). In 2009, ESS increased the quarterly dividend by a penny to total $4.12 (about a 1% increase), and the quarterly dividend was raised by a quarter of a penny in 2010, to total $4.13. ESS started off 2011 by raising the quarterly payout to $1.04, which would annualize to $4.16.
NOTE: ESS’ properties are primarily mid-level priced apartment buildings throughout the west coast, and predominantly in California.
UDR, Inc. (UDR)
Current Yield: 2.88%
Market Capitalization: $4.9 billion
Price to Cash-Flow: 20.4
Price to Book: 3.3
Short Position: 4.1%
Yield Growth Analysis: UDR’s yield has had a volatile last few years. In 2006, UDR’s total payout was $1.2375, which it increased to $1.3025 (a 5.25% increase). In 2008, the UDR payout peaked at $1.95 (a 49.7% increase), though that did include one large year-end dividend of 96 cents. In 2009, UDR’s payout dropped significantly, for a total of $0.665 (a 65.8% decrease, or 32.8% if you discount that one large dividend). At the end of 2009, UDR set am 18-cent quarterly dividend, which it maintained until the end of 2010, when it raised it to $0.185 for a total payout of $0.725 (a 9% increase). UDR has maintained the quarterly dividend at $0.185 for the last 3 quarters.
NOTE: UDR’s properties are principally located in densely populated coastal cities.
Please note the reasonably high short positions on several of these names. Many REITs, though down from their peak prices, have appreciated considerably since the market collapse in late 2008 into early 2009. Some individuals believe a correction is in order, while others may find that real estate is simply overvalued and likely to continue to depreciate over the next few years. Opinions differ and are certainly welcome.
REITs must distribute at least 90% of their taxable income in order to eliminate the need to pay income tax at the corporate level. Under the current tax laws, REIT dividends are usually subject to a higher tax a traditional corporate dividend (this can change as tax laws change). For the purposes of this analysis, yield includes regular and special dividends, for a total payout yield.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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