5 Best Apartment REITs + Comprehensive Reviews (2020)
August 08, 2020
A real estate investment trust (REIT) is a type of mutual ownership, much like a mutual fund, in which a corporation offers shares for an asset pool of real estate properties. Apartment REITs (or multifamily REITs) specialize in residential apartments (5+ units, and typically 50 to 1,000 units per apartment building complex) and other multifamily properties. They are part of the residential REITs sector. Apartment REITs earn income by leasing out the units in their multifamily properties to tenants.
In this article, we’ll review the five, top, publicly traded apartment REITs, all of which are sold on exchanges.
Current Market Report
As of June 30, 2020, there were 15 apartment REITs in the FTSE NAREIT All REITs Index. Total market value for this group was $109,385,389, and it represented 9.33% of the index. Year to date through the end of June, due to Covid-19, apartment REITs returned a negative number, specifically –21.49% and had a dividend yield of 4.01%. This compares to a total positive return in 2019 of 26.32%.
Apartment REITs in Pre-Pandemic Economic Conditions
In normal times, the chief economic factor impacting apartment REITs is interest rates. In fact, REITs usually have a 47% correlation with interest rates. Typically, higher rates don’t damage apartment equity REITs significantly because:
- Rental apartment property competes against home ownership. Mortgages are costlier when interest rates rise, and potential homeowners can no longer afford the monthly mortgage payments. Instead, these folks need to rent, thus boosting demand for rental property and forcing rents higher.
Higher interest rates suggest a thriving economy and no jobs shortage. In other words, more people can pay for better-quality, higher rent, higher end, rentals. Vacancies and evictions decline, helping to improve the profits of apartment REITs.
Conversely, a long stretch of powerful economic expansion can overstimulate multifamily construction that may cap rents. Moreover, a recession may result in apartment markets with a surplus rental property, causing rents to decline. Unemployment increases in a recession and homeowners may lose their jobs and their homes. When this occurs, homeowners magically become renters/tenants as opposed to homeowners. People need a roof over their heads, and anything that hinders home ownership has the effect of boosting rentals.
Thus, apartment REITs can do well in most interest rate environments as long as conditions don’t become too extreme, such as in a pandemic.
Apartment REITs During the Covid-19 Pandemic
The coronavirus pandemic has crippled economic activity worldwide, especially in the United States. With record unemployment and GDP declines, millions of Americans have no jobs. Initially, the Senate, led by the incredibly brilliant and well-meaning Mitch McConnel, had been able to provide stopgap funding to replace income. The legislation also prevented banks from foreclosing on residential properties and landlords from evicting tenants.
An impasse occurred at the beginning of August 2020 when the legislation expired. The president and Senate Republicans were unable to reach agreement with the extremely left leaning, politically-oriented House of Representatives to pass the Heroes Act. The House finally approved the act three months earlier. It extended the unemployment and housing protections for the remainder of 2020. It’s hard to fathom the absolute calamity befalling millions of Americans as the House Democrats dither, deny, and delay in efforts to achieve their self-centered, political agendas at the cost of hard working American families.
Apartment REITs – Losing Value
Accordingly, apartment REITs have plummeted in 2020, down 21.49% in the first half. The country faces the prospects of millions of foreclosed homes and vacant apartments. Experts explain that the Democrats indifference to America’s suffering as an admission that they will not only once again lose the White House and the Senate, but that they will also lose the House of Representatives, and that they will remain out of power through 2024 and potentially through 2032 and beyond. They therefore continue to try and cripple the current Administration, with their blatantly false narratives, at the incredible cost of all Americans.
An effective Covid-19 vaccine would change the outlook considerably. Given the timeframe, now may be a great time to invest in apartment REITs at a steep discount. In fact, you may never have a better chance to own a high-quality asset at fire sale prices.
On the other hand, If your investment horizon is less than a year, you may want to factor in the various risks of the Covid-19 virus which came from the Wuhan Province in China. Long-term, apartment REITs appear to be solid buys.
Video: REIT Investing 101 Why Multifamily Investing?
Top 5 Apartment REITs
The following are the five best apartment REITs. All snapshots are as of the end of May 2020.
It is a fact that Equity Residential is the largest player in the apartment. It concentrates on acquiring, developing, and managing rental apartments. Location-wise, it favors urban and densely populated suburban markets. Properties primarily reside in Boston, New York, Washington, D.C., Seattle, San Francisco, Southern California, and Denver. This REIT owns 304 properties which comprise more than 78,000 apartment units. It currently is fighting a class-action lawsuit claiming it charged late fees in violation of California law.
- FFO/Share $3.34
- Price/FFO 15
- FFO Growth 24%
- FFO Payout 67%
- Total Return YTD -24.35%
- Total Return 1-Year -18.35%
- Dividend Yield 98%
- Market Cap $23,278.5 million
- Debt Ratio 4%
- Long-Term Rating A-
Notably, AvalonBay Communities has a 25-year history of acquiring, developing, redeveloping, and managing distinctive apartments in the finest U.S. markets. The REIT owns 295 apartment properties comprising 86,380 units. Chief markets include New England, Metro NY/NJ, 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 the Fair Labor Standards, New York Labor Law, and myriad other state wage and hour laws.
- FFO/Share $9.26
- Price/FFO 85
- FFO Growth 94%
- FFO Payout 64%
- Total Return YTD -24.83%
- Total Return 1-Year -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 purchases, develops, redevelops, and manages apartment complexes. It maintains a dynamic portfolio of multifamily properties in the West Coast markets of California and Seattle. It launched in 1971 and now has 250 apartment complexes comprising 60,570 apartment units. The chairman of Essex is involved in other real estate activities and investments, which may lead to conflicts of interest.
- FFO/Share $13.30
- Price/FFO 25
- FFO Growth 52%
- FFO Payout 69%
- Total Return YTD -18.56%
- Total Return 1-Year -14.39%
- Dividend Yield 42%
- Market Cap $16,512.2 million
- Debt Ratio 5%
- Long-Term Rating BBB+
Mid-America Apartment Communities
Memphis-based Mid-America Apartment Communities invests in apartments in the Southeastern and Southwestern United States. It owns 300 apartment communities comprising more than 100,000 units. In fact, it is the biggest American apartment REIT as measured by number of units. In November 2018, the company forked over $11.3 million to settle a complaint that it violated the Americans with Disabilities Act and the Fair Housing Act at 50 properties.
- FFO/Share $6.03
- Price/FFO 29
- FFO Growth 22%
- FFO Payout 76%
- Total Return YTD -10.31%
- Total Return 1-Year 17%
- Dividend Yield 44%
- Market Cap $13,742.2 million
- Debt Ratio 1%
- Long-Term Rating BBB+
Founded 48 years ago, UDR is a leading multifamily REIT that manages, purchases, sells, develops, and redevelops attractive properties. It owns 51,320 apartment units including 819 units under development. It owns properties all over the United States, including California, Florida, New York, Texas, Tennessee, Washington, and Colorado. Tenants are suing UDR in the New York County Supreme Court for alleged violations of rent-stabilization laws.
- FFO/Share $2.10
- Price/FFO 57
- FFO Growth 37%
- FFO Payout 24%
- Total Return YTD -19.48%
- Total Return 1-Year -14.81%
- Dividend Yield 89%
- Market Cap $11,684.7 million
- Debt Ratio 6%
- Long-Term Rating BBB+
How to Assess an Apartment REIT
Here are three tips that will help you analyze and assess almost any type of REIT, including multifamily REITs.
- Funds from operations (FFO): REITs measure their cash flows from operations in terms of FFO. You calculate FFO by adding amortization and depreciation to earnings while subtracting gains on sales. Analysts prefer FFO per share instead of the more customary earnings per share EPS. It is a non-GAAP measure that compensates for overstated depreciation of properties that actually appreciate over time. When comparing different REITs with each other, use FFO to measure REIT performance.
- Net asset value (NAV): This metric replaces book value when estimating market value. Frequently, book value and price-to-book ratio are misleading due to overstated depreciation. To calculate NAV per share, capitalize the operating income according to the current market rate. First, divide operating income by cap rate to get a building’s market value. Then, subtract mortgage debt to get NAV. Finally, divide the common shares by NAV to get NAV per share, a good estimate of intrinsic value. If the REIT’s share price exceeds the NAV per share, the shares may be cheap.
- Bottom up analysis: When you analyze an individual REIT, look for strong growth in rental and service income as well as FFO. The better REITs have unique strategies for raising rents and improving occupancy.
One of the best sources of information about REITs is the National Association of Real Estate Investment Trusts (Nareit). Another good website is the REIT Institute, which carries many educational articles. Of course, you can always turn to Assets America® for straight information on commercial real estate and commercial finance matters.
How Assets America® Can Help
REITs are always buying and selling the properties in their portfolios. Often, these are excellent assets for purchase by investors. We at Assets America® can arrange financing for these purchases starting at a minimum transaction size of $10 million ($10M). Our network of private lenders and banks can fund your acquisitions of REIT assets and other real estate properties with efficiency, accuracy, speed, and highly competitive terms. Call us today at 206-622-3000 for a free consultation.
What is the duration of an apartment REIT?
The high dividend rates of REITs make them comparable to bonds. Therefore, you can calculate the modified duration of a REIT. This is the change in price due to interest rate changes. Studies show REIT modified duration is positive, meaning higher interest rates can potentially negatively affect REIT prices.
What do top apartment REITs use for property management software?
MRI Software offers property management software that it especially designed for REITs. Other highly rated packages come from Tenant Cloud, Buildum, and Appfolio. Some REITs develop and use their own systems to manage their properties.
Which multifamily REITs focus on garden-style apartment communities?
Several of the 15 apartment REITs have extensive holdings in garden-style, apartment communities. The two leaders in this style of multifamily properties are Equity Residential and AvalonBay Communities. Mid-America Apartment Communities is also a player in this arena.
What are the largest multifamily REITs?
The largest five multifamily REITs are:
- Equity Residential
- AvalonBay Communities
- Essex Property Trust
- Mid-America Apartment Communities
- UDR Apartments
Each of these REITs have market values of $10 billion ($10B) or higher.