Review of US REITs

Below is a brief review of the largest US publicly traded Real Estate Investment Trusts (REITs). The first aspect that strikes me as a Canadian investor is how much larger US markets are. Some of the largest Canadian REITs such as Canadian Apartment Properties and Boardwalk REIT have market caps of $3.3 billion and $2.83 billion respectively. But this would barely put these large Canadian residential REITs in the top 10 of North America.  The largest residential REIT in the US (Equity Residential) has a market cap of almost $29 billion. This makes it almost 10 times larger than the largest Canadian residential REITs.

Another factor that stands out when comparing the US residential REIT market to its Canadian counterpart is the much lower yields and payout ratios of US REITs. Although US REITs are compelled to distribute 90% of earnings to shareholders, Canadian REITs seem to payout a much higher portion of FFO. This results in higher distribution yields from Canadian REITs. For example, Canadian Apartment Properties currently pays a distribution yield of 4.34% compared to the average of the top 10 US residential REITs with a distribution yield of 3.26%.

It’s worth noting that many US residential REITs have recently raised distributions. This confidence reflects the strong fundamentals of the sector, which has benefited from a recovery in US real estate and a tightening of credit to home purchasers.

My own view is investors should position themselves in the higher growth urban markets such as the largest cities in Texas (Houston, Dallas, San Antonio, and Austin), Florida (Miami), and New York City (Manhattan), with secondary exposure to DC and California. Unless yield spreads between regions are dramatically large and appealing, investors should follow long term demographic trends and cater to growing populations in the South within the largest cities with the highest density.

Below is a review of individual issuers.

 Equity Residential

Equity Residential is the largest publicly traded residential REIT. It has a diversified portfolio of high density multi-unit residential properties focused on the largest urban areas in the US including New York, Chicago, and Southern California. Equity Residential represents a best in class management team led by Sam Zell.

Equity Residential has a balance sheet that is moderately levered with a debt to equity ratio of 44.63%. Shares currently yield 2.94% and have a payout ratio of 69.62% of FFO. Investors who favour a high quality name with a diversified portfolio should consider Equity Residential.

AvalonBay Communities

AvalonBay is a residential REIT with a diversified portfolio of multi-unit properties covering 11 states. Historically, AvalonBay has been a sector out-performer and is now the second largest residential REIT in the US as measured by market cap. Their portfolio has exposure to both northern and southern California, the NY/NJ metropolitan area, New England, DC, and Seattle.  Much of AvalonBay’s portfolio is low-rise and mid-rise, although in the New York and DC markets, it holds a mix of mid-rise and high-rise properties. AvalonBay has a relatively small exposure to higher growth southern states such as Texas and Florida.

AvalonBay has a payout ratio of 66.49% with shares currently yielding 2.97%. Its financial profile is more conservative than most of its peers as AvalonBay carries a low debt to equity ratio of 32.18%, which is the most conservative out of the nine largest publicly traded US residential REITs.

Essex Property Trust

Essex Property Trust is the third largest residential REIT in the US. It is entirely focused on the Seattle area and California, making Essex one of the most geographically concentrated REITs. Within its geographic area, Essex holds properties in urban and suburban markets.

Essex shares carry a yield of 2.55%, which is a bit lower than some of its direct peers. It has a payout ratio of 63.44%, which is in-line with its peers. Essex also has a preferred share outstanding that may be of interest to some fixed income investors looking for a higher yield. The preferred series H shares can be called at $25 by the issuer, are currently trading at $26.25 with a distribution yield of 6.785%.

Post Properties

Post properties is a multi-unit residential REIT focused on specific high growth areas mostly in the Southern US including a strong focus on Atlanta, Texas (Dallas, Houston, and Austin), DC, Charlotte & Raleigh, and Florida (Tampa & Orlando).  Most properties are targeted to the middle market and feature amenities such as pools, patios, and fitness facilities. Post Properties has a market cap of just over $3 billion, making it the 9^th largest publicly traded residential REIT in the US.

Post Properties has one of the lowest leverage ratios of the REITs surveyed with a LTV ratio of 44.39% and a debt to market cap ratio of 32.33%. It has an FFO payout ratio of 57.14% and a cash yield of 2.76%. This REIT is attractive based for investors who are bearish on rates as Post Properties has low leverage and good exposure to high growth urban areas.

UDR Inc

UDR provides luxury apartment living to the largest communities in the US. Their portfolio is diversified on both coasts including properties in Boston and New York, and also in San Francisco, Orange County, Las Angeles, San Deigo, Dallas, Seattle, and Washington DC.

UDR has a current yield of 3.33%, which is the second highest among the top 10 largest US residential REITs. This higher yield reflects a higher payout ratio of 70% and an average amount of financial leverage.