The sharp increase in interest rates over the past year is a negative catalyst for real estate investment trusts (REITs). But not all REITs have been negatively affected to the same extent. The top apartment REITs have attractive valuations and high dividend yields. This article will discuss three of our top-ranked apartment REITs for income investors right now.
Essex Property Trust (ESS)
Essex Property Trust (NYSE:ESS) invests in West Coast multifamily residential proprieties where it engages in development, redevelopment, management and acquisition of apartment communities and a few other select properties. Essex has ownership interests in several hundred apartment communities consisting of over 60,000 apartment homes. The trust produces approximately $1.7 billion in annual revenue.
As a high-quality operator, Essex has posted strong earnings results to start 2023. For the first quarter, Essex reported funds from operations (FFO) of $3.65 per share. That surpassed estimates by 4 cents. It achieved strong same-property revenue and net operating income (NOI) growth of 7.6% and 9.2%, respectively, compared to the first quarter of the previous year.
The company increased its dividend by 5%, resulting in an annual distribution of $9.24 per common share. Essex is an attractive dividend growth stock because of its impressive dividend track record. The REIT is on the Dividend Aristocrats list. It has raised its dividend for 29 consecutive years from the time it first became a publicly traded trust. Its exposure to high-value cities with strong technology cultures further widens that moat.
The trust has a solid BBB+ credit rating and currently has a very healthy interest coverage ratio and net-debt-to-adjusted-EBITDA ratio. It maintains a relatively safe balance sheet and its weighted average interest rate is quite low, reflecting the trust’s strong credit metrics.
Essex Property Trust has been a strong outperformer in terms of total returns since it went public in 1994. This is due to a combination of good management and a tailwind from the fast-growing West Coast property market on the back of a strong technology industry in the region.
ESS currently yields 4%.
American Homes 4 Rent (AMH)
American Homes 4 Rent (NYSE:AMH) is an internally managed REIT that focuses on acquiring, developing, renovating, operating and leasing single-family homes as rental properties. The trust holds nearly 54,000 single-family properties in sub-markets of metropolitan statistical areas in 22 states. AMH has a market capitalization of about $14 billion. Futhermore, it generates annual revenues of $1.6 billion. The REIT was formed in 2013.
AMH delivered a strong first-quarter earnings report. For the quarter, revenue grew 11.7% to $397.7 million. That was $7.7 million more than expected. FFO of 41 cents compared favorably to FFO of 38 cents in the previous year. Additionally, it was 1 cent above estimates. AMH had a same-home average occupied day percentage of 97.2%, up 20 basis points sequentially. New leases signed had rental rate growth of 7.8%. Rents and other single-family property revenues grew 11.7% to $397.7 million, while occupied homes totaled 55,827 compared to 53,995 in the first quarter of 2023. Average monthly rents per property was higher by 8%.
The REIT reaffirmed its prior guidance for 2023 as well. The trust continues to expect core FFO of $1.58 to $1.64 for the year. At the midpoint, this would be 4.5% growth from 2022. AMH has a fairly short history as a publicly traded REIT. However, its growth has been impressive in that time. FFO grew at a rate of 7.8% annually over the last five years.
Dividends have grown at a high rate as well. AMH’s quarterly dividend had amounted to 5 cents per share since the trust’s inception. Multiple large increases to the dividend have taken the quarterly payout to 22 cents per share. Given the aggressive growth recently and the reasonable payout ratio, we project dividend growth will be 10% per year moving forward.
AMH is one of the largest operators of single-family in the U.S., giving it a size and scale that is above most of its peer group. AMH stock currently yields 2.5%.
Equity LifeStyle Properties (ELS)
Equity LifeStyle Properties (NYSE:ELS) owns and operates lifestyle-oriented properties consisting primarily of manufactured home and recreational vehicle communities. Equity LifeStyle Properties operates through the following segments: Property Operations; and Home Sales and Rentals Operations. The Property Operations segment owns and operates land lease properties. The Home Sales and Rentals Operations segment purchases, sells, and leases homes at the properties.
Today, Equity LifeStyle Properties owns or has a controlling interest in more than 400 communities and resorts in 33 states and British Columbia. It has more than 165,000 sites. Additionally, it boasts a current market capitalization of $13 billion.
On April 17, Equity LifeStyle Properties reported first-quarter earnings for fiscal year 2023. For the quarter, revenues increased by $10 million, or 9.8%, to $370 million. That’s compared to $360.2 million for Q1 2022. The Trust reported a net income of $82.4 million, or 44 cents per share, compared to $82.9 million, or 45 cents per share, for the same period in 2022. FFO was 74 cents per share, representing a 2.0% increase compared to the same period in 2022. That outperformed the midpoint of our guidance expectation by $0.8 million.
The ELS management team provided 2023 full-year guidance in its first-quarter report. They expect a 6.5% increase in core income from property operations year over year. Overall, for 2023, management anticipates FFO per share to be between $2.79 and $2.89.
The continuation of acquiring properties and increasing core income from property operations has fueled the REIT’s growth. Over the past 10 years, ELS has had an FFO compound annual growth rate (CAGR) of 8.8% and a five-year CAGR of 8%. In turn, the REIT has a strong dividend growth history. The company has increased its dividend for 19 consecutive years.
Its competitive advantage is that Equity LifeStyle has a national presence and excellent reputation within the industry. Thisallows the Trust to pursue opportunities to increase customer service and deliver quality earnings for shareholders. During the Great Recession of 2007-2010, the Trust performed very well. In 2008, FFO increased 5% from 76 cents per share in 2007 to 80 cents per share in 2008. In 2009, FFO jumped by 12% to 99 cents per share. During the Covid-19 pandemic, the Trust saw the same results. In 2020, FFO grew 4% to $2.17 per share.
As a result, ELS is a recession-resistant REIT. The Trust’s balance sheet is in good shape, with a current debt-to-equity ratio of 2.3 and a long-term debt cap ratio of 68.2%. The dividend is very well-covered, with only 63% of FFO going toward its dividend payment. ELS is an attractive dividend growth REIT.
On the date of publication, Bob Ciura did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.