Fortune.com recently reported that renter households in the US rose by 1.9% in the second quarter, 3x the increase of homeowner households. It is the third consecutive quarter where this happened, suggesting that rental REITs to buy could be a wise investment in the year’s second half.
“The cost of both renting and buying a home has skyrocketed in recent years, but the affordability crunch isn’t quite as severe in the rental market. That’s because America has been building a lot of apartments to keep pace with robust demand from renters,” Fortune reported comments from Redfin senior economist Sheharyar Bokhari.
According to Fortune, Los Angeles has the highest percentage of renters in the U.S. at 53%, considerably higher than the national average of slightly more than a third. This tells me that some of the Rental REITs to buy have apartments for rent in the LA area.
Who are these names? Here are my three ideas.
Douglas Emmett (DEI)
Douglas Emmett (NYSE:DEI) is a Los Angeles-based REIT (real estate investment trust) that owns 68 Class A office properties with 17.6 million square feet and 14 multi-family properties. The multi-family properties have 4,483 apartment units in Los Angeles and Honolulu.
In the three months ended June 30, its multifamily revenues were $46.5 million, with a segment profit of $30.6 million, while its office revenues were $199.2 million, generating a profit of $132.1 million.
Although it has 1o multifamily properties in Los Angeles with approximately 2,000 apartment units, its four properties in Honolulu have 2,487 units. Together, they account for about 20% of its overall rent.
In LA., the REIT’s multifamily revenue per unit is $4,592, 73% higher than the average for six of its multifamily REIT peers.
Interestingly, the REIT is converting a 25-story, 493,000-square-foot office building into 493 apartment units in Honolulu. It has leased 98% of the 449 units it’s already converted. The final two floors will be premium office space.
It has an attractive 5.04% dividend yield. Get paid to wait for further conversions by the REIT.
Avalon Bay Communities (AVB)
Avalon Bay Communities (NYSE:AVB) isn’t based in LA but has a sizeable multifamily presence in Southern California. In the three months ended June 30, it generated $148.7 million in quarterly revenue in the region, accounting for 22% overall. This translated into $104.5 million in NOI (net operating income), up from a year ago.
The REIT expects South California same-store residential revenue to increase by 4.5% in 2024, the highest growth rate among nine geographical regions.
Avalon Bay’s core FFO (funds from operations) per share in the second quarter was $2.77, 11 cents higher than a year earlier.
Through July 31, the REIT had sold five communities (1,069 apartments) for $514 million. The capitalization rate—defined as the net operating income divided by the current market value—was 5.1%. One of the communities sold was the AVA North Hollywood in Los Angeles.
It has 11,992 apartments in LA, 4,024 in Orange County, and 1,767 in San Diego, totaling 17,783. It also owns 12,137 in Northern California. It owns 77,413 units nationwide with an average occupancy rate of 96.0%.
It yields 3.2%.
Equity Residential (EQR)
Equity Residential (NYSE:EQR) is a Chicago-based REIT that owns or has investments in 299 properties (284 wholly-owned) with 79,738 apartment units.
Of the 77,054 apartment units included in its Q2 2024 same-store residential revenue, LA accounted for 18.3%. Orange County and San Diego contribute another 6,596 apartments. The region’s NOI accounted for 27.0% overall. Washington, D.C. and San Francisco were the next two highest contributors at 16.7% and 15.9%, respectively.
Like Douglas Emmett, it focuses on the Affluent Renter, whose average household income is $169,000, 59% higher than the U.S. average. The median age of its residents is 32, and its average tenant spends a manageable 20.5% of their income on rent.
Between 2011 and 2024, the REIT grew its annual dividend by 6%, compounded annually, paying out about 70% of its annual normalized FFO (funds from operations). It currently yields 3.8%.
It currently has just 6.4% of its debt in floating-rate securities.
Given that the inflation-adjusted monthly cost of housing for home ownership has never been greater, rental housing makes sense for even the affluent. With a lack of supply for all residential housing types, rents will remain healthy for REITs like EQR.
On the date of publication, Will Ashworth did not have (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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.