AVB: Avalonbay Communities vs. Equity Residential: Which Residential REIT is a Better Buy?

AvalonBay Communities, Inc. (AVB - Get Rating) and Equity Residential (EQR - Get Rating) are two of the largest real estate investment trusts that invest in apartments in the U.S. AVB has ownership interests in 294 apartment communities that represent 86,676 apartment homes in 11 states, while EQR has investments in 305 properties consisting of 78,568 apartment units across eight states.

The global real-estate market has been holding up well, achieving better than normal figures and shrugging off the impact of the pandemic. The impressive rebound has been supported by lower mortgage rates, accommodative monetary policy, and upbeat buyer sentiment. The U.S. fiscal stimulus and affordable mortgage rates should keep fueling the industry’s growth. Hence, we believe this might be a good time to invest in residential REITs such as AVB and EQR that have been witnessing robust demand.

In terms of past three-month performance, EQR is the clear winner with 5.7% returns versus AVB’s 0.1%. But which of these stocks is a better pick now? Let’s find out.

Latest Movements

AVB was recently declared a Global and Regional Sector Leader in the 2020 Real Estate Assessment, a benchmark that includes more than 1,000 REITs, by the Global Real Estate Sustainability Benchmark. The achievement reflects the company’s solid performance, which should allow it to stand out in the market.

On December 2, the company announced a partnership with the National Urban League to increase diversity in leadership by 2025. This multi-year engagement should help AVB create a more dynamic and robust workforce that will contribute to the overall development of the company.

EQR also announced in December that the sale of an apartment property in San Diego, for approximately $312.5 million. The company intends to use the proceeds from the sale to bolster its already strong financial position.

Recent Financial Results

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In the third quarter ended September 31, 2020, AVB’s rental revenue declined 3.4% year-over-year to $566.39 million, attributable primarily due to a decrease in the sale of real estate because of the pandemic. The company’s joint-venture income grew 209.4% from its year-ago value to $5.08 million. And AVB’s gain on other real estate transactions increased 76.7% from the prior-year quarter.

EQR’s rental income for the third quarter ended September 30, 2020 has declined 9.2% year-over-year to $622.43 million. The company collected approximately 97% of its expected residential revenues in the third quarter.

Past and Expected Financial Performance

AVB’s revenue and EBITDA have grown at a CAGR of 3.7% and 3.2%, respectively, over the past three years. The company’s tangible book value grew at a CAGR of 1.1% over this period.

Analysts expect the company’s revenue to increase 0.5% in 2021. Moreover, its EPS is expected to grow at a rate of 2.5% per annum over the next five years.

In comparison , EQR’s revenue and EBITDA grew at a CAGR of 2.6% and 1.9%, respectively, over the past three years. The CAGR of the company’s tangible book value has been 1.4%.

Analysts expect the company’s revenue to decrease 3.4% in 2021. EQR’s EPS is expected to grow at a rate of 6.1% per annum over the next five years.

Profitability

EQR’s trailing-12-month revenue is 1.12 times AVB’s. But AVB is more profitable, with a gross profit margin of 65.9% versus EQR’s 65.2%.

Moreover, AVB’s EBIT margin of 33.1% compares favorably with EQR’s 31.8%.

Valuation

In terms of trailing-12-month P/E, EQR is currently trading at 54.42x, 65.2% more expensive than AVB, which is currently trading at 32.95x. Though EQR is less expensive in terms of trailing-12-month EV/Sales (11.71x versus 12.71x), its forward PEG of 30.43x is 211.1% higher than AVB’s 9.78x.

Thus, AVB is the more affordable stock here.

POWR Ratings

Both AVB and EQR are rated “Neutral” in our proprietary POWR Ratings system. Here are how the four components of overall POWR Rating are graded for AVB and EQR:

AVB has a “C” for Trade Grade, Buy & Hold Grade, and Industry Rank, and a “D” for Peer Grade. In the 25-stock REITs – Residential industry, it is ranked #11.

EQR has a “C” for Trade Grade, Buy & Hold Grade, and Industry Rank, and a “D” for Peer Grade. It is ranked #12 of 25 stocks in the same industry.

The Winner

While both AVB and EQR are good long-term investments considering their market dominance, AVB is a cheaper investment option for riding the industry’s growth. Moreover, we believe AVB’s better financials and higher profitability should help it perform better than EQR.

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AVB shares were trading at $157.63 per share on Friday morning, up $0.57 (+0.36%). Year-to-date, AVB has declined -1.75%, versus a 1.50% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...