With increasing population levels, urbanization, and shifting demographics boosting demand for new housing, the residential construction sector is expanding robustly. Additionally, a growing desire for modern, energy-efficient homes is growing, further accelerating the sector’s expansion.

Therefore, with the industry’s tailwinds, it could be wise to keep an eye on fundamentally sound residential REITs, Equity Residential (EQR), AvalonBay Communities, Inc. (AVB), and Essex Property Trust, Inc. (ESS) amid rising housing demand.

One of the great things about investing in REITs is that they’re known for delivering steady, high dividend payouts. Thanks to long-term tenant leases and a rule that requires them to distribute at least 90% of their taxable income as dividends, one can count on them for reliable returns.

Plus, the sector is poised to benefit significantly from current market dynamics. With mortgage levels dropping to their lowest in nearly 15 months, the demand for housing has been on the rise. Additionally, despite high interest rates, the Federal Reserve’s potential rate cut this month could further boost the industry’s growth prospects.

That said, privately-owned housing completions in July reached an annual rate of 1,529,000, marking a 13.8% increase from July 2023. Single-family housing completions were at a rate of 1,054,000, up 0.5% from the revised June rate of 1,049,000.

According to Statista, the residential real estate market in the United States is projected to reach a value of $106.70 trillion by 2024. This projection shows a steady annual growth rate of 3.6% from 2024 to 2029, with an anticipated market volume of $127.40 trillion by 2029.

Considering all these factors, let us now discuss the fundamentals of three REITs – Residential stocks, starting with number #3.

Stock #3: Equity Residential (EQR)

EQR focuses on acquiring, developing, and managing multifamily residential properties, primarily generating rental and related income by leasing apartment units. The company owns 302 properties across ten states and the District of Columbia, comprising 80,191 apartment units.

On August 7, EQR agreed to acquire 11 apartment properties from Blackstone Inc. (BX), a global frontrunner in real estate investing, for around $964 million. The acquisition, which includes 3,572 apartment units in Atlanta, Dallas/Ft. Worth, and Denver, enhances EQR’s presence in expanding markets.

The high-quality properties could drive growth and financial performance through increased rental income and strategic market positioning.

On July 19, EQR re-opened the staircase plaza at Harbor Steps Apartments in Seattle after extensive renovations. The revitalized public plaza, connecting downtown to the Seattle Waterfront, now features 30,000 square feet of retail space, dining options, and commercial office space.

The upgrade is expected to boost EQR’s community engagement and commercial appeal.

In addition, on June 20, EQR declared a quarterly cash dividend of $0.675 per share for the second quarter of 2024. Paid on July 12, 2024, to stockholders of record on July 1, 2024, this underscores EQR’s commitment to shareholder value and financial stability.

EQR pays an annual dividend of $2.70, which translates to a yield of 3.61% at the current price level. Moreover, the company has raised its dividends at a CAGR of 3.9% over the past five years, while its four-year average dividend yield is 3.69%.

For the fiscal 2024 second quarter that ended June 30, 2024, EQR’s rental income increased 2.3% year-over-year to $734.16 million. Its net income available to common shares and units grew 27.4% from the year-ago value to $182.13 million. Plus, normalized FFO available to common shares and units came in at $380.14 million or $0.97 per share, up 2.9% and 3.2% year-over-year, respectively.

Analysts expect EQR’s revenue for the fiscal third quarter (ending September 2024) to increase 2.4% year-over-year to $741.60 million. Meanwhile, its FFO for the same quarter is expected to grow 2.2% from the prior year’s period to $0.98. Furthermore, the company surpassed the consensus FFO estimates in three of the trailing four quarters.

Shares of EQR have surged 17.2% in the past three months and 24.4% in the past nine months to close the last trading session at $74.88.

EQR’s prospects are reflected in its POWR Ratings. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

EQR has a B grade for Sentiment, Stability, and Momentum. The stock is ranked #8 among 20 stocks within the REITs – Residential industry.

To see the other ratings of EQR for Growth, Quality, and Value, click here.

Stock #2: AvalonBay Communities, Inc. (AVB)

AVB holds direct or indirect ownership in around 279 operating apartment communities with over 83,655 apartment homes across 12 states and the District of Columbia. Additionally, 19 wholly-owned communities are under development. The company operates under four core brands: Avalon, AVA, eaves by Avalon, and Kanso.

During the three months ended June 30, 2024, AVB acquired Avalon at Pier 121 in Lewisville, TX. The wholly-owned community, featuring 300 apartment homes, was purchased for $62.1 million. This acquisition strengthens the company’s market presence and adds substantial value to its portfolio.

In July, AVB expanded its holdings by acquiring two wholly-owned communities: Avalon Perimeter Park in Morrisville, NC, with 262 apartment homes for $66.5 million, and Avalon Cherry Hills in Englewood, CO, with 306 apartment homes for $95 million. These acquisitions enhance growth potential and diversify the company’s asset base.

On May 16, AVB’s board of directors declared a quarterly cash dividend of $1.70 per common stock for the second quarter of 2024. This dividend was paid on July 15, 2024, to all common stockholders of record as of June 28, 2024. This shows AVB’s commitment to generating income for its shareholders.

AVB pays an annual dividend of $6.80, which translates to a yield of 3.01% at the current price level. The company has raised its dividends at a CAGR of 2.3% over the past five years, and its four-year average dividend yield is 3.39%.

For the fiscal 2024 second quarter that ended June 30, 2024, AVB’s total revenue increased 5.1% year-over-year to $726.04 million. The company’s core FFO came in at $394.57 million or $2.77 per share, indicating increases of 4.3% and 4.1% year-over-year, respectively.

In addition, as of June 30, 2024, AVB’s cash and cash equivalents stood at $545.77 million compared to $397.89 million on December 31, 2023.

For the fiscal third quarter ending September 2024, AVB’s revenue and FFO are expected to increase 5.4% and 2.6% year-over-year to $733.33 million and $2.73, respectively. Moreover, the company topped the consensus revenue estimates in each of the trailing four quarters, which is impressive.

Shares of AVB have gained 18.8% over the past three months and 30.5% over the past nine months to close the trading session at $225.73.

AVB’s fundamentals are mirrored in its POWR Ratings. The stock has an A grade for Sentiment and a B grade for Stability and Momentum.

Within the REITs – Residential industry, AVB is ranked #3 out of 20 stocks.

In addition to the POWR Ratings highlighted above, you can check AVB’s ratings for Growth, Value, and Quality here.

Stock #1: Essex Property Trust, Inc. (ESS)

ESS owns interests in 256 operating apartment communities, totaling 63,480 apartment homes. The company operates through three segments: California; Northern California; and Seattle Metro. It focuses on acquiring and developing apartment communities in supply-constrained markets while redeveloping its existing properties to enhance value.

On March 25, ESS acquired its joint venture partner’s 49.9% interest in the BEXAEW portfolio for $505 million. The portfolio, consisting of four properties with 1,480 apartment homes, initially had a 5.25% cap rate.

After integration, ESS anticipates a 5.9% year-one yield and an 11.4% IRR. ESS will also recognize $1.5 million in promote income, which will be excluded from Core FFO. The acquisition could enhance growth by expanding the portfolio, improving profitability, and boosting financial performance.

On May 15, ESS declared a regular quarterly cash dividend of $2.45 per common share for the second quarter. The dividend, payable on July 12, 2024, will be distributed to shareholders of record as of June 28, 2024. The announcement reflects ESS’s commitment to returning value to its investors.

ESS has increased its dividends for 29 consecutive years. It pays an annual dividend of $9.80, which translates to a yield of 3.25% at the current price level. Moreover, the company has raised its dividends at a CAGR of 4.6% over the past five years, while its four-year average dividend yield is 3.41%.

ESS’s revenues for the fiscal 2024 second quarter, which ended on June 30, 2024, came in at $442.36 million, indicating an increase of 6.3% year-over-year. Its core funds from operations attributable to common stockholders and unitholders were reported to be $261.97 or $3.94 per share, showing increments of 4.6% and 4.5% year-over-year, respectively.

The consensus revenue and FFO estimates of $445.58 million and $3.86 for the fiscal third quarter ending September 2024 exhibit a year-over-year rise of 7% and 2.2%, respectively. Moreover, the company has surpassed the consensus FFO estimates in all four trailing quarters.

Shares of ESS have gained 18.1% over the past three months and 41.4% over the past nine months to close the trading session at $301.79.

ESS’ fundamentals are echoed in its POWR Ratings. The stock has a B grade for Stability, Sentiment, and Momentum.

Within the REITs – Residential industry, ESS is ranked #2 out of 20 stocks. Beyond what is stated above, we’ve also rated ESS for Value, Quality, and Growth. Get all ESS ratings here.

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AVB shares were unchanged in premarket trading Tuesday. Year-to-date, AVB has gained 22.73%, versus a 19.34% rise in the benchmark S&P 500 index during the same period.

About the Author: Aanchal Sugandh

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. More...

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