Are These Bulked Up Landlords’ a Buy?

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Apartment REITs AvalonBay (NYSE: AVB) and Equity Residential (NYSE: EQR) announced that they were jointly purchasing the assets and liabilities of Archstone Enterprises from Lehman Brothers.  This $16 billion deal will have AvalonBay acquiring 40% of the assets with Equity taking the remaining 60%.  This is a big deal for both companies but does it make either a buy?

For AvalonBay they reiterated their 2012 outlook while announcing that they anticipate boosting their 2013 dividend by between 8% and 12%.  Not all of that boost will be from the acquired Archstone assets as AvalonBay cited “current operating platform and recent operating trends, the expectation for continued favorable apartment fundamentals in 2013” among the reasons for the anticipated boost. 

With a dividend being the main reason you’d invest in a REIT the word of a boost is welcome news.  If they went with the top end of their guidance that would mean AvalonBay is trading at about a 3.4% forward yield.  While that’s certainly better than a US Treasury its low when considering that a REIT is primarily a tax advantaged and leveraged income vehicle and there are several blue chip companies out there that yield much higher. 

Over at Equity they too reaffirmed their 2012 guidance and didn’t change forward guidance either although they did note that Funds from Operations would dip by about four cents because of the Archstone deal.  The company is currently guiding for a $1.79 annual dividend which would also be about a 3.4% current yield. 

While both companies are well off their 52 week highs they certainly aren’t the screaming bargains they were in the financial crisis as you can see from this chart:

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AVB data by YCharts

It’s really hard to find a value in the REIT sector these days as many are priced for perfection if not priced to sell.  Given occupancy rates, supply and demand dynamics and favorable demographic trends the premium being enjoyed by publically traded apartment owners while understandable is still tough to justify.  While both AvalonBay and Equity bulked up with the Archstone purchase they paid a fair price for those assets which should add value to the firm over time, but investors today are still paying a premium for that future value.

Outside of these two top tier players there aren’t a lot of other pure play options for investors seeking to be landlords without all the hassles at least for a reasonable value.  Both UDR (NYSE: UDR) and Essex (NYSE: ESS) are trading for yields under 4% and at a price to funds from operations north of 18 times.  In order to secure a higher payout you’d need to look at much smaller companies which come with increased risk profiles. 

Another interesting option for really long term investors is a company that’s building their multi-family platform, Brookfield Asset Management (NYSE: BAM).  That platform comes through a 65% interest in Fairfield Residential which they acquired by recapitalizing the company two years ago.  While Fairfield ranks as the 16th largest apartment manager in the US they represent just a tiny portion of Brookfield’s assets under management.

Knowing Brookfield, this asset could eventually be spun off to shareholders once it’s gained critical mass and can thrive on the open market.  That would of course be years away, but in the meantime Brookfield is trading meaningfully under their intrinsic value.  Value alone isn't likely reason enough to tempt income investors as Brookfield doesn’t offer the payout a traditional real estate investor would be seeking as shares yield just 1.6%. 

Despite the trends favoring landlords these days it’s tough to find value in the sector.  While both AvalonBay and Equity bulked up through their Archstone buy, they appeared to pay full value for the assets.  They’ll be hard pressed to offer investors very compelling long term gains.  Other than Brookfield’s compelling valuation the only other name that could be worth looking into is UDR. They've underperformed their peers and are the cheapest of the bunch.  I plan to dig a little deeper into the company in a future article but for now I'll stick with Brookfield as my landlord of choice.

latimerburned owns shares of Brookfield Asset Management. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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