When it comes to urban apartment REITs, Equity Residential (NYSE: EQR) and AvalonBay Communities (NYSE: AVB) are the two largest players in the space, by far. And not only are they in a class of their own when it comes to size, their businesses are quite similar in terms of geographic concentrations and the number of properties they own.
So, what are the differences between these two real estate investment trusts (REITs), and is one a better buy than the other? Let's take a closer look.
Equity Residential and AvalonBay are quite similar
I've said before that Equity Residential and AvalonBay Communities are mostly the same business. Both specialize in top-quality apartment complexes in the same core markets like Boston; New York City; Washington, D.C.; San Francisco, and a couple others. And both are quite similar in size.
At the end of the second quarter, AvalonBay owned 288 apartment communities with nearly 86,000 total homes. Total occupancy of the portfolio was at 95.9%. Equity Residential has 303 apartment communities with about 78,100 homes, mostly concentrated in the same markets as AvalonBay's. Occupancy was quite similar to AvalonBay's, at 96.1% at the end of the second quarter.
Equity Residential has a $30.2 billion market cap as of the end of September and pays a dividend yield of just under 3%. AvalonBay is a $31.1 billion company and yields about 2.9%. So, these two massive apartment REITs are very similar.
Key differences for investors to know
I'd say that AvalonBay and Equity Residential use about 90% the same business model. But there are a few key differences to know.
For one thing, both companies are actively expanding beyond their core markets but are branching out into different areas. AvalonBay's two main expansion markets are Denver and South Florida and the company is also pursuing investments in Texas and North Carolina, and while Equity is expanding its portfolio into Denver and Austin, Texas, as well, it sees lots of opportunities to grow in Atlanta, where it plans to focus a significant portion of its growth efforts in the near term. So, while the geographical composition of the portfolios is quite similar today, it looks like that will change a bit over time.
Second, while both of these REITs acquire and develop properties, AvalonBay definitely places more emphasis on developing properties from the ground up, while Equity is more of an acquirer. For example, Equity Residential expanded into Atlanta and Austin by purchasing four apartment properties.
Through the first seven months of 2021, Equity spent $646 million on acquisitions and nothing on development. In contrast, AvalonBay completed four communities and started construction on five more during the second quarter alone. The five new communities will cost $578 million to build, while the company spent just $119 million on a single acquisition during the quarter.
The Millionacres bottom line
To be perfectly clear, both of these are rock-solid and well-run real estate investment trusts that have solid track records of producing returns for investors, and there's no reason to think that will change going forward. Investors won't go wrong with either of them.
Having said that, I'm a big believer in the value-creation potential of real estate development, so I tend to gravitate towards AvalonBay. The simple version of the company's business model is to develop properties that will be worth more than their construction cost, adding an additional element of shareholder value creation versus acquiring properties that already exist. So, if I were going to put new money into one of these two today, it would have to be AvalonBay.