Equity Residential (NYSE: EQR) currently clocks in as the second-largest residential real estate investment trust (REIT) by market cap. It's also one of the leading owners of apartment buildings with 304 properties and 78,410 apartment homes. Because of that, it's one of the top options for investors who want the income benefits of being a landlord without all the hassles.
However, while Equity Residential is a top-tier REIT, investors seeking exposure to the multifamily sector should consider buying smaller rival Camden Property Trust (NYSE: CPT) instead. Here's why.
The right portfolio for the current environment
While Equity Residential has a substantial apartment portfolio, it's highly concentrated. The company currently operates in only seven markets:
- Southern California (27% of its NOI)
- San Francisco (21%)
- Washington D.C. (16%)
- New York City (14%)
- Seattle (11%)
- Boston (10%)
- Denver (1%)
The problem with this is that multifamily market conditions in several of those cities are under pressure because of COVID-19. For example, in New York City, apartment vacancies reached a record of more than 15,000 in August as renters who can work from home fled the city to cheaper areas, causing the vacancy rate to cross above 5% for the first time. High-cost big cities like Boston and San Francisco are seeing similar trends. Because of that, Equity warned that it's seeing increased price sensitivity in those three cities' urban cores, which could have a long-term impact on its bottom line as it could take a while for occupancy and rental rates to rebound to pre-pandemic levels.
Contrast that highly focused portfolio with Camden's approach. While the REIT owns fewer apartment homes -- over 56,000 as of the end of the second quarter -- they're spread across 14 major markets. Not only is it more geographically diversified, but it also has no exposure to price-sensitive markets like Boston, New York, and San Francisco.
Meanwhile, Camden also has more diversification by asset class and market location. It has a mix of both Class A (33%) and Class B (67%) properties as well as urban (39%) and suburban (61%) locations. Because of that, it reaches a broader tenant pool and has less exposure to high-priced rental properties, which have been under more pressure due to the pandemic. As a result, its occupancy levels and rental rates should hold up better than Equity Residential's.
An even better balance sheet
Equity Residential and Camden Property Trust are in an elite class of REITs as they're among only eight with A-rated credit. Because of that, they're pillars of financial strength, which gives them the cushion to weather a prolonged downturn in the apartment sector. They also have tremendous financial flexibility, affording them the ability to take advantage of opportunities to invest in development projects or make acquisitions.
However, while they both boast top-tier financial profiles, Camden has the best balance sheet in the sector. Its leverage ratio of 4.6 times net debt-to-adjusted EBITDA is better than Equity's 5.1 times leverage level. Further, it doesn't have any secured debt, while Equity Residential has used assets to back some debt. Because of that, Camden has even more financial flexibility than Equity Residential.
A safer apartment REIT for the current uncertainty
There's no doubt that Equity Residential is a top-tier apartment REIT as it boasts both a high-quality portfolio and a top-notch balance sheet. However, its concentration in high-priced markets has become an issue this year as COVID-19 has had a greater impact on those areas. Because of that, it might remain under pressure for a while.
Contrast that with Camden Property, which boasts a more diversified portfolio of high-quality apartment communities and an even stronger balance sheet. Because of those factors, investors who are thinking about buying Equity Residential might want to consider Camden instead.