AvalonBay Communities Inc (AVB), Equity Residential (EQR): Is This REIT a Dangerous Investment?

Like AvalonBay, Equity Residential (NYSE:EQR) focuses on high-barrier-to-entry markets. And like AvalonBay, it has taken a stake in Archstone. AvalonBay has a 40% stake in Archstone properties (60 properties), and Equity Residential (NYSE:EQR) has a 60% stake in those properties (78 properties). This will increase expenses for Equity Residential (NYSE:EQR), which might affect earnings in the near future.

Equity Residential (NYSE:EQR) has seen revenue increase over the past two years. Earnings have been inconsistent, but the firm is always profitable. In the second quarter, same-store revenue increased 4.9%, and same-store net operating income jumped 5.6%.

Equity Residential (NYSE:EQR) currently yields 2.80%, and it owns a debt-to-equity ratio of 1.13, which is lower than the industry average. Equity Residential (NYSE:EQR) is trading around 10 times earnings.

The industry

Though there are many positives listed throughout this article, it all comes down to investor confidence. And truth be told, investors aren’t feeling great about REITs right now. There is much speculation that interest rates will increase soon. If that’s the case, then investors will be quick to move out of REITs.

On the positive side, underemployment and student loan debt have led to decreased demand for houses and increased demand for rental apartments. This trend might gather momentum as the 30-year fixed mortgage moves higher.

Conclusion

Of the three REITs, AvalonBay and Equity Residential look to have the most potential. And demand is likely to increase. On the other hand, and unfortunately, the market doesn’t care.

Put simply, REITs don’t perform well when the market corrects. This was exemplified at the height of The Great Recession, when AvalonBay and Equity Residential fell 60%, and AIMCO plummeted more than 80%. With the threat of Ben Bernanke tapering, and interest rates increasing, investing in any REIT would be extremely risky and isn’t recommended, regardless of how well they’re managed.

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Dan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Is This REIT a Dangerous Investment? originally appeared on Fool.com is written by Dan Moskowitz.

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