Equity Residential (EQR), AvalonBay Communities Inc (AVB): Make Money From Your Rent Increase – Buy These REITs

Valuation

REITs use FFO as a supplementary measure to EPS. FFO functions like EPS but ignores depreciation and the gains/losses from one-time items like the purchase or sale of property. The idea is that the depreciation schedule used by the IRS does not accurately reflect the fact that real estate held for investment purposes may hold value for longer and/or appreciate in value. I will be using a Price/FFO ratio for the trailing-12 months instead of the traditional P/E ratio when looking at valuation for these reasons.

Price/FFO is 19 for UDR, assuming a share price of $25.50. For AvalonBay Communities Inc (NYSE:AVB), the Price/FFO is roughly 28 assuming a share price of $135.00; Equity Residential (NYSE:EQR)’s Price/FFO clocks in at about 21, assuming a share price of $58.00. Keep in mind, as I mentioned above, the valuation difference is partially attributable to the costs surrounding the purchase of the Archstone portfolio. Nonetheless, the difference between UDR and Equity on the one hand, and AvalonBay on the other, is substantial, and I believe UDR and Equity are better investments long-term because of it.

Foolish conclusion

AvalonBay has a lot of its future growth priced in already as the flashy market-leader. UDR, Inc. (NYSE:UDR) has sailed a bit more under the radar, which provides you with an excellent opportunity to purchase a potentially undervalued REIT – particularly given the revenue growth management can anticipate from further redevelopments. That being said, any of these three is a great opportunity – they all have credible growth plans, they all are growing revenue, and they all are geographically dispersed, which helps hedge against risk. Bet on the economic recovery and on the continued expansion of the young workforce – buy these REITs.

The article Make Money From Your Rent Increase – Buy These REITs originally appeared on Fool.com and is written by Michael Douglass.

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

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.