Equity Residential (EQR 0.88%) is one of the U.S.'s largest apartment landlords. The real estate investment trust (REIT) owns more than 300 properties with over 80,000 apartment units. Most of those apartments are in major cities along the coasts, like Boston, New York, San Francisco, and Los Angeles, which benefit from steady demand and constrained supply. 

While that strategy has enabled Equity Residential to grow its dividend steadily over the years, the REIT recently expanded its approach to accelerate growth. That could allow Equity Residential to deliver even higher total returns in the coming years.

Following the migration trend

Equity Residential's strategy of focusing on high-cost coastal markets has worked well over the past decade. Demand for apartments in those cities has remained strong due to healthy job markets that draw a steady stream of job seekers, who often need to rent because of high housing costs. That has helped keep occupancy levels high and rental rates rising.

As a result, Equity Residential's net operating income has climbed steadily over the years. The REIT has complemented the growing rental income from its existing apartments by adding new properties to the portfolio via development projects and acquisitions. These drivers have enabled the REIT to grow its dividend at a 6.4% compound annual rate since 2011.

However, more people are migrating away from the coasts to warmer and cheaper cities in the Sun Belt region. Likewise, more companies are relocating and expanding in the Sun Belt to take advantage of the influx of people and the region's better business climate.

That's leading Equity Residential to make a similar move. Since 2018, the residential REIT has sold off 4.6 billion dollars' worth of older apartment communities in select coastal markets. It has recycled that capital to expand into Denver, Dallas, Austin, and Atlanta, where rents are growing faster. It has acquired 4 billion dollars' worth of recently built communities and invested $1.1 billion in development projects.

Equity Residential currently gets less than 5% of its income from those expansion markets. However, it's aiming to grow its income from its four expansion markets to 20% in the future as it continues to recycle capital.

A growth accelerant

Equity Residential's legacy portfolio is prospering these days. Rental rates are growing briskly, driven mainly by a recovery in demand as the pandemic's effects have subsided, enabling companies to bring more employees back to their urban offices. The REIT's rental rates grew by an average of 13.3% in the first quarter. 

While that's a strong growth rate, rents are rising even faster across the Sun Belt region. For example, MAA (MAA 1.55%), a Sun Belt-focused apartment REIT, reported a 16.8% blended rent growth rate (new and renewal leases) in the first quarter. Meanwhile, Camden Property Trust (CPT 1.40%), another REIT primarily focused on Sun Belt markets, delivered 15.1% blended rent growth in the first quarter. 

Because those REITs are benefiting from faster rental growth rates, they're delivering bigger dividend increases. MAA boosted its payout by 15% this year, while Camden Property gave its investors a 13.3% raise. For comparison's sake, Equity Residential only increased its dividend by 3.7% this year. 

However, with Equity Residential shifting a larger portion of its portfolio to faster-growing markets, the REIT's income should grow at a higher rate in the future. That could allow it to increase its dividend at an accelerated pace in the coming years.

A smart move

Equity Residential's coastal strategy has been highly successful over the years. However, the REIT can see the demographic shift to the Sun Belt region. That's leading it to expand into that area so that it can capture some of the region's faster growth. This strategy shift could enable the REIT to follow in the footsteps of its Sun Belt-focused peers by delivering more rapid dividend growth in the coming years, which could help it produce higher total returns.