Housing has been and always will be a necessary asset class in real estate. Whether it's single-family homes, mobile homes, or apartments, people will always need a place to live. Equity Residential (NYSE: EQR) and Invitation Homes (NYSE: INVH), two popular residential real estate investment trusts (REITs), both serve the demand for housing across the United States, but in different ways. One provides housing in the form of high-end apartments across major metro cities. The other leases single-family homes in desirable neighborhoods. Both can be viable residential REITs to invest in, but which is the better buy right now? Let's take a look at where each company stands and which is a better buy in today's market.
Equity Residential owns and manages higher-end apartment buildings in large urban metro cities across the United States, like Boston, New York, and Chicago. Since Equity Residential's tenant base is largely comprised of the upper working class with more job security and flexibility in working from home, occupancy rates and collection have remained relatively strong since the pandemic first broke out in March of 2020.
Currently, occupancy is at 94.9% as of Q2 2020 with collections at 97%, which is near The National Multifamily Housing Council (NMHC)'s average of 95.9% for full months collections by months end in June 2020. With that being said, new leases and renewals are down, with a -1.1% blended decrease since Q1 2020, no doubt a result of the current pandemic. Nonresidential leases, which include retail space below their apartments and public parking spaces, are down significantly, with cumulative outstanding delinquency or deferred payment balances around $7 million.
In Q1 2020, Equity Residential sold three properties in the San Francisco and Phoenix markets, achieving an unlevered internal rate of return (IRR) of 12.9% and increasing their overall liquidity. This, in combination with a recent acquisition of a 10-year interest-only loan, provides more than $200 million in available capital to deploy or help cover debt services in the coming quarters. In combination with a conservative payout ratio of 69% and normalized funds from operation (FFO) of $0.87 per share, Equity Residential is in a generally positive position even during this uncertain and challenging time.
Invitation Homes is a younger company that was largely built up by Blackstone Group's (NYSE: BX) desire to branch into the single-family rental world. It took Invitation Homes public in 2017. While Blackstone Group no longer holds shares in Invitation Homes as of May of 2019, Invitation Homes is now one of the nation's leading single-family home providers for renters in highly desirable areas with proximity to good schools, shopping centers, public transit, or job hubs throughout the Southwest and Florida.
All homes leased by Invitation Homes have been renovated and offer features many tenants want in today's rental environment, including smart-home technology, accepting pets, and homes in desirable locations throughout the 16 markets they serve.
As of Q1 2020, Invitation Homes saw a 3.3% year-over-year increase in revenue, with increased core FFO per share of 4.4% to $0.34 with adjusted funds from operations (AFFO) of $0.29. This places them at a payout ratio of 51%, which is low by REIT standards, but stable. Additionally, the company's Q1 2020 debt-to-EBITDA ratio decreased to 8x. While this is an improvement from last year, it's still considered high for a REIT and may indicate that they currently have too much debt.
May's rental collection was at a record 97%, with strong year-over-year rental-rate growth and high occupancy. In early June 2020, Invitation Homes extended an offering of 14.5 million shares, which netted around $395 million for the use of basic operational costs, paying debt service, and for future acquisitions and remodels of properties. This capital raise will force a discount on the company's stock, especially during the current crisis and recession, thereafter leaving a lot of room for growth as they deliver quality housing to a shifting demographic of renters.
Which is the better buy right now?
While both companies have a strong balance sheet given the current economic climate, Equity Residential's high delinquency with retail and parking tenants, in combination with the current shift away from high-density housing, makes Invitation Homes the better buy right now in my opinion. While I don't think this preference will last forever, I do think for the next few years we'll start to see more tenants seeking alternative housing that provides more security, safety, and space. Invitation Homes' current discounted share price means it can be a great time to get in on this stock while the value is down; however, its debt ratios and payout ratios should be considered before buying. In all honesty, in the long run, both of these companies have strong financials and will likely continue to be strong buys -- even beyond the current crisis.
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