High rent for San Diegans means strong revenue growth for publicly traded companies that peddle apartments.
Four real estate investment trusts, companies that own and operate rental units, control 12,330 apartments in San Diego County and have occupancy rates north of 95 percent. They all reported earnings recently and seem to have avoided fears of slowing rent growth.
REITs were formed in 1960 by President Dwight D. Eisenhower as a way for more investors — not just wealthy landowners — to invest in large-scale real estate. They must pay out at least 90 percent of their taxable income each year in shareholder dividends.
Because REITs are publicly traded they offer a window into the San Diego rental market, dominated by private owners, that has seen rents rise 5.1 percent from the first quarter of 2016 to the first quarter of 2017, said real estate tracker CoStar's analysis of more than 200,000 San Diego County apartments.
The biggest REIT operating locally is San Mateo-based Essex Property Trust that has roughly 5,000 units in San Diego County and is the third largest landlord in the region. It is paying the most out to shareholders based on its funds from operations, the primary way to look at the success of a REIT because it includes net income but factors in wear and tear of buildings, as well as debt payments.
Essex had $199 million in funds from operations, or $2.94 per share for shareholders, in the first three months of 2017. That was up from $181.7 million in the first quarter of 2016 and $190.8 million from last quarter.
The REIT charged an average $1,809 a month for rent in San Diego County in the first quarter, up 4.7 percent from the first quarter of 2016. Gross revenue from those apartments equaled $27.5 million.
Essex's San Diego apartments equaled a 6 percent year-over-year growth in gross revenues, outpacing Los Angeles County (3.6 percent) and Orange County (5.6 percent). Its' Ventura County revenues grew by 6.1 percent. The company said it had a net income of $178 million, or $2.72 per share, in the first quarter.
It might be tempting to think REITs are the cause of rent rising faster than incomes in the county, but they make up less than 10 percent of the market. It might not bad to be in one of their buildings if you are a renter (under certain circumstances).
Russ Valone, president of market research firm MarketPointe Realty Advisors, said REITs are focused so heavily on occupancy that they will likely be the first to lower rents when there is a market slowdown.
"They may be the first to discount rents in the beginning to fill up," he said.
Valone said REITS have more high-end units, so it can be more difficult for them during a downturn. He said those properties have tenants who are more flexible, presumably because they have more money than the average renter, and could more easily move or buy something. More affordable units are less volatile in a market downturn because those renters are there because they can't afford anything else.
"They have to be a renter," he said of renters in older, less expensive apartments. "They don't have as much discretionary income."
Only one trust, Aimco, increased rates faster than the market as a whole. The Denver-based REIT charged an average rent in the first quarter of $1,896 a month for 2,001 apartments, increasing its rate 5.2 percent in a year. It has a 96.9 percent occupancy rate.
Aimco, the county's 10th largest landlord, did not report funds from operations like other REITs, instead reporting adjusted funds that include capital for building improvements. Its adjusted funds from operations were $80.1 million, or $0.51 per share.
Despite a good start to the year for many apartment-focused REITs, Aimco CEO Terry Considine said an increase in more apartments coming on the market could begin to affect the bottom line.
"The supply of new apartments continues to increase and there are many markets where new lease rent increases have slowed or turned negative," he said during a conference call with investors.
Arlington-based AvalonBay Communities, the county's 17th-largest landlord with more than 1,000 apartments, had $287.3 million in funds from operations, or $2.09 per share.
AvalonBay charged an average monthly rent of $2,054 in San Diego County, up 5 percent from the same time last year. Rental revenue was $10.9 million. It outpaced its holdings in Los Angeles County (3.5 percent) and Orange County (4.7 percent).
In its conference call last week, CEO Timothy Naughton said it was tracking homeownership changes that could affect its business.
"Obviously, the apartment sector has benefited tremendously this cycle, as homeownership rates dropped roughly 500 basis points in the aftermath of the housing correction," he said.
Chicago-based Equity Residential, the county's seventh-largest landlord with 3,505 apartments, had $283.7 million in funds from operation, or 0.74 per share. It charged an average $2,220 monthly rent, increasing it 4.8 percent a year. It had a 96 percent occupancy rate.
Equity's 5.1 percent revenue growth in San Diego was the third highest of its markets across the nation. Seattle was its biggest rent growth at 6.4 percent and Orange County had 5.5 percent.
In its conference call with investors, CEO
"Fortunately, the apartment demand is proving sufficiently strong to absorb this new supply while maintaining healthy occupancy levels in existing assets across our market," he said.
REITs can sometimes be a risky investment because they often take on a lot of debt to purchase units and are subject to the whims of interest rate changes. But, with interest rates still at historic lows, they seem to be weathering the storm.
"You have to get comfortable with the fact that some portion of their balance sheet is going to be debt, some is going to be equity," said Dan Castro, founder of New Jersey-based Robust Advisors, a consulting service for deposition and trial testimony and analysis of different businesses.
Castro has worked for more than 25 years with REITs. He said the first thing he looks at is how the trusts are financed and then examines their earnings. Another important factor, he said, was how broad their portfolio is. Most of the REITs operating in San Diego have properties all over the United States.
"If somebody is 60 percent in Southern California, if that market goes down, you've got a problem because you're not diversified," Castro said.
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Essex Property Trust (ESS). 4,961 San Diego County apartments.
Core funds from operations per share in Q1 2017: $2.94
Occupancy rate: 96.4 percent
Average rent: $1,809
Stock price as of Friday afternoon: $250.37
Key properties: Mesa Village, Form 15, Allure at Scripps Ranch
Equity Residential (EQR). 3,505 San Diego County apartments.
Core funds from operations per share in Q1 2017: $0.74
Occupancy rate: 96 percent
Average rent: $2,220
Stock price as of Friday afternoon: $65.49
Key properties: Vantage Pointe Apartments, Market Street Village Apartments, Encinitas Heights Apartments
AvalonBay Communities (AVB). 1,863 San Diego County apartments.
Core funds from operations per share in Q1 2017: $2.09
Occupancy rate: 95 percent
Average rent: $2,054
Stock price as of Friday afternoon: $192.75
Key properties: Avalon Vista, Avalon Fashion Valley, AVA Cortez Hill
Aimco (AIV). 2,001 San Diego County apartments.
Adjusted core funds from operations per share in Q1 2017: $0.51
Occupancy rate: 96.9
Average rent: $1,896
Stock price as of Friday afternoon: $43.96
Key properties: Broadway Lofts, Windrift Apartments, Island Club Apartments