John Reese selects stocks based on a detailed historical analysis of the strategies of many of the s...
The Right REIT for the Trump Era
02/20/2017 7:00 am EST
We’re adding at REIT to our portfolio that offers a triple play of strong income, growth potential and inflation protection in case Trump’s policies rev up the economy and spark higher prices, asserts Richard Stavros in Investing Daily's Personal Finance.
Equity Residential (EQR), one of the biggest companies or components of the S&P 500 real estate index, owns 315 high-quality apartment properties in top U.S. growth markets, including Boston, New York, Washington, Seattle, San Francisco and Southern California.
On a recent earnings call, CEO David Neithercut said, “Strong demand continues unabated across our markets, with current occupancies remaining at or near 96%.” While income growth did slow down recently, the CEO also said that wage growth occurring in all industries across the country, “is a very good sign for the apartment business.”
In applying our SHIELD stock selection model, we found that Equity Residential scored a stellar 9 out of a possible 10 points for dividend safety and potential income growth.
After looking at specific REIT metrics, we were impressed with the ability of the company’s cash flow to fully cover its dividend, currently yielding 3.18%.
Equity Residential’s fortunes would be bolstered by Trump’s administration policies to stimulate more jobs and higher wages, as both would fuel demand for apartments. But even if growth doesn’t materialize, we believe the company will still do well because it’s big and diversified.
Although it only owns apartment buildings, Equity Residential is anchored in real estate markets where demographic and economic trends point to strong income growth.
These markets could offset any weakness in other cities that are more sensitive to the business cycle because they rely heavily on tech employment, such as San Francisco and Seattle. In addition, with its short-duration leases, can quickly raise rent and lodging prices to defend against inflation.
A University of Pennsylvania’s Wharton business school study found that residential real estate was 77.8% effective as an inflation hedge by providing returns that were greater than or equal to inflation. So Equity Residential will be protected if inflation rises as a result of Trumps’ policies.
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