Two Dividend Growing REITs Face Off

AvalonBay (AVB)  is a national apartment REIT with a primary focus on coastal markets, particularly in major cities. While they are gradually expanding into sunbelt markets, their core operations remain concentrated along the coasts.

Rexford (REXR)  is a Southern California-based industrial REIT.

Both REITs possess significant expertise in development and redevelopment, considering these efforts as important drivers for enhancing shareholder value.

Although comparing apartment REITs with industrial REITs may seem unconventional, it adds an element of interest for the reader.

Valuation

AFFO trades around 22x forward consensus AFFO estimates while REXR trades about 25x.

That makes it sound like REXR is more expensive, but it’s actually pretty rare to see them so close.

Dividend Payout Ratios

REXR’s payout ratio is higher at 83%, but not dramatically higher.

AVB has a payout ratio of 66%, which is very low. It wouldn’t surprise me if AVB increases its dividend in the next 2 quarters, 3 at the most.

For comparison, Equity Residential (EQR) is an apartment REIT with an 84% payout ratio.

The industrial REITs typically have higher payout ratios because they have a large amount of embedded AFFO growth as a result of large leasing spreads.

REXR, Prologis (PLD), Terreno (TRNO), and EastGroup (EGP) are all industrial REITs reporting attractive spreads.

In my Q2 2024 Rexford and Prologis Update, I highlighted that I was glad to see those REITs continuing to report impressive spreads.

Due to those large spreads, I expect the REIT to continue posting AFFO growth which will bring that payout ratio down unless the dividend is hiked again.

Interest Rates

Interest rates had a profound impact on REIT valuations over the last few years. 

Lower interest rates are likely to benefit Rexford more than many of the apartment REITs.

If Rexford expands its portfolio more rapidly (through acquisitions and developments), it will issue a greater amount of new debt compared to its existing debt.

As a result, lower interest rates play a more significant role in reducing the weighted average cost of debt.

Conclusion

AVB benefits from the low payout ratio creating plenty of room for dividend growth.

However, I'm favoring REXR in this matchup. The mark-to-market on leases creates plenty of opportunity for growing their AFFO and dividend per share.

If we see lower rates, I think it would be a bigger tailwind for REXR due to their emphasis on expansion.

Disclosure: Long REXR, PLD, TRNO.

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