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3 Apartment REITs to Buy in December

Dec 05, 2020 by Reuben Gregg Brewer
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The fast-spreading coronavirus has resulted in huge changes in the housing sector as people move out of cities and into more rural areas. That's led to real estate investment trust (REIT) winners and losers. But you need to think long-term here, which is why you'll still want to take a look at industry bellwether AvalonBay Communities (NYSE: AVB). Meanwhile, UDR (NYSE: UDR) is a more diversified choice for those who like to spread their bets, and Mid-America Apartment Communities (NYSE: MAA) is basically in the right location at the right time. Here's a quick look at each of these apartment REITs.

The coastal REIT

AvalonBay has a long history of success. Though it hasn't increased its dividend every year, the payment has trended steadily higher over time. To put a number on that, the dividend payment has increased by over 200% since the turn of the century -- a period that has included two recessions and three major market corrections.

Behind that dividend is a REIT that owns nearly 300 apartment communities in coastal markets. AvalonBay focuses on densely populated areas with high average incomes, which means its apartments are located in and around cities.

That hasn't been a great business plan lately, with people, fearful of the coronavirus, moving to more rural areas. Same-store rents fell roughly 6% year over year in the third quarter, resulting in funds from operations (FFO) (like earnings for an industrial concern) dropping 12%. And the problem is likely to get worse before it gets better, since the global pandemic has yet to be defeated.

But vaccine advances hold material promise, and history suggests that people will eventually come back to the cities they left for both social and cultural reasons. With a yield of around 3.7%, still fairly generous by historical standards, long-term investors willing to bet big cities will regain their luster might want to take a closer look here.

Diversified across the country

The next name to look at is UDR, which owns nearly 150 communities, with a heavy focus on the East Coast and West Coast. But it also has exposure to key markets in the center of the country, including Denver; Dallas; Austin, Texas; and Nashville, Tennessee. Combined, it has 20 apartment communities in those markets, expanding its reach well beyond the coasts. The company estimates that its portfolio is around 60% suburban and 40% urban. That diversification should help to support the REIT's business as it works through the shifting dynamics in the apartment sector.

That said, revenues were off nearly 6% year over year in the third quarter, driven by steep rent declines in the Northeast and West at properties that have been fully operational for more than a year. The rest of the portfolio, however, was flat or slightly higher. Notably, FFO only fell two cents year over year, dropping from $0.52 per share in 2019 to $0.50 in 2020.

Basically, the good markets are helping to soften the blow from those getting hit hardest by the COVID-19-driven big-city exodus. That's the benefit of diversification. The stock yields around 3.6%. If you're looking for an apartment REIT with broad exposure to the United States market, UDR could be for you.

Right in the thick of things

AvalonBay is focused on coastal cities, and UDR provides a more diversified portfolio. The last name here, Mid-America Apartment Communities, is focused on areas benefiting from the current population shift away from big-city living. It owns roughly 300 communities across the southern portion of the United States lovingly called the Sun Belt. Many of the regions it serves are actually gaining population from the moves people are making because of COVID-19 concerns.

For example, Mid-America's revenues were actually higher by roughly 2% year over year in the third quarter. Core FFO was essentially flat, which is pretty good considering apartment landlords have needed to increase spending on cleaning and maintenance during the pandemic.

So, given the situation, this apartment REIT appears well-positioned. That, however, hasn't gone unnoticed on Wall Street, with the stock down in the mid-single digits so far in 2020, compared to mid- to high-teen declines at UDR and AvalonBay. Still, if you want to buy an apartment REIT and aren't willing to take on the big-city focus many peers have, Mid-America and its 3.2% yield could be the name for you.

Three ways to play

AvalonBay, UDR, and Mid-America provide three different ways to play the apartment REIT space. AvalonBay is the big-city giant with a long history of success, making it the turnaround option today. UDR is something of a punt, given its diversification. And Mid-America is the name to own if you want to be in the locations seeing the most action right now. In other words, if you're looking for an apartment REIT, one of these three should probably appeal to you.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends AvalonBay Communities and Mid-America Apartment. The Motley Fool has a disclosure policy.