3 Top Apartment REITs to Buy Right Now

By: , Contributor

Published on: Sep 21, 2019 | Updated on: Dec 16, 2019

There is a national housing shortage, causing rental prices to rise and vacancies to remain low. Investing in these top three apartment REITs may be a great way to take advantage of market conditions.

Real estate investment trusts (REITs) provide investors with an opportunity to passively participate in commercial real estate investments. While there are numerous types of REITs to choose from, apartment REITs are especially interesting.

Rental rates are soaring and homeownership fell to a 50-year low in 2016, meaning rental housing is in high demand. This means investing in multifamily properties or apartments may be worthwhile, both today and in the coming years. And apartment REITs could present an excellent opportunity to profit from market conditions.

Below are three top apartment REITs to buy right now that you may want to consider adding to your real estate portfolio.

What is a REIT?

A real estate investment trust or REIT is a pooled investment fund that combines investors' money into various real estate assets. The investments are professionally managed and are typically in large commercial properties such as self-storage facilities, industrial facilities, mortgages, health facilities, retail locations, or apartments, to name a few. Shares of REITs can be purchased through a brokerage account and are a relatively low-cost investment.

To qualify as a REIT, the investment company must invest at least 75% of its assets in real estate and pay out at least 90% of its taxable income to its shareholders. REITs receive favorable tax advantages for this classification and often pay higher dividends than other stocks or investments because the way they are structured. Given the potential for higher dividend returns, cheaper upfront investment, and ease of purchase, it's an enticing way to passively invest in commercial real estate.

What are the risks of investing in apartment REITs?

As with other types of REITs, such as mortgage REITs, rising interest rates have the largest effect on apartment REITs. Increases in interest rates can affect the overall net income from the properties, directly impacting the profits and dividend returns from the company.

Additionally, economic conditions can affect this sector's profitability. During economic recessions, vacancy rates typically increase while rental rates decrease. This can negatively impact the overall net income and value of the property.

It’s important when evaluating a REIT investment that you determine the health of the company within the sector by comparing their total funds from operations (FFO), leverage ratio, payout ratio, track record, and future potential growth to other REITs in that sector. It’s up to you to determine if these three apartment REITs are a good addition to your portfolio based on your own research and risk tolerance.

Company Symbol Market Capitalization Dividend Yield
AvalonBay Communities NYSE: AVB $29.5 billion 2.90%
Apartment Investment and Management Company (Aimco) NYSE: AIV $7.6 billion 3.03%
American Campus Communities Inc. NYSE: ACC $6.5 billion 4.01%

Data source: Market data as of Sept. 17, 2019.

Top three apartment REITs to buy right now

1. AvalonBay Communities

AvalonBay Communities (NYSE: AVB) is the ninth-largest publicly-traded REIT. It is most commonly known for higher-end, Class A apartments, but also invests in Class B apartments as affordable housing solutions. As of June 30, 2019, AvalonBay Communities owned 294 apartment communities containing 86,184 apartment homes, primarily in New England, the New York/New Jersey metro area, the Mid-Atlantic, Washington D.C., the Pacific Northwest, and Northern and Southern California. In the first half of 2019, AVB completed the development of three communities containing 800 apartment homes for a total capital cost of $243,000,000 and has 21 additional development communities underway with a total capital cost of $2.58 billion.

AvalonBay Communities has an impressive average annualized return of 14.64%, although at 99.33%, their payout ratio is slightly more than the market average. Their stable balance sheet, moderate leverage ratio of 0.7, and numerous developments underway put them high up on the list for top apartment REITs to invest in. However, it is important to note that their price per funds from operations (P/FFO) is 22.60x, meaning this REIT doesn’t have a notable discount in value at this time.

2. Apartment Investment and Management Company (Aimco)

Aimco (NYSE: AIV) focuses on developing and redeveloping apartment complexes equally split across Class A and Class B/C price points across 12 primary markets of the United States. Aimco recently lowered its cost of debt to an average rate of 3.37% for over $587 million in property loans, saving about $20 million annually. Additionally, their year to date occupancy is holding strong at 97%. Before the end of 2019, Aimco aims to sell 10% of its portfolio to reinvest in capital improvements, redevelopment, and potentially some developments in high growth markets. Aimco has several promising projects underway and has maintained an adequate balance sheet while beating market projections for the past two quarters.

While the lower cost of debt will help improve the overall profitability of the company, AIV has an interest coverage ratio of 1.98x, which is below the 3x ratio and, for many, is considered risky. Additionally, AIV’s P/FFO is 20.41x which means this company may be overvalued at this time.

3. American Campus Communities, Inc.

American Campus Communities Inc. (NYSE: ACC) is the largest developer, owner, and manager of high-end student housing in the nation. ACC has strong credit ratings and focuses on Class A assets located on or off campus that produce stabilized yields in the 5.75%–6.8% range. Currently, they have $767.5 million in development underway and $107.3 million in their presale development pipeline that includes expected deliveries between Fall 2019 and 2021. ACC has the highest dividend return out of this list and one of the best P/FFO of 17.37x, meaning it’s priced adequately for its value. However, as of June 2019, ACC has a high debt-to-equity ratio of 0.94, meaning for every $1 of assets, they have $0.94 of debt.

American Campus Communities Inc.’s strong past performance, stable outlook, healthy dividend payout of 73.41%, and annualized year to date returns of 17.68% makes this a contender for the top three apartment REITs to buy right now.

When considering these top three apartment REITs, make sure you review each company and determine if their investment portfolio and risk potential make sense for you. Most commercial assets, including apartments, are intended to be long-term investments and provide better returns over a longer period of time. With that being said, shifts in economic circumstances or increases in interest rates can affect any of these companies at any moment. Always conduct your own due diligence and make sure your investments align with your risk level.

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Liz Brumer-Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends American Campus Communities. The Motley Fool has a disclosure policy.