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3 Top Multifamily REITs to Buy

[Updated: Aug 17, 2020] Dec 24, 2019 by Matthew DiLallo
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Real Estate Investment Trusts (REITs) that focus on multifamily properties like apartment buildings and student housing have been hot investments this year. According to NAREIT, the 21 publicly traded residential-focused REITs delivered a 35.5% total return through mid-December -- due in part to falling interest rates -- which has outpaced the equally red-hot S&P 500's roughly 30% total return. Meanwhile, the top-performing apartment REITs have done even better, due in part because they focus on supply-constrained regions like Seattle, San Francisco, and Southern California.

The rising stock prices of these REITs have pushed down their dividend yields, making the sector a bit less attractive to income-seeking investors. However, there are still some attractive multifamily REITs with higher-yielding dividends to consider buying these days.

Here's a look at the top three multifamily REITs to buy right now:

REIT Market capitalization Dividend yield
American Campus Communities (NYSE: ACC) $6.3 billion 4.1%
Brookfield Property REIT (NASDAQ: BPR) $1.2 billion 7.2%
Independence Realty Trust (NYSE: IRT) $1.3 billion 5.2%

Market data as of 12/19/19

1. American Campus Communities

American Campus Communities (NYSE: ACC) is a REIT focused on owning and developing student housing communities in the United States. The company currently owns 168 properties that can house 113,400 students, with a substantial presence along the West Coast and mid-Atlantic regions. All its communities are either on campus or within walking distance.

The student housing-focused REIT has grown its portfolio over the years through a combination of development projects and acquisitions, investing more than $16 billion since its inception. Those expansion-related investments, along with its ability to steadily increase rental rates, have enabled American Campus Communities to grow its funds from operations (FFO) and dividend over the last several years.

One issue with American Campus Communities' expansion efforts is that the company now has a high leverage ratio of 6.7 times net debt to Adjusted EBITDA. However, it has a low dividend payout ratio of 73% to help balance things out and expects its leverage ratio to decline to 5.8 times by 2023 as it finishes construction on several new campus communities.

With its financial profile on track to improve, and a massive addressable market -- American Campus Communities currently owns just 1.4% of the beds near its targeted schools -- the company has lots of growth potential. Because of that, it could produce strong total returns for REIT investors in the coming years.

2. Brookfield Property REIT

Brookfield Property REIT, which is the REIT subsidiary of global commercial real estate partnership Brookfield Property Partners (NYSE: BPY), isn't a pure play on multifamily. Because of that, investors focused on that subsector of the real estate market tend to overlook this REIT. However, the company owns interests in nearly 20,000 multifamily units and 49 student housing properties through its investments in real estate funds managed by Brookfield Asset Management (NYSE: BAM).

In addition to those investments, Brookfield Property is building out a core urban multifamily portfolio from the ground up. The company is currently investing $1.8 billion into seven multifamily properties in London and New York City that it expects to finish by 2021. As those development projects come online, they'll help grow Brookfield's value as well as its FFO.

While Brookfield's diversification is a drawback for investors who want to focus on multifamily, it does help reduce its overall risk profile. Because of that, the company should be able to deliver a steadily growing income stream as it aims to increase its big-time dividend by 5% to 8% per year.

3. Independence Realty Trust

Independence Realty Trust (NYSE: IRT) operates 57 multifamily communities that have 15,536 apartment units. Instead of focusing on major markets like Boston, New York, and Washington, D.C., Independence Realty invests in middle-market communities in regions like the Southeast and mid-America. The company looks for places with strong employment drivers, a growing population, well-rated schools, and attractive rent vs. buy dynamics.

The REIT typically invests in older mid-rise and garden-style apartment communities with appealing amenities that it can update. This value-add strategy enables it to charge higher rents on the renovated units so it can grow its income. It can then sell these communities for a profit and recycle the proceeds into new opportunities with more upside potential.

One knock against Independence Realty is that it has an elevated leverage ratio of 9.0 times net debt-to-adjusted EBITDA. However, its financial condition should improve as it executes its redevelopment strategy. The rising rents should help push down its dividend payout ratio from its current level of 94% while also dropping its leverage ratio to its 7.0 times target level by 2021. That upcoming improvement in Independence Realty Trust's financial profile could enable it to produce outsized total returns as well as eventually start growing its dividend.

Attractive options to buy in the multifamily sector

The rally in most multifamily REIT stocks this year has pushed down their yields, making them less appealing for investors who want income. However, American Campus Communities, Brookfield Property REIT, and Independence Realty Trust stand out for their higher yields and upside potential, making them ideal options to consider buying right now.

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Matthew DiLallo owns shares of Brookfield Asset Management and Brookfield Property Partners. The Motley Fool owns shares of and recommends American Campus Communities and Brookfield Asset Management. The Motley Fool has a disclosure policy.