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3 Apartment REITs to Buy in July


Jul 09, 2020 by Matt Frankel, CFP

A real estate investment trust, or REIT, is a special type of company whose primary business activity involves owning, operating, developing, and/or managing real estate assets. Among other requirements, a REIT must distribute at least 90% of their taxable income to shareholders as a dividend.

Let's take a look at three excellent apartment REITs for long-term investors to buy now, as well as some important information about each one.

A large apartment REIT with room to grow

AvalonBay Communities (NYSE: AVB) is one of the largest residential REITs and is actually one of the 10 largest REITs of any kind. AvalonBay owns or has an interest in 296 apartment communities, many of which are large urban apartment buildings.

This residential REIT has historically concentrated on six main markets -- New York City metro; New England; Washington, D.C.; Seattle; San Francisco; and Southern California. The idea is that these are not only extremely desirable markets but that they have excellent economics. These are markets where supply of new apartments is generally low, wage and job growth has been above average, and homeownership is prohibitively expensive for a relatively large portion of the population.

Recently, AvalonBay has started to expand to the South Florida and Denver markets, creating tons of room for the company to grow its portfolio. The company acquires some properties but prefers to grow through development, which can be an excellent way to create value for shareholders -- especially when combined with an active capital recycling program (meaning AvalonBay sells mature and highly appreciated properties to reinvest in new opportunities).

AvalonBay hasn't exactly been immune to the COVID-19 pandemic, but it has held up quite well. AvalonBay collected 95% of its billed rent in May (97% to 98% is typical), and occupancy is above 94%. With shares about 30% off their pre-pandemic highs and yielding 4%, now could be a great time to get into this leading apartment REIT at a discount.

Capitalize on the growth of the Sunbelt region

MAA (NYSE: MAA), formerly known as Mid-America Apartment Communities, is an apartment REIT focused on the Sunbelt region. The idea is to capitalize on affordable, high-growth areas of the United States: Atlanta, Dallas, Charlotte, and Austin are some of the company's largest markets, but MAA has a presence in many fast-growing cities in the Southeast, Southwest, and mid-Atlantic regions and has over 102,000 apartments altogether.

MAA has been aggressively updating its units (about 25% have been redeveloped in the last three years alone), which has done a great job of adding value. The company has identified a pipeline of 12,000 more units that are excellent development candidates and also is actively seeking ways to incorporate value-adding amenities to its communities. And this is in addition to the company's $490 million development pipeline that will add 2,100 additional units to the portfolio.

The company's properties are generally affordable, and residents have favorable rent-to-income ratios, making for excellent rent collection statistics. And this has been extremely important in 2020, for obvious reasons -- throughout the COVID-19 pandemic, MAA's rent collection stats have been impressive. The company collected more than 96% of expected May rent and agreed to defer another 2.7% -- that combines for just 0.4% less than the average month.

A different kind of apartment REIT

The first two companies in this discussion are traditional apartment REITs. However, my other favorite is a somewhat different type of business. American Campus Communities (NYSE: ACC) acquires, develops, and manages apartment communities specifically designed for college students.

American Campus Communities is the only pure-play student housing REIT. The company owns 166 student housing properties with nearly 112,000 beds and manages 35 more on a third-party basis. Many of the properties are located very close to major university campuses, while some (especially the managed properties) are even located on campus.

The general business model is to focus on large university markets where purpose-built student housing is in short supply and the on-campus housing options are dated and undesirable. And when the company sets its sights on a university, it pursues the opportunity aggressively. For example, Arizona State University is a massive school and more than 15% of its student body lives in American Campus Communities properties.

The million-dollar question for investors is "What happens this fall?" Specifically, if the schools where American Campus Communities has a presence can resume in-person classes this fall, its properties will do just fine. This question is the big reason why it's still down 25% year-to-date.

As of the most recent update (May 31), about 76% of the company's universities had announced plans for in-person classes or some sort of hybrid model. Just 4% were definitively planning for online-only instruction, but it's the 19% that were still undecided that are the big question mark for investors.

But with increasing pressure on universities to bring classes back (many students plan to take the semester off if online classes are the only choice), I'd be surprised if American Campus Communities properties aren't at least close to normal occupancy levels this fall.

Invest for the long term

Like other REIT investments, apartment REITs like these three are best suited for patient, long-term investors who aren't worried about short-term fluctuations. Apartment REITs like these are rather stable businesses, but there are many factors that could cause their stock prices to fluctuate over short time periods. So, it's not a good idea to invest in these (or any other REITs) with money that you'll need within the next five years. On the other hand, for money that you can leave invested for years, these can be excellent sources of long-term growth and income in your portfolio.

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Matthew Frankel, CFP owns shares of American Campus Communities. The Motley Fool owns shares of and recommends American Campus Communities. The Motley Fool recommends AvalonBay Communities. The Motley Fool has a disclosure policy.

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