Apartment REITs Are Dividend Plays

by Lawrence Meyers | February 16, 2012 12:05 pm

I recently wrote about the necessity of owning dividend stocks to hedge against the coming Social Security implosion[1]. But that’s not the only way to profit from government-created troubles.

You can also profit from the housing crash — without buying up distressed properties. Just take advantage of the fact that a lot of people have lost their homes and need a place to live, so they move into an apartment. That brings us to apartment REITs, an overlooked portion of the REIT market.

As with most real estate, the concept here is pretty simple: A building owner takes out a mortgage to build or buy his or her property. The owner then rents it out for more than what he pays in debt service and passes 90% of net income to shareholders per REIT requirements.

There are about 40 million renters right now in the U.S., and demand over the next four years suggests a 10%-12% increase beyond that. Supply is not being created fast enough to meet demand, so rental trends are expected to move higher. Most apartment REITS saw “same-store” rental increases (as earnings reports call them) in the 5% range in 2011.

UDR Inc. (NYSE:UDR[2]) owns, acquires, renovates, develops and manages middle-market apartment communities. The company targets young professionals, blue-collar families, single-parent households, older singles, immigrants, and non-related parties and has an occupancy rate of 96%. UDR is 40% leveraged and spent more than $1 billion in 2011 on New York City acquisitions. If you know New York City, you know those rents are high.

The company has more than $5 billion of unencumbered assets and almost $800 million in cash and credit available, meaning it is extremely well-positioned to increase its leverage to expand. UDR expects to pay a 3.5% yield this year.

BRE Properties Inc. (NYSE:BRE[3]) is all about multifamily communities. The company has an untapped credit facility of $750 million, pays a 3.1% dividend and also has a 96% occupancy rate. Investors may also want to look into the company’s Preferred Series D stock, which yields 6.6%

Despite its name, Associated Estates Realty Corp. (NYSE:AEC[4]) deals with multifamily units as well and has about the same number as BRE, with an occupancy rate of 96%. But AEC is a more modest play than BRE — it has only a $350 million credit facility available. It does, however, pay a slightly higher divided, at 4.4%.

Post Properties Inc. (NYSE:PPS[5]) also plays in the multifamily space, has roughly the same number of units as the previous two companies and has an occupancy rate of around 96% for 2011. The company made some nice moves regarding indebtedness this year, paying off a secured mortgage and also redeeming its Series B preferred stock.

PPS is tight on cash at the moment, but it just drew down $100 million of a $300 million new credit facility. I think it’s a more speculative play that could yield higher capital gains to offset its smaller 2% dividend.

Finally, we have Home Properties Inc. (NYSE:HMC[6]), which own about 50% more units than the other companies, again in the apartment-community space. It is tight on liquidity despite being only 44% leveraged and has less credit available than its peers. HMC pays a 4.4% yield.

I think the most interesting play is UDR, but BRE and Associated are also worth a look.

Lawrence Meyers does not own shares of any company mentioned.

  1. the necessity of owning dividend stocks to hedge against the coming Social Security implosion: http://seekingalpha.com/article/347971-12-dividend-stocks-to-hedge-against-a-social-security-implosion
  2. UDR: http://studio-5.financialcontent.com/investplace/quote?Symbol=UDR
  3. BRE: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRE
  4. AEC: http://studio-5.financialcontent.com/investplace/quote?Symbol=AEC
  5. PPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=PPS
  6. HMC: http://studio-5.financialcontent.com/investplace/quote?Symbol=HMC

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