The cause of the global credit crisis could be summed up in word: housing. While the U.S. housing market has moved from its recessionary lows, it still isn’t exactly humming along.
For a lot of people, getting a mortgage is still pretty hard to come by. This shift in home-buying and ownership is having a positive effect on apartments and the firms that own them. After all, people have to live somewhere.
That fact has propelled occupancy rates to a high 95% in 2014 and sent rental rates sky-high.
Directly benefiting from this has been those real estate investment trusts (REITs) that own multifamily housing units. The apartment REITs have enjoyed torrid returns over the last few years — with a return of nearly 40% last year capping that run.
And more could be in store for the apartment REITs.
Many of the same factors that have led to their rise continue to remain in place. In fact, some of them have gotten better for the REITs. For investors, that means the apartment REITs could be still one of the best real estate subsectors to buy going into the New Year for both capital gains and strong dividends.
Let’s look at three apartment REITs that investors should consider today.
1-year Performance: +50.6%
Dividend Yield: 2.6%
The market loves a guru. And when it comes to real estate Sam Zell is pretty much the go-to guy. He’s been quite successful over the years as a real estate developer, but his apartment REIT, Equity Residential (NYSE:EQR), could be his crown jewel.
EQR owns and manages nearly 400 properties with more than 110,000 units, primarily located in bustling metro areas such as Boston, New York, San Francisco and Washington, D.C. That focus on these key areas of the country has allowed EQR to have a pretty strong occupancy rate as well as strong rental rate growth.
It’s also helped the firm on the dividend and cash flow front.
For its last earnings report, EQR saw a 10-cent-per-share jump in its funds from operation (FFO) versus the same quarter a year ago. Additionally, the 81 cents in FFO it reported managed to beat analysts’ estimates. The continued cash flow generation at EQR allowed management to recently up their full year 2014 and 2015 FFO estimates.
That’ll trickle down to EQR’s 2.6% dividend. While it isn’t the highest headline yield when it it comes to REITs, it is backed by one of the strongest apartment owners out there.
Apartment REITs to Buy #2: Avalonbay Communities Inc (AVB)
If EQR is the biggest apartment REIT, then AvalonBay Communities Inc (NYSE:AVB) is a very close second. In fact, it’s actually partnered with EQR before to get deals done — such as buying a whole slew of apartments from bankrupt Lehman Bros. for $6.5 billion back in 2012.
Currently, AVB owns more than 82,000 apartment units across 11 states, and that number continues to grow. The REIT has about $3.2 billion in new expansion projects — equaling 27 new apartment communities — under construction.
Those projects adding to its already immense size will continue to boost AVB on the earnings and cash flow fronts. Analysts estimate that the projects will deliver yields in the 6% to 7% range.
That will build on Avalonbay’s already impressive FFO and earnings growth. For its latest reported quarter — the third quarter of 2014 — AVB saw its cash flows increase by 14.4%. That’s about double the average REITs cash flow growth versus the same quarter a year ago.
Meanwhile, the company reported third-quarter earnings of $241 million and earnings per share of $1.83, compared to a loss of nearly $16 million and EPS of -8 cents in the same quarter a year ago.
Those great growth numbers have continuously pushed up analysts’ price targets for the REIT. Investment bank Jefferies currently has a target of $195 on AVB shares. That’s about 10% higher than today’s selling price plus the REITs 2.8% yield.
1-Year Performance: +32.4%
Dividend Yield: 3.8%
Operating almost 82,000 apartment units across the Sunbelt of the U.S. — where foreclosure activity remains relatively high — REIT Mid-America Apartment Communities Inc. (NYSE:MAA) could be a great bet for investors looking for dividend income.
MAA has plowed some pretty big dollars into acquisitions and expansion properties across various high-growth markets. Those successful expansion plans have allowed it basically doubled the number of apartment units under its umbrella over a few short years. That aggressive strategy has paid off big time for the REITs’ bottom line.
Earnings at MAA have exploded higher by about 141% last year, while net operating cash flows have increased by 66% compared to the third quarter of last year. MAA is set to report fourth quarter and full-year earnings in early February. Based on the REIT’s history, those year-end earnings numbers should be pretty good.
Investors have been treated pretty decent by MAA’s expansion plans as well.
Shares of the stock managed to finish 2014 with a nearly 27% gain. This year, the REIT is already up 4.9%. Driving that gain has been the continued growth in FFO and the firm’s dividend. The most recent was a 5.5% increase in the REITs quarterly payout.
MAA currently yields 3.8%.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.