In a rising-interest-rate environment, many investors have begun to steer clear of companies operating in industries that are largely viewed as bond proxies. Industries such as utilities or real estate investment trusts (REITs) have been pushed aside in favor of high-flying growth stocks in sectors encompassing higher levels of innovation.
In a world of rising valuations for the vast majority of industries, making a bull case that buying and holding a significant position in any REIT in this economic environment can be a difficult one for some investors.
Besides the obvious benefits to diversification owning a small REIT holding has on one’s portfolio, I’m going to highlight three apartment REITs in this article I believe will provide superior value to long-term investors with a smaller downside related to rising rates that the broader REIT sector. Here we go.
REITs That Will Soar: AvalonBay Communities REIT (AVB)
One of the premier apartment REITs available to investors, AvalonBay Communities Inc (NYSE:AVB), operates a diverse portfolio of apartment units in some of the premier real estate markets in the country. With a portfolio of properties in in New York, California and Washington D.C., this REIT provides investors with markets which are relatively insulated from regional housing market issues. These markets are generally able to achieve higher yields, lower vacancy rates and higher average income growth – fundamental factors supporting continued outperformance when comparing AVB with its regional peers.
Its 3% dividend yield is modest, but the company has grown its dividend for nearly two decades and continues to forecast additional increases moving forward.
AVB also focuses on building its portfolio of real estate assets from scratch, creating additional value across the spectrum other REITs are now able to create.
REITs That Will Soar: American Campus Communities REIT (ACC)
Long-term investors looking for an ultra-safe niche to invest hard-earned money into should definitely consider student housing.
Boasting some of the lowest vacancy rates in the industry, REITs like American Campus Communities, Inc. (NYSE:ACC) provide investors with access to a stable and renewable pool of renters across the country. ACC operates in upscale communities close to college campuses, growing its reach in many of the best college towns in the country which many REITs tend to stay away from.
The market for student housing is one with tremendous opportunities for growth, and ACC estimates it will be able to easily double its unit count within five years as it continues to reinvest in growth.
The company’s dividend of 4.1% is very attractive, and has been on the rise in recent years as the company continues to return a significant percentage of its net income to investors.
REITs That Will Soar: Killam Apartment REIT (KMMPF)
A relatively unknown REIT, Killam Apartment REIT (OTCMKTS:KMMPF), is a small REIT operating a portfolio of multi-unit apartment buildings in Atlantic Canada. The REIT’s attractive dividend yield is supported by a robust growth rate in a region of the country which is largely viewed to be insulated from a potential housing bubble seen in other metropolitan areas in Canada. The company designs, builds and operates apartment buildings (with an impressive portfolio of projects currently underway), while also acquiring projects which are underutilized or still under construction, adding value where many other operators simply cannot.
KMMPF remains very cheaply valued, trading at a small premium to book value, with a very attractive dividend payout ratio as compared to its peers.
The apartment space is generally one which is looked to as being insulated from interest rate movements, much more so than commercial or retail real estate due to the fact that rental increases are much easier to push through in a time of rising rates, allowing the REIT increased flexibility in matching any rising borrowing costs with minimal margin disruption. KMMPF remains one of my top picks in this space.
As of this writing, Chris MacDonald has no position in any stocks mentioned in this article.