Apartment rents are on a tear of historic proportions.
National median rents have increased by nearly quadruple the typical increase in any normal year.
And it doesn’t seem to be slowing down.
Have you tried to buy a house lately?
House prices increased by the fastest rate on record in July; simply put, renters can’t afford to buy a house right now.
And not only are renters getting priced out of the market, but they are also relocating.
Despite some return to normalcy in urban locations, many young renters have fled the big city, spurred by the ability to ‘work from anywhere’, better work opportunities, and a desire for more affordable housing.
These trends in relocation are the most pronounced in what is known as the Sunbelt region, which has experienced the biggest increase in rents among all regions in the US.
Areas such as Austin and Nashville have become the go-to spots for those New York and Silicon Valley millennials that have had enough with the close confines and out-of-control rents.
The Sunbelt is expected to account for 55% of the US population by 2030.
Add it all together and I think you have a scenario playing out in the Sunbelt where rents should continue to see strong appreciation over the next decade as urban city dwellers flock for the sun.
So what does this mean for investors?
Despite solid price appreciation in many apartment REITs this year, I think it’s time to put some money to work in a few names, especially those focused on the Sunbelt region.
Here are three Sunbelt-focused Apartment REITs to consider for your portfolio.
Apartment REIT Pick #1:
Mid-America Apartment Communities (MAA)
Dividend Yield: 2.2%
MAA is entirely focused on the high-growth Sunbelt region, with apartment units located in areas like Florida, Georgia, and Texas.
I will admit, MAA isn’t cheap. It trades at around 27 times forward FFO and yields 2.2%. However, the current valuation is about on par with other Apartment REIT competitors. Over three years, investors in MAA have done quite well.
However, its recent blockbuster earnings results reinforce the trends that we’ve already discussed; higher tenant demand and higher overall leasing rates.
MAA experienced such strong rent and occupancy growth in the second quarter that it boosted expected FFO for the year by 4%.
“We believe our uniquely diversified portfolio across this high-growth region has MAA well positioned as the economy in our Sunbelt markets continues to recover, while these markets attract a growing number of employers, new jobs and households”
– MAA CEO Eric Bolton on Q2 Earnings Call
Despite the premium, I like MAA as a high-quality Apartment REIT, benefiting from continued Sun Belt migration trends.
Note that MAA has provided consistent dividend growth and has ample capacity to continue paying an attractive dividend to shareholders.
Apartment REIT Pick #2:
Camden Property Trust (CPT)
Dividend Yield: 2.3%
Like MAA, CPT is a high-quality Apartment REIT focused on the Sunbelt region.
CPT has a portfolio of 169 properties, consisting of over 57K apartment homes across the Southern and Western regions of the U.S, with a big focus in Austin, Houston, Atlanta, Dallas, and Charlotte.
When considering total returns, investors in CPT have beat out the S&P over the past three years.
CPT has a highly experienced management team – Ric Campo has been CEO of CPT for over 30 years and is well recognized as one of the better operators in the REIT space.
And Campo has not sat idle during the pandemic. The team recently built a $105 million apartment community in one of the hottest real estate markets – Nashville, Tennessee. And leasing is now commencing at three newly built Camden properties in Orlando, Atlanta, and San Diego.
We can also see that the renter profile for CPT sits squarely in that demographic I spoke of earlier:
Source: Camden Company Presentation
Similar to MAA, CPT also reported strong rental trends during the quarter, with rental rates on new and renewal leases growing by an unbelievable 19% and 11% YoY.
Note that CPT also trades at a premium; currently at around 27 times forward FFO and yields 2.3%.
Still, I consider CPT to be a high-quality, well-managed (and investment grade) REIT that should continue to provide attractive total returns to shareholders.
Apartment REIT Pick #3:
Independence Realty Trust (IRT)
Dividend Yield: 2.4%
Make it three for three in the Sunbelt Apartment REIT space.
IRT is another apartment REIT heavily focused on Sunbelt markets like Austin, Indianapolis, and Raleigh/Durham.
And like MAA and CPT, IRT reported a blowout second quarter driven by strong rental trends in that good old Sunbelt.
And IRT is getting a LOT bigger in the Sunbelt; they have a pending $7 billion merger with Steadfast Properties (another Sunbelt-focused REIT), which will make it the third biggest Apartment REIT in the Sunbelt market. The deal is expected to close in Q4.
Source: IRT Investor Presentation
I’ll be clear once again that IRT on typical valuation measures is not cheap. It does trade at a discount to CPT and MAA, at 24x forward Funds From Operation (FFO), at about a 20% premium to the entire REIT market. Its dividend yield is currently at 2.4%.
However, the trend is our friend.
A combined Steadfast/IRT will have a strong portfolio of assets that should see not only increasing rents over time but a consistent appreciation in asset values, as Sunbelt properties continue to see strong demand from investors.
Consider it a high-quality, capital appreciation, total return play.
And while I like the future for all names mentioned here, I know these Apartment REITs aren’t a perfect fit for those seeking high dividend income.
What If we could find you stocks that yield more than 7%?
Juice Your Retirement Income With These 7% Dividend Yielders
Chief Investment Strategist Brett Owens has put together what he calls his “No Withdrawal” Retirement Portfolio.
Here’s where you can earn a stress-free $35,000 on a half-million… $70,000 on a million… and $100,000+ annually on anything higher.
Plus, you won’t even have to tap your initial capital or “draw down” any of your priceless principal.