Very few investment sectors have caused as much headaches for covering analysts than the broader real estate market. With an explosive bull market that continues to pull like a freight train, industry professionals have been left flabbergasted, let alone the everyday folks that simply want a piece of the American Dream. However, many of these would-be buyers may have to settle for real-estate investment trusts (REITs).
Companies that manage or finance income-generating properties, REITs offer several advantages for investors, irrespective of their goals or strategies. Primarily, when you wager on a REIT, you’re levered to an organization which specializes in real estate, perhaps down to a specific market segment depending on how it’s structured. Since many regard real estate as the king of all assets, you want professionals to handle this critical sector.
Second, REITs generate passive income for shareholders. According to the Securities and Exchange Commission (SEC), a REIT “must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.” With so much uncertainty in the equities sector and society broadly, REITS represent a viable avenue for your investment funds.
Beyond the structural advantages of REITs, they’re particularly relevant in the current economic environment. Since the novel coronavirus upturned our reality, housing prices have soared to unprecedented levels. Many experts believe that this circumstance will only worsen as inventory shortages and ballistic demand sustain upside demand. If so, this dynamic will continue to push people priced out of the housing market into rentals.
Certainly, it’s not a welcoming situation for those hoping to get a home. According to data from the U.S. Census Bureau, the rental vacancy rate remains stuck at multi-decade lows. In other words, for right now, people have no choice but to continue renting. Theoretically (and cynically), this should bolster the following REITs:
- AvalonBay Communities (NYSE:AVB)
- Equity Residential (NYSE:EQR)
- Essex Property Trust (NYSE:ESS)
- Independence Realty Trust (NYSE:IRT)
- Camden Property Trust (NYSE:CPT)
- Apartment Investment and Management Company (NYSE:AIV)
- American Campus Communities (NYSE:ACC)
Fair warning to those who are about to pull the trigger on these or other REITs: no market continues upward forever. At some point, buyers collectively lose purchasing power. As well, history shows that rental vacancies only stay subdued (as they’ve been since 2015) for so long until they rebound. Therefore, as with any investment sector, please perform your due diligence beyond the content of this article.
REITs to Buy: AvalonBay Communities (AVB)
A common fixture in the premium apartment space, analysts often cite AvalonBay Communities as one of the best REITs to purchase. Thanks to prime real estate properties that are “located in the Northeast, Mid-Atlantic, Pacific Northwest, Northern and Southern California, Colorado and Southeast Florida regions of the country,” AvalonBay benefits from arguably perpetual relevance.
I know that we live in a culture of inclusivity and that everybody should get their 15 minutes. Granted, that’s a discussion for the sociological component of America. But when it comes to real estate, it’s just a harsh reality: some areas are more important than others, whether that’s due to geographical advantages or economic catalysts. Life isn’t fair but you can at least profit from the favorable side of this binarism via AVB stock.
Now, it’s important to note that AvalonBay — like other REITs — suffered a hit because of the coronavirus pandemic. In 2020, the company posted revenue of $2.3 billion, down 1% from 2019’s result. Nevertheless, as people start to realize the hopelessness of the ridiculous housing market, AvalonBay could regain sales momentum in the second half of this year.
Equity Residential (EQR)
When the Covid-19 pandemic gave us a rude wake-up call, shares of Equity Residential plummeted badly, a condition not uncommon in the least among REITs. However, following some wild swings in either direction, EQR stock continued to tumble into October of last year. Since then, EQR has changed a much-needed change of fortune, with shares up massively.
Like AvalonBay above, Equity Residential specializes in upscale apartments in several key markets, including southern and northern California. As well, Equity has a strong presence on the east coast with proprieties in New York, Washington, D.C. and Boston. Naturally, this affords EQR a viable consumer base. Many if not most of its renters are those who aren’t rich enough to pay for a house in cash but can easily make rent.
Financially, Equity Residential shares a similar theme with apartment REITs. In 2020, the company posted revenue of $2.57 billion, which was down nearly 5% from the year prior. Further, its first quarter of 2021 sales result isn’t particularly encouraging. But discouragement in the real estate market could translate into an influx of renters for Equity.
REITs to Buy: Essex Property Trust (ESS)
One of the most recognized names among apartment REITs in California, Essex Property Trust has the biggest footprint in the San Francisco Bay area, with 83 apartments. That’s not a bad gig considering the ridiculous cost of living there — and the big wig companies that are willing to pay these incredible salaries.
Coming in second place is the Los Angeles area, where Essex owns and operates 44 properties. The remainder of its units are scattered through high-value California markets Orange County, San Diego, Santa Barbara and Ventura County. As well, Essex has a presence in Washington, with 56 apartments in the Seattle metro area.
Some folks might be dissuaded by the lack of geographical diversity, and I respect that opinion. But let’s just be honest: no matter how awful the tax situation and ridiculous cost of living is in many California hot spots, seemingly everybody wants to move here. Therefore, ESS stock benefits from the classic aphorism: location, location, location.
Also, Essex has a new mantra: revenue, revenue, revenue. In 2020, the company generated top-line sales of nearly $1.5 billion, up 2.5% from 2019’s result.
Independence Realty Trust (IRT)
I’m a west coast guy, born and raised. For me, the eastern side of the U.S. might as well be eastern Europe. In my mind, it’s a foreign country. The sad truth is, I know more about other countries than I do about the U.S. east of Nevada and Arizona. Outside of quick layovers in Salt Lake City and JFK, I have never walked foot in that part of the country.
I mention this as full disclosure in case you detect bias in my writing about apartment REITs. It’s not you, it’s me. Having said that, Independence Realty Trust confirms that everybody should open their eyes when it comes to the rental market. True, the glitz and glamor of Hollywood grabs the headlines. But IRT stock is a REIT that you can trust.
For one thing, positive momentum has carried IRT shares conspicuously beyond their pre-pandemic highs. Part of that is due to Independence Realty’s footprint in the burgeoning markets of Atlanta, Memphis and Raleigh. The other is revenue growth. For both full year 2020 and its latest Q1 2021 reports, top-line sales have exceeded their respective year-over-year comparisons.
That’s not something all apartment REITs can say, putting IRT stock in a very positive light.
REITs to Buy: Camden Property Trust (CPT)
If you’re looking for a little bit of normalcy in your apartment REITs, then you will be well served considering Camden Property Trust. From a renter’s standpoint, Camden Property Trust is appealing because it specializes in multi-family communities. While living in luxury apartments in crowded metropolitan areas has its attractive factors, it also gets old pretty quickly.
On the other hand, Camden offers family friendly communities that cater to middle-market renters. Therefore, it has broad exposure which could prove quite lucrative during these shaky times. As well, the company features a geographically diverse footprint, though it concentrates on the Sun Belt region; specifically, we’re talking about California, Arizona, Texas and Florida.
According to some reports, Texas ranks as the top U.S. destination for millennials. And over the years, many have moved to Arizona for its relatively lower cost of living and better weather (although the summer heat is atrocious).
Also, it’s worth mentioning that CPT stock is one of the apartment REITs that saw its revenue increase from 2019 to 2020. Camden’s Q1 2020 sales of $268 million is up 0.7% year over year, suggesting that the middle-market consumer base is a viable one.
Apartment Investment and Management Company (AIV)
As one of the largest apartment REITs in the nation, featuring properties across 17 states and the District of Columbia, Apartment Investment and Management Company provides a diversified take on the residential rental industry. Thanks to a combination of various communities, including high-level markets like Boston, San Diego and Miami, AIV stock enjoys relative insulation from economic pressures.
True, when a recession hits, no metropolitan area is immune, no matter how big and important it may be. Nevertheless, as I mentioned earlier, some locales are more significant than others. For instance, Boston, San Diego and Miami are coastal cities. Just for that fact alone, they provide higher economic value than an inland community off the beaten path.
Sure enough, this wide-reaching exposure to key real estate markets is paying off in the financials. For 2020, Apartment Investment and Management Company posted revenue of $151.5 million, which is up more than 5% from 2019’s tally. It’s fair to point out that net income slipped to a loss of $5 million last year, whereas it was positive in 2019.
Should the economy bounce back, though, AIV stock could be the one to watch.
REITs to Buy: American Campus Communities (ACC)
I mentioned near the top that you need to perform due diligence before getting involved with apartment REITs. While many factors suggest bullishness in this arena, other circumstances — such as a mixed jobs report for May 2021 — indicate that we could see deflation in this market. Therefore, you must be vigilant.
However, American Campus Communities may take this need for vigilance to another level. Specializing in rentals close to major college campuses, in an earlier paradigm, you might say that ACC stock enjoyed a moat. After all, there are only so many housing units in close proximity to popular university campuses. Of course, Covid-19 changed everything and this is where the narrative gets tricky.
On one hand, American Campus Communities stands to benefit as society returns to normal, in no small part due to the vaccination rollout. Thus, ACC could see pent-up demand. But on the other hand, remote learning offered many students is a viable (and cheaper) alternative to higher education.
It’s also possible that we may have hit peak college in that the last thing America needs is yet another white-collar worker. But if you don’t agree, you may want to take a close look at ACC stock.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.