The COVID-19 pandemic has created tremendous economic uncertainty, and the real estate sector has been one of the most hard-hit areas of the stock market. Apartment real estate investment trusts (REITs) haven't been unscathed, and as a result, some of the best-run apartment REITs are trading at attractive discounts, especially from a long-term investor's perspective. Three in particular that are still down by double-digit percentages from their 2020 peaks and well worth a look right now are AvalonBay Communities (NYSE: AVB), American Campus Communities (NYSE: ACC), and MAA (NYSE: MAA).
Don't let short-term uncertainty scare you away
There's a widespread fear that Americans will flee high-cost real estate markets (particularly cities) in large numbers. This has been a major drag on AvalonBay Communities, an apartment REIT that develops, owns, and operates apartment complexes in high-barrier coastal markets, such as New York City, San Francisco, Washington, and others.
The market doesn't seem to have much faith in AvalonBay, as shares are down 34% from their pre-COVID levels. But I think this is a huge overreaction. In the third quarter, AvalonBay's earnings were lower, but only by about 12% year over year. The company is still very profitable and generating more than enough money to keep paying its 4% dividend yield. Same-store occupancy was down by 2.7% at the end of September. And with roughly 97% of second- and third-quarter revenue collected as of late October, the company's tenants seem to be holding up.
Here's the takeaway: Has AvalonBay been affected by the pandemic? Absolutely. Does it deserve the 40% haircut the share price has received? Not even close.
Student apartments are a long-term growth market
Being in a business that relies on college students living on or near campus isn't a great one to be in this year. And to be sure, student housing REIT American Campus Communities (NYSE: ACC) is feeling the pain. Many of its university markets chose to use a hybrid instruction model or even exclusively hold classes online in the fall 2020 semester, and this is reflected in the numbers. While the company typically starts the fall semester each year with less than 3% vacancy (2.6% in September 2019), American Campus Communities' same-store vacancy rate is nearly 10% this year.
However, this is still a pretty strong occupancy rate given the current environment. And some key universities that remained online only during the fall semester are planning to restart in-person instruction in the spring 2021 semester.
In the meantime, American Campus Communities pays a 4.8% dividend yield and is trading for more than 20% less than its pre-pandemic 2020 peak.
Affordable apartments in high-growth markets
MAA (NYSE: MAA), formerly known as Mid-America Apartment Communities, specializes in apartment complexes in fast-growing but affordable markets, particularly those in the Sunbelt region. And while I don't think Americans will leave cities in huge numbers like many experts fear, certainly some will leave high-cost markets in favor of less-expensive, but still exciting cities. Just to name a few, top MAA apartment markets include Atlanta, Dallas, and Charlotte, North Carolina -- the types of markets residents of expensive cities who can now work from home are likely to gravitate to.
So far during the pandemic, results have been impressive. Funds from operations (FFO) was actually flat year over year during the third quarter, something most other apartment REITs would be thrilled about. Same-store revenue actually increased by 2.1% year over year. And as of Oct. 26, MAA had collected (or in some cases, agreed to defer) 99.2% of its billed rent for the third quarter -- about what would be expected in normal times.
In fact, reading through MAA's latest earnings report, I'm struggling to figure out why the share price is down 17% from its February pre-pandemic peak.
Expect some volatility in the near term
As a final thought, I'd expect these three apartment REITs (and pretty much any other stock you invest in) to be rather volatile in the near term as the COVID-19 pandemic and its full economic impact continue to play out. Only invest in these if you have at least five or so years to ride out any ups and downs. All three of these REITs should do quite well over the long run, but it's likely to be a bit of a roller-coaster ride for a while.