The COVID-19 pandemic has certainly brought its fair share of challenges to the rental market, but not all rental housing has been impacted in the same way. Location, tenants' incomes, and types of housing have all played huge roles in the successes and struggles encountered by landlords and real estate investment trusts (REITs).
The shift in tenant preferences has created clear leaders among residential REITs today and is the exact reason there are three REITs to buy this October.
Right place at the right time
Mid-America Apartment Communities (NYSE: MAA) is a perfect example of being in the right place at the right time. The company's portfolio is highly concentrated in the Sun Belt region of the U.S., an area experiencing record growth and inward demand. Many of the markets the company operates in are experiencing double-digit rental-rate growth and strong demand for rental housing among its tenant base.
It also helps that the company is well-diversified among its 289 properties, having Class A and Class B apartments in suburban, inner-loop, and urban markets, with a blend of garden, mid-rise, and high-rise apartments.
This diverse range of asset classes and ideal property locations across the South has allowed the company to grow to new heights over the past year. August 2021, quarter to date, MAA achieved an incredible 14.3% blended average lease-over-lease growth, while occupancy remained stable at 96.4%.
According to its latest earnings report (Q2 2021), earnings per share grew 137% six months to date, while funds from operations (FFO) increased 3.7%. At a time when many apartment REITs are suffering losses in FFO and earnings per share, this growth is notably impressive.
MAA also has a strong balance sheet with a debt-to-EBITDA of 4.75 times and $31.8 million in cash and cash equivalents on hand. What's more, the company increased its dividend in Q4 2021, providing investors with a roughly 2.2% return.
Growing exposure in the Southern states
Another leader among apartment REITs in the Sun Belt region is Camden Property Trust (NYSE: CPT). Similar to MAA, the company owns a diverse portfolio of 169 apartment communities that are a mix of mid-rise, high-rise, and low-rise Class A and Class B apartments located predominantly in suburban markets in major Sun Belt cities.
This positioning has helped the company remain relatively stable and achieve moderate growth over the past year. Adjusted funds from operations (AFFO) increased 4.7% year to date, earnings per share grew 1.6%, but net operating income (NOI) fell by 0.3%.
As of September 2021, occupancy was 97.3%, and Camden was battling delinquencies at a small scale, with 1.3% of its portfolio remaining delinquent. But in relation, it maintains a strong financial position, with a debt-to-EBITDA of 4.6 times and $885 million in cash and cash equivalents on hand.
The company is tackling several development and redevelopment projects, helping to boost Camden's future rental rates and revenues, including the renovation of 34,000 15- to 20-year-old apartment communities and 16 developments in the pipeline or active development today.
Small but growing Sun Belt presence
Independence Realty Trust (NYSE: IRT) is a fairly small REIT when compared to our other recommendations, having interest or ownership in 57 apartment communities across the Midwest and Southeastern U.S., mostly in secondary suburban markets surrounding major metros like Atlanta; Dallas; Columbus, Ohio; Oklahoma City; and Nashville, Tennessee, many of which are experiencing a surge in demand.
Rental collections averaged 99.1% for Q2 2021, while occupancy rates maintained at 97.1%, and lease-over-lease growth is growing at a blended 10% rate to date in Q3 2021.
The company is further repositioning its portfolio, disposing of six assets to help pay down debt while merging with Steadfast Apartment REIT, a Sun Belt-centric residential REIT that will more than double the company's current portfolio.
Unlike MAA and Camden, Steadfast Apartment REIT focuses mostly on tertiary markets -- including Chattanooga, Tennessee; Madison, Alabama; and Lawrenceville, Georgia -- providing unique market exposure and diversification for Independence Realty Trust when the merger is complete in Q4 2021.
The company has performed admirably during a challenging year and a half, achieving impressive growth. There's clearly a major upside here for investors, but it's not without risks. Post merger sale, IRT will be at a massive 9.7 times debt-to-EBITDA. The company has a strategic plan to reduce its debt burden over the next two years to a high but more manageable target of 7 times by 2023. This is a lot of debt, so IRT is a buy for more patient, risk-tolerant investors.
The Millionacres bottom line
All in all, these three companies are in the right place at the right time and can take advantage of long-term trends for rental demand. Having already established a presence in high-growth markets in the Sun Belt region means they can achieve and maintain growth over the next few quarters, while other REITs are faced with the challenge of repositioning their portfolios into these areas.