Location is one of the most important factors for success in real estate investing. That's why several apartment-focused real estate investment trusts (REITs) are moving their portfolios toward the fast-growing Sun Belt region. Businesses are relocating and expanding across major metro areas in the southern half of the U.S., bringing jobs with them. That's drawing in job seekers, driving up occupancy levels and rental rates for apartment communities in the region.
Because of that, several residential REITs are shifting their portfolios to take advantage of this long-term growth trend, which accelerated during the pandemic. Three REITs making notable pushes into the region in recent months are Equity Residential (NYSE: EQR), Independence Realty Trust (NYSE: IRT), and Preferred Apartment Communities (NYSE: APTS). That makes them look like compelling buys this September.
Moving beyond the coasts
Equity Residential is one of the largest apartment REITs. It currently owns 303 properties with 78,107 apartment units, primarily in major coastal gateway cities like Boston, New York, Washington, D.C., Seattle, and San Francisco.
However, Equity Residential has started expanding beyond the coasts. It moved back into Denver in 2018 and has purchased properties in Austin, Texas, and Atlanta this year. Meanwhile, it recently formed an apartment community development joint venture with luxury homebuilder Toll Brothers (NYSE: TOL). The deal could see them invest up to $1.9 billion in building apartment communities in several metro areas, including Atlanta, Austin, Denver, and Dallas-Fort Worth, the latter of which Equity Residential is reentering.
The company is financing this move by recycling capital through the sale of older, less desirable, or regulatorily challenged assets in markets like California. That shift towards rapidly expanding Sun Belt markets positions Equity Residential to grow its net operating income (NOI) at a faster pace in the coming years.
A smart combination
Independent Realty Trust focuses on non-gateway U.S. markets in the Southeast and Midwest. It currently owns 58 communities with 16,261 apartment units across a dozen states. However, the company is beefing up its presence in the Sun Belt region by merging with non-traded REIT Steadfast Apartment REIT. The deal will grow the combined portfolio to 128 communities with 38,102 units in 16 states.
The transaction will also significantly increase Independence Realty's exposure to the Sun Belt region. The combined company will have 82 communities with 25,991 units in those high-growth markets, contributing 69% of its total NOI. It's gaining incremental exposure to fast-growing metros like Atlanta and Dallas while adding Houston, Denver, and Nashville, Tennessee.
Meanwhile, the company will gain further rental growth upside by adding a pipeline of 5,000 apartment units to renovate in the future. Independence has renovated 4,000 units across its portfolio over the years, generating a 17.1% average return on those investments by capturing higher rental rates.
Getting back to its roots
Preferred Apartment Communities has been narrowing its focus over the past year. The company sold off its student housing properties and its office portfolio. That gave it the cash to bolster its balance sheet, including redeeming some of the preferred equity it used to finance its diversification strategy. It also provided the company with the flexibility to expand its Sun Belt-focused multifamily platform.
The REIT is taking a two-pronged approach to growing its multifamily portfolio, which had 38 properties with 11,393 units at the end of the second quarter. It's acquiring stabilized communities and funding real estate loans to help finance Class A multifamily community developments, which it has the option to purchase upon stabilization.
In recent months, it has funded real estate loans to support new communities in Orlando, Florida; Atlanta; and Savannah, Georgia. Meanwhile, it has purchased properties in Atlanta (where it now has 1,811 units, or 15.9% of its portfolio) and, like Equity Residential, reentered the Dallas-Fort Worth metro area.
With a growing pipeline of potential acquisitions in high-growth markets thanks to its development loan strategy, Preferred Apartment Community has lots of expansion potential in the coming years. In addition, it has a solid portfolio of grocery-anchored shopping centers spread across the Sun Belt region that should benefit from continued population growth.
Moving into high-growth markets
Equity Residential, Independence Realty, and Preferred Apartment Communities are all making moves to pivot their portfolios toward faster-growing Sun Belt markets. They believe this shift will enable them to grow their rental income at a faster pace in the coming years. That puts them in a better position to increase shareholder value, which is why they stand out as attractive apartment REITs to consider buying this September.