Residential housing was often viewed as a safe haven during recessions, but the coronavirus pandemic has impacted residential rentals, particularly multifamily and apartment real estate investment trusts (REITs) in unexpected ways. A move from urban city centers to suburban markets has shifted supply and demand in many markets, putting tremendous pressure on rents and landlords. This, coupled with extended eviction moratoriums and a record number of tenants unable to pay rent, makes it a tough time to be an apartment REIT.
Despite the challenging circumstances, there are clear winners and losers among apartment REITs today. Take a look at why Mid-America Apartment Communities (NYSE: MAA), AvalonBay Communities (NYSE: AVB), and Equity Residential (NYSE: EQR) are the top three apartment REITs to buy now.
Suburban apartments are having a moment
Location is everything in real estate. And right now, suburban markets, particularly those located outside of coastal areas are in high demand. This means Mid-America Apartment Communities, which owns and manages 102,772 apartment units in the Southeast, Southwest, and Mid-Atlantic regions is well positioned to profit. While a small portion of its portfolio operates in urban downtown districts, Mid-America Apartment Communities primarily invests in garden and mid-rise apartments in the city's "inner loop" or in suburban submarkets, which has allowed the company to fare far better than others in this sector.
The company's latest Q4 2020 earnings report showed a 2.7% increase in core funds from operations (FFO) for the year ended 2020 when compared to year ended 2019, as well as a 1.8% increase in revenues for quarter end when compared to the same quarter the year prior. Rent collections through February 1, 2021, were 99.2%, far better than the industry average of 88.6% according to the National Multifamily Housing Council, while occupancy is at 95.7%. With a fairly low debt-to-EBITDA for the sector at 4.81x and $849.8 million in cash and cash equivalents, the company is well positioned to maintain operations and dividend payouts, which right now can provide investors with around a 3% return.
Short-term downside, long-term potential
AvalonBay Communities is the ninth-largest publicly traded REIT by market share. Specializing in high-end, high-density urban apartments in major metropolitan areas in New England, the West Coast, and Mid-Atlantic, most investors wouldn't pin AvalonBay Communities as a buy right now. Its portfolio, which includes interest or ownership in 86,025 apartment units in 11 states and the District of Columbia, took a pretty hard hit this year with a 7% decrease in core FFO per share for the year ended 2020 and a 3.2% decrease in same-store revenue. Because a large number of its properties are located in markets that are suffering from lowered demand, concessions and decreasing rental rates are eating into the company's annual profits.
The company sold nine apartments in 2020 and recently completed the sale of one community in January of 2021. This has helped increase its liquidity as it rides out the recovery period for urban markets. The company has a pretty grim outlook for 2021, with continued downward pressure on FFO, revenues, and rental rates. But thankfully, the company is backed by strong liquidity and an average debt-to-EBITDA ratio of 5.4x. At year-end 2020, the company had $313 million in cash and cash equivalents and access to a $1.75 billion revolving line of credit.
Considering AvalonBay share prices are still 24% below its pre-pandemic high, investors can purchase shares at a slight discount while achieving around a 3.6% return. However, this is a long-term buy for a patient investor who is willing to ride out what is sure to be another volatile few years for the company.
Hope on the horizon for high-density cities
Equity Residential owns, operates, and manages 77,889 urban and suburban high-rise apartments in high-density markets, including San Francisco, Seattle, Boston, Denver, New York, Southern California, and Washington, D.C., all of which have been hit hard over the past year. Luckily its higher-income earning tenant base is among the least impacted from job losses, which has allowed the company to maintain an average monthly collection rate of 97%. Despite strong collection rates, the company still suffered a 2.7% decrease in earnings per share, 1% decrease in revenues, and 2% decrease in FFO for the nine months ended September 30, 2020.
Having roughly 45% of net operating income (NOI) coming from its suburban properties, Equity Residential has been able to rebound some from the impact of the pandemic. But long-term recovery for Equity Residential is still heavily reliant on the rapid distribution and effectiveness of the vaccine to help demand return to its core markets, which to date has proven challenging. The company's Q4 2020 and year-end earnings release came out February 10, 2021, and provides more insight into forecasting for 2021 and overall performance for the year end. Thankfully its moderate debt-to-EBITDA of 4.9x and $2.5 billion in cash and cash equivalents as of Q3 2020 should allow it to ride out the storm.
Similar to AvalonBay, investors should take a long-term approach to Equity Residential. Right now, share prices are still well below pre-pandemic highs, allowing investors to achieve an estimated 3.6% return.
Volatility is likely in the coming years, and very few apartment REITs will remain untouched. Investors should take a long-term approach to investing right now and look for quality of portfolio and current strength of financial standing above all else.