Apartment real estate investment trusts (REITs) have been under a lot of pressure this year. The average one has produced a negative 22.7% total return. That has underperformed the average REIT, as the FTSE Nareit All Equity REITs index is down about 10% on the year.
On a more positive note, that sluggish performance allows investors to buy some high-quality apartment REITs at much lower prices than they could earlier this year. Three standout opportunities this month are Camden Property (NYSE: CPT), AvalonBay Communities (NYSE: AVB), and Equity Residential (NYSE: EQR), which are down 13%, 23%, and 29%, respectively, this year.
In a tier of their own
One thing that stands out about this trio of multifamily-focused REITs is the strength of their balance sheets. They're in a three-way tie for having the highest credit rating in the multifamily sector, as they're in an elite group of REITs with A-rated credit. They all back this with low leverage metrics.
That high rating has two benefits. First, they have more access to credit than lower-rated REITs. Second, they can borrow at cheaper rates than their peers. That gives them more financial flexibility, which is a competitive advantage during these turbulent times in the real estate sector.
Rent collection, income are holding up well despite COVID-19
One reason shares of multifamily REITs have tumbled this year is the impact an economic downturn has on tenants' ability to pay their rent. Despite this overall trend, rental collection rates for these REITs have held up well so far.
For example, Camden Properties collected 98.7% of the rent it billed in July, which was higher than the 98.4% it received in the year-ago period. Meanwhile, it received 97.7% of the rent it billed during the second quarter. Both AvalonBay and Equity Residential experienced similarly strong rental collection rates.
This factor means these REITs haven't experienced much pressure on their income. For example, AvalonBay's total rental revenue has increased by 0.1% through the first half of the year as higher lease rates helped offset uncollectable residential and retail rent. Because of that, its core FFO has increased from $4.57 per share in the first half of 2019 to $4.61 per share during the first six months of 2020. Peers Equity Residential and Camden Property have also seen their financial results hold up reasonably well this year.
The trend is their friend
Meanwhile, the demographics favor continued demand growth for multifamily units after the near-term effects of COVID-19 wear off. Currently, there are some pressure points in the multifamily sector. Some renters need more space as they and their kids spend more time in the home because of COVID-related closures, which led them to buy houses. Meanwhile, others chose to move back home with their parents to save money.
However, that latter group will likely move back out as the economy recovers and work-from-home orders expire. On top of that, many millennials in the 18-to-24 age bracket will graduate college over the next few years, after which they'll likely move into apartments.
What's worth noting about this future is that it could be increasingly supply-constrained. That's because multifamily housing starts are on track to decline sharply in coming quarters (down from 400,000 to begin this year to around 200,000 in the 2021 to 2022 timeframe, according to Witten Advisors).
Combine that slower supply growth with the potential for rising demand, and rental and occupancy rates should improve in the coming years. That should bolster the financial results of big multifamily REITs like AvalonBay, Equity Residential, and Camden Property. On top of that, it could enable them to start more development projects, driving future income growth.
The bottom line
AvalonBay, Equity Residential, and Camden Property are navigating the current challenges facing the multifamily sector better than most, which speaks to the quality of their apartment portfolios. They also have top-tier balance sheets, which gives them an edge over their competitors. Because of that, their high-yielding dividends (3.7% for Camden Property, 4% for AvalonBay, and 4.3% for Equity Residential) are on solid ground. Add that income to their upside as conditions improve, and these multifamily REITs look like great long-term buys this month.