The Great Recession officially ended about two years ago, but the U.S. housing market remains in shambles. According to real-estate information provider Zillow (NASDAQ:Z), more than 28 percent of U.S. households with mortgages in the first quarter owed more than their homes were worth. Home prices in the nation’s 20 largest cities are also down an average of 33 percent from their July 2006 peak. With homeowners in such a tenuous situation, any dip in the economy increases the likelihood of defaults and foreclosures, exerting additional downward pressure on home prices.
Overbuilding in formerly red-hot markets such as Arizona, Florida and Georgia contributed to the disaster, but lax underwriting in a benign credit environment was the biggest contributor to the boom and bust. On the supply side, many local housing markets face a massive overhang of foreclosures or distressed sales. Meanwhile, elevated unemployment rates and stricter lending requirements have thinned the ranks of willing and eligible buyers.
Although some real estate markets have recovered from the crisis--Washington, DC and its exurbs are a case in point--the overall housing market faces an uphill struggle to return to pre-boom normalcy.
At the same time, the residential rental market has picked up steam. Rents and occupancy rates have ticked up as a growing number of U.S. households opt to rent their primary residence. Real estate investment trusts (REIT) that focus on residential real estate have reaped the rewards of this trend and offer additional upside for savvy investors.
As subscribers of Personal Finance are aware, I first highlighted this opportunity in the Sept. 23, 2009, article “The Next REIT Run.” This investment thesis has panned out thus far. After the Bloomberg REIT Apartment Index bottomed in March 2009, the group has rallied to a 147 percent gain. But this outperformance has reduced the 14 index members’ average dividend yield to 2.6 percent.
Apartment REITs offer exposure to several upside catalysts, though the group’s post-crisis rally makes selectivity the key to success. As long as the U.S. employment and housing markets languish, consumers will opt to rent rather than buy. Securing mortgage financing has become a far more difficult task than it was a few years ago, particularly for first-time homebuyers.
Demographic trends are also on apartment REITs’ side. By 2030, more than 84 million Americans will enter their 20s and hunt for an apartment. With permits for new multifamily structures down 70 percent nationwide, demand at some point will outstrip supply, leading to higher profits and dividends for the apartment REITs that own these buildings.
Rather than raising dividends to boost yields and entice investors, many of these REITs have hoarded cash to make timely acquisitions, laying the foundation for future dividend growth. Check out my article, "High-Yield Investing: How to Find Sustainable, Reliable Dividends," for more on my philosophy on dividend investing.
Mid-America Apartment Communities
Even at the nadir of the 2007-09 credit crunch and recession, Mid-America Apartment (NYSE:MAA) refused to cut its payout and earlier this year rewarded investors with a 2.1 percent dividend increase. Investors who purchased Mid-America Apartment Communities after I recommended it as a buy in my 2009 InvestingDaily.com article, "Real Value in Real Estate," were rewarded with a 160-percent stock appreciation in addition to unwavering dividend payments. But with the company’s operations and balance sheet gaining strength, there’s still plenty of upside to come.
Mid-America Apartment owns 47,910 apartment units throughout the Sunbelt, providing exposure to attractive demographic trends. The company has no debt maturities remaining in 2011 and boasts “strong” coverage for its BBB rating, according to credit rater Fitch.
In the first quarter, net operating income jumped by 4.9 percent from year-ago levels, rents from new leases increased by 7.4 percent and the portfolio-wide occupancy rate of hovered near 96 percent. The company has also acquired a number of prime properties in Texas and Florida at favorable prices. Additional deals could be in the offing.
Trading at 4.4 times book value, shares of Mid-America Apartment aren’t cheap. But this blue chip continues to execute and offers plenty of long-term upside.
Disclosure: I am long MAA.