Look At Mid-Size Apartment REIT Stocks For Better Income

Includes: AVB, CPT, EQR, HME, MAA
by: Tim Plaehn

In light of the current housing mess, apartment rental companies have several demographic trends working in their favor. The decline in housing values has changed the sentiment away from home ownership. The bulk of new job creation is going to young adults - ages 20 to 34 - and this generation is more inclined to rent rather than purchase a home. Also there is the very large number of former homeowners who will be renters for quite a while due to foreclosures and short sales on their credit reports. These trends are positives for the real estate investment trust - REIT - companies which own portfolios of rental apartments.

There are currently 15 publicly traded apartment or residential REIT companies. Of this group, two stand out as the largest in the sector. Equity Residential (NYSE:EQR) has a market cap of $18.3 billion and Avalon Bay Communities (NYSE:AVB) has a current value of $13.2 billion. After these two large-cap companies, the next largest residential REIT has a market value of $5 billion. The problem with just focusing on the two large apartment REIT stocks is the low current dividend yield from both. Avalon Bay yields just 2.6 percent and Equity Residential has a dividend yield of 2.25 percent. REIT investors who want to add some residential focused shares to their portfolio may want to look at the smaller companies for better current yields. Here are three:

Home Properties Inc. (NYSE:HME) currently owns almost 42,000 apartments in 124 communities. The company's properties are located in what it terms "high barrier to entry" cities: Washington, D.C., Baltimore, suburban New York City, Philadelphia, Boston, Chicago and Ft. Lauderdale, in order of descending number of units. Besides growing the portfolio through acquisitions, Home Properties has developed a strategy to increase the revenue from lower quality apartments through a regular program of interior and exterior upgrades. With the upgrades the company targets a 10 percent return on the capital cost of the improvements. After lowering the quarterly dividend rate to 58 cents from 67 cents in 2010, the payout has been increased for the last two years. The quarterly dividend was 62 cents quarterly in 2011 and has been increased to 66 cents for the first distribution of 2012. Home Properties has a current dividend yield of 4.4 percent.

Mid America Apartment Communities (NYSE:MAA) owns over 47,000 apartments spread throughout the southeast Sunbelt of the U.S. Since going public in 1994 with 5,600 apartments the company has grown steadily through acquisition and development. In a recent investor presentation (pdf), the company noted new apartment completions in its largest markets are projected to be 40 percent below historical averages for the next four years. Mid America Apartments is one of the three residential REITs that has not instituted a dividend reduction at any point in the last 15 years. For 2012, the quarterly dividend was increased to 66 cents, up from 62.75 cents paid in 2011. The dividend represents 71 percent of the available funds from operations - FFO - and the stock currently yields 4.0 percent.

Camden Property Trust (NYSE:CPT) owns apartment properties across the southern sweep of the U.S., from California, to Florida, and up to Washington, D.C. The company's largest markets are Texas, Florida, and Washington, D.C. Including properties under development, Camden Property Trust owns approximately 70,000 apartments in 205 communities. The company is aggressively growing the portfolio through both acquisition and development. For 2011, net acquisitions totaled $365 million and $400 million was invested in development starts. Camden management forecast similar growth transactions for 2012. Funds from operations were $2.73 per share in 2011 and management guidance for 2012 is FFO of $3.30 to $3.55. The quarterly dividend was increased from 45 cents paid in 2010 to 49 cents for 2011 and bumped again to 56 cents for 2012, a 24 percent increase in two years. Camden Property Trust currently yields 3.5 percent.

Prospects look good from all three REIT companies for continued dividend increases in future years. The financial crisis has restrained supply growth of new apartments and these three companies will be able to grow net income from both rent increases and additions to their portfolios.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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