Apartments remain one of real estate's most attractive sectors. Three attractive prospects that benefit from continued solid performance in the apartment industry include Mid-America Apartments, the BSR REIT and UDR.
MAA and BSR have most of their exposure to the high growth secondary and tertiary markets in the sunbelt region. UDR presents a compelling investment for believers in an urban comeback.
BSR Real Estate Investment Trust BSRTF: BSR's management has drastically transformed the portfolio.
Older properties in small, tertiary markets have been sold. Proceeds have been recycled into new properties in larger, primary markets, mainly throughout Texas, including Houston, Dallas, and Austin. Earnings per share has been negatively impacted for two reasons related to the capital recycling:
1) Proceeds from the company's dispositions have not been rapidly redeployed into acquiring new properties in the Texas markets.
2) Given the properties BSR is acquiring are in more stable, higher quality markets, they are acquired at lower cap rates relative to the properties that have bene sold.
BSR's earnings decline should be relatively temporary. Earnings should return to pre-capital recycling levels once the portfolio stabilizes.
Despite the earnings decline, BSR's net asset value has increased in the past year 8.3% from $12.20 to $13.21. BSR's stock price is $13.25, basically in line with its NAV. BSR's small premium contrasts with other multifamily REITs that have average NAV premiums ranging from 15%-20%.
BSR's pricing reflects the company's significant upside potential. That the portfolio value has increased during the company's transition and COVID-19 reflects the higher quality portfolio and highly attractive market location.
Same-store NOI increased 2.7% in 2020. Should BSR return to its full year 2019 AFFO per share results of 64 cents, its earnings multiple would be 21, a steep discount to peer apartment companies.
Mid-America Apartment Communities, Inc. MAA: Mid-America is a large-cap company that owns apartments across sunbelt markets. Mid-America's top markets include Atlanta, Dallas, Austin, Charlotte, Raleigh and Durham and Orlando.
The stock has been on a tear, up 46% since Jan. 1.
The company's operations have been stable throughout the last year-and-a-half. Same store net operating income increased 1.2% for the last year, and management is guiding for zero to 2% growth in 2021.
The company's midpoint AFFO per share estimates for the upcoming year are $5.77 per share. This generates an earnings multiple of 32. With an estimated NAV of $141 per share, Mid-America trades at a 32% premium to its current stock price of $185 per share.
Rapid multiple expansion has resulted in the company's valuation being elevated compared to prior history and their small-cap peer, BSR. However, Mid-America is distinguished from most other sunbelt multifamily REITs because it has low leverage and a class A portfolio.
The debt/EBITDA ratio is around 4, well below the multifamily average. With an average monthly rent of $1,302, its rental rates are at a premium to peers.
While the current valuation is high, Mid-America supports a superior growth profile to most multifamily REITs. Future multiple expansion is likely limited, and a pullback could occur. Now is certainly not the best time to initiate a large position. However, initiating a small position and increasing the stake as valuation decreases appears to be the smart approach to investing in Mid-America.
UDR Inc. UDR : UDR is an apartment company that invests in both large costal markets and smaller secondary markets. For people bullish on a strong urban comeback, UDR presents a compelling company given its diversified property holdings.
While coastal markets represent a majority of the portfolio, eight of the 21 markets where the company operates are located in the sunbelt. Of the other 13, several are smaller markets, including Portland and the Inland Empire. Such markets are experiencing strong demand.
UDR also maintains an attractive submarket presence. 66% of its portfolio is located in suburban regions of the country. Suburban and sunbelt secondary markets have outperformed relative to other coastal market REITs.
25% of UDR's portfolio consists of properties in New York City, San Francisco and Boston. These three markets reported NOI declines of 22% for the full year of 2020. By contrast, the remaining 75% of UDR's portfolio reported declining NOI of just 3.7%. With a P/AFFO ratio of 30, UDR trades several turns below MAA's current multiple. Even if urban, coastal markets continue to struggle in the coming quarters, UDR's sizeable presence in smaller markets hedges against this potential risk going forward.
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