Housing

Despite Weak Renting Trends, Top Apartment REIT Dividends Offer Upside Ahead

The housing market has remained hot in many cities, with the suburbs actually winning the most. It turns out that being cooped up in the city during a pandemic has become less attractive than living in a larger home with more space to spend your time alone. For those who cannot afford to buy a home, or who may have just lost their job or seen a pay cut, apartment living will have to continue.

Some fresh data would sound very concerning for apartment owners, landlords and real estate investment trusts (REITs), but the largest stocks of apartment and housing rental REITs rose almost in unison on Thursday. These rental REITS all have relatively high dividends over Treasuries, they are all still down handily from their pre-recession highs, and they all have more implied upside ahead on their stock prices from the Refinitiv consensus analyst target prices.

While Freddie Mac and Fannie Mae just extended their foreclosure and eviction periods through the end of 2020, rental properties looked as though they have been left in a lurch. Apartment projects are having a very difficult time raising rents. Moving is expensive, and the non-collection of rents has suddenly become a serious issue during the pandemic-induced recession and 10%-plus unemployment rate.

The current trends are likely to keep pressure on apartment rental companies. Or will they?

24/7 Wall St. has tracked a fresh study below and we have then covered the top 10 REITs by market cap. What is interesting about them is that the stock prices rose on Thursday after Federal Reserve Chair Jerome Powell specified that short-term interest rates will remain lower for much longer as the Fed wants to target stronger inflation to juice the economy back up.

According to the website Apartment List, there is a serious soft patch in the rental market. The group suggests that 33% of Americans are now less likely to move over the course of 2020 due to the pandemic and a belief that it is not currently safe to move. The group also has shown that there is a spike in the number of adults moving in with family over the summer. More vacancies and departures means lower rent prices, right?

Apartment List also specified that a V-shaped recovery is starting to feel out of reach and that the rental market is cooling. Property owners have started to deal with a new set of realities by offering lower rental rates in an effort to fill vacancies. The group also shows that rent prices are responding much more rapidly in the most heavily affected parts of the country, which happens to be in the largest and most expensive markets, where so many of the top apartment, housing and condo rental companies have a high concentration.

Of the 100 largest cities tracked, 42 markets have seen rents fall or hold steady on average since March. There are 67 markets that have seen month-over-month increases, but the rental price growth is actually the lowest level in five years. The most expensive markets of San Francisco, New York and San Jose have seen major rent price drops since the start of the pandemic. San Francisco rents have fallen by 4.7%, New York City rents have fallen by 3.9% and San Jose rents have fallen by 2.8%.

Another factor is at work here. Apartment List noted that the 21% of renters who are now more likely to move in 2020 are being driven largely to find more affordable housing. One expected outcome is that competition should remain tight for rental units at the middle and lower rental prices, and luxury vacancies will become harder to fill. Also, the expensive downtown markets seem to be losing ground toward more affordable suburban rents.

As for the apartment REIT stocks, the current trends all sound like they are not good for landlords. Even if rents are not lowered, they may have to include more incentives to get renters in. Some landlords historically have conducted shadow price cuts by offering a free month of rent or they will work with renters by demanding lower deposits.

The latest move in apartment REITs was all higher, likely with Powell’s higher tolerance for above-target inflation acting as a green-light for many business sectors to raise prices (if they can). Despite an uptick in long-term Treasury yields and a promise of low short-term interest rates for the foreseeable future, the reality is that some of the largest apartment REITs have seen favorable trends on rent collections. Income, access to capital and very solid dividend yields.

Here are 10 of the nation’s largest apartment and other residential rental companies that rent to millions of Americans and have dividends that are handily above long-term Treasury yields.

AvalonBay Communities Inc. (NYSE: AVB) is the largest apartment renter, with a $21.8 billion market cap. It specializes in leading metro areas such as the New York/New Jersey Metro area, the Mid-Atlantic region, the Pacific Northwest and northern and southern California. The company also has expanded into southeast Florida and Denver. AvalonBay’s shares were up 3% at $158.50. That compares to a 52-week low of $118.17 and a 52-week high of $229.40. The apartment REIT has a 4.1% dividend yield, and its consensus target price is $167.12.