2 A-Rated Sun Belt REITs So You Can Sleep Well At Night

seekingalpha04-15

Sun Belt real estate is considered a primary investment attribute due to its opportunistic GDP growth and population growth.Two apartment REITs, Camden Property Trust and Mid-America Apartment ...

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It's an overreaction to company-specific challenges, real or perceived, that has pushed the share price well below levels that even realistic downturns could justify. Beyond that, we want:  Good credit rating; in this case, we actually want an A rating. Solid fundamentals and good profitability. We do not invest in unprofitable businesses - obviously. A good yield for the sector. In this context, this means we want better than the risk-free rate, which to me is currently above 4%. A significant conservative upside in the case of reversal, preferably coupled with market outperformance even if the company underperforms. We usually stick with a 15% annualized upside here.  If we can find all of the above, then we're in good shape, and we know our portfolio will be as well. So, here are 2 REITs that cu","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"MAA":"MAA房产信托","BK4585":"ETF&股票定投概念","BK7024":"系统软件","BK4215":"住宅房地产投资信托","BK7504":"锂钴概念","AVB":"阿湾物产","BK4588":"碎股","CFA":"VictoryShares US 500 Volatility Wtd ETF","ESS":"埃塞克斯信托","CPT.AU":"Cipherpoint Ltd","CFA.SI":"NikkoAM-STC Asia REIT","ESS.AU":"Essential Metals","BK7095":"多种金属与采矿","BK7506":"金矿股","CPT":"卡姆登物业信托"},"translate_title":"2 A级阳光地带房地产投资信托基金，让您晚上睡个好觉","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"AVB":1,"CFA":1,"CFA.SI":1,"CPT":1,"CPT.AU":1,"ESS":1,"ESS.AU":1,"MAA":1},"content_text":"Sun Belt real estate is considered a primary investment attribute due to its opportunistic GDP growth and population growth.Two apartment REITs, Camden Property Trust and Mid-America Apartment Communities, are identified as undervalued, high-quality investments with attractive yields and upside potential.Both REITs have solid fundamentals, good profitability, and a focus on high-growth markets, making them strong candidates for long-term investment.Catherine Ledner/DigitalVision via Getty Images This article was co-produced with Wolf Report. On Friday, I conducted a seminar at the MoneyShow in Miami on the topic of \"Sunbelt REIT Investing\". As I informed the audience, I consider \"sun belt\" real estate to be a primary investment attribute given the opportunistic GDP growth (as shown below). GDP (US Bureau of Economic Analysis) I live in the Sun Belt (Greenville-Spartanburg) and I've witnessed the exponential growth first-hand. As you can see below, the Sun Belt leads the largest population growth in the US. Population Growth (US Census Bureau) Since 2022, I've been focusing on Sun Belt real estate, recognizing that demand for certain REITs has created an opportunity set that should lead to strong returns. In addition, when the market is being volatile - and the market is currently being somewhat volatile, with a single-digit percentage drop during the last trading day, as an investor, you'll want to know what's worth buying as things drop. So let me show you what we consider interesting. In this particular article, we're going to actually take a look at our two favorite apartment REITs. By favorite, we don't mean the REITs with the best possible upside in the entire market - we mean the ones that combine safety and upside in a pleasing mix of safety, yield, and upside potential. That's more what we're about these days. Safety and upside are in a very pleasing mix. Let's look at what we have here. What Apartment REITs are attractive? So, when we look at REITs, we generally look for a few common denominators because undervaluation tends to look fairly similar across most sectors and sub-sectors, which also includes REITs. It's an overreaction to company-specific challenges, real or perceived, that has pushed the share price well below levels that even realistic downturns could justify. Beyond that, we want:  Good credit rating; in this case, we actually want an A rating. Solid fundamentals and good profitability. We do not invest in unprofitable businesses - obviously. A good yield for the sector. In this context, this means we want better than the risk-free rate, which to me is currently above 4%. A significant conservative upside in the case of reversal, preferably coupled with market outperformance even if the company underperforms. We usually stick with a 15% annualized upside here.  If we can find all of the above, then we're in good shape, and we know our portfolio will be as well. So, here are 2 REITs that currently stand out to me in a non-trivial manner as undervalued, above-quality businesses - and in apartment REITs.  1. Camden Property Trust (CPT)  Our investment/s in Camden has actually gone fairly well, even if the company has actually seen a bit of a share price decline in the past few months. But what makes us so convinced that Camden is, in fact, as it stands, a good investment here? Well, part of the risk of two of our other favorite companies in this sector, Essex (ESS) and AvalonBay (AVB), is the company's relative west-coast exposure. This is not an overweight shared in any way by CPT. Camden instead focuses on high-growth non-coastal but sunbelt markets with good employment, population, and migration patterns. Like most of these apartment REITs, the company does a mix of recycling capital through M&As, development, repurposing, and repositioning to find the right asset mix and focus. Here is the company's focus as it stands today. CPT IR (CPT IR) And as you can see, there are a few reasons for what we would consider \"worry\" here. Because even if there has been considerable risk at work here for the past few years, Camden Property Trust has been ticking away, increasing Core AFFO and FFO year over year, with perhaps one of the few exceptions being COVID-19 and the 2024E year - and then only slightly. CPT IR (CPT IR) Perhaps the strongest argument to be made for a large Camden allocation - and you'll see that with MAA as well later in this article, is the company's portfolio focus. CPT IR (CPT IR) It might be wrong to call it \"not coastal focused\", perhaps it should be called the right coastal focus. As you can see, the company not only has very impressive occupancy but also manages at this point close to 59,000 apartment homes in over 170 communities, with a high average portfolio age - meaning this company does not \"Abandon\" assets easily. The company's resident profile is appealing. We have a median age of around 31, with an average income of $122k to where the company's pricing for a home makes a lot of sense, with an average rent-to-income of around 19%. Capital recycling is something we want to speak about here as well - because since 2011, the company has done quite a bit to optimize things. We have $2.7B in total acquisitions, nearly $4B in development, and close to the same amount ($3.7B) in dispositions. A comparatively smaller amount - around $0.8B - has gone to repositioning and redevelopment purposes. The point here is, that CPT has spent a lot of money in the company's assets - both acquiring and redeveloping, to make sure that at this time in 2024, it has the right sort of portfolio mix to manage the next 10-40 years. It's a common misconception that these REITs are \"inactive\" as changes occur - as we've heard, it's as far from the truth as things can go. The company also fully fulfills my fundamental demands and has one of the strongest capital structures in apartment REIT-dom. CPT IR (CPT IR) This gives me the SWAN-like quality we want for a core investment. And CPT, with more than 1.5% in both my private and corporate portfolio, is a core holding. For the 2024E fiscal, CPT guides for a somewhat more conservative year. We're looking at an FFO per share of around $6.84 on the high end of the earnings forecast, which would call for no more than a 6-cent increase from 2023 - and that's on the high end. Current estimates are for the company to deliver slightly negative results, which goes some way to explain how the company's valuation has been pressured. We also shouldn't expect massive AFFO growth in the years to follow. But that is again not why we invest in CPT. Safety and conservative management with a good yield and reversal potential is the reason. And we certainly do have that. F.A.S.T graphs CPT Upside (F.A.S.T graphs) Even if you go by the 5-year average premium, you have an upside well in excess of 15% annualized. In fact, even if you were to forecast the company at the 20-year average of 20.5x P/AFFO, that 15%+ annualized upside inclusive of yield remains here. That, dear readers, is why we're positive about CPT here. It's not as appealing as the company once was - but it certainly is appealing here. We consider CPT a \"BUY\" with a PT of at least $120/share for the long term. We are continuing to look to add to this business on a forward basis. Our yield basis is actually close to 4.6% here, but even at 4.2%, we still consider the company to be attractive.  2. Mid-America Apartment Communities (MAA)  The second pick is actually fairly similar, as we're sure you expected. Like Camden, Mid-America is A-rated, but has slightly lower long-term debt, and a somewhat higher yield - close to 4.6% - but it typically trades a bit lower than CPT, which makes the annualized RoR at a premium slightly lower. So you can see what one company delivers, and where it's \"weak\", is made up for by the other, but in turn, the other company has its own comparative shortfalls - even if those shortfalls, in this case, are very, very small. Both of these companies have extremely high forecast accuracy. MAA Forecast Accuracy (F.A.S.T graphs) Similar to a sort of \"bring it on\" stance here. Mid-America does not miss targets - neither does CPT, to any degree that we would say \"Matters\" in the long run. Much like CPT, MAA is a quality business when it comes to performance. MAA IR (MAA IR) And much like CPT, this company is a bit of an outperformed - though it's expecting 2024E not to be the \"best year\". However, the company strategies are largely the same. High growth, high-demand market, with redevelopment and repurposing appeal. They're two fish in the same pond, as it were. We like MAA more because it has no exposure to the West Coast, so if you want that, then this is \"your\" company. At the same time, it has a heavier exposure to the East Coast, and a slightly different profile - but each of these have their ups and downs - MAA has a bit more mid-tier, in the Midwest and central USA. MAA IR (MAA IR) But overall, drivers for these company's markets are quite similar. The company is also active in very good markets and areas, with strong job growth - a total of $100B in expected investment with thousands of jobs expected to come to the markets where the company is active, leading to continued strong growth. Like CPT, MAA caters to the affluent lower-middle-aged adult, 30-40 years of age, typically with no family or small family. And much like CPT, 20-24% of new lease rent/income is what the company targets here. MAA IR (MAA IR) Why is the company expected to outperform? Because the starts for new units and new living space, much like with CPT, is low for MAA: It's, in fact, record low. This is further confirmed by the extremely low level of total moveouts, and especially low moveouts to single-family rentals - which are only 3.1%. Because MAA is recording record-low move-out percentages, this gives the company strong confidence in its unit and market attractiveness. It does, as we've mentioned, better than many multifamily peers, and keeps growing when other companies simply do not. MAA IR (MAA IR) That is a large part of the reason why we consider this company to be well above average in quality here. While an investment into this company is unlikely to turn you from a non-millionaire into a millionaire, it can certainly provide you with both an attractive dividend and a very appealing capital appreciation potential at what we believe to be a very low overall risk. F.A.S.T Graphs Upside (F.A.S:T graphs) A 12-17.5% annualized upside is what we consider to be very likely here, even with AFFO forecasts including a downside potential of about 3.5% AFFO drop this year. That wouldn't bother us unless something else came along - we would, in fact, buy more if that was the case. The company has many attractive projects and assets, and we would consider MAA to be a solid part of any REIT investor's core portfolio where multifamily is part of the exposure. We would summarize this as follows. Wrapping up these investments These are the current 2 multifamily/apartment REITs that we consider to have a combination of undervaluation, quality, upside appeal, and likely growth to make them some of my strongest \"BUYs\" here. They are, of course, not the entirety of our \"BUYs\" at this time, but they are companies that we have been adding to over the past 2 months or so, and have frequently bought shares in as they have dropped/declined. We would give these companies the following targets. For Camden, we would say that:  Camden Property Trust is a solid Multifamily REIT with holdings in attractive geographies across the Sunbelt and other areas in the US. The company has an attractive 4.2%+ yield and trades at what I would view as a \"cheap\" valuation. Still, we do see a potential upside in the company here as an investment. At 20x P/FFO, that upside is high enough to interest me, and we say the company is a \"BUY\" here. We give CPT a PT of $130/share, and we're adding shares here.  For Mid-America Apartment communities, we would say that:  Mid-America Apartment Communities is, in this analyst's view, a sector-leading REIT with a very solid portfolio of good exposure to some of the most attractive apartment real estate in the USA. The company offers a compelling upside both based on valuation and the potential for growth and stability with above-average operating and safety metrics. We give the company a share price of $139/share, under which we believe the 15% annualized is intact.  Both of these REITs are good enough to where we consider \"pounding the table\" is very much justified here. For us, this is a large exposure and what we would view as a vote of confidence. Data Duel (I hope you're enjoying our new \"data duel\" feature. Let us know your feedback, please. Thank you).  iREIT® iREIT® iREIT® iREIT® iREIT®","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2427107984"}