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Investors love REITs for their high yields and stability. But the coronavirus has made real estate a tricky investment. Between shopping malls and retail outlets closing and people leaving cities - and high-end apartments and condos behind them - some REITs aren't what they once were.
Fortunately, there's an opportunity here too. You can find REITs that offer the same income, stability, and upside you're accustomed to. You just have to know here to look. And that's where people are moving to.
More than 30% of homeowners and renters missed their June first payments according to a survey done by Apartment Life. While much of that is covered by the end of the month, the sheer number of missed rents and mortgage problems give us a look at what is going on in the U.S. economy right now.
We all know the headlines. Large parts of the economy have been shut down. Many of these businesses will never reopen. While Congress acted quickly to get money into people's hands via enhanced unemployment benefits, many people did not qualify for benefits. Thanks to antique computer systems and the usual level of bureaucratic competence, many people that applied and were approved a month ago still have not received benefit payments.
To make matters worse, those benefits expire at the end of July. Those who are relying on them to pay their bills now have to depend on Congress to agree on a bill that extends the benefits for a longer period. I'm not holding my breath.
All of this uncertainty has hit the multifamily REITs pretty hard. Prices as apartment REITs are down 20% to 30% and more as investors dumped the shares starting in March. This risk of missed rents and rising occupancy rates have made the sector unattractive for many investors.
This creates an opportunity.
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There is a massive shift beginning in the United States, and select REITs will be significant beneficiaries. After three months of lockdowns and illness, followed by protests, riots, and civil unrest, many people are questioning why they live in major cities. The prospect of catching the virus or suffering property damage all while paying sky-high prices to live there has begun to outweigh the culture and entertainment options of gateway city living.
This is especially true now that we know that most white-collar jobs can be done on a work-from-home basis.
That means the REITs that cater to this new trend will thrive. These are real estate markets focused on America's suburbs and smaller cities, not the New Yorks or Chicagos that people are fleeing...
The Live, Work, and Play REIT
This trend is right in the wheelhouse for Bluerock Residential Growth REIT (NYSEAmerican: BRG). It is a real estate investment trust that focuses on developing and acquiring a diversified portfolio of what it calsl live/work/play apartment communities. It also likes to focus on what it refers to as knowledge economy growth markets to appeal to the renter by choice.
Bluerock is building the apartments where people want to live in the cities and towns where they want to live. It wants to be in markets with industries like tech, financial service, medical technology, and biotech that attract well-educated, well-paid workforces. As a result, its communities tend to be in markets that have above-average employment and income growth.
The focus on knowledge economies with the best amenities available shows up in the occupancy and rent collection rates. The operating portfolio occupancy at May 31, 2020, remained unchanged month over month at approximately 94%. Rent collection was 97%, including payment plans of 1.5%. This is incredible consistency during the height of the pandemic.
The stock is down over 30% so far this year, primarily due to uninformed REIT ETF selling earlier this year. But the recovery potential for this REIT is enormous over the next few years as renters leaving big cities creates additional demand for their apartments. Combined with a dividend yield of more than 8%, and the total return possibility from this level is massive.
But our next best REIT to buy targets secondary cities even more aggressively...
The "Local" REIT to Buy Now
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There is another way to play the exodus out of the gateway cities. Independence Realty Trust Inc. (NYSE: IRT) is a real estate investment trust that owns and operates multifamily apartment properties across non-gateway U.S. markets, including Atlanta, Louisville, Memphis and Raleigh. IRT's investment strategy is focused on gaining scale within key amenity rich submarkets that offer good school districts, high-quality retail, and major employment centers.
Independence likes to buy older Class B apartment complexes in non-gateway markets with strong local economies. They then renovate and add popular amenities that make the property more attractive to renters. As is the case with Bluerock, owning the right apartment complex in the right market is paying off for Independence Realty. As of May 31, occupancy was 93.5%, and it has collected 98.1% of May rent receipts, including 1.2% in deferred payment plans.
Just as the case with Bluerock, the flight from big cities will pick up the pace and create long-lasting demand for its apartment units.
Independence Realty did cut the dividend to preserve cash as the crisis began. Even after the cut, the REIT yields almost 5%. That should increase as the gateway exodus begins to strengthen.
The pandemic is going to change how we work and live. These two REITs will be major beneficiaries of those changes.
Action to Take: Add reliable income to your portfolio with REITs that capitalize on the exodus from mega-cities like New York, Chicago, and Los Angeles. We like Bluerock Residential Growth and Independence Realty Trust.
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.