This REIT is beginning to recover from COVID, and looks very undervalued. The REIT has a current dividend yield of 7.21%, paid quarterly.
Preferred Apartment Communities, Inc. (APTS)
From Contrarian Outlook
Preferred Apartment Communities isn’t quite what the name seems. The REIT, which owns 117 properties in 13 states—primarily in the Sun Belt—does specialize in Class A multifamily properties. But it also deals in grocery-anchored shopping centers, as well as Class A office buildings.
As you’d guess from the portfolio, APTS has struggled mightily ever since COVID spread across the States. Over the past four quarters, Preferred Apartment’s “core” funds from operations (FFO, an important measurement of REIT profitability) has dropped by between 11% and 42%, depending on the quarter.
Management saw the writing on the wall early on, electing to cut the dividend by 33%, to 17.5 cents per share, as of its June 2020 payout.
APTS Prices Remain Deeply Depressed
So, how exactly could a REIT like this help you battle inflation?
For one, Preferred Apartment Communities is paring down what could be the weakest link of its portfolio going forward: office buildings. In mid-April, the company said it would sell off seven office properties and an office real estate loan to Highwoods Properties (HIW) for $717.5 million.
The transaction will allow APTS to focus on two property types instead of three, with plans to continue growing its Class A suburban multifamily portfolio. The company also expects to redeem some of its preferred shares.
The immediate downside is a drag on Core FFO, with the company reducing its 2021 guidance from a range of 81 to 89 cents per share to a range of 73 to 83 cents per share. However, the company notes that “this may be offset to some extent based on the use of the proceeds, the timing of redeployment of proceeds, and G&A savings.” More important to us, however, is even at this lower guidance, APTS shares are trading at just about 12 times expected FFO—a fairly reasonable price for a 7%-plus yield.
And prior to COVID, Preferred Apartment Communities was a rare bird in that it upped its payouts every six months, rather than every year. Management has some difficult waters to navigate for now, but they have investor income in mind, and that the payout will resume its growth as finances allow.
Brett Owens, Contrarian Outlook, BNK Invest Inc., 500 North Broadway, Suite 265, Jericho, NY 11753 USA, 516-620-4294, May 21, 2021