Declining challenges are expected to benefit certain REITs in the forthcoming years.
Dividend stocks often present excellent investment opportunities, offering a consistent stream of passive income alongside gradual stock price appreciation as their earnings rise. These factors typically enable dividend stocks to achieve above-average total returns. Among the notable dividend stocks are Mid-America Apartment Communities (MAA) and Invitation Homes (INVH). These stocks are currently considered excellent options for those interested in income and growth.
Potential Recovery in 2025 and Beyond
Mid-America Apartment Communities, known for its steady growth over the years, is a real estate investment trust (REIT) focused on apartments. It has consistently increased its dividend for 14 consecutive years, including a 5% increase last December. This REIT has thrived due to stable rent growth and an expanding apartment portfolio.
However, 2023 has presented different challenges for the company. Its funds from operations (FFO) have decreased over the first nine months, dropping from $6.85 to $6.65 per share. This decline is attributed to an influx of new apartment supply in its markets across the Southeast, impacting occupancy and rent growth, with the average effective rent per unit decreasing by 0.4% in the third quarter.
The company anticipates these challenges will diminish next year, expecting a significant reduction in new apartment supply for several years. CEO Eric Bolton conveyed the expectation of entering a new multiyear cycle where demand will surpass supply which should enhance occupancy and rent growth.
Moreover, the REIT is taking proactive measures as its competitors reduce new developments due to higher interest rates. Mid-America has eight apartment communities currently under development, expecting completion over the next few years, and has been acquiring newly constructed apartments from developers. These investments are projected to generate incremental earnings growth in the future.
These headwinds have adversely affected Mid-America’s stock price, currently 33% below its peak from a few years ago. This decrease has driven its dividend yield near 4%. With challenges dissipating, the REIT presents an appealing income stream and significant upside potential.
Harnessing Strong Demand
Invitation Homes is a residential REIT that concentrates on single-family rental properties. Since going public in 2017, it has increased its dividend annually, including a 7.7% rise last December. The company has benefited from continuous rent growth and an expanding portfolio.
Demand for single-family rental homes remains robust, with the REIT’s occupancy level at 97%, and same-store rents escalating by 4.2% in the third quarter.
In addition, Invitation Homes has strengthened its property portfolio by acquiring more properties. It purchased 1,591 wholly owned homes for $557 million and invested $37 million into 108 joint venture homes during the first nine months of 2023. The REIT also expanded its third-party management platform, and the new investments, combined with increasing rental income, led to a 6.8% per share increase in core FFO in the third quarter.
The REIT is well-positioned for growth, as the demand for single-family rental homes remains strong due to high home-buying costs. Renting is currently 33% more affordable than buying in the 16 core markets where Invitation Homes operates, keeping occupancy levels high and allowing the REIT to regularly increase rents as leases expire.
Invitation Homes maintains a strong balance sheet, providing the flexibility to expand its portfolio. The company has agreed to acquire approximately 2,700 homes from builders, creating a pipeline for new property additions. Additionally, it can purchase individual properties on the open market, acquire rental property portfolios from other investors, and expand its third-party management platform to fuel further growth.
Despite ongoing growth, Invitation Homes’ stock has declined by about 30% from its peak a few years ago, which has increased its dividend yield to around 3.5%. With more growth anticipated, this REIT currently represents an attractive investment opportunity.
A Compelling Combination
Mid-America Apartment Communities and Invitation Homes present compelling dividend yields due to their steady payment growth and decreased stock prices. Both REITs have significant growth potential, and they are expected to deliver attractive total returns as they increase their earnings and dividends. This makes them appealing stocks for current investment consideration.
