Top Picks 2020: Preferred Apartment Communities (APTS)

01/09/2020 5:00 am EST

Focus: REITS

Douglas Gerlach

President, ICLUBcentral, Inc.

Founded in 2011, Preferred Apartment Communities (APTS) is a REIT focused on multi-family properties, student housing properties, office buildings, and grocery-anchored retail in growth markets throughout the United States, notes Doug Gerlach, editor of SmallCap Informer.

The current yield is around 7.6%, but with funds from operations (FFO) expected to grow in the high single digits and a price to FFO ratio below 10, the combination for an attractive total return looks to be in place with the concerns of investors being quite overblown.

The performance of residential REITs is typically aligned with the economic cycle. During a recession, occupancy rates decline, taking profits down with them.

Recent chatter about an impending recession has sent investors scurrying away from economically sensitive industries, and this has contributed to APTS’s lower current valuation.

This is where APTS’s diversification could be an asset — its retail properties are primarily grocery-anchored plazas, and grocery stores are cyclically defensive.

Revenues have grown rapidly since the REIT was founded in 2011. Since 2012, revenues have grown at an annualized 79% to reach $397.3 million in 2018. Funds from operations per share (FFO/S) have also grown well, averaging 18.8% a year since 2012.

Finally, the company admits to a certain level of “lumpiness” in its quarterly results, often driven by its loan business. At the end of the day, we see APTS as being able to support 8.0% growth of FFO/S and revenues over the next five years.

In the second and third quarters of 2019, APTS management did acknowledge higher levels of uninvested capital on their balance sheet from the REIT’s last share offering. Management’s position is that it would rather have uninvested cash than to invest it in a way that doesn’t add value to the portfolio.

We see the potential for the REIT to support a high P/FFO of 12, thus providing a future high price of $26.20. On the downside, a low P/FFO of 8 times trailing 12-month FFO/S provides a low price of $11.90.

The current reward/risk ratio is 8.2:1, better than our minimum desired 3:1 ratio, and the REIT is a buy up to $15.50. From the current price, the projected total annual return is 20.5% including an average 6.2% yield.

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