Last year, as the pandemic set in, we saw people begin to leave major cities. They figured out that no one was working in the office anymore. They realized if they could work at home from an apartment near the office, they could just as easily work from home in a smaller town much further away from the office.
And even though the pandemic is starting to die down, big cities are still seeing folks leave in large numbers. Rising crime rates and growing homeless problems many cities are another reason people are moving out of the cities.
They’re moving to less populated areas, with slower lifestyles and much lower rents. A lot of that’s in the sunbelt, including down here in Florida, but let me remind you that when you step out your door down here, just about every creature that you meet is very capable of doing you a lot of harm!
BRT Apartments Corp.
But seriously, the pick I want to tell you about today is BRT Apartments Corp. (BRT), which is a real estate investment trust (REIT) that’s looking to build in these sunbelt cities. But they’re doing it in a way that most REITs do not.
They’re working with joint venture partners who knows the market and the territory, and they’re looking for cities with high job and population growth, and they’re buying the class-B and a few class-A apartment buildings that cater more to the middle-class worker. That’s a much larger population than those who can afford the class-A apartments.
They’re doing the upgrades, and they’re rezoning and reorganizing the properties to increase the value and then dispose of them down the road. They like to buy properties that are at least 90% leased in these more favorable sunbelt markets and work with local partners to dramatically increase their value.
I’ve been involved with this company before, as they’ve been around for a long time. From 1983 to 2011, BRT was a multifamily lender. They just did apartment loans.
But in 2011, it occurred to them that the people they were lending money to were making more money than them by taking their money, building the apartment, paying them back at a fixed rate and then selling the apartment down the road for a profit. So, they decided to get into that game.
They already had great relationships with builders and markets all over the United States, so they decided to partner with them, get involve with the properties and work together to increase the value of those apartment properties.
A Seller’s Market
Now, here’s something that’s important to understand… From 2011 to 2020, they’ve been net buyers of apartments, meaning they’ve bought more apartments than they’ve sold in each of those years. But they’re now making it clear that they intend to become a net seller, as they think that pricing is very inflated as folks have moved into the sunbelt cities.
And just like single-family homes, the values of the properties have risen rather sharply. They’re going to be aggressively looking to cash in on some of the buildings they bought in 2017, 2018 and even as recently as during the pandemic scare in 2020.
They’re going to cash in those properties and use that money to pay down debt. As regular readers know, that’s one of my favorite things a company can do with their cash flow and sales proceeds.
These guys are very good at what they do. Since 2017, BRT has returned 198% in total return while the S&P 500 has returned 88% and the REIT indexes have done about 23%-25% over the same period. So, this company has dramatically outperformed the overall market and comparable REITs by using its unique strategy.
The company is throwing off a 4.6% dividend yield, and insiders also have a lot of skin in the game, as they own about 37% of this particular REIT. They’re also dedicated to their strategy, and they’re very wisely going to sell assets because pricing is so attractive right now. I love to see that in managers I’m working with, especially in the REIT market.
I think BRT can continue to move much further up in price over time. It’s got that smooth, up-and-to-the-right momentum that we love to see, as institutions recognize that their strategy is working and working very well. And unlike a lot of the momentum stocks that we talk about, BRT also pays a solid 4%+ dividend while we wait for the stock to move higher.
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