Bet On These 3 Residential REITs as the Industry Looks Radiant
The REIT And Equity Trust - Residential industry players are poised to ride the growth curve as renting apartment units is a viable option as mortgage rates are high, and the transition from renter to homeowner is difficult with the high costs of homeownership. Residential REITs are banking on technology and organizational capabilities to drive innovation, rent growth and improve the efficiency of operating platforms. Amid these, Invitation Homes Inc. INVH, American Homes 4 Rent AMH and Centerspace CSR are poised to benefit.
However, elevated deliveries and macroeconomic uncertainties remain a concern. Also, interest expenses are expected to climb with high rates.
About the Industry
The Zacks REIT And Equity Trust - Residential category is engaged in owning, developing and managing a variety of residences. The types of residences include apartment buildings, student housing, manufactured homes and single-family homes. Residential REITs rent spaces in these properties to tenants and earn rental income in return. Markedly, some residential REITs focus on specific classes or types of residences or a particular geographical region. Moreover, unlike apartment buildings, manufactured homes and single-family homes that are open for leasing to all, student housing units are leased only to students. Therefore, such real estate is generally required to be set up within or in places closer to colleges and universities. Furthermore, the enrollment growth of educational institutes is a major driver of student housing assets.
What's Shaping the REIT And Equity Trust - Residential Industry's Future?
Healthy Rental Demand: This industry is poised to gain from the healthy demand for rental units amid a shortage of housing nationally. With high mortgage rates, the cost of homeownership remains elevated. Also, there is limited single-family home inventory. This is making the transition from renter to homeowner difficult. While young adults have gained from tight labor market conditions and wage growth, low rent-to-income ratios make renting far more affordable. Also, the unemployment rate remains low, indicating favorable momentum for rental units’ demand. Moreover, amid the housing shortage for low-cost apartments, the demand for rental units for this segment is expected to remain healthy, even in the case of a recession. There has also been a significant rebound in the demand for student housing properties on the reopening of campuses and in-person classes, as well as extracurricular activities, driving leasing activity and rent growth despite elevated new supply in certain markets.
Technology Adoption: Residential REITs are blending their sales and service expertise with technology to enhance their earnings, cut expenses and elevate both profit margins and the quality of customer interactions. They are embracing virtual leasing support, self-guided property tours and digital move-in procedures while refining search functionalities, tour scheduling and smart home accessibility. These technology innovations centered around customer satisfaction have the ultimate goal of driving increased net operating income down the line, underscoring the crucial role that technology plays in the transformation of the residential real estate sector.
Elevated Deliveries of New Units: The deliveries of new units are likely to remain elevated in many markets in the upcoming quarters as the ongoing construction activity remains high, resulting in a struggle on the part of landlords to lure renters. This elevated new supply is likely to weigh on rental rates and the occupancy level of residential REITs’ properties. However, there are signs of the construction pipeline thinning, with deliveries exceeding starts as rising cost of capital is also exerting pressure on starts.
Macroeconomic Uncertainties & High-Interest Rates: The residential REIT industry constituents face headwinds from the softening of the economy in the current year. A slowing economy is likely to cast a pall on leasing activity and affect rental rate growth and the occupancy level. Moreover, high-interest rates, deployed as an anti-inflation measure, present challenges by potentially restricting the capital flow to this asset category and increasing interest expenses. This confluence of factors could dampen the industry's performance in the current year.
Zacks Industry Rank Indicates Bright Prospects
The REIT And Equity Trust - Residential industry is housed within the broader Finance sector. It carries a Zacks Industry Rank #99, which places it in the top 40% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of the upward funds from operations (FFO) per share outlook for the constituent companies in aggregate. Looking at the aggregate FFO per share estimate revisions, it appears that analysts are gaining confidence in this group’s growth potential. Since March 2023, the industry’s FFO per share estimates for 2023 have moved up 3.8%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags the Stock Market Performance
The Zacks REIT And Equity Trust - Residential industry has underperformed the broader Zacks Finance sector and the S&P 500 composite over the past year.
The industry has declined 12.2% during this period against the S&P 500’s increase of 12.1%. The broader Finance sector has advanced 4.1%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-FFO ratio, which is a commonly used multiple for valuing residential REITs, we see that the industry is currently trading at 15.56X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 19.12X. The industry is trading above the Finance sector’s forward 12-month P/E of 13.26X. This is shown in the chart below.
Forward 12-Month Price-to-FFO (P/FFO) Ratio
Over the last five years, the industry has traded as high as 25.75X and as low as 15.15X, with a median of 19.12X.
3 Residential REIT Stocks to Keep a Close Eye On
Centerspace: This REIT is focused on the ownership, management, acquisition and redevelopment of apartment communities. Its primary objective lies in directing its investments toward regions distinguished by steady and expanding economies, robust employment opportunities and an appealing standard of living. This strategic combination culminates in the higher demand for apartment homes and retention of residents. CSR owned interests in 75 apartment communities comprising 13,497 apartment homes as of Jun 30, 2023.
Centerspace’s differentiated and low-supply exposure markets insulate the portfolio from broader economic and multifamily fundamental weaknesses. Its sale of lower rent, inefficient non-core communities strengthens portfolio quality. Moreover, CSR is poised to benefit from the implementation of new technology that boosts automation, self-service delivery and resident experience.
This Zacks Rank #1 (Strong Buy) stock has witnessed upward estimate revisions in recent times, indicating analysts’ bullish stance. The Zacks Consensus Estimate for 2023 FFO per share has been revised 8.1% upward over the past month to $4.65. The stock has also increased 8.5% over the past three months. You can see the complete list of today’s Zacks #1 Rank stocks here.
Invitation Homes: INVH, as one of the leading single-family rental REITs, has shown resilience in its financial performance. The company's focus on the single-family rental market offers a unique investment opportunity. Invitation Homes’ ability to provide quality homes and superior resident experiences has led to high occupancy rates and consistent rental income growth.
INVH focuses on high-growth markets and in-fill neighborhoods with proximity to jobs, transportation and schools. Furthermore, the company's strategic geographic diversification and robust technology platform contribute to its competitive advantage. Given its strong financials and unique position in the market, Invitation Homes is recommended for investors seeking exposure to the single-family rental sector.
Invitation Homes currently carries a Zacks Rank of 2 (Buy). The Zacks Consensus Estimate for the current-year FFO per share has been revised marginally upward to $1.79 over the past month, suggesting a 7.2% year-over-year increase, backed by 7.8% growth in revenues. The company’s shares have rallied 12.1% over the past six months.
American Homes 4 Rent: This REIT is focused on acquiring, developing, renovating, leasing and operating attractive, single-family homes as rental properties. As of Jun 30, 2023, AMH owned around 59,000 single-family properties in the Southeast, Midwest, Southwest and Mountain West regions of the United States.
Markedly, the pandemic has prompted a new wave of demand for single-family rentals, which positions the company well to deliver decent performances in the upcoming period. American Homes 4 Rent is poised to benefit from the favorable supply landscape and sustainable demand tailwinds amid the national housing shortage and growing single-family residence renter cohort, as well as the high cost of home ownership in its top markets.
American Homes 4 Rent currently carries a Zacks Rank of 2. The Zacks Consensus Estimate for the current-year FFO per share has been revised a cent upward to $1.65, suggesting a 7.1% year-over-year increase, backed by 7.5% growth in revenues. The company’s shares have rallied 18.7% in the past six months.
Note: Funds from operations (FFO) is a widely used metric to gauge the performance of REITs rather than net income as it indicates cash flow from their operations. FFO is obtained after adding depreciation and amortization to earnings and subtracting the gains on sales.
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Invitation Home (INVH) : Free Stock Analysis Report
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