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3 Top Stocks From a Thriving Residential REIT Industry

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The REIT And Equity Trust - Residential constituents are anticipated to benefit in the upcoming days, as rental housing demand remains robust with young adults forming new households and the job market showing improvement. Also, de-densification and the desire for more space is resulting in fewer adults per apartment, thereby creating incremental demand for renting units. Moreover, due to the high cost of homeownership, transition from renter to homeowner is difficult, making renting of apartments units a viable option. While product absorption continues in the Sun Belt and other non-gateway metros, the gateway metros are also showcasing a strong rebound. Therefore, residential REITs like Mid-America Apartment Communities, Inc. (MAA - Free Report) , Sun Communities, Inc. (SUI - Free Report) and Camden Property Trust (CPT - Free Report) are expected to ride the growth curve, despite elevated deliveries and regulation woes.

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 also 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, the student housing units are leased only to students. Such real estates are, therefore, generally required to be set up within or in places closer to colleges and universities. Furthermore, enrolment growth of educational institutes is a major driver of student housing assets.

What's Shaping the REIT and Equity Trust - Residential Industry's Future?

Robust Rental Demand, Rent and Occupancy Growth: With the reopening of offices and returning of lifestyle amenities to the established markets, a continued flow of residents is observed in the urban and job-centered suburban markets, which is encouraging. Moreover, de-densification and the desire for more space are resulting in fewer adults per apartment, thereby creating incremental demand for renting units. Also, higher household income is supporting rent growth. In fact, there is strong demand from young adults who are gaining from tight labor market conditions and record wage growth. Also, due to the high cost of homeownership, the transition from renter to homeowner is difficult, making renting of apartments units a viable option. With these positives, the residential REITs are expected to experience a solid peak leasing session with high occupancy and rent growth. In terms of markets, what is encouraging is that while there is a rebound in demand for the coastal markets, the Sun Belt markets too continued to experience high demand compared to supply. Moreover, after the past leasing sessions were affected by the pandemic, there has been a significant rebound in demand for student housing properties on the reopening of campuses and in-person classes as well as extracurricular activities. This is driving leasing activity and rent growth.

Technology Adoption: Technological adoption gathered steam amid the social-distancing trend, as the global health crisis needed an almost-overnight shift to virtual operations for the continuation of business operations. Now, landlords are binding together technology with sales and service expertise, aiming at driving revenues, trimming costs, improving operating margins, as well as enhancing customer experience. The residential REITs are focusing on virtual leasing assistance, virtual and self-guided tours, and a digital move-in process. Improvement in search and tour booking as well as smart home access has gained much attention and residential REITs are focusing on these. Such efforts are aimed at generating incremental net operating income in the years ahead.

Elevated Deliveries of New Units: Although supply chain woes and labor challenges have impacted construction activity to some extent, deliveries of new units are likely to accelerate in a number of markets in the upcoming quarters as the ongoing construction activity remains high, resulting in a struggle on the part of landlords to lure renters. However, although construction costs are up, landlords have been able to pass on the burden to renters, who are supported by wage growth to absorb cost increases through rent hikes.

Rent Control and Higher Interest Rates: The rent-control regulations in some of the major markets might curb the growth tempo. Moreover, the hike in interest rates to counter inflation poses a risk to the flow of capital for this asset category. This is likely to lead to volatility in asset prices. Also, interest expenses are expected to climb with rate hikes.

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 #61, which places it at the top 24% 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 bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms 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 positive 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 June 2021, the industry’s FFO per share estimate for 2022 and 2023 has moved 7.9% and 6.1% north, respectively.

Before we present a few stocks that you might want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags on Stock Market Performance

The REIT And Equity Trust - Residential Industry has underperformed the S&P 500 composite and the broader Finance sector in the year so far.

The industry has declined 17% during this period compared with the S&P 500 composite’s fall of 13.9% and the broader Finance sector’s 9.6%.

Year-to-Date Price Performance

Industry's Current Valuation

On the basis of the forward 12-month price-to-FFO (funds from operations) ratio, which is a commonly-used multiple for valuing Residential REITs, we see that the industry is currently trading at 19.71X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 17.73X. The industry is trading above the Finance sector’s forward 12-month P/E of 14.49X. 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 25.36X, as low as 15.70X, with a median of 18.90X.

3 Residential REIT Stocks Worth Betting On

Mid-America Apartment Communities, Inc.: This residential REIT is engaged in owning, acquiring, operating and developing apartment communities, located primarily in the Southeast, Southwest and Mid-Atlantic regions of the United States. Healthy demand for the company’s well-positioned Sunbelt properties will likely aid this S&P 500 company’s performance in the days to come.

MAA’s diversified Sunbelt portfolio was less severely affected by the pandemic and the economic shutdown. In fact, the pandemic has accelerated employment shifts and population inflow into the company’s markets, as renters seek more business-friendly, lower-taxed and low-density cities. These favorable longer-term secular dynamic trends are increasing the desirability of its markets. Amid this, MAA is well-poised to capture recovery in demand and leasing as compared to the expensive coastal markets.

MAA continues to implement its strategic programs — interior redevelopment, property repositioning projects and Smart Home installations. The programs will help the company capture the upside potential in rent growth, generate accretive returns and boost earnings from its existing asset base in 2022.

MAA currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for the ongoing-year FFO per share was revised marginally upward in the past week. The company’s shares have appreciated 9.8% in the past year.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

 

Sun Communities, Inc.: The Southfield, MI-based REIT enjoys stake in or is engaged in the ownership or operation of manufactured housing communities, recreational vehicle (RV) resorts and marina properties located across 39 states, Canada, Puerto Rico and the UK.

This REIT is poised to benefit from its growth efforts in manufactured housing, RV resorts and marinas. The continued demand for affordable housing is acting as a tailwind, while demand for RV vacations is picking up pace amid the resumption of normalcy.  

Sun Communities currently carries a Zacks Rank of 2. The Zacks Consensus Estimate for the current-year FFO per share has been revised 1.5% upward in two months’ time. The company’s shares have declined 3.2% over the past year.

 

 

Camden Property Trust: Based in Houston, TX, Camden Property Trust is engaged in the ownership, management, development, redevelopment, acquisition and construction of multi-family apartment communities. It is an S&P 500 company.

Camden Property Trust is poised to benefit from the strong demand for multifamily rental housing. Demographic growth also continues to be strong in the young-adult age cohort, which has a higher propensity to rent. This age group is the main cohort for the formation of new households and most of them prefer to remain renters and enjoy locational advantages as well as flexibility that rental apartments offer.

Also, there is pent-up demand from young adults living at home or with roommates. Moreover, young adults are making lifestyle decisions later, choosing to marry and have children later in life, delaying homeownership decisions.

Camden Property Trust presently holds a Zacks Rank of 2. Over the past week, the Zacks Consensus Estimate for 2022 FFO per share has witnessed marginal upward revision to $6.50. The stock has also gained 11.1% over the past year.

 

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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