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3 Residential REITs to Consider Despite Industry Challenges
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The REIT And Equity Trust - Residential Industry constituents are expected to bear the brunt of soft rental housing demand amid low consumer confidence and weak household formation despite job gains and wage growth. Elevated deliveries and regulatory issues are also expected to add to the woes. Moreover, a hike in interest rates to counter inflation poses a risk to the flow of capital for this asset category. Also, interest expenses are expected to climb with rate hikes.
Nevertheless, residential REITs like Equity Residential (EQR - Free Report) , Mid-America Apartment Communities, Inc. (MAA - Free Report) and Sun Communities, Inc. (SUI - Free Report) are poised to benefit as mortgage rates are high, and with the high cost of homeownership, the transition from renter to homeowner is difficult, making renting of apartment units a viable option. Also, residential REITs are banking on technology and organizational capabilities to drive innovation, rent growth and improve the efficiency of their operating platform.
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, the 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?
Weak New-Lease Apartment Demand: The inflationary environment and macroeconomic uncertainty are likely to have an adverse impact on this industry’s performance. In fact, despite growth in jobs and wages, new-lease apartment demand remains weak amid low consumer confidence and weak household formation. In addition, there is a seasonality impact during winter months. With leasing traffic remaining soft, apartment rents are likely to bear the brunt .
Elevated Deliveries of New Units: Although supply-chain woes and labor challenges have impacted construction activity to some extent in recent quarters, 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. Per a RealPage report, the U.S. apartment market is on course to add almost 3,300 communities, comprising around 590,000 units in 2023. This marks the largest delivery volume since RealPage started tracking the U.S. apartment market 30 years ago. 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. In fact, in recent years, there has been an increase in states and municipalities implementing or considering rent control or rent stabilization laws and regulations. This is limiting the residential REITs’ power to raise rents or charge non-rent fees. 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. However, mortgage rates are high, and with the high cost of homeownership, the transition from renter to homeowner is difficult, making renting of apartment units a viable option.
Rebound in Demand for Student Housing Properties: 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, driving leasing activity and rent growth. Per a RealPage report, for fall 2023, already more than a quarter of student beds are pre-leased.
Technology Adoption: Technological adoption gathered steam amid the social-distancing trend, and now residential REITs are combining technology with sales and service expertise, aiming at driving revenues, trimming costs, improving operating margins, as well as enhancing customer experience. The REITs are now focusing on virtual leasing assistance, virtual and self-guided tours, digital move-in process and process enhancements. Improvement in search and tour booking as well as smart home access has gained much attention, and residential REITs are focusing on these.
Zacks Industry Rank Indicates Bleak Prospects
The REIT And Equity Trust - Residential industry is housed within the broader Finance sector. It carries a Zacks Industry Rank #167, which places it at the bottom 33% 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 dull 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 bottom 50% of the Zacks-ranked industries is a result of the downward 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 losing confidence in this group’s growth potential. Since August 2022, the industry’s FFO per share estimate for 2022 has moved marginally down. Moreover, over the past year, the industry’s FFO per share estimate for 2023 has moved 1.0% south.
However, 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 Zacks REIT And Equity Trust - Residential industry has underperformed the broader Zacks Finance sector as well as the S&P 500 composite over the past year.
The industry has declined 33.2% during this period compared with the S&P 500’s fall of 19.4% and the broader Finance sector’s decline of 14.1%.
One-Year 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 15.16X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 16.99X. The industry is trading above the Finance sector’s forward 12-month P/E of 13.02X. 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 25.48X, as low as 15.16X, with a median of 18.96X.
3 Residential REIT Stocks Trying to Survive Industry Challenges
Equity Residential: Based in Chicago, IL, this residential REIT is one of the leading, publicly-traded multi-family REITs in the United States.
It is well-positioned to benefit from its portfolio rebalancing efforts and a strong balance sheet. Equity Residential’s efforts to diversify its portfolio in the urban and suburban markets, with an affluent tenant base, bode well.
Its strategic buyouts and focus on technology and organizational capabilities to drive innovation and efficiency of its operating platform act as tailwinds.
Currently, EQR has a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for the company’s 2022 FFO per share indicates a favorable outlook, with estimates revised marginally upward over the past two months to $3.53. The company’s shares have declined 12.3% so far in the quarter.
Mid-America Apartment Communities: Headquartered in Germantown, TN, and commonly known as MAA, this residential REIT is engaged in owning, managing, acquiring, developing and redeveloping quality apartment communities, mainly in the Southeast, Southwest and Mid-Atlantic regions of the United States.
Mid-America Apartment’s well-diversified Sunbelt-focused portfolio is set to gain from healthy operating fundamentals and a strong development pipeline. The favorable in-migration trends of jobs and households in SunBelt submarkets are likely to fuel demand.
We expect strong rent growth and stable occupancy to drive revenues going forward. The prospects of its redevelopment program and progress in technology measures are likely to expand margins. Its solid balance sheet acts as a tailwind.
MAA currently has a Zacks Rank #3. The recent trend in estimate revision indicates a favorable outlook for MAA. Particularly, the Zacks Consensus Estimate for 2022 FFO per share has been revised 1.4% upward over the past month to $8.46.
Also, the consensus mark for 2023 FFO per share has moved 0.3% north over the past month to $9.17. The company’s shares have declined 0.6% so far in the quarter.
Sun Communities, Inc.: The Southfield, MI-based residential REIT enjoys a stake in or is engaged in the ownership or operation of manufactured housing communities, recreational vehicle (RV) resorts and marina properties 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 3. The Zacks Consensus Estimate for the current-year FFO per share has been revised 1.1% upward in the past month. The company’s shares have increased 2.6% so far in the quarter.
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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3 Residential REITs to Consider Despite Industry Challenges
The REIT And Equity Trust - Residential Industry constituents are expected to bear the brunt of soft rental housing demand amid low consumer confidence and weak household formation despite job gains and wage growth. Elevated deliveries and regulatory issues are also expected to add to the woes. Moreover, a hike in interest rates to counter inflation poses a risk to the flow of capital for this asset category. Also, interest expenses are expected to climb with rate hikes.
Nevertheless, residential REITs like Equity Residential (EQR - Free Report) , Mid-America Apartment Communities, Inc. (MAA - Free Report) and Sun Communities, Inc. (SUI - Free Report) are poised to benefit as mortgage rates are high, and with the high cost of homeownership, the transition from renter to homeowner is difficult, making renting of apartment units a viable option. Also, residential REITs are banking on technology and organizational capabilities to drive innovation, rent growth and improve the efficiency of their operating platform.
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, the 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?
Weak New-Lease Apartment Demand: The inflationary environment and macroeconomic uncertainty are likely to have an adverse impact on this industry’s performance. In fact, despite growth in jobs and wages, new-lease apartment demand remains weak amid low consumer confidence and weak household formation. In addition, there is a seasonality impact during winter months. With leasing traffic remaining soft, apartment rents are likely to bear the brunt .
Elevated Deliveries of New Units: Although supply-chain woes and labor challenges have impacted construction activity to some extent in recent quarters, 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. Per a RealPage report, the U.S. apartment market is on course to add almost 3,300 communities, comprising around 590,000 units in 2023. This marks the largest delivery volume since RealPage started tracking the U.S. apartment market 30 years ago. 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. In fact, in recent years, there has been an increase in states and municipalities implementing or considering rent control or rent stabilization laws and regulations. This is limiting the residential REITs’ power to raise rents or charge non-rent fees. 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. However, mortgage rates are high, and with the high cost of homeownership, the transition from renter to homeowner is difficult, making renting of apartment units a viable option.
Rebound in Demand for Student Housing Properties: 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, driving leasing activity and rent growth. Per a RealPage report, for fall 2023, already more than a quarter of student beds are pre-leased.
Technology Adoption: Technological adoption gathered steam amid the social-distancing trend, and now residential REITs are combining technology with sales and service expertise, aiming at driving revenues, trimming costs, improving operating margins, as well as enhancing customer experience. The REITs are now focusing on virtual leasing assistance, virtual and self-guided tours, digital move-in process and process enhancements. Improvement in search and tour booking as well as smart home access has gained much attention, and residential REITs are focusing on these.
Zacks Industry Rank Indicates Bleak Prospects
The REIT And Equity Trust - Residential industry is housed within the broader Finance sector. It carries a Zacks Industry Rank #167, which places it at the bottom 33% 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 dull 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 bottom 50% of the Zacks-ranked industries is a result of the downward 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 losing confidence in this group’s growth potential. Since August 2022, the industry’s FFO per share estimate for 2022 has moved marginally down. Moreover, over the past year, the industry’s FFO per share estimate for 2023 has moved 1.0% south.
However, 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 Zacks REIT And Equity Trust - Residential industry has underperformed the broader Zacks Finance sector as well as the S&P 500 composite over the past year.
The industry has declined 33.2% during this period compared with the S&P 500’s fall of 19.4% and the broader Finance sector’s decline of 14.1%.
One-Year 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 15.16X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 16.99X. The industry is trading above the Finance sector’s forward 12-month P/E of 13.02X. 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 25.48X, as low as 15.16X, with a median of 18.96X.
3 Residential REIT Stocks Trying to Survive Industry Challenges
Equity Residential: Based in Chicago, IL, this residential REIT is one of the leading, publicly-traded multi-family REITs in the United States.
It is well-positioned to benefit from its portfolio rebalancing efforts and a strong balance sheet. Equity Residential’s efforts to diversify its portfolio in the urban and suburban markets, with an affluent tenant base, bode well.
Its strategic buyouts and focus on technology and organizational capabilities to drive innovation and efficiency of its operating platform act as tailwinds.
Currently, EQR has a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for the company’s 2022 FFO per share indicates a favorable outlook, with estimates revised marginally upward over the past two months to $3.53. The company’s shares have declined 12.3% so far in the quarter.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Mid-America Apartment Communities: Headquartered in Germantown, TN, and commonly known as MAA, this residential REIT is engaged in owning, managing, acquiring, developing and redeveloping quality apartment communities, mainly in the Southeast, Southwest and Mid-Atlantic regions of the United States.
Mid-America Apartment’s well-diversified Sunbelt-focused portfolio is set to gain from healthy operating fundamentals and a strong development pipeline. The favorable in-migration trends of jobs and households in SunBelt submarkets are likely to fuel demand.
We expect strong rent growth and stable occupancy to drive revenues going forward. The prospects of its redevelopment program and progress in technology measures are likely to expand margins. Its solid balance sheet acts as a tailwind.
MAA currently has a Zacks Rank #3. The recent trend in estimate revision indicates a favorable outlook for MAA. Particularly, the Zacks Consensus Estimate for 2022 FFO per share has been revised 1.4% upward over the past month to $8.46.
Also, the consensus mark for 2023 FFO per share has moved 0.3% north over the past month to $9.17. The company’s shares have declined 0.6% so far in the quarter.
Sun Communities, Inc.: The Southfield, MI-based residential REIT enjoys a stake in or is engaged in the ownership or operation of manufactured housing communities, recreational vehicle (RV) resorts and marina properties 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 3. The Zacks Consensus Estimate for the current-year FFO per share has been revised 1.1% upward in the past month. The company’s shares have increased 2.6% so far in the quarter.
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.