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3 Residential REITs Set to Gain From Upbeat Industry Fundamentals

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The REIT And Equity Trust - Residential industry constituents are expected to benefit in the prime leasing season 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. Also, residential REITs are banking on technology and organizational capabilities to drive innovation and rent growth and improve the efficiency of their operating platforms. Amid these, residential REITs like Independence Realty Trust (IRT - Free Report) , Elme Communities (ELME - Free Report) and BRT Apartments Corp. (BRT - Free Report) are poised to benefit.

However, macroeconomic uncertainties in the near term remain concerns. Elevated deliveries, the lack of rental relief payments and regulatory issues are expected to add to the woes. High real estate taxes and insurance costs are likely to add to cost pressures. 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 and lower-than-expected delinquency rates as renters continue meeting their obligations despite inflation. 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. There has 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 integrating technology with their sales and service skills to increase revenues, reduce costs and improve margins and customer experience. They are adopting virtual leasing assistance, self-guided tours and digital move-in processes and enhancing search, tour bookings and smart-home access. These customer-focused tech advancements aim to generate additional net operating income in the future, signaling the pivotal role of technology in the evolution of the residential real estate industry.

Lack of Rental Relief Payments and Cost Pressure: Growth in revenues of residential REITs is likely to be affected by bad debt, given the lack of rental relief payments in 2023. Moreover, amid an inflationary environment, residential REITs are facing higher cost pressure, with utilities, payroll, and repair and maintenance costs remaining elevated. Adding to the woes are property taxes and insurance, which are not only high but also volatile. Given the frequency and severity of several disasters over the past couple of years, there is greater pressure on insurance rates. Also, for real estate taxes, municipal fiscal pressures are driving the growth rate.

Macroeconomic Uncertainties & High-Interest Rates Cast a Pall: 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. The impacts of the slowdown are likely to be more profound in case of a slowing economy during the peak leasing season than later in the year. 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 #89, which places it in the top 36% 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 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.

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 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 14.4% during this period against the S&P 500’s increase of 4.2%. The broader Finance sector has dipped 4.9%.

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 16.22X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 18.98X. The industry is trading above the Finance sector’s forward 12-month P/E of 13.16X. 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 Worth Betting On

BRT Apartments Corp.: This residential REIT, headquartered in Great Neck, NY, is engaged in ownership and operation and, to a lesser extent, holds stakes in joint ventures that own multi-family properties. Particularly, BRT owns and operates Class B and better multi-family assets, mainly in well-situated Sun Belt locations.

With well-located properties in growth markets, this residential REIT is poised to benefit from its focus on opportunities in Sun Belt markets due to positive net migration in the millennial age group moving into the area.

Also, middle-class renters who are more likely to rent Class B or better apartments drive demand in its markets. BRT also significantly reduced its outstanding exposure to higher interest rates.

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 33.6% upward over the past month to $1.55. The stock has also increased 12.4% over the past month. You can see the complete list of today’s Zacks #1 Rank stocks here.

Elme Communities: This is a multi-family REIT that owns and operates apartment homes principally in the Washington, DC, metro and Sunbelt regions.

The REIT’s portfolio allocation to the Washington metro offers insulation from employment loss. Also, its mid-level rents offer protection from new supply woes.

Elme Communities currently carries a Zacks Rank of 2 (Buy). The Zacks Consensus Estimate for the current-year FFO per share has been revised a cent upward to 99 cents, suggesting a 12.5% year-over-year increase, backed by 10.5% growth in revenues. The company’s shares have declined 3.8% in the past three months.

Independence Realty Trust, Inc.: This Philadelphia, PA-based residential REIT is focused on the ownership and operations of multifamily apartment properties across non-gateway U.S. markets, including Atlanta, GA; Dallas, TX; Denver, CO; Columbus, Ohio; Indianapolis, IN; Raleigh-Durham, NC; Oklahoma City, OK; Nashville, TN; Houston, TX; and Tampa, FL.

IRT targets boosting its presence in amenity-rich submarkets that offer good school districts, high-quality retail and major employment centers. Independence Realty Trust is poised to benefit from healthy fundamentals in its non-gateway markets and value-add program.

Independence Realty Trust currently carries a Zacks Rank of 2. The Zacks Consensus Estimate for the current-year FFO per share of $1.16 suggests a 7.4% year-over-year increase, backed by 6.7% growth in revenues. The company’s shares have rallied 8.3% over the past month.



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.

See More Zacks Research for These Tickers

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BRT Apartments Corp. (BRT) - free report >>

Independence Realty Trust, Inc. (IRT) - free report >>

Elme Communities (ELME) - free report >>

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