As the economy picks up pace, the rebound in rental residential unit demand poises the Zacks REIT And Equity Trust - Residential industry players like Invitation Homes Inc. (INVH Quick QuoteINVH - Free Report) , American Homes 4 Rent (AMH Quick QuoteAMH - Free Report) and UMH Properties Inc. (UMH Quick QuoteUMH - Free Report) well. With mortgage rates trending high, the flexibility of renting apartments rather than owning a home has aided this industry. Also, leveraging tech-driven features is likely to help residential REITs capitalize on this healthy demand while achieving operational efficiency.

Nonetheless, the elevated supply of new units might weigh on rent growth, especially now that the peak leasing season is over.

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: The demand for rental residential units has continued to show signs of solid rebound despite elevated supply in certain markets. High absorption rates, although not up to the 2021 mark, are an indication of the favorable industry conditions. Economic activity has resumed in full swing, especially in the urban sector. As a result, renter demand is anticipated to remain buoyant in the near future, especially among the young adult age cohort, which has a higher propensity to rent. In addition, with mortgage rates having trended up for most of 2023, the cost of homeownership has risen relative to rents. This has made the transition from renter to homeowner difficult, making renting apartment units a more affordable and flexible option.

Technological Initiatives to Boost Demand: Keeping up with the changing times, residential REITs are deploying new-age technologies to enhance customer experience and lure tenants. Tech-driven features like self-guided property tours, digital move-in procedures, the installation of smart home technology, building-wide Wi-Fi, artificial intelligence-enabled sales tool, etc., have brought about operational resiliency by reducing cost. Hence, in this age of digitization, leveraging technology and organizational capabilities is likely to provide residential REITs a competitive edge and drive net operating income (NOI) growth in the long run.

Elevated Supply of New Apartment Units: The residential real estate market is witnessing an influx of new deliveries as the construction of several projects that had been put on hold during the pandemic is nearing an end. This phenomenon is weighing on rental rates despite healthy demand, as operators prioritize occupancy rates over rents to safeguard their cash flow. It is likely that with a substantial delivery pipeline in place, supply will remain on the higher side in the remainder of 2023, keeping rent growth under check. 

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 #79, which places it in the top 32% of around 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. Since June 2023, the industry’s FFO per share estimates for 2023 have moved up 4.2%.  

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 Underperforms 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 9.8% during this period against the S&P 500’s increase of 14.1%. The broader Finance sector has advanced 3.9%.

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 14.24X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 19.09X. The industry is trading above the Finance sector’s forward 12-month P/E of 13.77X. This is shown in the chart below.

Forward 12-Month Price-to-FFO (P/FFO) Ratio

 

3 Residential REIT Picks to Bet On

Invitation Homes: The company is an owner and operator of single-family homes for lease and offers its residents high-quality homes in sought-after neighborhoods across the United States. INVH focuses on markets with strong demand drivers, high barriers to entry and high rent growth potential. It mainly operates in the Western United States, Florida and the Southeast United States markets. As of Sep 30, 2023, the company had more than 80,000 homes for lease in 16 core markets across the nation.

Given INVH’s ability to offer updated homes with modern features and the proximity to jobs and access to good schools, it is likely to continue enjoying healthy rental demand. This will help drive occupancy rates at its properties and maintain decent rental rate growth.

Invitation Homes currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for the current-year FFO per share is pegged at $1.79, suggesting a 7.2% year-over-year increase, backed by 8.6% growth in revenues. The company’s shares have rallied 13.2% in the year-to-date period. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
 

American Homes 4 Rent: This Maryland-based REIT is an owner, operator and developer of single-family rental homes. It focuses on acquiring, developing, renovating, leasing and managing single-family homes as rental properties.

The company owns a well-diversified portfolio with a superior operating platform. As of Sep 30, 2023, AMH owned more than 59,000 single-family properties in the Southeast, Midwest, Southwest and Mountain West regions of the United States. Banking on the sustainable demand tailwinds in its markets, the company seems well-poised for growth. Per the company’s November Presentation, same home average occupied days for October was strong at 96.2%.

Furthermore, AMH’s Resident 360 program, which combines the benefits of a technology-driven operating platform and integrated development program, provides a unique ability to optimize portfolio and platform through continuous data feedback loops. This is likely to give the company a competitive advantage and drive NOI growth by bringing about revenue optimization and expense efficiencies.

American Homes 4 Rent currently carries a Zacks Rank of 2. The Zacks Consensus Estimate for the current-year FFO per share is pegged at $1.65, suggesting a 7.1% year-over-year increase, backed by 8.1% growth in revenues. The company’s shares have rallied 20.4% in the year-to-date period.
 

 

UMH Properties, Inc.: The company is an owner and operator of manufactured home communities, which includes leasing manufactured home spaces on an annual or month-to-month basis to residents. As of Sep 30, 2023, UMH owned and operated 135 manufactured home communities containing around 25,800 developed homesites. These communities are located in New Jersey, New York, Ohio, Pennsylvania, Tennessee, Indiana, Maryland, Michigan, Alabama, South Carolina and Georgia.

The company’s ability to provide competitively priced quality homes is likely to help it witness healthy rental demand in the upcoming period, especially in a market where the gap between buying and renting is expected to continue in the following quarters. UMH anticipates adding a total of roughly 800 to 900 rental homes by the end of 2023.

UMH Properties currently carries a Zacks Rank #2. The Zacks Consensus Estimate for its 2023 FFO per share has been revised 1.2% upward over the past week to 84 cents. Moreover, the Zacks Consensus Estimate for 2024 FFO per share has been raised 2.2% over the past week. The company’s shares have risen 1.5% in the quarter-to-date period.
 

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.