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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 elevated deliveries, which is likely to weigh on rent growth. A high interest rate environment to counter inflation poses a risk to the flow of capital for this asset category. Also, interest expenses are expected to remain elevated. Regulatory issues are expected to add to the woes.

Nevertheless, Invitation Homes Inc. (INVH - Free Report) , UMH Properties, Inc. (UMH - Free Report) and Centerspace (CSR - Free Report) are expected to benefit despite high supply because of healthy demand in the market. 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.

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?

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 now being completed. This phenomenon weighs 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 near term, keeping rent growth under check.  

High Interest Rates and Complicated Regulatory Environment: The elevated interest rates to counter inflation pose 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 remain elevated in the near term. Moreover, with a growing focus by state and local and, in certain cases, federal and governmental authorities, the regulatory environment for rental housing continues to be complex. Particularly, rent-control regulations in some of the major markets might curb the growth tempo. 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 residential REITs’ power to raise rents or charge non-rent fees.

Healthy Rental Demand and Technological Initiatives: Despite elevated supply in certain markets, the demand for rental residential units has continued to show signs of solid rebound, and high absorption rates are an indication of that. A combination of elements like continuing wage increases, solid job growth and favorable demographic trends is driving this surge in demand. Moreover, with mortgage rates remaining high, 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. Move-outs from apartment units into single-family homes remain much lower. In the case of student housing, there is strong pre-leasing early in the season. Also, in this age of digitization, leveraging technology and organizational capabilities is likely to provide residential REITs with a competitive edge.

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 #211, which places it in the bottom 16% 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 dim 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 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. Over the past year, the industry’s FFO per share estimates for 2024 and 2025 have moved down 4.7% and 5.3%, respectively.

However, 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 advanced 0.6% during this period compared with the S&P 500’s increase of 25.2%. The broader Finance sector has rallied 25.3%.

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 15.28X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 21.21X. The industry is trading above the Finance sector’s forward 12-month P/E of 14.99X. 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 26.22X and as low as 13.62X, with a median of 19.20X.

3 Residential REITs to Consider

Centerspace: This REIT is focused on the ownership, management, acquisition, development and redevelopment of apartment communities. CSR owned interests in 72 apartment communities comprising 13,088 apartment homes as of Dec 31, 2023.

Its primary objective lies in directing its investments toward regions distinguished by steady and expanding economies, solid employment opportunities and an appealing standard of living. This strategic combination culminates in the higher demand for apartment homes and retention of residents.

Moreover, CSR is poised to benefit from the implementation of new technology that boosts automation, self-service delivery and resident experience.

Centerspace currently carries a Zacks Rank of 2 (Buy). The Zacks Consensus Estimate for the current-year FFO per share has been revised 1.5% north over the past month to $4.74. The consensus mark for 2025 FFO per share has also revised 2.9% upward over the past month to $4.91. The company’s shares have increased 3% in the past three months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Invitation Homes: This REIT 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 Dec 31, 2023, the REIT had around 85,000 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 #3 (Hold). The Zacks Consensus Estimate for the current-year FFO per share has been revised a cent upward over the past month to $1.88, suggesting a 6.2% year-over-year increase, backed by 6.2% growth in revenues. The company’s shares have rallied 9.7% in the past six months.

UMH Properties, Inc.: The company is an owner and operator of manufactured home communities. UMH owns and operates 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. Its communities continue to experience strong demand for both sales and rentals.

Also, the joint venture with Nuveen Real Estate, in which the company has ownership in and operates two communities in Florida, allows UMH to take up accretive development deals while lowering the need for capital.

UMH Properties currently carries a Zacks Rank #3. The Zacks Consensus Estimate for its 2024 FFO per share of 93 cents suggests a year-over-year increase of 8.14%. Moreover, the consensus mark for 2025 FFO per share has been revised 5.1% north over the past month and calls for an 11.1% increase year over year. The company’s shares have risen 16% in the past six months.

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.

See More Zacks Research for These Tickers

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