The U.S. economy has entered its longest spell of expansion, however it continues to create jobs at a solid pace as indicated by the latest job figures. Nonfarm payrolls in June jumped to 224,000 — well above market expectations of 165,000 — per the Labor Department. Though the unemployment rate ticked up 10 basis points to 3.7%, it is still hovering near 50-year lows, alleviating any fears regarding significant weakening of the labor market. This has also lowered chances of a substantial rate cut by the Fed anytime soon.
A solid job market and a stable economy also fuel expectations for more household formation and result in increasing housing demand. In addition, transition from renter to homeowner is difficult in several markets due to high homeownership costs, spurring demand for rental units.
Further, latest figures from real estate technology and analytics firm RealPage, Inc. (RP - Free Report) suggest that the U.S. apartment rental market has been able to bank on this trend during the current year’s prime leasing period.
In fact, in the second quarter, leasing activity accelerated as demand was strong. Per the RealPage report, from April through June, net move-ins aggregated 155,515 units, which came in 11% higher than the second-quarter 2018 product absorption and climbed to a five-year high.
With a solid leasing activity, occupancy reached 95.8% during the June-end quarter, up from the prior-year quarter’s 95.4%. This upswing in occupancy level amidst a steady delivery of new units looks encouraging. With occupancy pushing up, rent growth also seems to be steady. In fact, the market has achieved a 3% increase in rents from the prior-year level, attaining an average of $1,390 per month.
Also, one of the leading residential REITs, AvalonBay Communities (AVB - Free Report) , mentioned in its April-June period operating update that total rental revenues for established communities were up 3.4% for the two-month period ending May 31, 2019. This was 40 basis points higher than what was expected by the company for the period when it provided the 2019 established communities total rental revenue growth outlook in February.
Furthermore, the company noted that established communities’ like-term effective rent change for April and May were 3.2% compared to 3% witnessed in the comparable period last year. Additionally, the company stated that the renewal offers for June and July are being provided to residents at an average rise of 5.3% over the existing lease.
All these hint at a healthy residential real estate market and the Zacks REIT And Equity Trust - Residential industry, which is housed within the broader Zacks Finance sector, currently carries a Zacks Industry Rank #100, which places it at the top 39% of 256 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.
Selecting Top Residential REITs
Against this backdrop, picking up some top residential REITs backed by a solid Zacks Rank seems wise. This is because, no matter whether market conditions are good or bad, stocks with a Zacks Rank #1 (Strong Buy) and 2 (Buy) have a proven history of outperformance.
Here are the 3 picks from the residential REITs:
Camden Property Trust (CPT - Free Report) , a residential REIT based in Houston, TX, is engaged in the ownership, management, development, redevelopment, acquisition, and construction of multi-family apartment communities. The stock holds a Zacks Rank of 2, at present. Its projected growth rate for the current year is 6.3%. The Zacks Consensus Estimate for the current-year funds from operations (FFO) marginally improved to $5.07 over the past 30 days.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Headquartered at San Mateo, CA, Essex Property Trust, Inc. (ESS - Free Report) is a residential REIT engaged in the acquisition, development, redevelopment and management of multi-family residential properties. Specifically, the company enjoys concentration of assets in select markets along the West Coast. Notably, the West Coast is home to several innovation and technology companies and the region is witnessing solid job growth, higher wages, increased percentage of renters than owners, and favorable migration trends.
Essex Property currently carries a Zacks Rank of 2. The company has witnessed positive estimate revisions in the past three months. The Zacks Consensus Estimate for 2019 FFO indicates nearly 4.5% year-over-year increase.
Chicago, IL-based residential REIT Equity Residential (EQR - Free Report) is focused on the acquisition, development and management of high-quality apartment properties in top U.S. growth markets. The company is poised for growth amid stable economy and job-market growth, favorable demographics, lifestyle transformation and creation of households. This Zacks Ranked #2 stock has an estimated long-term growth rate of 5.9%. The ongoing year’s FFO per share estimate moved marginally north in 60 days’ time.
Here’s how the above stocks have performed so far in the 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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