The choppiness in rental housing demand in higher cost and urban/infill markets amid the flexible working environment, low mortgage rates, along with elevated deliveries will continue to affect cash flows of REIT And Equity Trust – Residential constituents in the days to come.
Nevertheless, the healthy demand in the Sunbelt markets and sub-urban locations, as well as the new wave of demand for single-family rentals amid the health crisis have been the saving grace for a number of residential REITs, including Mid-America Apartment Communities (MAA), American Homes 4 Rent (AMH) and Preferred Apartment Communities (APTS).
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.
What’s Shaping Future of the REIT and Equity Trust – Residential Industry?
Rental Demand Rebounds but Varies across Markets: The U.S. apartment market witnessed solid leasing activity in the fourth quarter of 2020, per a report from the real estate technology and analytics firm RealPage (RP). Typically, demand remains low during the October-December quarter, but thanks to the coronavirus pandemic that pushed this demand to the latter half of the year from the usually strong second quarter. Particularly, in the last six months of 2020, absorptions amounted to more than 234,000 units, denoting a greater chunk of the total annual volume. However, this demand rebound has not been even, rather, it has been varied across markets. Demand in the Sun Belt markets and the sub-urban ones has been strong, though considerable move-outs and sluggish demand were seen in gateway markets. Even though occupancy level held up well in December, rent changes varied across metros, with select big cities witnessing significant price reductions. Given the continuation of the work-from-home flexibility this year even with immunization process underway, the low-density and less-expensive sub-urban sub-markets are poised to lead the overall market performance in the near-term, while the gateway markets are likely to lag. In addition, record-low mortgage rates and the desire for spaces are spurring home sales and adversely impacting rental demand. Moreover, with higher education adopting remote-learning models and limiting on-campus activities for the near term, demand for student housing will continue to being dismal.
Elevated Deliveries of New Units and Rent Control: It is also feared that the struggle to lure renters is here to stay now, as supply volumes will likely remain elevated. Per report from RealPage, following delays in project timelines, completions bounced back in the last half of 2020 and construction of almost 345,000 market-rate units were concluded in 2020, marking it the “biggest annual block of deliveries since the mid-1980s”. With around 583,000 market-rate apartments under construction and roughly 404,000 of those being slated for completion this year, with major deliveries in the gateway markets, leasing activity might be affected. In addition, new rent-control regulations have been introduced in some of the major markets in recent times, while a number of other markets are being considered for establishing such regulations in the days to come. This is likely to curb any significant growth in the top line.
Technology Adoption: Technological adoption has gathered steam amid the social-distancing trend, as the health crisis needed an almost-overnight shift to virtual operations for the continuation of business operations. However, instead of focusing on apps catering to a specific purpose, landlords are now emphasizing more on existing technologies and supplements aimed at driving revenues, cut costs and improve operating margins, as well as enhance customer experience.
Rent Collection Woes and Concession Usage: The coronavirus mayhem is also affecting the rent-paying capabilities of residential tenants. According to a RealPage report, rent collections have been disappointing in the lower-tier properties. Also, rent collections are trailing in expensive metros where financial assistance is insufficient to cover most part of the rent bill. Though the extended unemployment benefits provided support earlier, in recent months unemployed renters have mostly relied on their savings to make rent payments but diminishing savings is straining the payment frequency. Nonetheless, short-term additional assistance to household will likely be a savior in the upcoming period. Furthermore, use of concessions has been rampant in urban portfolios, which will likely continue in the near term amid a demand slowdown. In addition, waiving of various fees for residents, including late payments, has dampened residential REITs’ top-line growth.Therefore, residential REITs with a healthier balance-sheet position and ample liquidity are poised to sail through the current turbulence.
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 #224, which places it at the bottom11% 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 bleak 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 negative 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 estimate for 2021 moved 15.9% south.
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 REIT And Equity Trust – Residential Industry has lagged the S&P 500 composite as well as the broader Finance sector in a year’s time.
The industry has depreciated 23.3% during this period as against the S&P 500’s rally of 17.6%. During the same time frame, the broader Finance sector has lost 0.4%.
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 18.12X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 23.16X. The industry is trading above the Finance sector’s forward 12-month P/E of 17.22X. 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 22.35X, as low as 15.54X, with a median of 18.56X.
3 Residential REIT Stocks Trying to Survive Industry Challenges
Mid-America Apartment Communities, Inc.: The Germantown, TN-based residential REIT is engaged in owning, acquiring, operating and selective development of apartment communities, located primarily in the Southeast, Southwest and Mid-Atlantic regions of the United States.Healthy demand for the company’s well-positioned Sunbelt properties will likely aid its performance in the days to come.
Mid-America Apartment Communities currently carries a Zacks Rank #3 (Hold). Over the past month, the Zacks Consensus Estimate for 2021 FFO per share witnessed marginal upward revision to $6.61. The stock has also gained 10.4% over the past six months.
American Homes 4 Rent: This Agoura Hills, CA-based REIT is focused on acquiring, developing, renovating, leasing and operating attractive, single-family homes as rental properties. The company owns single-family properties in select submarkets across 22 states in the United States. Markedly, the pandemic has prompted a new wave of demand for single-family rentals, which positions the company well to deliver decent performances in the upcoming period.
The stock currently carries a Zacks Rank of 3. The stock’s current cash-flow growth of 9.2% compares favorably with the industry’s 7.2%.The Zacks Consensus Estimate for the ongoing year’s FFO per share moved 1.6% north in the past week to $1.26 and calls for a year-over-year increase of 9.7%. The stock has appreciated 8.3% six months’ time.
Preferred Apartment Communities, Inc.: The Atlanta, GA-based REIT is mainly engaged in the ownership and operation of Class A multi-family properties, with select investments in grocery-anchored shopping centers, Class A office buildings, and student housing properties. This REIT is poised to benefit from its sub-urban Sunbelt focus.
Preferred Apartment Communities currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for the current-year FFO per share has been revised marginally upward in two months’ time. The company’s shares have rallied 35.1% over the past three months.
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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RealPage, Inc. (RP): Free Stock Analysis Report
MidAmerica Apartment Communities, Inc. (MAA): Free Stock Analysis Report
Preferred Apartment Communities, Inc. (APTS): Free Stock Analysis Report
American Homes 4 Rent (AMH): Free Stock Analysis Report
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