Housing REITs Remain Cheap | Seeking Alpha

The batch of housing REITs we’re going to discuss in this article is shown below:

Ticker

Subsector

Company Name

Ticker

Div Yield

AFFO or Core Yield

RESI

Single-Family Rental

Front Yard Residential Corp

RESI

0.00%

3.67%

AMH

Single-Family Rental

American Homes 4 Rent

AMH

0.67%

3.52%

INVH

Single-Family Rental

Invitation Homes Inc

INVH

2.13%

3.91%

SUI

MH Park

Sun Communities Inc

SUI

2.18%

3.51%

ELS

MH Park

Equity Lifestyle Properties, Inc.

ELS

2.21%

3.44%

NXRT

Apartments

NexPoint Residential Trust Inc

NXRT

2.83%

5.06%

MAA

Apartments

Mid-America Apartment Communities Inc

MAA

3.39%

4.72%

CPT

Apartments

Camden Property Trust

CPT

3.62%

4.52%

IRT

Apartments

Independence Realty Trust Inc

IRT

4.10%

5.95%

ESS

Apartments

Essex Property Trust Inc

ESS

4.16%

5.79%

AVB

Apartments

AvalonBay Communities Inc

AVB

4.37%

5.51%

UDR

Apartments

UDR, Inc.

UDR

4.44%

5.67%

EQR

Apartments

Equity Residential

EQR

4.75%

5.73%

AIV

Apartments

AIMCO

AIV

4.82%

5.73%

CLPR

Apartments

Clipper Realty

CLPR

6.26%

8.95%

BRG

Apartments

Bluerock Residential Growth REIT

BRG

7.98%

6.93%

APTS

Apartments

Preferred Apartment Communities Inc.

APTS

12.94%

7.35%

Before we get into our main topic for discussion, we’ve got a few more charts that have been popular with readers. We start by turning those values into a bar chart:

Source: The REIT Forum

Then we provide the payout ratios:

Source: The REIT Forum

Recent Developments – ELS

Equity Lifestyle Properties reported Q3 normalized FFO per share of $.55, beating estimates of $.53 per share and last year’s value of $.53 per share. NAREIT FFO per share was only $.50. What was the difference? A charge of $9.7 million on early retirement of debt. Every analyst (OK, competent analyst) will agree that we should add that back.

ELS announced they were able to acquire some cheap debt capital:

“During the quarter ended September 30, 2020, we closed on a financing transaction with Fannie Mae generating gross proceeds of $386.9 million. The loan is secured by ten manufactured home (“MH”) communities and consists of two tranches with a weighted average interest rate of 2.55% per annum and a weighted average maturity of 13.4 years. The net proceeds from the transaction were primarily used to repay our $200.0 million unsecured term loan scheduled to mature in 2023 and secured loans scheduled to mature in 2021. We incurred early debt retirement costs of $9.7 million related to these financing transactions.”

They were also busy buying up new properties:

“In October 2020, we completed the acquisition of Marina Dunes RV Park, an 89-site RV community located in Marina, California, and we completed the acquisition of Acorn Campground, a 323-site RV community in Green Creek, New Jersey. The total aggregate purchase price for these properties was $36.0 million, which was funded with available cash.

In October 2020, we also completed the acquisitions of two development properties, The Resort at Tranquility Lake, a planned 500-site RV community located in Cape Coral, Florida and Bayport, a planned 900-site RV community located in Jamaica, Virginia, for a total aggregate purchase price of $16.3 million. These acquisitions were funded with available cash.

As part of our strategy to expand owned communities with additional developed sites, in September and October 2020, we completed the acquisitions of five parcels of land adjacent to four of our properties for a total aggregate purchase price of $6.4 million, which was funded with available cash.”

Recent Developments – RESI

RESI announced they would sell the company for $13.50 per share. That’s a huge premium to the prior share price, though still a substantial discount to the projected liquidation proceeds some investors were hoping for. Altisource Portfolio Solutions called on RESI to liquidate, owned 5.9% of the shares, and believed liquidation should deliver at least $16.50 per share.

We’ve long argued that RESI’s best way to create shareholder value was sell the company. Whether that was through liquidation or selling the entire company, the emphasis was simply on closing up shop. Why? Because RESI wasn’t as good at operating their portfolio as AMH and INVH (the two major single-family REITs).

AvalonBay Continues Construction

AvalonBay has been one of the best apartment developers in the country for a long time. The REIT is regularly developing new properties. One of their properties, the AVA Arts District, got a loan for $167 million.

The building will have 475 units and is expected to have about 60,000 square feet of commercial space. The project is labeled in an “opportunity zone,” where it can benefit from a federal tax incentive.

Given the way apartment REITs are trading at very high “implied capitalization rates” and huge discounts to NAV (net asset value), construction will most likely become far less common over the next two years. The remaining projects, like this one, may involve incentives for developments.

Ratings

Let’s get into some ratings.

We’re bullish on several of the apartment REITs.

We’ll highlight a handful: AVB, EQR, and ESS.

Source: The REIT Forum

Why are we bullish on these REITs? Strong balance sheets, great management, solid record of creating shareholder value, high implied cap rates, and a belief that large cities will recover over the next few years. One of the cures for cheap rent is cheap rent. You read that right. When prices drop, the demand still comes. Yes, it’s a rough environment, but how many millennials do you know that are happy about living with their parents right now? You may well know some who have moved back home, but few are loving the experience. When the labor market recovers, we should expect to see a recovery in rent as well.

That doesn’t mean REITs will promptly be setting new record highs. No, we don’t view that as likely. However, they should be able to cover their dividends and see rental rates recover over the next few years. This isn’t retail. There’s a world of difference. People actually want to live in nice apartments.

Our method works. We know because we buy the same shares we recommend. We track our results on a real portfolio and we compare our returns with the major ETFs for our sector:

Those four ETFs are:

  • MORT – Major mortgage REIT ETF
  • PFF – The largest preferred share ETF
  • VNQ – The largest equity REIT ETF
  • KBWY – The high-yield equity REIT ETF

Sign up now. Take advantage of our October sale!

Disclosure: I am/we are long AVB, EQR, ESS, ELS, SUI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: We will be watching the sector and may add to our positions.

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