Rental REITs Take Advantage of Housing Fallout

There were many big winners after the housing crisis.  Think about all the people who lost their homes.  What did they do?  Where did they go?  They had to live somewhere.  They had tons of furniture and other personal property.  What happened?
The storage companies have been doing incredibly well coming off the financial crisis, as all that personal property got placed in storage.
The other areas doing really well are apartment buildings and housing rentals.  Foreclosures forced people to go into rentals.  Companies have been buying up apartment buildings all over the country, refurbishing them, and moving in the renters.  Demand has been extraordinary, allowing for robust occupancy and rent increases.
With the economy puttering along with weak growth and the labor force participation rate at 36 year lows, apartments aren’t going to be emptying anytime soon.
Rental REITs are thus a good place to look for stocks, as well as dividends.  Let’s see if we can find any value.

The Best Rental REITs 

Independence Realty Trust (NYSE:IRT) is a small-cap play in the space, and is 28% owned by RAIT Investment Trust (NYSE:RAS).  It focuses on secondary and tertiary markets lacking in new construction, with 150-200 units, acquired at less than replacement costs, with cash flow that can grow, and can be more efficiently managed.
It only owns 19 properties valued at $343 million.
I love that management’s interests are aligned with shareholders due to the high ownership.  I love the 7% yield.  I also love the relative valuation, which is about 12x 2014 Price-to-FFO.
On the other side, we have the mega-REIT named Equity Residential (NYSE:EQR).  This is a $24.6 billion company founded by Sam Zell.
Zell’s empire stretches across 24 states, 150,000 rental units, and 580 properties.  That’s been a drag on the company’s financials, as it must put enormous amounts of capital expenditures to work, which has dragged on cash flow.  Still, even with a price-to-FFO of 22x, and a 3% yield, you want to be in business with Zell when it comes to real estate just like you want to be in business with Steve Wynn when it comes to Vegas resorts.
UDR, Inc. (NYSE:UDR) is a $7 billion REIT established in 22 markets, with 181 communities, representing 51,923 homes. These are part of communities with a roughly 50-50 split as to home quality between “A” level and “B” level.
Same store revenue growth is 4.4% vs. multifamily peer averages of 3.7% and NOI is up 5.5% on a same store basis.  Occupancy remains robust at 96.9%.  The company continues to develop and contract new rental homes.
Finally, have a look at Avalon Bay Communities (NYSE:AVB).  The REIT is also in the multifamily community space, with 164 such communities spread across the nation, and holding 45,000 units.  Avalon Bay is also being aggressive in developing, having purchased rights to develop another 27 communities, adding 20% to its overall total.
The company is priced in the same area as EQR, with a price-to-FFO ratio of about 22, and a dividend yield of 3.1%.
The question is whether these REITs are overpriced.  On the one hand, I always like to go big and conservative and like a Sam Zell business.  On the other hand, I like a small cap with room to grow significantly that the market is undervaluing.  It all depends on what kind of investor you are.
Lawrence Meyers does not own shares in any company mentioned.

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