REIT Rankings: Flats
That is an abridged model of the total report revealed on Hoya Capital Earnings Builder Market on August 2nd.
Renting or proudly owning – housing has change into considerably dearer over the previous three years as pre-existing secular tailwinds got an added pandemic-related accelerant. Whereas the period of 15-20% will increase in dwelling costs and rents could also be coming to an finish, renters should not count on important reduction anytime quickly – and the inflationary results shall be felt for years to return. House REITs proceed to report stellar earnings outcomes with record-setting hire progress whereas concurrently managing to extend occupancy charges to record-highs and scale back turnover charges to record-lows. Throughout the Hoya Capital House REIT Index, we observe the fifteen largest condo REITs which collectively account for roughly $150B in market worth, $300B in whole asset worth, and personal over one million rental items throughout america.
Renters throughout the nation have been receiving an unwelcome shock at finish of their lease time period in current quarters, most of which have seen – or will quickly see – a double-digit proportion improve on their renewal provide. After buying the market, many renters quickly understand they could be sitting on the very best deal accessible, underscored by one other quarter of traditionally excessive occupancy charges and record-low turnover charges reported by condo REITs with broad-based power seen throughout each Sunbelt and Coastal-focused markets. As mentioned in our REIT Earnings Halftime Report, condo REIT earnings outcomes had been spectacular throughout the board within the second quarter with all ten main condo REITs elevating their full-year property-level steering, indicating that increased mortgage charges have merely shifted the sturdy housing demand from the possession market again in direction of the rental markets whereas provide progress has been inadequate to fulfill the sturdy demand.
Regardless of a stellar slate of earnings outcomes from the condo sector by which all ten REITs raised their full-year steering, the sector continues to commerce close to its least expensive valuations in a decade amid concern that the rate-driven slowdown within the homeownership markets and the broader financial slowdown will bleed into the rental markets – issues that we consider are untimely given the comparatively countercyclical nature of condo demand. In its most up-to-date hire report, Zumper reported that hire progress reaccelerated in July to an 11.3% year-over-year fee after exhibiting some indicators of moderation within the prior two months. Information from Zillow (Z) reveals that annual hire progress has remained round 15% all through 2022 with 50 of the highest 60 markets seeing hire progress in extra of 10% in its most up-to-date June report.
Naturally, the historic tempo of hire progress has normalized a bit over the previous two quarters – significantly in lots of the resurgent Sunbelt and Mountain West markets that had been posting hire progress above 25% earlier this yr – however renters holding out hope for some “free hire” or different concessions will doubtless be disillusioned. According to current knowledge from Yardi Matrix, House Listing reported final week that whereas rents are rising extra slowly than they did in 2021, the tempo continues to be double that of pre-pandemic years. Over the primary seven months of 2022, rents have elevated by a complete of 6.7%, shy of the 12.0% over the identical months of 2021 however nicely forward of the 4.0% fee in 2017, 4.5% in 2018, 4.1% in 2019, and -0.4% in 2020. Information from Yardi reveals related themes with its survey noting that nationwide rents have elevated by $73 for the reason that begin of 2022 by the top of June to a median of $1,706. The rise represents a 13.7% p.c year-over-year improve, 50 foundation factors decrease than it was in Could and 130 foundation factors off the February peak.
Measures of market rents doubtless understate the “embedded” progress ensuing from the traditionally vast unfold between new lease charges and in-place rents as condo house owners have needed to restrict renewal will increase in lots of states and cities on account of regulatory limits. House REITs reported new lease fee progress of 17.5% in Q2 whereas renewal hire progress averaged 12.4% – a differential that has continued since late 2021. This unfold has been particularly vast within the Coastal markets, which at the moment are accelerating at a barely quicker tempo than the Sunbelt as these markets “catch up” with the unbelievable double-digit progress seen within the Sunbelt all through the pandemic. House Earnings (AIRC), for instance, estimated that its “loss to lease” – the unfold between in-place rents and market rents – was above 10% within the second quarter whereas Essex (ESS) famous that its loss to lease was “one of many strongest loss to lease within the Firm’s historical past at 10.3%”, indicating that transacted charges will stay sturdy for the stability of 2022 and into subsequent yr.
As famous above, fueled by these double-digit hire will increase, every of the ten main residences raised their full-year same-store NOI progress goal – which is now anticipated to common greater than 13% this yr – whereas eight of the ten boosted their full-year Funds From Operations (“FFO”) goal – which is now anticipated to common 19.0% this yr. Led on the upside by Essex, AvalonBay (AVB), and Fairness Residential (EQR), the upside revisions had been extra substantial throughout the Coastal-focused REITs with a median improve to FFO steering of 310 foundation factors in comparison with their Sunbelt friends which raised their FFO progress targets by a median of 150 foundation factors. Occupancy charges elevated to 96.6% for the Coastal REITs – a rise of 30 foundation factors from final yr – whereas Sunbelt REITs reported common occupancy of 95.5% – decrease by 25 foundation factors from their record-high charges final yr.
Additionally of word, Coastal REITs count on extra modest expense progress this yr of simply 3.6% – far beneath the broader inflation fee and the 6.2% common will increase anticipated by Sunbelt REITs – pushed by a major decline in turnover charges in comparison with 2021, which is once more in step with these broader “catch-up” results. If these FFO targets are met, condo REITs could have delivered common cumulative FFO progress of twenty-two.8% for the reason that begin of the pandemic – a fairly spectacular feat contemplating the misery reported by Coastal-focused REITs early within the pandemic. Sunbelt REITs by no means skipped a beat through the pandemic and now count on 2022 FFO ranges to be 36.3% above their pre-pandemic fee from 2019 whereas Coastal REITs now count on 2022 FFO ranges to be 9.3% above 2019-levels.
Deeper Dive: Macro Fundamentals
Taking a step again to a extra macro-level, whereas items shortages and the ensuing inflation ought to steadily ease over the following yr as financial progress cools and as provide chain headwinds lastly ease, elevated ranges of housing inflation will doubtless persist into the again half of the last decade, and we count on that the Shelter part of CPI will resume its function as the first driver of inflation. We have mentioned for a lot of months how the historic surge in rents has not but been captured by the BLS inflation metrics which confirmed cumulative hire inflation of simply 7.7% for the reason that finish of 2019 – considerably beneath the 24.1% cumulative hire progress reported in Zillow knowledge. The delayed recognition of shelter inflation alone will add an estimated 0.6-1.2% to the Core CPI index in 2022 and 2023.
Whereas the near- and medium-term outlook stays very compelling, provide progress is a possible looming longer-term headwind as hovering hire progress has sparked a brand new wave of growth. After a number of years of muted provide progress, multifamily begins and units-under-construction have climbed to multi-decade highs, however elongated building timelines and lingering provide chain points proceed to restrict completions. Given the hearty fundamentals of near-record-high occupancy charges and record-low turnover charges – mixed with the discounted valuations – condo REITs seem well-equipped to outperform by the inevitable normalization.
Taking a step again, from an funding perspective, condo demand is pushed primarily by demographics, employment progress, and wage progress. House REITs have benefited from extraordinarily favorable millennial-led demographic traits during the last decade, a development that also has just a few extra years left to run, significantly in sunbelt cities which are attracting an more and more bigger share of 25-35-year-old “prime-age” renters. House REITs are additionally among the many extra operationally “environment friendly” actual property sectors, commanding a comparatively low working and overhead expense profile and requiring pretty modest ongoing capital expenditures in comparison with different sectors like retail, resort, and workplace. Importantly, residential actual property has additionally confirmed to be among the finest inflation hedging property during the last century not solely within the U.S. but in addition throughout completely different areas.
For the undersupplied housing trade, we count on the favorable provide/demand imbalance to persist for the foreseeable future amid ongoing constraints on new dwelling building whereas demographic-driven and WFH-driven demand stay resilient. Freddie Mac estimates that the U.S. housing market is 3.8 million houses in need of what’s wanted to fulfill the nation’s demand, representing a 52% rise within the nation’s housing scarcity in contrast with 2018. These record-low stock ranges of houses have resulted in hire progress and residential worth appreciation persistently above the speed of inflation all through the previous decade – a really constructive long-term basic backdrop not just for condo REITs, however throughout the broader U.S. housing trade.
House REIT Inventory Efficiency
Regardless of a stellar slate of earnings outcomes from the condo sector by which all ten REITs raised their full-year steering, condo REITs have lagged the broader REIT Index this yr amid concern that the rate-driven slowdown within the homeownership markets and the broader financial slowdown will bleed into the rental markets – issues that we consider are untimely. The Hoya Capital House REIT Index is decrease by 20.0% this yr, lagging the 16.5% decline from the broad-based Vanguard Actual Property ETF (VNQ) and the 14.1% decline from the S&P 500 ETF (SPY). The underperformance this yr follows the very best yr on report for condo REITs with whole returns of 58%
House REITs have been among the strongest-performing REITs over most long-term measurement intervals. From 2010 by 2021, House REITs delivered common annual returns of 16.4%, outpacing the 14.4% annual whole returns from the broad-based REIT common throughout that point. Among the many eight main condo REITs, Mid-America (MAA) and Camden Property (CPT) have delivered the strongest 5-year whole returns, however these Sunbelt-focused REITs have lagged their Coastal friends this yr. Apparently, three small-cap REITs have been the strongest performers this yr led by Aimco (AIV), BRT Flats (BRT) and Clipper Realty (CLPR) whereas Veris Residential (VRE) has continued to underperform since its rebranding and technique shift from an workplace REIT into an condo REIT 2021.
Whereas we gained a pair of latest condo REITs by strategy-shifts, Blackstone (BX) picked off a trio of multifamily REITs over the previous yr for its nontraded REIT, Blackstone Actual Property Earnings Belief (“BREIT”). Final December, Blackstone agreed to accumulate Bluerock Residential Progress REIT (BRG) in an all-cash transaction valuing the REIT at $3.6 billion at $24.25/share – a roughly 80% premium from its pre-announcement share worth. Two months later, Blackstone agreed to accumulate Most popular House (APTS) in a $5.8B deal at $25 /share – a 40% premium from its pre-announcement worth after which in April, Blackstone acquired pupil housing REIT American Campus (ACC) in a $12.8 billion takeout at $65.47/share bid – a 14% premium to ACC’s prior shut. The acquisitions of BRG and APTS closed in June whereas the ACC acquisition is predicted to shut this quarter.
Deeper Dive: House REIT Portfolios
As goes the U.S. housing trade, so goes the U.S. financial system. The $4-5 trillion U.S. multifamily condo market is extremely fragmented, with these sixteen REITs proudly owning roughly 1,000,000 of the estimated 25 million multifamily rental items throughout the US, which is barely about 2-4% of the whole rental condo inventory. Multifamily rental items comprise roughly 15% of all housing items in america, and these condo REITs comprise roughly 15% of the Hoya Capital Housing Index, the housing trade benchmark that tracks the efficiency of the U.S. housing sector.
As a sector, condo REITs collectively have pretty balanced geographical publicity throughout a lot of the main U.S. markets. Particular person condo REITs are likely to concentrate on both coastal markets or sunbelt and secondary markets and personal portfolios that usually embrace a mix of luxurious high-rise, mid-rise, and garden-style condo communities. Coastal condo REITs embrace Fairness Residential, AvalonBay, Essex, House Earnings, UDR (UDR), and AIMCO, whereas sunbelt-focused condo REITs embrace Camden, Mid-America, Independence (IRT), and NexPoint Residential (NXRT). In a class of its personal, Centerspace (CSR) focuses totally on Midwest and Mountain West markets with its main markets being Minneapolis, Omaha, and Denver.
We have additionally seen a pair of workplace REITs shift their focus to change into pure-play multifamily REITs during the last yr: Washington REIT (WRE), and Veris Residential – previously Mack-Cali. Maybe much more necessary than their geographical distribution, the distribution of portfolios in direction of both city or suburban has taken on added significance all through the pandemic as suburban properties surrounding the hardest-hit “shutdown cities” have seen among the strongest charges of hire progress each within the multifamily and single-family rental classes. For instance, NYC suburbs Stamford and New Haven, Connecticut noticed among the strongest charges of hire progress since at the very least 2015 as versatile distant work choices have lessened the burden of the longer suburban commutes. We have seen some modest reversals in these traits in 2022, nevertheless, because the post-pandemic reopenings have led to significantly sturdy hire progress in New York Metropolis.
The bigger condo REITs are typically among the most well-capitalized firms throughout the REIT sector – a essential attribute through the pandemic-related turbulence – however a number of of the small-cap condo REITs do function with elevated debt ranges. The seven largest condo REITs command investment-grade credit score rankings from Normal & Poor’s, led by A- rankings by AvalonBay, Fairness Residential, and Camden. The bigger REITs within the sector additionally are likely to rank excessive on the company governance scale with shareholder-friendly governance buildings. NexPoint Residential is the lone externally-managed REIT within the sector however has however delivered sector-leading efficiency.
House REIT Dividend Yields
House REITs pay a median dividend yield of three.1%, which is barely beneath the REIT market-cap-weighted sector common of three.2%. Because the begin of 2015, condo REITs have delivered common annual dividend progress of roughly 2.8%, however pay out solely round 65% of their accessible money stream, giving these firms the flexibleness to make the most of exterior progress alternatives or to extend distributions. 9 condo REITs raised their dividend final yr whereas one other 9 have raised their payouts this yr as nicely with Mid-America and NexPoint delivering the strongest fee of improve. The ten mid- and large-cap condo REITs pay dividend yields starting from 2.25% to 4.12% whereas small-cap BRT Flats and Clipper pay dividend yields of 4.5% and 4.2%, respectively.
Takeaway: Loads of ‘Embedded’ Progress Left
Regardless of a stellar slate of earnings outcomes from the condo sector by which all ten REITs raised their full-year steering condo REITs have lagged this yr and the sector now trades at traditionally low-cost valuations. We see loads of “embedded” progress remaining given the traditionally vast unfold between new lease charges and in-place rents, significantly in coastal markets which at the moment are accelerating at a barely quicker tempo than the Sunbelt as these markets “catch up” with the unbelievable double-digit progress seen within the Sunbelt all through the pandemic. The potential for a deeper-than-expected recession and longer-term provide progress are dangers as multifamily begins and units-under-construction have climbed to multi-decade highs, however given the hearty fundamentals of near-record-high occupancy charges and record-low turnover charges – mixed with the discounted valuations – condo REITs are at present some of the compelling values throughout the true property sector.
For an in-depth evaluation of all actual property sectors, remember to try all of our quarterly reviews: Flats, Homebuilders, Manufactured Housing, Pupil Housing, Single-Household Leases, Cell Towers, Casinos, Industrial, Information Middle, Malls, Healthcare, Internet Lease, Procuring Facilities, Lodges, Billboards, Workplace, Farmland, Storage, Timber, Mortgage, and Hashish.
Disclosure: Hoya Capital Actual Property advises two Alternate-Traded Funds listed on the NYSE. Along with any lengthy positions listed beneath, Hoya Capital is lengthy all parts within the Hoya Capital Housing 100 Index and within the Hoya Capital Excessive Dividend Yield Index. Index definitions and a whole listing of holdings can be found on our web site.