The red-hot housing market of 2021 and 2022 is officially over. Weak demand continues as interest rates and inflation weigh on consumers.
And it’s not just single-family homes that are feeling the pinch. December 2022 saw rental rates decline for the fourth consecutive month.
A sluggish market has investors worried about the future of popular residential real estate investment trusts (REITs). MAA (MAA 0.13%), Camden Property Trust (Cpt 0.12%)And Welcome home (INVH 1.91%). All three stocks are down 25% or more over the past year. But their beaten-down share price is not necessarily a sign that trouble is ahead.
According to recent earnings, these three REITs — which specialize in owning, developing and leasing rental properties — are still red hot. Is now the time to take advantage of their low prices?
Sunbelt growth may be slowing, but these REITs still shine
MAA (formerly known as Mid-America Apartment Communities), Camden Property Trust, and Invitation Homes are the three major residential REITs. This is largely thanks to a top-tier portfolio of assets in high-growth markets. MAA and Camden operate similar portfolios of high-end multifamily apartment communities throughout the southern region of the country, while Invitation Homes focuses on leasing single-family rental properties.
The Sunbelt has blazed the trail for rent growth and demand growth over the past decade, with cities like Atlanta, Dallas, Phoenix and Austin, Texas, Tampa and Orlando, Florida, seeing consistently record-breaking growth year after year. But that demand is cool.
Strong construction over the past few years has resulted in deliveries exceeding market demand, resulting in rising vacancy rates. Vacancies are not good for rental operators as they lead to high costs and low returns.
But all three REITs still have exceptionally high occupancy. Beginning in 2023, the national average vacancy rate for multi-family properties was 5.7%. According to recent earnings reports, Camden’s vacancy rate is just 3.4%, MAA’s 4.2%, and Invitation Homes’ 2.9%.
Rent is also increasing. As of the third quarter of 2022, Camden and MAA saw their blended rental rates increase 14% year-over-year for new and renewals, while Invitation Homes’ blended rate grew 10%.
The double-digit growth that the rental industry saw over the past few years was unsustainable and it was only a matter of time before things returned to normal. Many investors see the slowdown as a red flag, but almost all markets these companies operate in are still posting positive rent growth — just at a slower pace than before.
These top-tier stocks are trading at discounted prices
MAA, Camden Property Trust, and Invitation Homes used the rental housing boom to better hedge their finances and reduce their debt exposure, which was a smart move that could help maintain their dividends and control debt obligations in the near future.
Right now, Camden trades for an optimal valuation of about 15.6 times its trailing 12-month funds from operations (FFO), a metric that works like price to earnings for REITs. MAA is trading at around 21 times its FFO and Invitation Homes is trading at just 9.3 times. A year ago, these stocks couldn’t be bought for less than 25 to 30 times their FFO, so today’s lower range is certainly worth the price.
The rental market is likely to slow in 2023 and beyond, meaning investors should take a long-term approach when buying this REIT. But there is still huge demand for the accommodation these operators provide. Given their favorable prices and attractive dividends in the 2% to 3% range, right now is a great time to buy these red-hot stocks.
Liz Brummer-Smith has held positions at Invitation Homes and Mid-America Apartment Communities. The Motley Fool has positions with and recommends Camden Property Trust, Invitation Homes and Mid-America Apartment Communities. Motley Fool has a revealing policy.