Multifamily REITs – Expensive Becomes More Expensive

chart01Whenever I hear news reports regarding the U.S. rental market, whether urban legend or not, I tend to remember stories about people sleeping in their cars and showering at companies based in the San Francisco Metro Area. Recently the world has learned that the same principles apply to Washington, D.C. Speaker of the House, Paul Ryan, admitted that he sleeps at his office, and showers at the gym. Well, the next thought that comes to mind is that of Essex Properties Trust.

chart03There are not many multifamily REITs that have the ability to enjoy tailwinds as well as Essex. This Palo Alto, California-based company primarily invests in the same state that it is based out of. Essex has surfed the wave of the housing rental industry with high-end apartments. The company’s success has been fueled by a combination of millennials postponing their first home purchase, shortage of supply, and a presence in housing markets that enjoy high levels of job creation. There is no wonder that Essex made it to the top in our Q2 US equity ranking amongst apartment REITs.

Q3 Performance

Year over year Q3 figures are once again proof as to why this company shines in the sector. Essex has shown a 15 percent increase in Core FFO per share, 10 percent growth in same property net operating income, 12 percent bump in total revenues, and an 11 percent rise in their dividend per share. In summary, these figures are extremely similar to the results in Q2 that catapulted the company to the top.

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Locations

Essex owns and operates 245 properties totaling 58,000 homes that are divided into three areas: Southern CA, Northern CA, and the Seattle, Washington Metro Area.

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Multifamily Fundamentals

The company’s multifamily fundamentals could not be any better for businesses that operate on the West Coast. There have been several recent reports that name Florida metro areas as the best place for job growth, however not all jobs are equal especially in salaries. That being said, San Jose, CA has emerged as a region with one of the highest paying job creation potential.

chart04The cities in which Essex operates have been flagged as areas where demand is greater than supply. There do not seem to be any signs that this will change anytime soon. For example, many of the most expensive single-family home prices are in San Francisco, San Jose, and Oakland. Coldwell Banker formulated a list of the most expensive housing markets in 2014, and an incredible 9 out of 10 were in California. Renting as opposed to purchasing homes in those areas simply makes sense at this time.

When compared with its peers, Essex enjoys the highest same store net operating growth. In Q2, the company shared that title with Trade Street Residential, however that company was acquired by Independence Trust Realty in Q3 this year.

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Debt Profile

In most cases higher levels of leverage are linked to larger levels of default, however this is not a problem for Essex. The company certainly has a great debt profile with a total debt to total capitalization of 26 percent, one of the lowest in the apartment sector. Essex maintains the majority of its debt fixed to in order to reduce interest rate sensitivity. In addition, a significant portion of the debt is unsecured. The company has received investment grade ratings by three credit agencies, and last June Standard & Poor’s reaffirmed their BBB rating, “The outlook is positive. We believe favorable multifamily fundamentals will persist over the near term, with steady demand and manageable new supply in most of Essex’s core markets.”

Threat

A potential tech bubble burst may pose a threat to multifamily properties in Northern California, an area that generates approximately 40 percent of Essex’s net operating income. At last week’s NAREIT conference, Essex made the case for themselves that consolidated industry giants such as Google, Apple, and Cisco create far more jobs than billion dollar startups. Following that thought, analysts that are concerned about the strength of the fundamentals should shift their focus away from the riskier tech companies and towards the more mature.

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Valuation

Essex’s stock yield is currently at 2.5 percent, which is below the sector median of 3.5 percent. The stock does not appear to be attractive, however it needs to be taken into consideration that its total return is close to 12 percent year to date. Having invested in a low yield stock is not necessarily a bad thing after all.

Essex’s price-to-FFO, a P/E for REITs is 24x, higher than most of the company’s peers. This is a sign that Essex has been able to weather the storm of the REIT selloffs.

Takeaway

The apartment sector has been a top performer in terms of cash flow and profitability. Essex Properties have been one of the sector’s most coveted representatives. What was an expensive stock has become more expensive. Despite a high valuation and low yield, the company has been able to deliver stellar performance to its shareholders.

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Source: Fast Graphs, Essex Properties Trust (NYSE:ESS)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Investing In Residential Real Estate Properties vs. REITs (Part 2/2)

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Click here if you haven’t read Part 1

Purchasing REIT stocks is a much less hands-on approach to real estate investment. Once the investor has decided which REIT stocks to buy, all that is required is to track the stock value, get paid regular dividends and decide when to sell. There is no financial responsibility once the initial purchase has been completed, unless the investor decides to buy additional shares. Liquidation is easy: You just pick up the phone or enter the necessary information on your PC, tablet or smartphone.

Among residential REITs, our due diligence has spotted certain highly-ranked stocks with regard to dividend-generation potential. Essex Property Trust (NYSE:ESS), which invests in apartment communities on the West Coast, has greatly exceeded our expectations. It has no sole leading indicator that outperforms its peers; however, all distributing-boost components stand out as above average. The downside is its heavy price-to-FFO — around 24× vs. the sector median of 19×.

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Note: As of 23 October of 2015

Mid-America Apartments (NYSE:MAA), currently trading at 16×, is a cheaper choice, with a dividend-generation potential somewhat above the sector median — not little for one of the best-performing REIT space sectors at the moment. Additionally, dividend yield is at par with peers’, unlike Essex’s, which has the lowest. Also unlike Essex, Mid-America invests in Southeastern and Southwestern markets — about ⅔ in large markets, the rest in secondary ones.

Mid-America released strong Q3 results on October 28. The highlight has been its 2015 FFO guidance, which, compared with 2014 FFO, increased from 7 to 9 percent.

NexPoint Residential Trust (NYSE:NXRT) and Post Properties (NYSE:PPS) are also highly-ranked and will be subject to analysis in coming posts.

Source: Fast Graphs, Essex Property Trust, Mid-America Apartments

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Investing In Residential Real Estate Properties vs. REITs (Part 1/2)

real-estate-475875_1920Many people earn great returns on their investments by putting their money into residential real estate purchases. These types of properties include singe family homes, multi-family homes, individual condominiums, and townhouses. Although some investors purchase and then quickly sell the residential properties for profit, otherwise known as flipping, for the purpose of this article we will concentrate on holding the assets for long-term rental purposes.

We will also compare purchasing individual residential properties to investing in Real Estate Investment Trusts or REITs. Both options provide investors with an excellent opportunity to earn great returns on their money. However, they are quite the opposite of each other regarding the overall investment strategy.

Residential Real Estate Properties

Purchasing individual residential properties may very well be the best option for investors that are hands-on and enjoy having far greater control over the situation. That being said, investors certainly need to be aware of the various aspects involved before considering this type of commitment. It can take a considerable amount of effort and time in order to locate the correct single-family property.

If purchasing more than one property, investors need to multiply that effort and time by a significant amount. Some might not agree, but a good rule of thumb to go by is that two properties require three times the amount of work. Another hugely important factor is financing. Most people are not able to pay for the purchases in cash, and rely on obtaining mortgages. Regarding mortgages, some aspects to keep in mind are the down payments, monthly principal and interest payments.

Other factors to consider are the property taxes and insurance, maintenance fees, and management. If an investor decides to manage the property, s/he needs to be prepared to answer phone calls in the middle of the night from unhappy tenants. On the other hand, hiring property managers will add on yet another expense. The expenses need to be paid even if the properties are empty or the tenants are not paying their rent. Residential properties are often hard to sell, so it may take time to liquidate the assets. Investors are able to borrow against the asset, and build equity over time.

To be continued…

Are We Creating a Generation of Renters?

  • Renters can expect to spend 30 percent of their income on rent, while buyers can expect to spend 15 percent of their monthly income on a monthly mortgage payment.
  • Rental affordability worsened year-over-year in 28 of the 35 largest metro areas covered by Zillow.
  • Denver, Los Angeles, San Francisco, San Jose, and San Diego are unaffordable for both renters and buyers.

Sourced through Scoop.it from: www.zillow.com

Although buying is currently more affordable than renting, rents continue to rise in major metropolitan areas. This factor fully benefits apartment Real Estate Investment Trusts (also known as REITs). However, will this trend continue to the point where it is worth keeping, or buying apartment REITs, whose valuation metrics have been above historic measures?

Zillow has recently publicized that mortgage affordability has improved in comparison with the period between 1985 and 2000, and rent affordability has worsened. Although this is the best time to purchase homes, and stop paying rent, people are not buying. Will it ever change? In the mid-term, it does not seem like it, which should result in apartment REITs continuing to fare well over the next few years.  

A few factors help to explain it:  

· Mortgage rates remain at historically low levels; however, long-term trends should modify this resulting in a gradual worsening of mortgage affordability to historic averages. Of course this will make it more difficult for people to purchase homes.

· Down payments are a confirmed obstacle for many potential homebuyers. Since renters are paying upwards of thirty percent of their income to rent payments, it is less likely that they are saving money to purchase homes. This trend directly affects their ability to afford the down payment.

· Regarding the millennials, they need to separate a significant portion of their income to pay school loans.

· Renters also need to consider the cost of healthcare, and given the choice between that or homeownership, the safer bet is healthcare coverage. 

In conclusion, renters are often trapped in a vicious cycle. Since they pay out a significant portion of their income in rents, it makes it far less likely to be able to afford purchasing homes. Apartment REITs have significantly benefited from this trend, and likely will continue to. 

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Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Multifamily REITs: Increase in Renting Results From Structural Changes

Short of cash and unsettled in their careers, young Americans are waiting longer than ever to buy their first homes. The typical first-timer now rents for six years before buying a home, up from 2.6 years …

Sourced through Scoop.it from: finance.yahoo.com

The Great Recession brought about structural changes to multifamily REITs, which have shown to be beneficial. Those changes have spurred growth in apartment rentals. First-time buyers’ decision to delay home purchase and overall home ownership decline demonstrate two important factors driving the strong operating performance of these REITs.

Student loan debt and high down payments have stretched millennials’s budgets. Those stretches translated into longer periods before they can buy a house. Moreover, workforce opportunities in today’s world have resulted in a mobile workforce. Such changes in the job marketplace have delayed many significant adulthood events, such as marrying, having children, and purchasing a home.

For those reasons, renting no longer has the stigma of wasting money as viewed by earlier generations. Also, many people prefer renting now because of the additional costs homebuyers face, such as property taxes, HOA fees, and home maintenance and repairs.

The cost of renting, however, takes a considerable part of the renter’s income. In Q2 of this year, Zillow reports that renters spend an average of 30.2 percent. This sizeable percentage is the highest since 1979. In larger cities, renters pay an even higher percentage of income. For example, California tops the list of areas becoming unaffordable. Renters in Los Angeles, for example, spend about 49 percent of income for rent; San Francisco 47 percent, Miami 45 percent, and NYC 41 percent.

Investors wonder how long multifamily REITs will benefit from rent increases, which have fueled internal growth. Even though many renters have a higher than average income, increasing rents cannot occur for long. One key to investing in multifamily is to consider companies operating in areas with growing employment rates, where income rises faster than rent rates. 

Source: Yahoo, Zillow, Seeking Alpha, Monogram Residential (Photo)


Written by Heli Brecailo


Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Multifamily REIT Monogram Residential is in High Gear

Younger renters are less likely to believe that renting is cheaper than owning. Renters with lower income levels have shown a desire to own.

Sourced through Scoop.it from: seekingalpha.com

Monogram Residential Trust (NYSE:MORE) is a newer multifamily REIT that had its initial public offering (IPO) in November of last year. Although the company has only been traded publicly for a short time, the market has demonstrated great faith in the stock. Its price to FFO currently sits at 18x. Monogram is well positioned in Class A properties within coastal and high grown markets that are geared towards young people. Some of their locations exhibit the highest growth rates for employment in the country.

Monogram is also largely benefiting from millennials that are renting instead of buying. Homeownership has recently declined to near twenty-year lows. Some surveys have shown that people in their 20s and 30s still would like to own a home, but have been deterred by several factors. ColoradoWealthManagementFund has explored this topic recently. Please click on the link above for more information.

What makes Monogram different? The company boasts the youngest property age in the market, averaging five years, and total capital expenditure per unit is one of the lowest. In addition, their core FFO, and AFFO have spiked up, by 63 percent, to $0.13 per share in the Second Quarter of 2015 versus the same period in 2014. Monogram has recently announced their quarterly dividend at $0.075 per share, resulting in a secure 58 percent dividend payout.

Monogram does not own one hundred percent of its 55 multifamily communities. Instead, they typically maintain a 50 to 70 percent ownership interest. The same model applies to the company’s aggressive $1.1 billion development calendar, with a company’s total market capitalization of over $3.0 billion. This May, the company acquired joint venture interests in six multifamily communities, and one mezzanine loan for a total of $225 million. As to dispositions, they have completely exited Chicago.

Twenty-five percent of Monogram’s same property NOI is in San Francisco and Los Angeles. This is the company’s largest portion amongst all markets. Washington DC at 16 percent and Texas at 15 percent have also large representation.

Monogram is an extremely tempting high growth stock due to solid fundamentals, great locations, aggressive growth with external partners, and low capex per unit. The only negatives are the short company’s public history, and unproven management in public markets. This REIT stock is worth considering.

Click here to see performance of Monogram and other multifamily REITs

Curated by Heli Brecailo

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Manufactured Homes, Multifamily REITs Benefit From Housing Trends

2015 mid-year housing report: starts, data, and trends

Sourced through Scoop.it from: blog.forest2market.com

Housing market data emphasized by John Greene from Forest2Market explains why some REIT stocks have recovered over past weeks, following a pullback.

One of the few well-performing REITs of the year has been the manufactured homes sector. Growing numbers of baby boomers have reached retirement age. The lowered vacancy rate and increased rents have made them look at alternatives so they are seeking affordable housing, such as provided by manufactured homes. Overall, manufactured home REIT stocks have increased 12 percent. Two highlights have been Equity LifeStyle Properties (NYSE:ELS) and Sun Communities (NYSE:SUI).

In addition, a trend towards multifamily building has benefited Multifamily REITs. For instance, Camden Property Trust (NYSE:CPT) has enjoyed strong growth in same-property new lease or renewal rates and occupancy. Millennials have preferred to rent apartments and wait longer to start families and buy homes, possibly due to financial constraints or for prioritizing experience over possessions.

Other Multifamily REITs such as UDR (NYSE:UDR) and Essex Property Trust (NYSE:ESS) have experienced the same trend. However, they have faced more severity because they have greater exposure to the West Coast, where the gap between supply and demand has been wider. For example, UDR’s portfolio occupancy in the second quarter of 2015 was 97 percent. New leases and lease renewals rose more than seven percent compared to the same period last year. Essex Property has had similar strong results.

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Written by Heli Brecailo

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.​