Rental Revolution: 3 Stocks to Ride Housing’s Newest Trend
· InvestorPlaceFortune reported in November that rent is cheaper than mortgages in 95 out of 97 major metropolitan areas in the U.S. These rental market trends were from Bank of America’s economists.
“[T]heir analysis found that ‘rent was still cheaper than mortgages in all but two of 97 major Metro Areas,’ as of October, despite the fact that both rents and mortgage payments have gotten more expensive, relative to median income, since the pandemic.”
The only two metros where buying is better than renting? New Orleans and Jackson, Mississippi.
Rents currently account for approximately 26% of the median U.S. household income, 600 basis points less than mortgage payments to income.
As interest rates fall, housing prices will most likely rise due to increased demand, offsetting any gains homeowners would gain from a lower mortgage rate.
Due to the severe housing shortage in America, these three rental stocks will do well for years to come.
Mid-America Apartment Communities (MAA)
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Mid-America Apartment Communities (NYSE:MAA) is a Memphis-based real estate investment trust that owns apartment communities across the Sunbelt region of the U.S. As of Sept. 30th, MAA owned 101,987 apartment homes across 13 states and the District of Columbia.
In the company’s Q3 2023 press release, CEO Eric Bolton said the REIT’s situation looks very optimistic in 2024.
“The delivery of new apartment supply is currently impacting rent growth performance associated with new move-in residents, and we expect this pressure to persist for another few quarters… The volume of new apartment starts has begun to decline, and we expect that leasing conditions will be supportive of higher rent growth in late 2024 as markets absorb the current development pipeline.”
Translation: the REIT’s rental revenues and core funds from operations (CFFO) are increasing.
One of the ways it grows its rental revenue is by renovating vacant units and upping the rent on those units. In Q3 2023, it renovated 2,258 apartment homes at rents 7% higher than its unrenovated units.
Another way it grows rental revenue is through acquisitions. On Nov. 29, it acquired a 323-unit mid-rise apartment building in Phoenix for $102 million, or $317,000 per unit, much less than the current replacement costs.
Based on its $1.40 quarterly dividend, it yields an attractive 4.4%. Down 21% over the past year, it hasn’t traded this low since late 2020.
NexPoint Residential Trust (NXRT)
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NexPoint Residential Trust (NYSE:NXRT) also focuses on the U.S. Sunbelt region. However, it tends to go after Class B multifamily properties where it can add value through the addition of lifestyle amenities.
It owns 39 properties with 14,485 units across seven states, including Texas, where it’s based. The average monthly rent of its units is $1,507. As of Sept. 30, its occupancy rate was 94.0%.
In the third quarter, it increased its total revenues by 4.6% over Q3 2022 to $61.8 million, while its net operating income rose 8.0% to $38.4 million.
During the third quarter, it completed the sale of its Silverbrook property in Dallas for $70.0 million, a 34.0% internal rate of return (IRR). At the same time, it agreed to sell its Timber Creek property in Charlotte for $49 million, an IRR of 25.5%.
In 2023, the REIT refinanced 21 property-level mortgages at better interest rates than previously while extending its weighted average debt maturity schedule to 6.4 years from 3.3 years. As a result, it has no meaningful maturities until June 2025. Approximately 71% of its debt is fixed rather than floating.
For 2023, it expects its same-store net operating income to increase by 8.7%, higher than all of its major peers, including Mid-America.
On Oct. 31, NexPoint announced a 10.1% increase in its quarterly dividend to $0.46242 a share from $0.42. Since its inception in 2015, it has increased its dividend by 124.5%.
Tricon Residential (TCN)
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Tricon Residential (NYSE:TCN) is a Canadian real estate company listed on the NYSE in October 2021. Its initial public offering and simultaneous private placement with Blackstone Real Estate Investment Trust raised $570 million. Blackstone owns nearly 12% of Tricon.
Although Tricon’s history as a real estate investor and asset manager dates back to 1988, the company’s move into single-family rental homes (SFR) accelerated its IPO on the NYSE.
Today, Tricon’s business includes 37,024 SFRs in the U.S. and more than 5,000 multifamily rental properties in Canada that are either available for rent or in development.
The company’s SFR business is focused on the U.S. sunbelt states. Georgia (23% of its net operating income (NOI)), Florida (15%), and Texas and Arizona (tied at 13%) are its largest markets.
From Q3 2021 through Q3 2023, its same home NOI has grown every quarter by 6.0% or more with an occupancy no lower than 97.3%. The average home size is 1,700 square feet, with an average monthly rent of $1,815. It services the middle market — the 25 million households earning between $75,000 and $125,000.
As for the company’s Canadian multi-family business, the net asset value per share is $0.93 as of Q3 2023. When it gets the 4,015 units up and rented currently in construction or pre-construction in Toronto, the net asset value is expected to be $1.87 per share.
Tricon’s quarterly dividend of $0.058 yields a reasonable 2.9%.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.