Proprietary Data Insights
Retail Top (Apartment) REIT Searches This Month
It’s Not The Best Environment Right Now For REIT Investors
The bull run for Real Estate Investment Trusts (REITs) might be coming to an end.
However, as our main story today illustrates, it could pay to take a contrarian view in the face of recent news relevant to a particular sector that contains a few consistently high-quality REITs.
For the record, REITs are companies that invest in real estate across a wide range of sectors (offices, medical buildings, etc.). REITs must pay out a minimum of 90% of their annual taxable income to shareholders via dividends.
After a period of impressive outperformance, conditions appear to be deteriorating, which means REIT investors might want to jump ship, look for sector-specific long-term opportunities, or both.
The following factors are contributing to and could help further create a toxic environment for REITs going forward:
A whole slew of economists – including from large investment banks (for example, Wells Fargo and Goldman) – recently increased their odds for slowing growth, if not an outright recession by 2023.
While this doesn’t make all REITs untouchable, particularly for long-term investors, you should proceed with caution.
Dig deeper into public data, checking to see if the REIT you’re interested in has managed to lock in low interest rates on its debt over a meaningful period of time.
Does The ‘Exodus’ From Cities Scream Investment Opportunity?
Every time you turn around, there’s somebody pronouncing cities dead on arrival.
Like James Altucher’s now infamous gun-jumping blog turned NY Post bombast:
Source: NY Post
Hard Census data backs up many of these assertions:
The day this news broke, several luxury apartment REITs were bludgeoned.
And yet…Rents Are Skyrocketing Again In Cities!
Consider the following numbers from Zumper, showing astronomical year-over-year rent increases in America’s biggest cities.
It seems like every time you scroll your newsfeed you see stories about lofty rents soaring and discouraged first-time homebuyers outbid and priced out of the aforementioned pricey markets.
Making Sense of Contradictory Data
Census data lags.
It doesn’t jibe with current reality on the ground in big cities.
Nor does a decline in big city populations does not foreshadow the death of these places.
First, there’s the reality that people died during the pandemic.
In 2021, these deaths coalesced with fewer births and an aging population to produce a natural population decrease across the board, according to the Census report.
Second, while remote work has prompted a considerable number of people to leave dense urban cores, the rising rents and bidding wars are real. So it’s not like the desire to be in the center of it all evaporated.
Third, those would-be homeowners priced out of posh markets are still affluent enough to rent. And to do so at a premium in luxury units.
Which brings us to an apartment REIT worth looking at – Essex Property Trust (ESS).
When negative news on cities hits, ESS – and peers Equity Residential (EQR) and Avalon Bay (AVB) – tend to, at the very least, dip, trade in a depressed range for a day or two, only to rebound.
For long-term investors, here’s a classic case of adding to a position you believe in by buying these dips.
With its high-end luxury apartment properties concentrated in San Francisco, Southern California, and Seattle, ESS might be an apartment REIT to consider on temporary declines, especially if you have a long-term time horizon.
It’s expensive to buy in Essex’s markets.
According to the company, it actually costs less to rent in Northern and Southern California and Seattle:
As long as a meaningful number of high-end renters, including the ones who can’t quite yet become homeowners, exist in these places, REITs such as Essex should remain relatively well-positioned.
The company also looks good from a debt standpoint.
As noted on its most recent earnings conference call, Essex refinanced almost 40% of its debt over the past two years, locking in low rates. Just 6% of its debt matures in the next two years and only 4% is exposed to variable interest rates.
The Bottom Line: Lagging data screams an exodus from cities. Even if this population decline holds or intensifies, it doesn’t take into account the wealth that remains in our urban centers. Some of this wealth will always go towards expensive rents.
In addition to ESS, AVB and EQR might be worth a look. Both apartment REITs have broader national exposure than ESS, but still maintain large presences in the country’s largest metros.
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