Much has changed in the real estate market over the past year. Commercial real estate is making a major comeback after pandemic shutdowns shook the market, and residential real estate is selling at a rapid speed and at record prices. As the market transforms, so do the opportunities for investors. Here are three real estate investment trusts (REITs) to buy in today's housing market.
Trends backing the changes
Low interest rates and a serious housing shortage are driving home appreciation to new levels, putting housing affordability into question. Expensive housing in this competitive market is pushing the dream of homeownership further from reality for many Americans.
This situation is creating a long-term trend toward renting over homeownership in many markets across the U.S., especially in the Sun Belt, which is experiencing high inward migration.
Mid-America Apartment Communities (NYSE: MAA), Invitation Homes (NYSE: INVH), and Sun Communities (NYSE: SUI) are backed by these trends, with direct exposure to the housing or rental markets in the Sun Belt region or affordable housing sectors providing long-term growth potential.
Sun Belt-driven multifamily operator
Mid-America Apartment Communities is one of the largest multifamily operators in the Sun Belt region, having ownership interest in 102,772 apartment units across 16 states and Washington, D.C.
Unlike many other multifamily REITs, Mid-America focuses on Class B apartment communities in majority-suburban and inner-loop areas surrounding some of the nation's major metropolitan markets in the South -- areas currently in high demand.
The company's top 10 markets, based on net operating income (NOI) in the first quarter of 2021, were all Sun Belt cities, several of which are experiencing the highest inward migration of anywhere in the country.
The REIT also boasts a solid balance sheet, having a healthy debt-to-EBITDAre ratio of 4.9 times and steady revenue growth when many other apartment operators saw losses in revenues.
Built-to-rent homes in the Sun Belt region
Sticking with the long-term trend toward rental real estate, few REITs are positioned to benefit from changing consumer preferences as much as Invitation Homes, which specializes in built-to-rent single-family homes across the country. People want more space and privacy out of their rental homes -- and they are willing to pay for it.
Invitation Homes currently owns or has interest in 80,330 homes -- 95% of which are located in the Sun Belt region. Blended rental rate growth is up 8.1% year over year as of May 2021, occupancy is 98.3%, and funds from operations (FFO) are up 4.5% as of Q1 2021.
At 7.1 times, the company's debt ratios are higher than most residential REITs', but the company has remained focused on lowering this each quarter and improving its balance sheet ratios, particularly while high demand is boosting revenues.
Affordable housing provider in the Sun Belt and beyond
Mobile home communities -- typically located in sought-after areas in the Sun Belt region that are home to warmer weather for fleeing snowbirds -- are becoming a viable affordable housing option for many. Meaning Sun Communities -- which owns or has interest in 562 mobile home, RV, and marina communities in 39 states and Ontario, Canada -- is an attractive play right now. Occupancy is up to 98.8%, core funds from operations (CFFO) grew 3.3% year over year as of Q1 2021, and net operating income (NOI) is up 2.7% for the same time period.
While most of the company's portfolio is in mobile homes, 28% is in RV slips, which are also seeing a boost in demand as Americans get outside and explore in safety this summer. As a result, Sun Communities' debt-to-EBITDA ratio is 6.1 times, a bit higher than the industry average but manageable given its portfolio performance over the past year.
Despite a challenging housing market for many, loads of opportunities remain in the right sectors. The long-term trends backing these three companies today have pushed share prices to record highs for all three companies, meaning investors are paying a premium. But the high demand and shifting housing trends backing these companies put them in a long-play position for growth.