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Dallas Tanner, Invitation Homes CEO, joins ‘Closing Bell Overtime’ to talk slow progress on shelter inflation, housing supply, and more.
03:25
Wed, May 15 20244:53 PM EDT
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Tag: Invitation Homes Inc.
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How the U.S. housing market got stuck in the ’80s
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The Federal Reserve’s inflation fight has been particularly brutal for anyone not already a U.S. homeowner before interest rates and mortgage rates rose to 15-year highs.
With mortgage rates around 7.2% to kick off the post–Labor Day period, the difference between the rates on a new 30-year home loan and on all outstanding U.S. mortgage debt (see chart) has not been so wide since the 1980s.
It’s the 1980s again in the U.S. housing market.
Glenmede, FactSet
“Generally, climbing interest rates curb demand and cause housing prices to fall,” Glenmede’s investment strategy team wrote, in a Tuesday client note, but not this time.
Instead, U.S. homes remain in critically low supply after more than a decade of underbuilding, and with most homeowners who already refinanced at low pre-pandemic rates being “reluctant to leave their homes,” wrote Jason Pride, chief of investment strategy and research, and his Glenmede team.
Also, while homes prices have come off their prepandemic highs, they still were fetching $416,000 in the second quarter, based on median sales prices, above $358,700 in the fourth quarter of 2020, according to U.S. Census and HUD data.
“Until the supply gap is filled by new construction, home prices and building activity are unlikely to decline as meaningfully as they normally would given the headwind from rising rates,” the Glenmede team said.
Read: Housing affordability is now at its worst level since 1984, Black Knight says
The Glenmede team, however, does expect more pressure on consumers in the coming months, particularly as student-loan payments resume in October and if the Fed keeps interest rates high for a while, as increasingly expected. The benchmark 10-year Treasury yield
BX:TMUBMUSD10Y,
which underpins the U.S. economy, was back on the climb at 4.26% Tuesday.Meanwhile, shares of home-vacation rental platform Airbnb Inc.
ABNB,
+7.23%
rose 7.2% on Tuesday, after the Labor Day weekend, and 66.4% higher on the year so far, according to FactSet.Don’t miss: New York City cracks down on Airbnb and other short-term-rental listings
Shares of Invitation Homes Inc.
INVH,
-0.91% ,
which grew out of the last decade’s home-loan foreclosure crisis to become a single-family-rental giant, were up 14.3% on the year, according to FactSet.Dallas Tanner, CEO of Invitation Homes, said he expected “the rising costs and the burden of homeownership” to continue to benefit his company, in a July earnings call. The company recently bought a portfolio of about 1,900 homes and has been snapping up newly constructed homes. Companies can borrow on Wall Street at much lower rates than individuals.
Stocks closed lower Tuesday, with the Dow Jones Industrial Average
DJIA
off 0.5%, and the S&P 500 index
SPX
0.4% lower and the Nasdaq Composite Index
COMP
down 0.1%, according to FactSet.[ad_2]
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How Wall Street’s REIT giants are reshaping U.S. real estate
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U.S real estate investment trusts today manage $4.5 trillion in real estate worldwide. Many groups on Wall Street offer these tax-friendly funds to retail investors.
KKR’s real estate business is one of the big players in the REIT game. The private equity firm manages multiple REIT funds. The KKR Real Estate Select Trust, which currently manages $1.5 billion in assets, paid a dividend of 5.4% to its investors in July 2023.
But the benefits extend beyond returns.
“When you look at the after tax equivalent of that yield, it is very compelling.” said Billy Butcher, CEO of KKR’s global real estate business. “The depreciation from our properties has covered 100% of the income generated by our properties, and there’s no tax on that dividend,” he said in an interview with CNBC.
Larger funds sometimes contain a diversified pool of assets. Categories may include office, student housing, casino, timberlands, radio and cell towers, server farms, self-storage properties, billboards, and much more.
“Back in the 1960s, there were three or four different types [of REITs], said Sher Hafeez, a managing director at Jones Lang LaSalle, a real estate services firm. “Now, I can count at least 20 different types.”
Top performing REIT sub-sectors in recent years include data centers, self-storage properties, residential housing and tower REITs. Residential housing delivered a return of 16% from 2010 to 2020, according to a S&P Global Investments report.
The investor-friendly tax rules can also increase the pace of large-scale development.
“Having REITs there as a potential exit helps the market, and helps the availability of financing,” said Michael Pestronk, CEO and co-founder of Post Brothers, a Philadelphia-based housing developer.
Some funds like Invitation Homes and American Homes 4 Rent were founded in the yearslong slowdown in U.S. home construction. At the time, REITs bought and managed commercial-scale properties, which could include products like master-planned communities or traditional apartment complexes.
In recent years, publicly traded trusts have targeted single-family rental market, and today, these REITs have grown tremendously — enough to build new neighborhoods in their entirety.
Watch the video above to learn the fundamentals of real estate investment trusts.
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20 dividend stocks with high yields that have become more attractive right now
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Income-seeking investors are looking at an opportunity to scoop up shares of real estate investment trusts. Stocks in that asset class have become more attractive as prices have fallen and cash flow is improving.
Below is a broad screen of REITs that have high dividend yields and are also expected to generate enough excess cash in 2023 to enable increases in dividend payouts.
REIT prices may turn a corner in 2023
REITs distribute most of their income to shareholders to maintain their tax-advantaged status. But the group is cyclical, with pressure on share prices when interest rates rise, as they have this year at an unprecedented scale. A slowing growth rate for the group may have also placed a drag on the stocks.
And now, with talk that the Federal Reserve may begin to temper its cycle of interest-rate increases, we may be nearing the time when REIT prices rise in anticipation of an eventual decline in interest rates. The market always looks ahead, which means long-term investors who have been waiting on the sidelines to buy higher-yielding income-oriented investments may have to make a move soon.
During an interview on Nov 28, James Bullard, president of the Federal Reserve Bank of St. Louis and a member of the Federal Open Market Committee, discussed the central bank’s cycle of interest-rate increases meant to reduce inflation.
When asked about the potential timing of the Fed’s “terminal rate” (the peak federal funds rate for this cycle), Bullard said: “Generally speaking, I have advocated that sooner is better, that you do want to get to the right level of the policy rate for the current data and the current situation.”
Fed’s Bullard says in MarketWatch interview that markets are underpricing the chance of still-higher rates
In August we published this guide to investing in REITs for income. Since the data for that article was pulled on Aug. 24, the S&P 500
SPX,
-0.29%
has declined 4% (despite a 10% rally from its 2022 closing low on Oct. 12), but the benchmark index’s real estate sector has declined 13%.REITs can be placed broadly into two categories. Mortgage REITs lend money to commercial or residential borrowers and/or invest in mortgage-backed securities, while equity REITs own property and lease it out.
The pressure on share prices can be greater for mortgage REITs, because the mortgage-lending business slows as interest rates rise. In this article we are focusing on equity REITs.
Industry numbers
The National Association of Real Estate Investment Trusts (Nareit) reported that third-quarter funds from operations (FFO) for U.S.-listed equity REITs were up 14% from a year earlier. To put that number in context, the year-over-year growth rate of quarterly FFO has been slowing — it was 35% a year ago. And the third-quarter FFO increase compares to a 23% increase in earnings per share for the S&P 500 from a year earlier, according to FactSet.
The NAREIT report breaks out numbers for 12 categories of equity REITs, and there is great variance in the growth numbers, as you can see here.
FFO is a non-GAAP measure that is commonly used to gauge REITs’ capacity for paying dividends. It adds amortization and depreciation (noncash items) back to earnings, while excluding gains on the sale of property. Adjusted funds from operations (AFFO) goes further, netting out expected capital expenditures to maintain the quality of property investments.
The slowing FFO growth numbers point to the importance of looking at REITs individually, to see if expected cash flow is sufficient to cover dividend payments.
Screen of high-yielding equity REITs
For 2022 through Nov. 28, the S&P 500 has declined 17%, while the real estate sector has fallen 27%, excluding dividends.
Over the very long term, through interest-rate cycles and the liquidity-driven bull market that ended this year, equity REITs have fared well, with an average annual return of 9.3% for 20 years, compared to an average return of 9.6% for the S&P 500, both with dividends reinvested, according to FactSet.
This performance might surprise some investors, when considering the REITs’ income focus and the S&P 500’s heavy weighting for rapidly growing technology companies.
For a broad screen of equity REITs, we began with the Russell 3000 Index
RUA,
-0.04% ,
which represents 98% of U.S. companies by market capitalization.We then narrowed the list to 119 equity REITs that are followed by at least five analysts covered by FactSet for which AFFO estimates are available.
If we divide the expected 2023 AFFO by the current share price, we have an estimated AFFO yield, which can be compared with the current dividend yield to see if there is expected “headroom” for dividend increases.
For example, if we look at Vornado Realty Trust
VNO,
+1.03% ,
the current dividend yield is 8.56%. Based on the consensus 2023 AFFO estimate among analysts polled by FactSet, the expected AFFO yield is only 7.25%. This doesn’t mean that Vornado will cut its dividend and it doesn’t even mean the company won’t raise its payout next year. But it might make it less likely to do so.Among the 119 equity REITs, 104 have expected 2023 AFFO headroom of at least 1.00%.
Here are the 20 equity REITs from our screen with the highest current dividend yields that have at least 1% expected AFFO headroom:
Company Ticker Dividend yield Estimated 2023 AFFO yield Estimated “headroom” Market cap. ($mil) Main concentration Brandywine Realty Trust BDN,
+2.12% 11.52% 12.82% 1.30% $1,132 Offices Sabra Health Care REIT Inc. SBRA,
+2.41% 9.70% 12.04% 2.34% $2,857 Health care Medical Properties Trust Inc. MPW,
+2.53% 9.18% 11.46% 2.29% $7,559 Health care SL Green Realty Corp. SLG,
+2.25% 9.16% 10.43% 1.28% $2,619 Offices Hudson Pacific Properties Inc. HPP,
+1.41% 9.12% 12.69% 3.57% $1,546 Offices Omega Healthcare Investors Inc. OHI,
+1.23% 9.05% 10.13% 1.08% $6,936 Health care Global Medical REIT Inc. GMRE,
+2.55% 8.75% 10.59% 1.84% $629 Health care Uniti Group Inc. UNIT,
+0.55% 8.30% 25.00% 16.70% $1,715 Communications infrastructure EPR Properties EPR,
+0.86% 8.19% 12.24% 4.05% $3,023 Leisure properties CTO Realty Growth Inc. CTO,
+2.22% 7.51% 9.34% 1.83% $381 Retail Highwoods Properties Inc. HIW,
+0.99% 6.95% 8.82% 1.86% $3,025 Offices National Health Investors Inc. NHI,
+2.59% 6.75% 8.32% 1.57% $2,313 Senior housing Douglas Emmett Inc. DEI,
+0.87% 6.74% 10.30% 3.55% $2,920 Offices Outfront Media Inc. OUT,
+0.89% 6.68% 11.74% 5.06% $2,950 Billboards Spirit Realty Capital Inc. SRC,
+1.15% 6.62% 9.07% 2.45% $5,595 Retail Broadstone Net Lease Inc. BNL,
-0.30% 6.61% 8.70% 2.08% $2,879 Industial Armada Hoffler Properties Inc. AHH,
+0.00% 6.38% 7.78% 1.41% $807 Offices Innovative Industrial Properties Inc. IIPR,
+1.42% 6.24% 7.53% 1.29% $3,226 Health care Simon Property Group Inc. SPG,
+1.03% 6.22% 9.55% 3.33% $37,847 Retail LTC Properties Inc. LTC,
+1.42% 5.99% 7.60% 1.60% $1,541 Senior housing Source: FactSet Click on the tickers for more about each company. You should read Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.
The list includes each REIT’s main property investment type. However, many REITs are highly diversified. The simplified categories on the table may not cover all of their investment properties.
Knowing what a REIT invests in is part of the research you should do on your own before buying any individual stock. For arbitrary examples, some investors may wish to steer clear of exposure to certain areas of retail or hotels, or they may favor health-care properties.
Largest REITs
Several of the REITs that passed the screen have relatively small market capitalizations. You might be curious to see how the most widely held REITs fared in the screen. So here’s another list of the 20 largest U.S. REITs among the 119 that passed the first cut, sorted by market cap as of Nov. 28:
Company Ticker Dividend yield Estimated 2023 AFFO yield Estimated “headroom” Market cap. ($mil) Main concentration Prologis Inc. PLD,
+1.63% 2.84% 4.36% 1.52% $102,886 Warehouses and logistics American Tower Corp. AMT,
+0.75% 2.66% 4.82% 2.16% $99,593 Communications infrastructure Equinix Inc. EQIX,
+0.80% 1.87% 4.79% 2.91% $61,317 Data centers Crown Castle Inc. CCI,
+0.93% 4.55% 5.42% 0.86% $59,553 Wireless Infrastructure Public Storage PSA,
+0.19% 2.77% 5.35% 2.57% $50,680 Self-storage Realty Income Corp. O,
+0.72% 4.82% 6.46% 1.64% $38,720 Retail Simon Property Group Inc. SPG,
+1.03% 6.22% 9.55% 3.33% $37,847 Retail VICI Properties Inc. VICI,
+0.81% 4.69% 6.21% 1.52% $32,013 Leisure properties SBA Communications Corp. Class A SBAC,
+0.27% 0.97% 4.33% 3.36% $31,662 Communications infrastructure Welltower Inc. WELL,
+3.06% 3.66% 4.76% 1.10% $31,489 Health care Digital Realty Trust Inc. DLR,
+0.63% 4.54% 6.18% 1.64% $30,903 Data centers Alexandria Real Estate Equities Inc. ARE,
+1.49% 3.17% 4.87% 1.70% $24,451 Offices AvalonBay Communities Inc. AVB,
+0.98% 3.78% 5.69% 1.90% $23,513 Multifamily residential Equity Residential EQR,
+1.46% 4.02% 5.36% 1.34% $23,503 Multifamily residential Extra Space Storage Inc. EXR,
+0.31% 3.93% 5.83% 1.90% $20,430 Self-storage Invitation Homes Inc. INVH,
+2.15% 2.84% 5.12% 2.28% $18,948 Single-family residental Mid-America Apartment Communities Inc. MAA,
+1.83% 3.16% 5.18% 2.02% $18,260 Multifamily residential Ventas Inc. VTR,
+2.22% 4.07% 5.95% 1.88% $17,660 Senior housing Sun Communities Inc. SUI,
+2.12% 2.51% 4.81% 2.30% $17,346 Multifamily residential Source: FactSet Simon Property Group Inc.
SPG,
+1.03%
is the only REIT to make both lists.[ad_2]
