Residential REITs are real estate investment trusts that own and manage residential properties. They make money by leasing out the space in their properties to tenants. Residential properties include apartment buildings, manufactured homes and single-family homes. Some of these REITs focus on specific types of property or geographical areas.
As of January 31, 2019, 22 residential REITs were in the FTSE NAREIT All REITs Index. Of these, 15 focused on apartments, four on single-family homes and three on manufactured homes. Total market value for this group was $159.68 billion. That’s 13.70% of all FTSE NAREIT REITs. The three largest apartment REITs were Equity Residential, AvalonBay Communities, Inc., and Essex Property Trust, Inc. The leaders among the single family homes and manufactured home groups were Invitation Homes, Inc., and Equity Lifestyle Properties, Inc., respectively.
Residential REITS and Economic Conditions
The major economic factor affecting REITs is interest rates. Not surprisingly, REITS have a 47 percent correlation with interest rates, second only to utilities. Higher rates don’t hurt residential equity REITs very much, because:
- Rental residential property competes with home ownership. As interest rates rise, mortgages get more expensive. At the margins, some potential home owners can’t afford the monthly payments. This group must rent instead, increasing demand for rental property and pushing rents higher.
- Higher interest rates imply a strong economy and plenty of jobs. This means that more workers can afford quality rentals that have higher rents. Evictions and vacancies fall, helping to fatten the profits of these REITs.
On the other hand, a lengthy period of strong economic growth can spur too much building of residential rental property. Obviously, this can limit rent increases. In addition, when a recession hits, many geographic markets may find themselves with too much rental property. That causes rents to fall. Unemployment rises during a recession. Unfortunately, homeowners who lose their jobs might also lose their homes. When this happens, homeowners become renters. At the end of the day, folks need shelter, and anything that hurts home ownership helps rentals.
Sector Performance
The following data, from REIT.com, is as of the end of February 2019.
Apartment Subsector
The 15 REITs in this subsector have an average estimated 2019 free funds from operations (FFO) of $3.52 per share. FFO growth was 17.71% and FFO payout was 76.10%. The one-year total return averaged 21.14%, considerably higher than the three-year return of 15.50% and the five-year return of 13.25%. Obviously, 2018 was a good year for this subsector, and with a two-month YTD return of 11.09%, 2019 is also shaping up well. The average debt/EBITDA was 10.05, and the dividend yield was 3.83%.
Single Family Homes Subsector
The four REITs in this subsector have an average estimated 2019 FFO of $0.84 per share. FFO growth was 55.81%, an unusually big number skewed by the 152.87 figure turned in by Front Yard Residential REIT. FFO payout was 38.54% and the 2019 price/FFO estimate was 30.41. One-, three- and five-year total returns averaged -1.90%, 2.37% and -6.52%, respectively. These numbers are low due to the poor results from Reven Housing REIT, the smallest member of the subsector. It’s market value is only $38.8 million, compared to $11.906 billion for the biggest player in the group, Invitation Homes REIT. The 2019 YTD average total return of 14.56% for this subsector is healthy. The average debt/EBITDA was 12.57, and the average dividend yield was 2.24%.
Manufactured Homes Subsector
The three REITs in this subsector have an average estimated 2019 FFO of $3.17 per share. FFO growth was 8.91% and FFO payout was 53.25%. The one-year total return averaged 21.17%, on par with the three-year return of 20.79% and the five-year return of 21.12%. The YTD return was 11.86%, and the price/FFO 2019 estimate average was $3.17. The average debt/EBITDA was 4.81, and the dividend yield was 3.26%.
Largest Player in Each Subsector
Equity Residential (NYSE: EQR) is the biggest player in the apartment subsector with a market value of $27.19 billion. It focuses on the purchase, development and management of rental apartment properties. Geographically, it centers on urban and densely-populated suburban markets. The REIT owns 307 properties which comprise more than 79,000 apartment units.
All snapshots are as of the end of February 2019:
| Characteristic | EQR |
| FFO/Share | $3.40 |
| Price/FFO | 21.32 |
| FFO Growth | 4.28% |
| FFO Payout | 66.67% |
| Total Return YTD | 9.92% |
| Total Return 1-Year | 21.82% |
| Dividend Yield | 2.98% |
| Debt Ratio | 25.9% |
| Long-Term Rating | A- |
Invitation Homes (NYSE: INVH) leads the single-family homes subsector with a market value of $11.906 billion. The REIT’s business model is the acquisition, development and management of high-quality homes for lease. It’s portfolio contains 80,000 homes for lease in 17 U.S. markets. Its focuses its operations on Florida and the Western United States. INVH renovates or updates its homes, which come with around-the-clock maintenance. The homes are near transportation, good schools and major employment centers. In 2017, INVH merged with Starwood Waypoint Homes.
| Characteristic | INVR |
| FFO/Share | $1.24 |
| Price/FFO | 18.15 |
| FFO Growth | 5.38 |
| FFO Payout | 45.83% |
| Total Return YTD | 12.00% |
| Total Return 1-Year | 2.00% |
| Dividend Yield | 1.96% |
| Debt Ratio | 46.5% |
| Long-Term Rating | N/A |
Equity LifeStyle Properties (NYSE: ELS) is the largest manufactured homes REIT, with a market value of $10.119 billion. It is the leading North American owner and operator of manufactured home communities, campgrounds and RV resorts. It owns 409 properties containing almost 154,000 sites. These units are in upscale communities within the most desirable markets. Properties are available in 33 states as well as British Columbia in Canada. The unit price has ranged between $82.62 and $111.31 over the last 52 weeks.
| Characteristic | ELS |
| FFO/Share | $4.17 |
| Price/FFO | 25.37 |
| FFO Growth | 5.76% |
| FFO Payout | 61.11% |
| Total Return YTD | 9.01% |
| Total Return 1-Year | 25.61% |
| Dividend Yield | 2.08% |
| Debt Ratio | 20.2 |
| Long-Term Rating | N/A |
Summary
In sum, 2019 is shaping up to be another Goldilocks year for residential REITs. The economy is not too hot, meaning that interest rate hikes should be minimal. Nor is it too cold, as unemployment remains low. The biggest threat on the horizon is recession, which some pundits say is overdue. A bad recession usually means increased home foreclosures, which helps the residential rental sector. However, if unemployment balloons, we can expect downward pressure on rents.