Mutual Fund Commentary
THE ELUSIVE WHITE PICKET FENCE
Millennials - Americans born between 1982 and 2000 - have a reputation for delaying marriage and home ownership, but it may all be due to affordability (or lack thereof), according to a new research report.
"While conventional wisdom suggests that, because of declining homeownership rates and the obstacles preventing Millennials from entering the property market, apartments would be the primary and preferred rental choice. The data indicate otherwise. Census figures show that, since, 2006, the number of single-family rental homes has grown 35%--to 15.1 million, from 11.2 million. During that time, 3.9 million single-family homes have become rental properties, exceeding the 2.9 million newly built apartment units," writes Beth Ann Bovino, U.S. chief economist for Standard and Poor's Credit Market Services in a report on lifestyle choices for the millennial generation, published this week at www.spratings.com.
Bovino cites analysis done last year by John Burns Real Estate Consulting (JBREC) that said among U.S. residents aged 20-39, student loan debt caused an 8% decline in home purchases, and that every $250 a month a person owed on such a loan reduced home-purchasing power by $44,000. Given that about 35% of households under age 40 have monthly student debt payments exceeding $250 (up from 22% a decade ago), approximately 308,000 home purchases were "lost," according to the JBREC analysis.
The demographics of student-debt holders fit nicely with those of typical first-time buyers, who last year accounted for only 33% of transactions, according to the National Association of Realtors. That was the lowest percentage since 1987 and substantially lower than the historical average of about 40%.
S&P Capital IQ Equity Research, which operates independently from Standard and Poor's Credit Market Services, has a neutral 12-month outlook on the residential real estate investment trust (REIT) sub-industry.
"Many REITs reported average occupancy figures of more than 95% for the first half of 2015, allowing a push on new rents to higher levels," says S&P Capital IQ Equity Analyst Cathy Seifert. "However, we think rental rate increases moderated recently and portend slower 2016 growth as newly-constructed supply begins to hit the market."
Longer term, Seifert thinks fundamentals for residential REITs are positive, but that valuations are generally appropriate.
Using the proprietary STARS (STock Appreciation Ranking System), Seifert has 3-STARS (hold) recommendations on these residential REITs, but she notes the "attractive" dividend yields (higher than the S&P 500's average 2.2% yield) , which may appeal to income-oriented investors:
--Apartment Investment and Management (AIV 40 ***). This REIT yields 3.0%. Average rent hikes of nearly 5% will likely be largely offset by an ongoing program to sell underperforming properties, says Seifert. AIV expects to sell the lowest performing 5% to 10% of its portfolio each year, and to reinvest the proceeds in redevelopment or in acquiring higher-quality properties.
--AvalonBay Communities (ABV 185 ***). This REIT yields 2.7%. "We estimate revenue growth of about 7% to 10% in 2015," notes Seifert. "Our forecast includes the impact of the February 2013 purchase of 64 communities from Archstone Enterprises for $6.9 billion, offset by what we see as the potentially disruptive impact of a recent fire at AVB's Edgewater, NJ apartment buildings. We estimate occupancy will remain stable at about 96% in 2015. AVB may begin to experience some push-back from tenants on renewal rate increases as the current industry growth cycle matures."
--Camden Property Trust (CPT 79 ***). This REIT yields 3.6%. It owns and operates more than 180 properties with some 63,000 apartments in the Sunbelt, Midwest, Mid-Atlantic and West. "Following a rise of 7% in 2014, we forecast revenue growth of 4% to 5% in 2015, as the impact of property dispositions are partly offset by a relatively favorable demand curve for rental properties in the company's core markets," comments Seifert. "We expect occupancy to remain stable at just under 96%, from 95.7% at year-end 2014. Results in coming periods will benefit from continued favorable economic and labor market conditions."
--Equity Lifestyle Properties (ELS 62 ***). This REIT yields 2.4%. "After a 5.4% rise in 2014, operating revenues will rise by 4% to 6% in 2015," Seifert estimates. "Our outlook assumes average rental rate increases of about 3% at established communities. We expect occupancy at established communities to stay at about 92% to 92.5% through 2015, as the economic environment slowly improves."
--Equity Residential (EQR 79 ***). This REIT yields 2.8%. "We forecast revenue growth of 4.75% to 5% in 2015, and 5% to 7% in 2016, compared with revenue growth of 4.3% on a "same-store' basis in 2014," says Seifert. Total revenue growth of 9.5% in 2014 largely reflected contributions from acquisitions. One of EQR's more significant transactions was the February 27, 2013, acquisition of assets (including 22,000 apartment units) from Archstone Enterprises for $9 billion.
--Essex Property Trust (ESS 231 ***). This REIT yields 2.4%. It owns and operates primarily in California and the Pacific Northwest. "Our forecast is for 2015 total revenues to advance by about 7% to 10%," notes Seifert. "We see revenue growth driven by average rent hikes on new leases of 5%-6%, as well as recent acquisitions. In our estimation, average occupancy levels will remain at or above 96% in 2015, owing to relatively low home ownership rates and limited levels of new competitive supply. The REIT's Seattle and Northern California markets are also benefiting from job growth at local technology companies."
--Post Properties (PPS 62 ***). This REIT yields 2.8%. "We estimate a 1% to 3% rise in revenues in 2015, down from a 4.2% rise in 2014 and an 8.4% advance in 2013," Seifert comments. "PPS has recently sacrificed some rental growth in order to maintain occupancy levels. During the second quarter of 2015, same-store rental revenue rose 2.8%, above our expectation, but still below the rate of growth of many peers. Also, a growing supply in PPS's Sunbelt markets will remain an issue in coming periods, particularly in the Washington, DC, and Dallas markets."
--Sun Communities (SUI 70 ***). This REIT yields 3.7%. This firm operates manufactured housing communities, mainly in the Midwest and the Southeast. "Following a 13.6% rise in 2014, we see revenue growth of around 20% in 2015," forecasts Seifert. "Our outlook reflects recent acquisitions, increases in occupancy, and about a 3% annual rise in rental rates. We also look for higher home sales. We are encouraged by more tenants converting from rentals to home ownership in SUI's communities.
--UDR (UDR 36 ***). This REIT yields 3.1%. It owns more than 50,000 apartment homes throughout the U.S. "Following a 4.2% rise in 2014, we forecast revenue growth of just over 6% for 2015," says Seifert. "We expect stable occupancy of about 95.0%, and average rent hikes of 3% to 5% in 2015."
For exposure to the residential REIT sub-industry via exchange-traded funds (ETFs), investors might consider Schwab US REIT ETF (SCHH 40 Overweight) or SPDR Dow Jones REIT ETF (RWR 92 Marketweight), both of which have 20.3% of assets in residential REITS; or Vanguard REIT Index ETF (VNQ 81 Overweight), which has 17.0%.