It seems as if the interest rates and home prices have risen in tandem to make buying a home even tougher than it was. This also translated into real estate investment trusts (REITs) that focus on apartments, losing a lot of value in 2022, possibly making them ideal bargains for the high rate environment while offering income through dividends.
Additionally, apartment REITs are, on average, discounted by 20% compared to the assets they hold on their balance sheets, according to the analytics firm, Green Street.
It is not surprising that the value of REITs has decreased, given that increasing interest rates make it more costly to borrow money; on the other hand, buying apartments will be more difficult, thus making such REITs, more valuable.
Picks for you
Thereupon, Finbold identified two moderate buy apartment REITs to keep on your watchlist.
Apartment Income REIT (NYSE: AIRC)
AIRC is a founder-led REIT, which is often times rare for mature companies, and AIRC is trading at lower valuations compared to peers as it is going through a company-wide transformation. Rising mortgage rates and the pricing power this apartment REIT posses should enable it to be profitable in the future.
Similarly, in its latest earnings report, the company announced revenue of $181.5 million, missing estimates by $4.09 million. Further, earnings per share were $0.57, in line with expectations, while the company management increased their full-year forecast for funds from operations (FFO) to $2.37 and $2.45.
Year-to-date (YTD), the stock is down over 24%, while lower than usual trading volumes have been noted in the last couple of trading sessions. The general trend for the stock is negative, with support zones likely converging from $40.97 to $41.23, and resistance zones from $41.46 to $42.78.
On the other hand, analysts rate the shares a moderate buy, predicting that the average share price in the next 12 months could reach $49.57, 20.20% higher than the current trading price of $41.24.
AvalonBay Communities (NYSE: AVB)
Elsewhere, multifamily apartments are often more recession-proof than REITs that offer long lease times since, for multifamily apartments, the leases are between one and two years. AVB is a coastal luxury apartment REIT, targeting expanding markets such as Texas, Florida, and North Carolina.
Meanwhile, their Q1 earnings report showed FFO of $9.38 to $9.78, pinpointing the increase in the residential rental income of $540.4 million, a jump from $498.07 million in Q1 of 2021. Earnings before interest, taxes, depreciation and amortization (EBITDA) were $377.74 million.
YTD, the stock is down over 25%, with a negative long-term trend, possibly with less price volatility in the near turn as the interest rate hike seems to be priced into the stock at these levels.
Chart analysis shows a potential support line formed around the $189.13 level, and a resistance zone ranging from $191.10 to $192.71.
Moreover, analysts agree that the stock is a moderate buy. Average price predictions for the next 12 months see the shares reach $226.56, 19.78% higher than the current trading price of $189.14.
Housing is a nondiscretionary item, meaning that even if there is a recession or lay-offs, the demand will not fall as, say, for luxury or discretionary items.
The above two REITs have strong balance sheets, and though some more downside could be had due to various macro elements, a bounce in the price could occur as soon as the economic outlook improves.
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Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
