Another Bargain in Real Estate Stocks

 | Sep 17, 2013 | 4:00 PM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:




On Monday, I discussed some bargains among real-estate-related stocks. There is one other opportunity in the real estate market that I have touched on recently on Real Money, but I haven't jumped in just yet.

Single-family home prices have seen recovery in 2013, but I am a firm believer that much of the activity has been from institutional buyers rushing into the market to snap up these properties as long-term rentals. The figure tossed around is that about $18 billion of institutional money has flowed into the single-family rental property market in the past couple of years. Several real estate investment trusts have come public to invest in these properties, and several more are in registration, waiting for a favorable market to sell shares.

In spite of the strong market, the wave of money flowing into the marketplace has pushed home prices up a bit, and the first players in the market have found the going a little tougher than anticipated. The new REITs were competing against not just Blackstone (BX) and other institutional giants but also the local operators that have better knowledge and contacts in the marketplace. They have had to realign staffing and outsource some services they had hoped could be handled in-house. Many of the homes needed extensive repairs to make them livable, and the ramp-up to occupancy and cash flows has taken longer than expected.

This is slowly creating an opportunity. Single-family homes have seen some gains in price, but they are still way below pre-bubble levels. I am of the opinion that much of the recent gains will be retraced or at least consolidated, as the large institutional buyers are done for now. The demand will soften, and the fierce bidding wars for rental properties will once again be a thing of the past. If you compare rentals with price paid, well-managed properties can still provide an attractive yield for long-term investors in selected markets around the U.S.

The rental market will remain attractive for some time. Home ownership is down below 65% of families right now, and that is not likely to improve much anytime soon. There is still not a strong pickup in the job market, and the labor force is at the lowest level in years. Around 15% of those who are still in the labor force are underemployed at low-paying or part-time jobs. That's a very large pool of people who will have to rent for several years still.

It is also harder for many people to get a mortgage. The new qualified mortgage rules, when they are finally passed, will require better credit scores and higher down payments. Right now, the average FICO credit score in the U.S. is around a 690, while it takes about a 735 to actually get a mortgage, on average. We are getting back to a housing market that requires renting for several years in order to accumulate cash and pay down bills before buying a home. All of this favors the market for rental homes.

The single-family REITs have performed dismally so far in most cases. Silver Bay (SBY) attracted a lot of attention when it came public, and the shares initially moved higher. However the ramp-up was longer than expected, and the high dividends are not appearing as fast as investors had hoped. The stock has sold off and now sells below $16. That's potentially a huge bargain when compared with management's estimate of a net asset value of almost $19 and a stated book value of $17.30. The current occupancy rate is just about 65%, but that should improve rapidly. Silver Bay concentrates on the battered markets of Atlanta, Phoenix and Tampa, so the properties should have substantial upside to long-term holders. Eventually there will be another Sun Belt housing boom, and these houses will move much higher.

American Family Homes 4 Rent (AMH) is the largest rental home REIT, with about 19,000 homes around the U.S. It used a different approach and favors more stable markets, but the occupancy rate is just about 55% so far. The company recently let go about 15% of its workforce, as it will be cutting back on acquisition activity, digesting the current portfolio and getting the homes in a rentable condition. The stock is trading at about 80% of book value and looks like a bargain when you consider the long-term potential of the rental housing market.

There was excessive enthusiasm about the single-family rental market, and too much money entered the sector too quickly. That is ebbing now, and as the sector fades from favor, the REITs that are invested in single-family homes could provide enormous returns over the next decade.

Columnist Conversations

We will take off some more risk, bank some winners SOLD PG OCT 90 CALL AT 3.3 (in at 2.90) ...
After a very calm and sedate period of volatility which saw the VIX fall not only to all time lows but had a r...
today is a good day to lighten the load and take some positions off the table. SOLD WB OCT 85 CALL AT 11 (i...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.