Playing the Thriving Rental Market

 | Dec 15, 2011 | 1:20 PM EST  | Comments
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Stock quotes in this article:

avb

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udr

,

dtv

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low

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bbby

The housing crisis has decimated real estate price and home ownership rates. The other side of this equation has been a boom in the rental market.

Rental occupancy rates currently sit at very attractive levels. While many young adults are coming out of college and moving back home with the parents, the vast majority of past homeowners are renters. In addition, factors such as tighter lending standards, reduced household wealth and fear of buying a home in today's market have all lead to a boon in renting.

According to data group Real Estate Information Services, apartment vacancies have been declining since 2009 and as of 3Q 2011 national apartment vacancy dropped to 5.6%, the lowest vacancy level since late 2006. Investors can choose to play the rental market the obvious way by owning apartment REITS such as Avalonbay Communities (AVB) or UDR (UDR). But that market has known about improving rental vacancy rates for some time and these shares trade at the higher end of their price ranges.

On the other hand, there are businesses who will grow regardless of which type of living arrangement a household pursues. If folks suddenly decided to take advantage of low rates and attractive real estate prices, apartment REITs may suffer while these other companies are less likely to be affected. The implication then is that whether the economy grows or stalls, such businesses will stand out operationally. The market will likely treat the underlying share prices more favorably than the overall market.

Satellite TV company DirecTV (DTV) is a high quality business that passes the test. Whether you own or rent, you will likely maintain the same TV package. DirecTV's satellite service stands out for a couple of reasons: service can be provided in more remote areas and programming costs can be substantially less than traditional cable. In addition, DirectTV boasts a deep package of channel options, including the popular NFL channel. DirecTV happens to be a huge holding for Ted Weschler, the market-beating fund manager recently hired by Warren Buffett to oversee some of Berkshire Hathaway's billions of investable float.

Folks will buy blenders, shower curtains, trash cans and towels whether they rent or own. So, while a retailer like Lowe's (LOW) may stagnate in this environment, the same is not true for Bed Bath and Beyond (BBBY), arguably one of the best-managed retailers in the industry today. And investors get a free option with Bed Bath. When housing starts do pick up, business will get even stronger. A debt-free balance sheet along with growing free cash flows currently measuring over $800 million annually against an enterprise value of some $12 billion is a very favorable valuation for a high-quality company.

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