Coming into 2016, multifamily housing was by far the most successful segment of the real estate market. The leftover malaise from the housing and credit crisis has many Americans still renting as their finances and credit ratings improve.
The entry-level market really has leveled off as 20- and 30-somethings are reluctant to buy homes. I know there are surveys that have indicated differently, but I have a secret weapon in this segment. I have a single, 27-year-old son and 31-year-old married daughter. I talk to them and their friends and they have no burning desire for ownership. The prefer to keep their professional and personal options open at this point in their lives and do not want to be tied down by home ownership.
At the other end of the spectrum, retiring seniors are discovering that when you factor in upkeep, maintenance and taxes, it is actually a little cheaper, and a lot easier, to rent in some of the more desirable retirement areas.
When he bought a large portfolio of apartments from Equity Residential (EQR) recently, Barry Sternlicht of Starwood Capital said this was the best apartment market of his lifetime and he does not expect that to change. The ratings agency Standard & Poor's recently issued a report that shares his view of the multifamily market. S&P said, "We believe the underlying trends in the multifamily sector continue to be favorable and the long-term fundamentals are attractive. We believe the demand drivers for the multifamily sector are strong and sustainable over the near to intermediate term."
Generally speaking, you pay a high price for a cheerful outlook, and the big apartment REITs are no exception. The larger apartment REITs such as Equity Residential, Mid-America Apartment Communities (MAA) and Avalonbay Communities (AVB) all trade for more than 2x book value right now as institutional money has poured into the sector, with much of the buying coming from exchange-traded funds. However, when you look deeper than the top-tier, high market capitalization multifamily REITs, there are still bargains available to take advantage of the favorable multifamily marketplace.
Independence Realty Trust (IRT) owns apartments in areas where management thinks there are strong demographic and employment trends with limited new supply coming into the marketplace. Earlier this year it acquired Trade Street Residential and now has 50 properties representing 14,044 apartments in 24 markets.
IRT has been selling properties in areas that it feels are not core markets and has been using the cash to reduce leverage. Most recently, it sold a 320-unit apartment property located in Tucson, Arizona, for $33.6 million. It is looking to sell other properties in moves that should result in about $50 million of net cash making its way onto the balance sheet.
The stock is selling at about 70% of book value and CEO Scott Schaefer recently commented on the undervaluation. On the last earnings call he told investors, "We continue to believe there is an absolute disconnect between our current price of our shares relative to the value and performance of our portfolio. We continue to believe that IRT shares are extremely undervalued, trading today at approximately a 24% discount to our NAV (net asset value). The recently announced transaction between Starwood and Landmark Residential validates both our business plan and our asset valuations." The REIT pays monthly dividends and yields about 10% right now, so you are well-paid while you wait for the market value to approach NAV.
I have owned shares of BRT Realty (BRT) for some time now and have no intention of selling them in spite of the little year-end selloff we saw. For years BRT was a short-term commercial lender, and although it does do that on a limited basis, it has switched its focus to multifamily housing.
The company owns 30 multifamily properties totaling 8,807 units in 11 states. It also owns 50% of a Newark, New Jersey, joint venture that is developing the Teachers Village multiuse project, which consists of apartments, retail space, three charter schools and a day care facility. So far, four buildings of the Newark project have been completed. Part of a fifth building also is complete; that building is 50% occupied and is expected to be finished in February, while a sixth building is under construction and should be completed by July.
BRT is negotiating the sale of all or most of its equity interest in this venture to focus solely on the multifamily business. BRT said it anticipates it will recognize a gain if this transaction is consummated. This is going to be one of those undervalued, under-followed companies that is very boring right up until the day when it is not, and something like a sale of its stake in the Newark venture or a dividend reinstatement causes the shares to move higher very quickly.
Multifamily is still hot and I think it stays that way in 2016, but you can still find bargains if you are willing to own smaller REITs.
