Inflation remains stubbornly high, despite the rate of increase having pulled back recently, and in response, the Federal Reserve has boosted interest rates to their highest level in well over a decade. However, inflation hasn’t been tamped out yet, and the central bank is making it clear that it will hold rates high for as long as it takes to get prices under control – and the effects of all of this are still rippling through the economy.
The housing sector is reeling under it. According to the Mortgage Bankers Association, the 30-year fixed rate mortgage is up to 6.71%, and it is rising on expectations that the Fed will enact further rate hikes. The higher price of financing has pushed home sales down; over the past week, mortgage applications are down by 5.7%. Overall, mortgage applications are at their lowest level in 28 years, while mortgage rates are more than 60% higher than one year ago.
This bodes ill for the housing market, and with it, the construction industry, but there are sectors that stand to gain should the housing market continue its contraction. Wall Street’s analysts have been tapping multifamily residential REITs (real estate investment trusts) as potential winners.
These companies function as large-scale property owners, owning, managing, and leasing out real properties of all sorts. In a slowdown of the single-family housing market, people will naturally move toward rental apartments – and for investors, that will open up new opportunities in the multifamily residential REITs.
So let’s take a closer look at two such stocks which have picked up recent approval from the analyst corps.
UDR, Inc. (UDR)
We’ll start our look at residential/apartment REITs with UDR. The company has a presence in 13 states plus the District of Columbia. As of December 31, 2022, the company’s footprint in these states totaled 58,390 apartment homes, with 554 of those still under development. UDR boasts a high level of rent collection, with current resident collections for 2023 expected to be in the range between 98.3% and 98.7%. The company has resources sufficient to maintain an $8.7 million reserve against bad debt.
In its last reported quarter, 4Q22, UDR reported a solid top line of $399.7 million. This was up by more than 14%, or $51.4 million, year-over-year. Two key metrics, which will interest dividend-minded investors, also showed gains in the 4Q/full year report. FFOA, funds from operations as adjusted, and the AFFO, adjusted funds from operations, both rose 13% y/y, to 61 cents and 53 cents per diluted share, respectively. The full-year 2022 figures for these figures came to $2.33 and $2.11 per diluted share, for y/y gains of 16%.
The funds from operations figures are important because they fund UDR's dividend. the last payment was sent out a 38 cents per common share on January 31 of this year. The dividend payment marked an impressive milestone, 201 consecutive quarterly dividends paid out. The annualized rate of 3.66% provides a steady income stream for investors.
UDR’s strong performance in Q4 was mainly attributed to growth in Same-Store communities – in other words, the company is seeing greater demand for tenancies in its apartments, a trend that bodes well for future performance.
Barclays analyst Anthony Powell is bullish on UDR, given the company’s geographical footprint in high-demand areas. He writes of the company: “We see it as increasingly important for investors in the apartment subsector to have New York City exposure, and highlight UDR as our preferred way to invest in the strong recovery there. Among the coastal markets, the residential outlook in New York looks the most favorable, with high renter incomes, a focus on in-person hybrid work from certain kinds of employers (financial firms) and manageable supply growth this year."
"We view UDR as our favorite way to invest in the market; while there are other apartment REITs with a higher NYC metro NOI mix, UDR combines NYC exposure with better than average expense control and exposure to high growth Sunbelt markets," Powell summed up.
Taking this stance forward, Powell rates UDR an Overweight (i.e. Buy) with a $50 price target implying a one-year upside potential of 20%. (To watch Powell’s track record, click here)
Overall, the 9 recent analyst reviews filed on UDR include 5 Buys and 4 Holds, for a Moderate Buy consensus rating. The shares are trading at $41.65 with an average price target of $46.44, suggesting an 11.50% gain out to the one-year horizon. (See UDR stock forecast)
Camden Property Trust (CPT)
The next stock in our sights is Camden Property Trust, another major owner of apartment homes. The company operates in some of the fastest growing urban areas in the US, including Austin, Texas; Charlotte, North Carolina; Denver, Colorado; and Phoenix, Arizona. Camden’s holdings, as of this past January, totaled 172 properties which contained 58,702 apartment homes. As a REIT, Camden owns, operates, and leases these properties.
Camden released its Q4 and full year 2022 results this past February, and showed positive results on several metrics. The company’s same-property revenues were up 9.9% year-over-year, outstripping expenses, which grew by 8.1%. Adjusted funds from operations (AFFO) rose y/y from $1.30 to $1.48 per diluted share.
Overall, Camden’s property revenues for 4Q22 came to $375.9 million, for a y/y increase of 23%. For the full year 2022, the top line of $1.422 billion was up 24% from the $1.143 billion recorded in 2021.
Along with the Q4 results, Camden also declared its 1Q23 dividend. The dividend, set to go out this coming April 17, was raised by 6.4% and now stands at $1 per common share. At this rate, the annualized payment of $4 gives a yield of 3.56%.
Camden has caught the eye of 5-star analyst Simon Yarmak, of Stifel, who writes: "The industry at large, and specifically CPT, should weather a potential recession better than in years past. The main reasoning being the current levels of high occupancy and rent, and the overall strength of the consumer, particularly in CPT's markets."
"The company's Sunbelt market exposure should remain advantageous given the heightened demand seen in recent years, accelerated during Covid. We believe this demand could continue to outweigh supply for the company's portfolio as a whole, and given the embedded loss-to-lease the company saw to end 2022, Camden should still be able to deliver above-average top and bottom line growth," Yarmak added.
These are not the comments of an analyst who has any doubts, and Yarmak gives Camden a Buy rating, with a $143 price target that suggests an upside of 27% in the next 12 months. (To watch Yarmak’s track record, click here)
Overall, no fewer than 13 Wall Street analysts have sounded off about Camden, and their reviews include a breakdown of 8 Buys and 5 Holds – giving the stock its Moderate Buy consensus rating. The average price target of $135.54 implies a 21% upside from the $111.96 trading price. (See Camden stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
