Betting on the increase in the value of properties

The U.S. housing market has been struggling over the past 12 months, as the housing sector has significantly underperformed the broader S&P 500 index during this period.

Some investors, particularly those focused on momentum plays, may stick with technology stocks. However, for those who prefer to take a value-based approach, supported by a fundamental strategy without any illusions, real estate can make the difference. Looking at the Vanguard Real Estate ETF, you can see how real estate now has a gap of up to 23% to fill if it wants to catch up with the rest of the market. Knowing this, strategists at Blackstone Inc. decided to dive into the real estate market.

However, not all properties are created equal and Blackstone has chosen to invest $10 billion in the residential sector by purchasing it Apartment Income REIT Corp. New York Stock Exchange: AIRC. And with this move, the $155 billion private equity real estate giant is telling Main Street that residential real estate prices could rise soon.

The devil in the details

It’s a sizable deal indeed, but the devil is in the details. Blackstone paid $39.12 per share in an all-cash deal, a 25% premium to the stock’s closing price on Friday, April 5.

Apartment Income’s dividend yield at the time of the acquisition was 5.7%, beating persistent U.S. inflation rates and the so-called “risk-free” yields paid by the U.S. Treasury. Even after its double-digit rally, Apartment Income is still valued for its 4.7% dividend yield.

Since the Vanguard ETF pays only a 3.8% yield, the Apartment Income REIT is still undervalued despite Blackstone paying the premium. Additionally, the fund is looking to invest another $400 million in improving properties and acquiring more, indicating that property prices could be compressed in today’s market. This would not appear to be the case, as the residential REIT sector trades at 90% of its 52-week high price on average, so traditional valuation methods matter here.

The residential REIT sector trades at an average price-to-book (P/B) valuation of 2.5x and, based on historical valuations, may be due for expansion. This expansion could be prompted by potential Fed interest rate cuts, which could come as early as May or June 2024, according to the CME’s FedWatch tool.

Are lifestyle equity properties the next deal?

Before interest rate cuts reach mortgage rates, which would also fall, investors may be looking for the next REIT. Equity Lifestyle Properties Inc. NYSE:ELS may offer lower dividend yields than Blackstone stuck with American Income. However, it is still worth considering. Far from its 2021 high of $88.7 per share, this REIT is still earning market love in its valuation. On a P/B basis, Equity Lifestyle boasts an 8.0x multiple, which is 120% higher than the residential REIT sector.

Like apartment income, only the best bets can make the markets pay a premium valuation. According to their price targets for February 2024, analysts at Wolfe Research believe this REIT could go as high as $75 per share. Seeing potential upside for the REIT, PNC Financial Services Group decided to increase its position in the stock by 8.3% starting in March 2024, representing a transaction of just over $100,000.

From a technical perspective, short interest in Equity Lifestyle has steadily declined starting in the third quarter of 2023. With a net short balance of $554 million at the outset, the bears are currently reported to a net short balance of 227 million dollars. Compared to notable peers like Equity Residential and Essex Property Trust Inc., valuation trends continue to favor the smaller portfolio of $12 billion market cap residential properties.

The saying “It has to be expensive for a reason” applies here, and as the median home price remains more than 31% higher than pre-pandemic levels of $375,000, homebuyers may be looking to rent instead of buying a home. new house. Notably, rising home prices aside, today’s average mortgage rates of 7.3% make it even more difficult for newcomers to join the homeownership wave, making these residential properties an even bigger investment thesis. stronger for investors.

Before you consider Apartment Income REIT, you’ll want to hear this.

MarketBeat tracks daily Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Apartment Income REIT wasn’t on the list.

While Apartment Income REIT currently has a “Hold” rating among analysts, top analysts believe these five stocks are better buys.

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