There are three ways to play property. You can buy the home builders, the lenders, or the property developers. The lenders present low yet stable growth while home builders are the deep value proposition, and property developers (real estate operations) present the best long-term growth potential.
Economics of properties
Between 2012 and 2013 the number of housing starts has increased from 500,000 to 1,000,000. Housing starts have nearly doubled over the same time frame that treasury interest rates have increased from 1.50% to 2%. Rising rates tend to correlate with rising housing start figures. Generally speaking, rising interest occurs in a period of economic growth.
Going forward, it is likely that the housing market will continue to recover as consumers continue to spend, and the average wage rate continues to rise. In light of this strengthening economic environment, I have identified three opportunities in the real estate space worth buying.
Perhaps one of my most favorite opportunities is KB Home (NYSE:KBH) Perhaps part of the reason why I like KB Home (NYSE:KBH) so much is because I have lived in a home built by this company. Let me tell you about KB Homes communities. Generally they are nice, well-run, and the homes are highly presentable.
The company has been able to grow its revenue from $254 million in 2012 to $405 million in the first quarter of 2013 (revenues grew year-over-year by 59%). The year-over-year growth in revenue was driven by the increase in average selling price along with increases in demand for homes. The average sale price of a house jumped from $219,000 to $271,000 from the first quarter of 2012 to 2013. The 24% year-over-year growth in the average sales price was driven by demand for larger homes.
The company’s backlog has increased from $460 million to $704 million (53% growth year-over-year) between the first quarter of 2012 and 2013. The company’s improving backlog implies that there’s a lot of pent-up demand for housing. In the first quarter of 2012, net order value was at $278 million, this value grew by 83% to $507 million in the first quarter of 2013. The company’s growth in order value along with the backlog is the primary short-term upside catalyst. Near-term performance measures indicate that the company is likely to grow rapidly.
As a result, analysts on a consensus basis anticipate the company to grow earnings per share by 136% in the current fiscal year, and 307% growth in the following fiscal year. Investors who are heavily focused on growth should consider buying KB Home (NYSE:KBH). Whether you buy the home or the stock, the value is likely to increase either way.
My favorite property operator Macerich Co (NYSE:MAC)
Macerich Co (NYSE:MAC) is one of my favorite property companies. The company has focused on growing its property portfolio through a healthy history of buying out large scale real-estate developments through the use of debt. Below is a long-term history of the year-over-year earnings per share growth. The high rates of growth were driven by the management team’s excellence at borrowing capital and investing into real estate.
The company’s investment years often resulted in negative earnings. This was due to the interest related expenses up until the company fully constructed its mall properties. During the construction process, the company is unable to collect any rental revenue. Following the completion of construction the company was able to pay down its debt, and record revenue along with net income. The leveraged nature of real estate leads to higher rates of return on capital, which is why the earnings growth averaged 61% year-over-year over the past 15-years. This high rate of growth is the primary reason for why the stock trades at a 39.7 earnings multiple. Investors are anticipating the company to generate higher rates of profitability through its leveraged real estate buyout strategy. The company offers a compelling dividend yield at 3.33%.
Undervalued banking
Bank of America Corp (NYSE:BAC) is my favorite bank right now. The main reason is due to the cost-cutting opportunities that the bank has in front of it. The CEO, Brian Moynihan believes that he can generate an addition $8 billion through 2015 through various cost-cutting measures.
Bank of America Corp (NYSE:BAC) in its latest quarter was able to improve its earnings per share by 233% year-over-year. The company’s EPS increased from $.03 in Q1 2012 to $0.10 in the first quarter of 2013. The first quarter growth in EPS was driven by the declining loan loss allowances from 3.61% in 2012 to 2.49% in 2013. The company also saw net charge offs decline from 1.80% in Q1 2012 to 1.14% in the first quarter of 2013.
Analysts on a consensus basis anticipate the company to grow earnings by 23.33% over the next 5-years. This is driven by the improving economy, declining loan related losses, along with improving fee income.
Conclusion
The lenders will continue to recover with Bank of America Corp (NYSE:BAC) being the best deep value play. The housing turnaround keeps KB Home (NYSE:KBH) red hot. Following that I am heavily optimistic on Macerich Co (NYSE:MAC) as the company has an awesome track record of making leveraged real estate investments.
The article How To Play the Monopoly of Property originally appeared on Fool.com and is written by Alexander Cho.
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