The interesting thing about these REITs is that they might actually benefit from a slowing home sale market. Even if people stop buying homes, they still need to live somewhere. These REITs will be there to serve customers who no longer want to live in an apartment, but can’t or are unwilling to afford a home.
Silver Bay Realty Trust Corp (NYSE:SBY) has the most internal growth potential because it started the year with an occupancy rate of about 50%. Its rent roll will improve as it fixes up and rents out the other half of its portfolio. While making those capital improvements costs money, it also means the company can be more selective about acquisitions. That said, with a token quarterly dividend of just a penny a share, this is a growth oriented investment.
American Residential Properties Inc (NYSE:ARPI)’ portfolio was over 85% leased at the end of the first quarter. That makes it a much more stable business today and still provides for some upside as it rents out more properties. Still, it probably isn’t reasonable to expect occupancy at single family home REITs to get much higher than 90% or so. That’s around where roughly similar manufactured home REITs Equity Lifestyle Properties and Sun Communities sit today.
So, American Residential is likely to be more reliant on acquisitions for growth. With prices still heading higher, new properties could be less profitable than old ones. That would be a drag on performance. That said, the company also has a business servicing about 600 properties owned by others. That could provide a nice avenue of growth if new purchases prove difficult. The company doesn’t have a dividend policy yet.
Appreciating assets
Silver Bay and American Residential both have notable portfolios of single-family homes. That puts them in prime position to benefit from a stalled housing market and/or improved pricing. Focused on a new asset class, these aren’t for conservative investors. However, more aggressive types with a long-term horizon should consider them. Home builders like Toll, meanwhile, are a direct play on the health of the new home market. That’s a high-risk market timing play right now that most should probably avoid.
The article Is This the Beginning of the Housing Slowdown? originally appeared on Fool.com is written by Reuben Brewer.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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