Many investors will be more than happy to see 2022 come to an end, as it has been one of the worst years for stocks since the turn of the century. Rising interest rates have been one of the major headwinds for stocks. Rates once again moved higher Wednesday with another 50-basis-point increase, and they are likely to go higher early next year. It has been especially difficult for real estate investment trusts (REITs), which are vulnerable to rising rates.
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The good news is the rate increases are close to being complete, as Wednesday’s hike pushes the federal funds rate to 4.25% to 4.50%. Given that the expected terminal, or final, rate is projected to be at 5.00% to 5.25%, the Federal Reserve seems close to being done, and that bodes well for REITs, especially those of the residential variety.
Five top REITs are rated Buy at Goldman Sachs, and all make sense for income investors looking to get back into a sector that provides consistent and dependable income. The Goldman Sachs team, while remaining cautious, said this in their research report:
We think there are supply headwinds facing the Sunbelt markets, where deliveries are expected to increase significantly in 2023 after record construction activity, and while we do not deny that the demand outlook in the Sunbelt is also more favorable, we think that with overall economic slowdown ahead — beyond just legacy Tech markets given broad-based positive effects of Tech activity in the last couple of years, we are more concerned about supply in these markets.
Despite the concerns over supply, the analysts feel that conditions will improve by 2024, so being selective in 2023 could set up investors for some big total return potential. Despite all five stocks being Buy rated, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
American Homes 4 Rent
As it is trading just above a 52-week low, rising mortgage rates could be a boon for this company as home buyers wait for rates to drop. American Homes 4 Rent (NYSE: AMH) is a leader in the single-family home rental industry, and “American Homes 4 Rent” is fast becoming a nationally recognized brand for rental homes, known for high-quality, good value and tenant satisfaction.
The company is an internally managed Maryland REIT focused on acquiring, developing, renovating, leasing and operating attractive, single-family homes as rental properties. As of September 30, 2020, the company owned 53,229 single-family properties in selected submarkets in 22 states.
American Homes 4 Rent posted very solid results last month, and the stock makes sense for investors looking to own single-family rental homes.
Shareholders receive a 2.20% dividend. The Goldman Sachs target price on American Homes 4 Rent stock is $39, while the consensus target is $36.29. The shares closed Wednesday’s trading at $32.34.
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Apartment Income REIT
The name says it all here, and this big-dividend stock is a great idea for those seeking higher income with growth potential. Apartment Income REIT Corp. (NYSE: AIRC) is focused on the ownership and management of quality apartment communities located in the largest markets in the United States.
It is one of the country’s largest owners and operators of apartments, with 74 communities in 11 states and the District of Columbia. As of September 30, 2022, it held unencumbered apartment communities with an estimated fair market value of approximately $8.3 billion, almost triple the amount from December 31, 2020.
Investors receive a 4.91% dividend. Goldman Sachs has a $43 target price, and the consensus target is $41. Wednesday’s close was at $36.63.
Essex Property Trust
This stock has been hammered, but it is an outstanding way for investors looking to add an inflation-busting real estate position to growth and income portfolios. Essex Property Trust Inc. (NYSE: ESS) is a fully integrated real estate investment trust (REIT) that acquires, develops, redevelops and manages apartment communities in selected West Coast markets.
The company currently has ownership interests in 246 apartment communities comprising approximately 60,000 homes, with an additional six properties in various stages of active development.
Note that the company is a Dividend Aristocrat, making it one of 66 companies in the S&P 500 that have increased dividends (not just remained the same) for at least 25 years straight.
Essex Property Trust stock comes with a 4.03% dividend. The $254 Goldman Sachs price objective compares with the $246.19 consensus target and Wednesday’s closing price of $220.94.
24/7 Wall St.Mid-America Apartment Communities
This one may provide one of the best entry points of all the top picks at Goldman Sachs. Mid-America Apartment Communities Inc. (NYSE: MAA) is a REIT focused on delivering full-cycle and superior investment performance for shareholders through the ownership, management, acquisition, development and redevelopment of quality apartment communities in the Southeast, Southwest, and Mid-Atlantic regions of the United States.
As of December 31, 2020, Mid-America Apartment Communities had ownership interest in 102,772 apartment units, including communities currently in development, across 16 states and the District of Columbia.
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The company announced this week that its board of directors approved a quarterly dividend payment of $1.40 per share of common stock to be paid on January 31, 2023, to shareholders of record on January 13, 2023, representing a 12% increase over the prior rate. The increase will raise the annualized dividend payout to $5.60 per share of common stock. The company has delivered 13 years of consecutive dividend increases.
The increase puts the dividend yield at 3.38%. Goldman Sachs has set its target price at $194, which is well above the $181.72 consensus target and Wednesday’s closing price of $164.46 for Mid-America Apartment Communities stock.
UDR
This top company reported revenue last month that was 17% higher than the same quarter of 2021. UDR Inc. (NYSE: UDR) is an S&P 500 company and a leading multifamily REIT with a demonstrated performance history of delivering superior and dependable returns by successfully managing, buying, selling, developing and redeveloping attractive real estate communities in targeted U.S. markets.
As of September 30, 2020, UDR owned or had an ownership position in 51,649 apartment homes, including 1,031 homes under development. For over 48 years, UDR has delivered long-term value to shareholders and the best standard of service to residents.
Funds from operations in the most recent quarter also showed significant growth over 2021, rising 11% to $198.3 million, while revenues exceeded estimates by 2.4%, though earnings missed estimates.
Investors receive a 3.72% dividend. UDR stock has a $48 target price at Goldman Sachs. The consensus target is $46.29, and the stock closed at $40.58 on Wednesday.
The REIT segment has been absolutely demolished and may offer patient investors with the best combination of stock entry points and dividend yields in years. Those looking to add real estate exposure, but wanting a more conservative path, should do well owning these top companies at today’s prices.
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