U.S. residential real estate investment trusts have been on a dividend hiking spree lately, with the sector experiencing several dividend increases since the turn of the year. Although rising interest rates and a waning economy have caused housing prices to fade, much of the residential rental market has increased steadily due to a fade in consumer purchasing power. This resulted in higher earnings among many of the leading U.S. residential REITs, allowing investors to reap the benefits of higher dividend yields.
Due to their affordability, REITs provide investors with easy access to the property market. In addition, REITs often offer better yields than tangible property because of their superior capital structures and expert management.
I’ve identified three “best-in-class” residential REITs, namely Equity Residential (NYSE:EQR), NexPoint Residential (NYSE:NXRT), and Tricon Residential (NYSE:TCN). After thorough analysis, I’ve decided to assign bullish ratings to all three REITs; here’s why.
Equity Residential (EQR)
Vertically-integrated REITs such as Equity Residential are often underrated as their integrated cost-saving attributes are ignored. Equity Residential owns nearly 80,000 apartments in dynamic cities, including New York, Boston, Seattle, Washington D.C., San Franciso, Southern California, and Denver. The REIT is established and arguably possesses a mid-to-upper-market stronghold across the United States.
Equity Residential exhibits a 96.2% occupancy rate with same property operating margins of 68.5%, explaining why the REIT has presented an annual shareholder return of 11.2% since its initial public offering in 1993. Much of the REIT’s success stems from its ability to carve out undervalued deals with capitalization rate growth potential. For example, with its share price at $63.30, the REIT is trading at a ~27% discount to its Green Street estimated net asset value.
Also, its 4.5% same-property embedded growth rate and potential debt reduction could add tremendous value to Equity Residential’s balance sheet, bolstering its already-impressive 3.96% dividend yield. Moreover, the asset is considered highly attractive from a risk vantage point with a beta of 0.78.
Is EQR REIT a Buy, According to Analysts?
Turning to Wall Street, Equity Residential earns a Moderate Buy consensus rating based on six Buys, 10 Holds, and one Sell assigned in the past three months. The average EQR price target of $73.88 indicates 16.3% upside potential.
NexPoint Residential Trust (NXRT)
Middle-market residential REITs are among the most overlooked by investors. NexPoint is an excellently managed mid-market real estate company with exposure to more than 15,000 units across Southern parts of the United States. Insiders have “skin in the game,” with 12.76% of NXR shares owned by insiders, illustrating management’s prudence and care.
NexPoint released its third-quarter financial results on October 25th, revealing 20.7% year-over-year revenue growth and an earnings beat of $0.12 per share ($0.85 vs. $0.73 expected). After delivering stronger-than-anticipated third-quarter results, NexPoint decided to bolster its quarterly dividend payment by 10.5% to $0.42 per share, with a forward dividend yield of 3.6%.
NexPoint’s investment strategy is simple yet effective. The company’s mandate emphasizes middle-income jurisdictions with high acquisition costs and solid income-growth prospects. Thus, allowing it to tap into rental markets with robust same-property growth potential.
The REIT’s strategy has produced tangible results, with its 94.1% occupancy rate delivering a 15.8% year-to-date increase in net operating income. Moreover, NexPoint’s long-term results provide assurance to a bullish argument as the fund’s 10-year rent compound annual growth of 12.5% is unmatched by most of its peers.
As previously mentioned, NexPoint sports an impressive dividend yield of 3.6%. In addition, the asset looks undervalued, with its price-to-adjusted funds from operations (AFFO is a metric used to measure a REITs cash flow) at a 16.2% discount to the sector median, making a plausible case that this REIT is in phenomenal shape.
Is NXRT REIT a Buy, According to Analysts?
Turning to Wall Street, NexPoint Residential earns a Strong Buy consensus rating based on three Buys and one Hold assigned in the past three months. The average NXRT price target of $62.50 indicates 32.7% upside potential.
Tricon Residential (TCN)
Tricon is an up-and-coming residential REIT. The company is invested in more than 31,000 single and multi-family units across Northern America. In addition, Tricon manages its own properties with a value-added technology-enabled platform, allowing for efficient integration.
Tricon strolled past its third-quarter earnings estimates earlier this month, dominating its revenue target by $34.16 million and succeeding its earnings-per-share expectation by $0.35 per share ($0.49 vs. $0.14 expected). Subsequently, the firm raised its full-year funds from operations guidance by $0.13 to $0.15 per share.
Furthermore, the REIT hosts solid fundamentals, with its 98% occupancy rate and 68.5% operating margin. Moreover, Tricon’s blended growth rate is robust at 8.4%, indicating a solid investment thesis.
A noteworthy update is the REIT’s recent divestment of its Sun Belt property buildings. Tricon offloaded 20% of its sub-portfolio for $315 million in gross proceeds. How the proceeds will be deployed remains ambiguous; however, Tricon will likely utilize the funds for debt reduction as elevated interest rates don’t provide an acquisitions-conducive market.
Lastly, Tricon exhibits a forward dividend yield of 2.63% and has a forward price/FFO ratio of 14.4x, suggesting it’s an asset waiting to be snapped up by investors.
Is TCN REIT a Buy, According to Analysts?
Turning to Wall Street, Tricon Residential earns a Strong Buy consensus rating based on eight Buys and one Hold assigned in the past three months. The average TCN price target of $12.02 indicates 34.8% upside potential.
Residential REITs currently present robust risk-reward profiles amid consolidation in the rental market. In addition, middle-market REITs are overlooked by many investors, which aligns with bullish arguments for Equity Residential, NexPoint, and Tricon.