Apartment REITs Benefit From Housing Crisis
The Dynamic Wealth Report
April 21, 2008
Profiting From The Real Estate Mess
I’m an optimist. Ask anyone in my family. I always have been and
probably always will be. Sometimes being an optimist can hurt you as an
investor. You might overlook a small detail that another investor would
see as a huge problem. I know this, and that’s why I always try to go
the extra mile in my research. I’m constantly forcing myself to look at
and understand all of the risks.
However, sometimes being an optimist can really pay off.
I have the perfect example. Right now, the news continues to highlight
just how bad the housing market is. From foreclosures to falling home
sales, tightening credit markets, bank write offs, hedge funds
collapsing . . . the list goes on and on.
I’ve been warning investors to stay away from the real estate and
financial industries for months now. Those who listened saved themselves
from huge losses and many actually made money.
Despite all the doom and gloom I recently found a bright spot in the
real estate market. That’s right, some positive news has caught my eye .
. . and I’ve figured out a way to profit.
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Just this morning, Bank of America (BAC) announced earnings. Their
profits fell 77%. And they had another $3.3 billion in loan write downs.
Yet another seeming victim of the real estate mess.
The part I found funny was CEO Ken Lewis’ comments, “[t]hese results
clearly did not meet our expectations." Really? I hope not. Ken should
be looking for a new job if he thought destroying profits by 77% was a
positive expectation.
The fall-out continues.
The National Association of Realtors (NAR) recently published a report
on the condo market. They looked at 59 different areas. 44% of these
markets recorded falling condo prices. What’s really scary is that in a
few of these areas prices dropped 10% or more.
To top it off, NAR also released the Pending Home Sales Index recently.
In February the index fell 21% from the same time last year. And the
chief economist for NAR anticipates new home sales to be down 25% for
2008.
I could give you about a hundred more data-points. But I don’t want to
bore you.
No doubt, you see the problems first hand in your own neighborhood. More
and more houses on the market. Bank owned real estate and foreclosures
falling into disrepair. I guess you can say the market’s a bit tough out
there.
But I did find a bright spot. See, I told you I’m an optimist.
Now, losing your home is a horrible event. My heart goes out to all of
those who are caught with falling home prices and increasing mortgage
payments. But there is a bright spot for investors. All of these
homeowners need someplace to live.
And mom and dad only have so much patience with inviting children back
into the home.
The National Multi-Housing Council (NMHC) is a group representing
apartment owners and developers. They note that from 2004 to 2006 more
than 1.2 million households became renters. They also point out that
because of the real estate turmoil home ownership numbers are declining. With ownership declining, demand for apartments is increasing.
Here’s The Opportunity
The number of renters is expected to grow by almost 4 million households
over the next 10 years. To meet this demand we need an additional
250,000 new apartments every year . . . for 10 years. Right now there is
a shortfall. The current rate of new apartment development is around
150,000 units.
We’re falling behind by 100,000 apartments every year. And you can’t
just toss up an apartment complex. The development and building process
takes years. At this rate, it won’t be long till apartments are in high
demand.
But it gets better.
According to one industry statistic, rents increased by 3.5% in the
fourth quarter of 2007. And most importantly, vacancy rates are stable
or falling.
Do you see where I’m going with this?
Rental prices are poised to increase even more. When rental rates
increase, owners of apartment complexes make money hand over fist. We’re
in the early stages of a growth cycle for apartment owners. One of the
best ways to profit from this trend – aside from owning your own
apartment complex – is to buy REITs that own apartments. Two of the
largest are Equity Residential (EQR) and Avalonbay (AVB).
Equity Residential (EQR) owns more than 570 properties in 24 different
states. All told, they manage more than 150,000 apartments. The company
has a market cap of more than $11 billion and pays investors a nice
yield of 4.5%. In February the company confirmed their 2008 guidance
with analysts.
The other REIT to look at is Avalonbay (AVB). This company owns more
than 160 apartment complexes in 10 states. They actively manage more
than 45,000 apartments. Avalonbay has a $7.7 billion market cap and a
yield of 3.5%.
Either of these companies provides great exposure to apartment REITs. I
think this is a great way to take advantage of the real estate mess and
make some money.
• Coal Index (Up 40%)
The Coal industry index is up 40% over the last month. Continued record
prices for oil and natural gas are driving interest in Coal as a
substitute fuel. The industry is being led higher by Arch Coal
(ACI) which is
up more than 63% in the last 3 months.
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