By the time the housing market had soared to insane heights, everybody and their grandmother was investing in homes and trying to flip them before the game of musical houses came to an end, or they tried to rent them.
Not only did many of them get burned, but everyone who had mortgages they couldn’t afford got toasted as well. The result was that a huge number of homes, as we know, went to foreclosure.
All those homes went into the market, and those with tons of capital started buying up these distressed houses on the super-cheap. As the years have gone by, many distressed properties still exist, but they are in shorter supply and there are more competitors for those properties.
That’s why I’ve been wary of REITs that bought up distressed properties for renovation and rental. These REITs entered the market in just the last few years, which is late on the scale. The key is not to overpay for those homes, and to rent them to creditworthy tenants.
The other issue, however, is that these stocks aren’t paying dividends. If you are going to be an investor in a buy-and-rent operation, you want to see some of that cash flow and not just rely on the capital appreciation of the stock — if any.
Still, it’s worth a look to see if any stocks exist that make sense.
American Residential Properties Inc. (NASDAQ:ARPI) is one of these REITs that acquires, renovates, leases and then manages single-family homes. ARPI has only $21.3 million in cash and $1.3 billion in land and improvements, and has $650 million in loans and credit facilities to purchase those properties. Equity was issued to raise capital as well, along with initial seed funding.
For the year, ARPI generated $86.8 million in revenue and had $76 million in operational expenses. REITs netting out $8.6 million in funds from operations is not impressive at all, especially spread over 8,893 properties.
At a share price of $18, the market cap is $585 million, or almost 50x funds from operations (FFO). Why pay for that and get no dividend when you can buy a hotel REIT like Ashford Hospitality Trust (NYSE:AHT) for 12.5x FFO and get a 4.9% yield?
Silver Bay Realty Trust Corp (NYSE:SBY) is in even worse position, having only generated $4 million in FFO and trading at 125x FFO. It does pay 1.5% as a dividend, but when it comes to REITs, we want a real dividend, not chump change.
If you want to play housing stocks, there’s no reason to go to these REITs. They are way overvalued as it is and there are better choices.
For starters, go to the home improvement stocks. All those renovations have to use stuff sold at these stores. So choose Home Depot Inc (NYSE:HD) or Lowe’s Companies, Inc. (NYSE:LOW).
There are other of these so-called “home improvement infrastructure” plays. You can buy the painting company Sherwin-Williams Co (NYSE:SHW), because there’s nothing better than buying a company whose products are always going to be needed. It’s a bit expensive, though.
A better choice is a company I left for dead a few years ago. Kudos to management of Whirlpool Corporation (NYSE:WHR). It’s arguably undervalued with $14.47 per share in expected 2015 earnings, 23% expected long-term earnings-per-share growth, but only trading at 14x fiscal year earnings.
As of this writing, Lawrence Meyers owned shares of HD.
