The United States housing market is heading into its busiest season, with several real estate stocks poised to gain from falling mortgage rates. With investors anticipating the Fed to cut rates later this year, the sector could pick up activity. Some real estate fund managers see the potential for “fantastic” real estate deals in the coming months.
Real estate stocks offer their own ecosystem, with companies targeting residential, commercial, healthcare and speciality sectors. Investing in real estate stocks helps investors diversify their portfolios, hedge against risks, and take advantage of some tax benefits.
The decline in mortgages is helping decompress the market, increasing sales volumes. Interest rates at more than 7% were seen as hurting demand recently, with loan applications falling drastically due to an uptick in mortgage rates. According to a recent survey, the further the rates drop, the more people will enter the home market, pointing to the possibility of rates falling to 5% as “unfreezing” the market. As mortgage rates are expected to trend to 6% by the end of the year, it could benefit real estate stocks.
Buying physical properties can be costly and difficult for individuals. For investors looking to get into the real estate market without the hassle and risk of buying a house, buying real estate stocks or specialist real estate investment trusts (REITs) is an interesting option to gain exposure.
Here are some real estate companies that might see some substantial upside if mortgage rates continue their downward trend.
EPR Properties (EPR)
Typically, real estate stocks attract investors by offering steady growth. Entertainment Properties Trust (NYSE:EPR) tries to straddle this by owning a relatively small number of properties focused on areas with potential strong growth. Some are amusement parks, ski resorts, and movie theatres, calling itself an “experiential” REIT. While this strategy didn’t work well during the pandemic, it has seen solid growth. This has allowed the company to increase dividends after beating consensus estimates at its last earnings release.
ERP trades at a price-to-earnings (P/E) ratio of 21.8 times, offering a forward dividend yield of 7.7%. The average analyst price target is 13% higher than the current $42 per share. For 2024, EPR issued guidance for funds for operations (FFO) of $4,76 to $4,96 per share. However, the company is focused on reducing theatres and improving theater portfolio quality. Its non-theater portfolio coverage remains healthy at 2.6 times.
Real estate stocks like EPR offer investors exposure to the real estate sector through operating income-producing properties.
Crown Castle (CCI)
Crown Castle International (NYSE:CCI) features the opposite of EPR, focusing on offering sites for wireless communications towers. Around 75% of its revenue comes from the top 3 mobile carriers in the U.S. As demand for cell phone towers is expected to increase over the next four years as 5G rolls out, more sites to host signals will be required.
Following a leadership contest at the start of the year with the arrival of a new CEO, the company has initiated a series of actions to improve its outlook and management. Co-founder Ted Miller even proposed a detailed plan to sell Crown Castle’s fiber business. He claimed it could save over $1 billion in tax efficiencies and position the firm as a premier tower company.
CCI trades at a P/E ratio of 32.1x, offering a dividend yield of 5.6%. The company has been paying dividends since 2014 and bumped them up yearly. While its dividend payout ratio of 1.68 may seem high, its strong profitability and growth prospects show potential for sustainable dividend payouts. All analysts recommend holding or buying the real estate stock.
Redfin (RDFN)
The tech-based real estate company Redfin (NASDAQ:RDFN) offers a different approach to gaining exposure to real estate stocks as it provides brokerage and mortgage origination services. Its shares were substantially by the high-interest rate environment. Although RDFN has lost over 90% of its value since the 2020 peak, it has survived challenging times. It may be well positioned for recovery, especially if President Biden’s proposed $10,000 tax credits are passed.
In a recent interview, Redfin’s CEO discussed returning supply in the housing market. Numbers show that inventory is up for the first time in eight months. Still, real estate stocks like Redfin may not see significant gains until mortgage rates fall further. However, the company recently relaunched its homebuyer refund program, Sign & Save. This could help drive more sales volume for Redfin agents. Notably, President Glenn Kelman recently bought $196,000 worth of shares. This took place despite the company reporting a loss of $0,20 per share in Q4, as this was slightly better than analysts expected.
On the date of publication, Stavros Tousios did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
