By Philip van Doorn
Investors have been concerned about inflation, and rightly so.
Even if the official Consumer Price Index indicates a slowing pace for inflation, people can be grossly affected by pieces of the inflation pie, especially housing prices, which have been rising in part because of an undersupply in the U.S.
Following a scoring of real estate investment trusts among the S&P 1500 Composite Index /zigman2/quotes/210600453/delayed XX:SP1500 +1.73% , below is a list of top-scoring residential REITs among the broader Russell 3000 Index /zigman2/quotes/210598149/delayed RUA +1.63% .
During an interview, Adam Hetts, the global head of portfolio construction and strategy at Janus Henderson Investors, said REITs are generally underrepresented in portfolios of U.S. investors, and that they can help address the problems of inflation and “income in a low-yield world.”
He specifically cited “sheds and beds,” by which he meant REITs that own and lease out warehouses and single-family or multifamily residences.
Two industrial/warehouse REITs that were mentioned during the same interview by Danny Greenberg, who co-manages the Janus Henderson U.S. Real Estate ETF /zigman2/quotes/202625921/composite JRE +0.42% , were Prologis Inc. /zigman2/quotes/200785374/composite PLD +4.32% and Rexford Industrial Realty Inc. /zigman2/quotes/209636065/composite REXR +3.17% . Both were featured in our previous list of high-scoring REITs in July.
Advantages of residential REITs highlighted by Hetts and Greenberg include diversification, with a large number of properties held within some portfolios, and a low housing inventory, which signals a continued rise in prices and rents for years to come. That can be a good way to keep up with inflation, according to Greenberg, who called REITs “the toll-road of American GDP.”
New residential REIT scores
Starting with the Russell 3000, which represents about 98% of the market capitalization of the entire U.S. stock market, there are 186 REITs. Among the REITs, 21 can be termed “residential REITs,” in that they mainly own and rent out single-family or multifamily homes, or manage and rent out units in manufactured home communities.
The following list includes diversified REITs if more than half of annualized rent revenue comes from residential properties. It excludes REITs focused on assisted-living or health-care properties.
To score the REITs, we again used the methodology suggested by Frank Haggerty, a senior portfolio manager at Duff & Phelps Investment Management in Chicago. The scoring in no way represents investment recommendations. Haggerty has emphasized that the scoring isn’t meant to help investors target discounted stocks, but is designed “to identify higher-quality companies that should do better over time.”
Haggerty co-manages the Virtus Duff & Phelps Real Estate Securities Fund /zigman2/quotes/202863038/realtime PHRIX +0.56% , which has a four-star rating (out of five) from Morningstar, the Virtus Duff & Phelps Global Real Estate Securities Fund /zigman2/quotes/200381804/realtime VGISX +0.61% (five stars) and the Virtus Duff & Phelps International Real Estate Securities Fund /zigman2/quotes/205218223/realtime PXRIX +0.56% (three stars).
Among the 21 residential REITs identified from within the Russell 3000 (as explained above), there are 17 covered by at least five analysts polled by FactSet, with necessary consensus estimates for 2022 available.
The 17 companies are ranked within the group by three factors:
Total debt to estimated earnings before interest, taxes, depreciation and amortization (EBITDA) for 2022.
Estimated increase in dividends in 2022 from 2021.