The stock market is down, but it doesn't mean there aren't great stocks on track for a red-hot summer. The real estate market is on fire, and summer is one of the busiest times of year. There are lots of reasons these three real estate stocks should be in for a sizzling season.
If you're looking for some high-quality stocks to help carry your portfolio despite the down market, you may want to consider investing in Sun Communities(NYSE: SUI), Mid-America Apartment Communities(NYSE: MAA), and Redfin(NASDAQ: RDFN).
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Sun Communities
The COVID-19 pandemic spurred a shopping spree for recreational vehicles (RVs) and boats as people sought new ways to get outside, have fun, and travel in the comfort and safety of home. The year 2021 marked the highest number of RV shipments in history, jumping nearly 40% year over year, while net boat sales in 2020 exceeded 320,000 units, a 13% jump from 2019 levels.
Higher numbers of boaters and RVers means higher demand for RV and marina space offered by Sun Communities, a real estate investment trust (REIT). It owns and operates over 600 mobile-home communities, RV resorts, and marinas across the United States, Canada, and the United Kingdom.
Sun Communities has done a great job of expanding its portfolio to add value for shareholders over the past few years. Its acquisition of Safe Harbor Marinas in 2020 helped boost revenues by branching out into the boating scene, and its most recent acquisition of Park Holidays UK in 2021 expanded its portfolio overseas. These efforts, in combination with increased demand during the pandemic, have resulted in an absolutely incredible performance as of late.
Net operating income (NOI), a metric that shows a REIT's profitability after expenses but before interest, taxes, depreciation, and amortization, grew 31% year over year last summer in Q3 2021. Occupancy is 100% for its RV spots as of the first quarter of 2022, and NOI for its marinas has grown 1.2% as of the start of 2022.
Despite this, share prices are down 26%, due largely to market turbulence. While the share-price dip is definitely upsetting for existing investors (myself included), it does mean new investors can jump in while the stock is trading at a notable discount, around 21 times its projected funds from operation (FFO) for 2022. I personally have doubled down on my investment in this company while prices have been favorable.
Mid-America Apartment Communities
Recent migration trends are seeing people move from larger cities across the north to the sunnier states in the south. This region, dubbed the Sun Belt, is booming.
According to recent census data, Phoenix, Houston, Dallas, Austin, and Atlanta, major cities in the Sun Belt, gained 300,000 new residents combined from mid-2020 to mid-2021. During that same time, New York, L.A., Chicago, and San Francisco, some of the most popular cities in the U.S., lost more than 700,000 people, collectively.
One REIT that's benefiting from this newfound demand and migration trend is Mid-America Apartment Communities (MAA), a multifamily REIT that specializes in the ownership and leasing of class A apartments across the Sun Belt of the United States. MAA has seen its performance skyrocket since 2020, with blended rental rates for new and renewed leases growing in the double digits. Most recently in Q1 2022, its blended lease rates rose 16.8%, while NOI and FFO jumped by 16.9% and 20%, respectively.
Mid-America is not relying on demand alone to drive revenue growth. It also has a robust renovation program where it revamps older, outdated apartments to help the units compete in the marketplace and generate higher market rents. Units recently completed have gone for 11% higher rents than non-renovated units. It also has five development projects underway, which should be fully delivered by 2024.
Summer is among the most active season for rental units, largely due to kids being out of school and more favorable weather for moving. This means the leasing momentum it achieved already could go up a notch in the coming months.
Mid-America is projecting a 13.5% increase in NOI for the full year 2022. Given the state of the housing market, I definitely think it can be achieved. Like Sun Communities, market volatility has put MAA on sale, and it's now down 24%. This makes right now an advantageous time to jump in.
Redfin
Down 71% year to date, Redfin is one of the many tech stocks that have been absolutely hammered this year. One of the largest online marketplaces for buying, selling, and renting real estate with over 51 million users per month, on average, Redfin has actually had a rather strong performance in recent years. A surge in homebuying and the rise in real estate values since the start of the pandemic gave the company a serious boost and helped it grow revenue by 123% year over year and gross profit by 71% as of the first quarter of 2022.
There's talk about a market cool down, with several signs indicating demand and competition is starting to slow, but there seems to be one more big buying boom before interest rates or prices get too out of hand. This happens to coincide with the peak season for real estate -- summer.
I expect to see strong earnings for the summer months by Redfin as people try to secure a home before interest rates rise even further. More activity, higher prices, and higher rates all translate to greater earnings for Redfin.
The big caveat here is if it will last. If the real estate market slows, it could lead to diminished performance in the next few years. This should be considered carefully, especially since Redfin still operates at a net loss.
However, the momentum it's experiencing today and its rock-bottom share price shouldn't be discounted today. It's a well-funded company with a lot of liquidity and great qualities for long-term growth.
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Liz Brumer-Smith has positions in Mid-America Apartment and Sun Communities. The Motley Fool has positions in and recommends Mid-America Apartment, Redfin, and Sun Communities. The Motley Fool recommends the following options: long May 2022 $22 calls on Redfin, short May 2022 $26 calls on Redfin, and short May 2022 $28 calls on Redfin. The Motley Fool has a disclosure policy.
