1 Residential REIT to Buy and 1 to Sell

Real estate investment trusts (REITs) are considered profitable investments during inflationary periods because of their ability to increase their rents. Also, the prices of properties that REITs hold usually rise amid an inflationary environment. 

According to the Center for Financial Research and Analysis’ (CFRA) chief equity strategist Sam Stovall, REITs are “a strong inflation hedge, with sub-industries that issue short-term leases able to adjust quickly to rising prices.”

In addition, skyrocketing home prices and mortgage rates have been benefitting residential REITs. Investors’ interest in REITs is evident from the Vanguard Real Estate ETF’s (VNQ) 4.5% returns over the past month.

Given the backdrop, it could be wise to scoop up the shares of quality residential REIT Daiwa House Industry Co., Ltd. (DWAHY), which possesses robust financials. However, we think Independence Realty Trust, Inc. (IRT) might be best avoided now, considering its bleak fundamentals.

Stock to Buy:

Daiwa House Industry Co., Ltd. (DWAHY)

Headquartered in Osaka, Japan, DWAHY engages in the construction business worldwide. It operates through Single-Family Houses; Rental Housing; Condominiums; Existing Homes; Commercial Facilities; Logistics, Business and Corporate Facilities; and Other Businesses segments.

For the year ended March 31, 2022, DWAHY’s net sales increased 7.6% year-over-year to ¥4.44 trillion ($33.22 billion). Its gross profit came in at ¥864.68 billion ($6.47 billion), up 4.6% year-over-year. Also, its net income came in at ¥228.96 billion ($1.71 billion), up 13.7% year-over-year.

DWAHY’s trailing-12-month EV/EBITDA of 6.44x is 67.7% lower than the industry average of 19.91x. Its trailing-12-month P/S of 0.44x is 92.4% lower than the industry average of 5.72x.

Analysts expect DWAHY’s revenue to be $34.66 billion in March 2023, representing a 126.8% year-over-year increase. Over the past month, the stock has gained 3.8% to close the last trading session at $24.30.

DWAHY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

DWAHY has a B grade for Value and Stability. It is ranked #2 out of 24 stocks in the REITs – Residential industry. Click here for the additional POWR Ratings for Growth, Momentum, Sentiment, and Quality for DWAHY.

Stock to Avoid:

Independence Realty Trust, Inc. (IRT)

IRT is a real estate investment trust that owns and operates multifamily apartment properties across non-gateway U.S. markets, including Atlanta, Louisville, Memphis, and Raleigh.

IRT’s total revenue increased 169.4% year-over-year to $154.76 million for the second quarter ended June 30, 2022. However, its net loss came in at $7.40 million, compared to a net income of $3.41 million in the year-ago period. Moreover, its loss per share came in at $0.03, compared to an EPS of $0.03 in the previous period.

IRT’s trailing-12-month EV/EBITDA of 31.11x is 56.3% higher than the industry average of 19.91x. Its trailing-12-month P/S of 8.13x is 42% higher than the industry average of 5.72x.

IRT’s EPS is estimated to fall 137.7% year-over-year to a negative $0.20 in 2023. IRT has lost 17.3% year-to-date to close the last trading session at $21.36.

IRT’s POWR Ratings reflect its poor prospects. The stock has an overall F rating, equating to a Strong Sell. It has a D grade for Growth, Value, Stability, and Quality.

Click here to access the additional POWR Ratings for IRT (Momentum and Sentiment). IRT is ranked last in the same industry.

DWAHY shares were trading at $23.75 per share on Wednesday afternoon, down $0.55 (-2.25%). Year-to-date, DWAHY has declined -17.25%, versus a -12.31% rise in the benchmark S&P 500 index during the same period.

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.

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