Location… location… and location… are the three most important tenets of real estate investing. That’s because if you own a desirable property in a rapidly growing area, you are likely to experience growing rents and property values.
With that in mind, Tesla (TSLA) recently announced that it is officially moving its headquarters from California to Austin, Texas.
This is big news for real estate investors because it reaffirms that the migration from California to Texas is in full force and unlikely to end any time soon. Companies are moving to Texas because it has:
- No state income tax.
- Lots of talent at a more affordable price.
- Lots of space and cheaper real estate.
- Business friendlier regulation.
And not surprisingly, real estate prices and rents are exploding to the upside. Last year alone, single-family homes have appreciated by 20-30% in many Texan cities:
Source: Invitation Homes
Similarly, the prices for multifamily apartment complexes and other commercial properties are surging as a result of rising rents and compressing cap rates.
Best of all, we think that this trend will continue for years to come because there simply isn’t enough supply to meet the rapidly growing demand.
Tesla is just the latest to make the move official, but over the past few years, we have also had Hewlett Packard (HPE), Oracle (ORCL), Charles Schwab (SCHW), McKesson (MCK), Toyota (OTCPK:TOYOF) , and countless others do the exact same thing: move from California to Texas. And since Tesla is now showing the example to others, we expect many more big companies to make the move over the coming years.
These companies are bringing lots of jobs and people with them and you can profit from this migration by buying undervalued REITs that own desirable properties in rapidly growing sunbelt markets.
In what follows, we highlight two of our favorite REITs to profit from the migration to Texas and other sunbelt markets.
BSR was founded in 1956, but it is only recently that it became a Texas-focused apartment REIT.
After a multi-year portfolio recycling, BSR now generates around 90% of its revenue from Austin, Dallas, and Houston:
It owns mainly Class B/B+ apartment communities, which are typically the favorite housing option of migrants. The properties are well-located, the rents are affordable, and it allows the person who moves to get familiar with the city before they may eventually decide to buy their own home and/or commit to the more expensive lease of a Class A property.
Below is an example of a property owned by BSR:
How well is it doing?
very well. In fact, its rents and property values are growing the fastest we have ever since we started covering the company.
In the last quarter, its net asset value per share rose by 22%, and since it is signing new leases at 16% positive spreads, we can expect the strong value creation to continue.
Right now, the company is valued at right around its last quarter’s NAV estimate, but with the rapid pace of rent increases, and further cap rate compression potential, we think that its NAV per share could land in the ~$16-18 range already in the near term.
This is why we have previously said that BSR is an ideal buyout target. It is still undervalued and it owns the exact kind of assets that many other apartment REITs would like to buy to boost their exposure to Texas. A REIT like AvalonBay (AVB) could easily integrate the entire operation and it would quickly boost its allocation to Texas and help the market sentiment of the entire company.
We expect 15-20% upside, and while you wait, you earn a 3.3% dividend yield.
Whitestone REIT (WSR)
Unlike BSR, WSR is not a pure play on Texas.
It generates a little over half of its revenue from Texas, and the remaining from Phoenix, Arizona, which is another rapidly growing sunbelt market:
Also unlike BSR, WSR does not own apartment communities.
WSR is a retail REIT that owns mainly grocery and service-oriented shopping centers that are essential to the communities that they serve.
Retail is hated today, but this is the right kind of retail that you want to own in today’s uncertain world. Think about your local strip center where you go get a haircut, buy food, go to the dentist, etc. You may have visited the same property for years, potentially decades and the same property will likely be there for a long time to come:
As the local community gets larger and wealthier, the strip center directly benefits from this. The tenant roster improves over time, the tenants earn greater profits, and that then justifies higher rents and leads to rising property values.
That’s precisely what WSR is experiencing right now. Its releasing spreads are 7% on average, despite the pandemic, and cap rates are also compressing, which increases property values.
Even then, you will be surprised to hear that WSR is still priced at a near 30% discount to pre-Covid levels:
We think that this disconnect between private/public market valuations is a great opportunity.
The public REIT market is fickle and quick to panic. Today, it fears anything retail-related, but the pandemic won’t last forever and eventually, it will have to recognize that these assets are growing in value.
Based on average analyst estimates, WSR is today priced at a ~30% discount to NAV. It implies that it has ~40% upside to fair value, and while you wait, you earn a 5% dividend yield.
At the end of the day, real estate is a fairly simple business.
You want to own properties in supply-constrained markets that are experiencing rapidly growing demand.
Austin, Texas is a great example and Tesla’s recent decision is a good indication that Austin will remain a strong market for years to come.
Unfortunately, REIT investors often forget about the importance of location and don’t give it much consideration.
At High Yield Landlord, we make sure that our REITs own desirable properties in markets like Austin and Phoenix because ultimately, it all comes down to location, location, and location…