Real estate stocks sometimes get an "income investors only" rap. Real estate investment trusts (REITs) are the most popular way to invest in real estate, and they typically pair low growth with high dividends.
REITs are required to pay out 90% of their net income as dividends. Though that usually means they have a high dividend, it also means they can only grow by taking on debt or selling more shares and diluting existing shareholders. But REITs aren't the only real estate stocks.
Zillow Group (ZG 5.74%) (Z 5.91%), CBRE Group (CBRE 3.10%), and Howard Hughes Corp. (HHH 2.19%) aren't REITs but still benefit from the same headwinds -- and may benefit a little more with their focus on growth, not dividends.
Zillow has had a tough year. Its stock is down about 65% over the past 12 months. The online real estate platform spent several years on a doomed-from-the-start house-flipping adventure and is attempting to turn around both its business and investor confidence.
The website is still going strong. As of the first quarter of 2022, it has 211 million average monthly unique users and more than 135 million homes in its database. In addition, 4.1 million homebuyers used the website to shop for a house in 2021.
Zillow certainly has the popularity and network effect working. The question for investors is: How does it monetize that popularity?
Zillow's answer is the "super app." The company wants homebuyers to use its app for just about every part of the rental and purchase process. Renters or buyers should be able to use it to be prescreened for a mortgage or lease, find a house, get a mortgage, schedule a tour, and then make rent or loan payments.
Zillow says that as of now, it earns about $4,100 per transaction started in its app. That amount could rise as high as $17,000 or more per transaction if the company can get users to go through the app for each part of the process.
If Zillow is able to leverage its incredible number of daily app users (currently 63% of the total people using real estate marketplace apps) to start making more money, the stock could be on the way back to where it was prior to the flipping failure a year ago.
CBRE is the largest commercial real estate broker company in the world. It had incredible growth over the past year. Global sales revenue was up 59%, and global leasing revenue was up 49%. It was also able to turn that growth into even more operating income -- operating margins were up from 19.7% in Q1 2021 to 20.9% in Q1 2022.
CBRE also has a real estate investment management division, and it was gangbusters last year as well. Revenue was up 34% and operating profit up 165%. Total assets under management (AUM) grew from $124.5 billion to $146.8 billion.
However, increasing AUM in its investment division doesn't necessarily increase CBRE's costs. A rising market and more dry powder to invest meant more than a doubling of its operating profit.
Finally, CBRE is actively returning value to shareholders. That doesn't mean it's shoveling cash out the door in the form of dividends -- it doesn't even have a dividend. CBRE is buying back shares. As of May 3, it had repurchased $237 million worth of shares. It bought back $370 million worth in 2021, so it's on track to beat that number soon in 2022.
That's a lot of good news, but buying back shares is only profitable for a company if the shares are actually undervalued. Of course, that's when it makes sense for individual investors to buy as well.
CBRE stock is down over 25% YTD because of commercial real estate market fears. That drop puts its current price-to-earnings at 13.6 and price-to-sales at 0.94. Its five-year averages are 20.10 and 0.97, respectively.
3. Howard Hughes Corp.
Howard Hughes is a master-planned community (MPC) company. When it was spun off from its parent company several years ago, it chose to not register as a REIT so it could focus on growing. Instead of borrowing money to develop or purchase real estate, it purchases acres of land and sells parcels to other developers to finance its own development.
Inside each MPC, there are houses, multifamily residences, retail businesses, hospitals, and even fire departments and schools. Howard Hughes preplans each part of the MPC and uses that plan to attract developers. As the community is developed and proved out, the land sales become more profitable.
Right now, the company has eight communities in six states. Its communities take up 118,000 total acres and contain 264 properties. Each of its communities has a strong history of land price and rental price appreciation. Since Howard Hughes bought the land years ago, it is able to profit from inflation without having to make more material fixed purchases. It can pick and choose when to sell or develop the additional parcels of land that it holds. When material and labor prices go down, it can develop, and when land prices go up, it can sell.
Over the last 10 years, net operating income (NOI) has grown at 17% per year to get to $250 million today. Management believes that stabilized net income from its existing properties will be around $356 million. If the company is able to reach that stabilized income number, keep growing with more properties, and finally get some multiple expansion out of Wall Street, the stock would be in for a great next five years.
Invest for income and growth
Real estate investing isn't all about income. These companies will share in the benefits of strong secular trends affecting real estate, while also allowing you to diversify the growth section of your portfolio.
That said, don't be afraid to go to real estate for safe income REITs as well. Your portfolio will thank you.