2021 was a great year to be invested in real estate. While the S&P 500 posted an impressive 28% gain for the year, the real estate sector did even better. The Dow Jones U.S. Real Estate Index ended 2021 with an incredible 35.1% gain. Numbers like that are going to turn a lot of investors' heads and are likely going to get more people interested in the sector for 2022.
While generating a 35% gain in 2022 will be a daunting task, three real estate stocks that stand out as good buys right now are Vail Resorts (MTN 2.16%), NVR (NVR 1.01%), and American Tower (AMT 0.84%).
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Unique real estate is always valuable
Vail Resorts doesn't typically get associated with real estate. At its core, though, it is a bet on some of the most prestigious real estate in the ski industry. It owns 40 total resorts in North America and Australia, and five of those resorts also happen to be in the top six in total skier visits in North America.
Even though total resort visits have been trending up -- the 2020-2021 season, in the middle of a pandemic, was the fifth-best on record, with 59.0 million total visits -- the actual supply of skiable terrain has been shrinking for decades. Since 1990, the total number of operating resorts in North America has declined by 99.
This dynamic of growing visits and a shrinking supply of options has been a nice tailwind for raising ticket prices, but Vail Resorts has been able to capitalize on this more than most thanks to owning some of the best real estate in the business. The average price for a single-day ticket at Vail, its flagship resort, has increased from $92 in 2007 to $219 for the 2022 season.
These embedded geographical advantages already make Vail Resorts a compelling investment, but what really sets it apart is management's ability to innovate and create value for shareholders. A combination of acquiring resorts, upgrading facilities to increase both amenities and total capacity, and innovative ticket pricing to encourage frequent and repeat visits has translated into impressive shareholder returns since going public.
Vail Resorts stock is not cheap by any measure. At a price-to-earnings ratio of 92 and a dividend yield of 1.1%, it doesn't scream bargain. The company has proven in the past to be a superior value creator, though, and is probably worth the premium.
Homebuilders have a multiyear tailwind behind them
Terms like "inflation" and "rising interest rates" aren't the ones you want to hear when you talk about homebuilders. Rising raw material and labor costs coupled with lower buyer purchasing power (higher interest rates reduce purchasing power) can be a tough one-two punch to face. Luckily for homebuilders, in general, the industry can punch back with an ever-larger trend supporting the industry, and NVR is perhaps one of the best in the business to take advantage of it.
Image source: Getty Images.
Despite the headwinds facing homebuilders, there are even larger, longer-term trends working in their favor. One of them is a structural undersupply of housing that has built up over the past decade. Prior to the Great Recession, the long-term average for housing starts was around 1.5 million per month. This was needed to meet growing population and replace obsolete housing stock. For the decade following the 2007 financial crisis, though, housing starts were less than 1 million a month. This has, according to the Urban Land Institute, created an estimated shortage of available homes of 2 million to 5 million.
Furthermore, the largest population cohort in the U.S. right now is the 25 to 40 age group, at 72.1 million. This has historically been the prime homebuying age group and should present the industry with robust demand well into 2030.
These two monster tailwinds should more than offset concerns of inflation and interest rates, and investors will be hard-pressed to find a company that has turned building houses into investor returns over the long haul better than NVR. Eschewing the conventional methods of the industry, the company doesn't do any of its own land development and outsources construction to third-party contractors.
This asset-light strategy has allowed the company to generate better returns on capital than the rest of the industry as well as a spectacular 725% gain over the past decade. If NVR can generate a return like that when the industry is in the doldrums, then a period of strong building could result in even better returns for investors. With its stock priced at 18 time earnings, it may be one of the better values on the market right now.
MTN Total Return Price data by YCharts.
The silent giant
If you were to ask most investors what the largest publicly traded real estate company is, chances are they would not come up with the right answer: American Tower. With a market capitalization just north of $128 billion, it is the largest real estate investment trust by a wide margin. Then again, how many people would guess that a company owning cellphone towers would be the largest real estate company?
The cellphone tower business is both mind-numbingly boring and incredibly lucrative: Own the land and the tower structure, and then lease space on the tower to telecom companies and others that require broadcast capability. American Tower has amassed a total of 219,000 communications sites in 25 countries (most of which are outside America, ironically). Through a combination of leasing towers to multiple tenants, long-term leases with built-in rate increases, and gradually increasing its tower count, American Tower has grown funds from operations per share by 13.7% annually for the past decade.
With telecom companies now deploying 5G network infrastructure and the dramatic increase in data consumption that will likely come with it, investors can expect even better things from American Tower for years to come. Similar to Vail, American Tower is by no means cheap, but the tailwinds behind it and its reputation for fantastic returns suggest it is worth the premium over the long haul.