The housing market has been severely impacted by rising interest rates and inflation, which are eating into homebuyers’ budgets. In addition, high prices of homes and rising mortgage rates significantly affected buyers’ affordability.

According to the National Association of Realtors’ monthly report, sales of previously owned homes fell nearly 6% sequentially and 20% year-over-year in July. This decline primarily resulted from a more than 6% increase in 30-year fixed mortgage loans in the month.

Also, according to John Burns Real Estate Consulting surveys, homebuilder cancellation rates have more than doubled since April. More than 17% of builder contracts fell through in July, compared to 8% in April and 7.5% in July 2021.

Moreover, new home listings fell 15% year-over-year in the four weeks ending August 21, the largest annual drop since the pandemic began. Given this backdrop, we think it could be wise to avoid real estate stocks Agree Realty Corporation (ADC), Redfin Corporation (RDFN), and Doma Holdings Inc. (DOMA).

Agree Realty Corporation (ADC)

ADC is a publicly traded real estate investment trust that primarily invests in and develops net leased properties to industry-leading retail tenants. As of June 30, 2022, the company owned and operated a portfolio of 1,607 properties spread across all 48 continental states with a total gross leasable area of approximately 33.8 million square feet.

Last month, ADC announced that its operating partnership, Agree Limited Partnership, priced a $300 million public offering of 4.800% senior unsecured notes due 2032. The public offering price for the notes was 99.171% of the principal amount, resulting in an effective yield to maturity of 4.904%. The notes will be senior unsecured obligations of the Operating Partnership, guaranteed by the company and certain of its subsidiaries.

The net proceeds of this offering will be used for general corporate purposes, including reducing amounts outstanding under its senior unsecured revolving credit facility and funding property acquisitions and development activity.

During the second quarter ended June 30, 2022, ADC’s core FFO increased 12.5% year-over-year to $74.5 million. Its AAFO grew 13.3% from the year-ago value to $73.7 million. In addition, the company’s net income increased 52.7% year-over-year to $34.1 million.

However, in terms of forward Non-GAAP P/E, ADC’s 41.16x is 37.3% higher than the industry average of 29.99x. In addition, its trailing-12-month Price/Sales of 14.08x is 165.7% higher than the industry average of 5.30x.

Analysts expect ADC’s EPS to decline 15.4% year-over-year to $0.44 billion in the current quarter. The stock has declined 5.4% over the past month.

ADC’s POWR Ratings are consistent with this bleak outlook. The stock’s overall D rating translates to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

ADC has been graded a D for Value and Sentiment. Within the D-rated Real Estate Services industry, it is ranked #32 of 42 stocks.

To see additional POWR Ratings for Growth, Quality, Stability, and Momentum for ADC, click here.

Redfin Corporation (RDFN)

RDFN is a residential real estate brokerage firm that operates in the United States and Canada. The company runs an online real estate marketplace and offers real estate services, such as assisting people with purchasing or selling a home. It also offers title and settlement services, buys and sells homes, and originates and sells mortgages.

RDFN’s revenue increased 29% year-over-year to $606.9 million for the second quarter ended June 30, 2022. However, its net loss increased 179.9% from the year-ago value to $78.1 million. Its adjusted EBITDA loss surged 921.4% from the prior-year quarter to $28.6 million. In addition, its cash and cash equivalents came in at $379.92 million, a decline of 35.7% for the six months ended June 30, 2022.

The stock has declined 83.1% over the past year and 78.7% year-to-date.

RDFN’s weak fundamentals are reflected in its POWR ratings. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. The stock has an F grade for Growth, Quality, and Sentiment. In the same industry, it is ranked #41.

In addition to the POWR Rating grades I have just highlighted, you can see the RDFN rating for Momentum, Stability, and Value here.

Doma Holdings Inc. (DOMA)

DOMA originates, underwrites, and offers title, escrow, and settlement services to homeowners, lenders, title agents, and real estate experts. Distribution and Underwriting are the two divisions through which it operates.

The company offers services in the areas of purchase and refinance transactions in the residential real estate market, as well as title insurance underwriting business, including policies referred through its direct agents and third-party agents’ channels.

For the second quarter ended June 30, 2022, DOMA’s revenue declined 4.8% year-over-year to $123.74 million. Its operating loss surged 217.8% from the prior-year quarter to $59.22 million, while its net loss increased 151.8% year-over-year to $58.65 million. Its loss per share came in at $0.18.

The company’s EPS is expected to decline 3.6% in the current year. Analysts expect its revenue to decline 16.3% year-over-year to $466.95 million in fiscal 2022. The stock has declined 92.9% over the past year and 88.1% year-to-date.

DOMA’s poor prospects are also apparent in its POWR Ratings. The stock has an overall D rating, which equates to a Sell in our proprietary rating system. It also has a D grade for Stability and Sentiment. DOMA is ranked #35 in the same industry.

Click here to see the additional POWR Ratings for DOMA. (Quality, Momentum, Value, and Growth).

ADC shares were trading at $74.90 per share on Thursday morning, down $0.42 (-0.56%). Year-to-date, ADC has gained 7.79%, versus a -17.05% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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