As the apartment REITs start to blitz analysts and investors with their fourth-quarter earnings calls over the next couple of weeks, the irony is that the previous period may be the last thing on the minds of those industry watchers. With seasonality playing a large role in the results from the fourth quarter, 2012 seems to be at the top of everyone’s mind.

“People will be focusing much less on fourth-quarter results,” says Andrew J. McCulloch, a managing director for Newport Beach, Calif.–based Green Street Advisors. “The only reason to focus on the last quarter is to get a gauge of momentum.”

The one REIT that has reported so far, Birmingham, Ala.–based Colonial Properties Trust, indicates that things continued to improve last fall, as the firm saw NOI for the fourth quarter of 2011 increase 6.9 percent compared with the fourth quarter of 2010. Those results certainly pleased analysts. Here are some things they’ll be looking at over the next couple of weeks:

The 2012 Outlook
Analysts were pleased with Colonial’s outlook for 2012. The REIT expects to build off of its strong 2012 with same-property NOI moving 5.50 percent to 7.50 percent and revenue increasing 4.25 percent to 5.75 percent.

“If you look at the overall apartment market, the slow economic recovery is creating jobs for those who rent apartments,” says Alexander Goldfarb, managing director of equity research of REITs for New York–based Sandler O’Neill + Partners. “Employment for those with a college education is about half of the general population.”

Goldfarb thinks employment growth in that cohort, which he considers “natural renters” for REITs, will spur apartment REIT growth in 2012. He says lack of supply, in an environment where getting construction loans remains difficult, has helped apartment landlords maintain pricing power.

Paula Poskon, a senior research analyst with Robert W. Baird & Co., a Milwaukee-based firm, says hitting income ceilings was a topic on third-quarter calls. While she expects REIT executives to comment that rent increases are leading to some move-outs, she doesn’t expect it to be a huge issue.

Others wonder how long the momentum will last. “We’re getting toward the latter stages of rent-growth acceleration,” Goldfarb says.

There was one stat that showed that things may be slowing. Colonial expected to get 4 percent to 5 percent on new leases, but only ended up securing a 0.7 percent increase. Colonial's president and CFO, C. Reynolds Thompson III, said he was surprised how little traction the company got with new leases.

Colonial anticipates expense growth of 2.50 percent to 3.50 percent for 2012, which comes in around estimates. McCulloch, along with his peers in the analyst community, expects REIT expenses for other companies to move up in 2012 as well.

“Expense growth will definitely be one issue people are looking at,” he says. “So far, it hasn’t seemed to be that big of a concern for operators. But it’s still early in earnings season.”

The main concern: property taxes. Expected water increases also played a part in Colonial’s projections. With property values moving up, analysts see tax assessments also moving north. “The companies are doing well controlling expenses they can control, like marketing and payroll," Poskon says, "but the big wild card will be real estate taxes.”

But Poskon has learned that it’s hard to predict increases in property taxes. “We’ve said for the past two years that [there will be property taxes] and still haven’t seen it happen, which maybe raises the possibility it will [happen] this year,” she says.

Continued Growth
Colonial, a company that has made its name with development, expects to spend $125 million to $150 million in development in 2012 (though $10 million or $20 million of that will be in retail), including a first-quarter start in Charlotte, N.C. In all, the company thinks it will start three or four projects this year. Analysts expect other REITs to break ground on more projects as well.

“We’ll see more development,” Poskon says. “The big developers will continue to accelerate development investment, even the ones who are doing these one-off projects in a joint venture with private partners like MAA and AEC. I think we'll see more of that.”

Cleveland-based Associates Estates, Colonial, and Memphis-based MAA are among the REITs eyeing the unsecured markets. Tom Lowder, Colonial’s CEO, said he’s hopeful the company will achieve its investment-grade rating in 2012. Poskon thinks REITs will look to the unsecured market to power growth.

“I think companies are continuing to position their balance sheets to tap the unsecured market to move away from secured financing, particularly away from the GSEs, as we march with every passing day being closer to GSE reform,” she says.