Most apartment analysts expected the optimism that reigned in June’s NAREIT conference to continue into the second quarter reports and conference calls. So far, they’ve been proven correct.
Three leading apartment REITs—Chicago-based Equity Residential; Birmingham, Ala.-based Colonial Property Trust; and Cleveland-based Associated Estates—have reported their results. So far, all three have raised their guidance for the rest of the year.
“We weren’t surprised at the strength that Colonial referred to,” says Michael Levy, vice president with New York-based Macquarie Securities. “We’re expecting guidance to be raised by a number of operators. Over the first half of the year, occupancy came in higher than they planned with higher rental rates. We’ve seen operators being fairly aggressive pushing rents over the quarter.”
That’s shown up in 2010 projections. For instance, Equity pushed its FFO guidance to $2.14-$2.20 per share from $1.95-$2.15 per share. In fact, William Acheson, a REIT analyst with New York-based Benchmark Capital thinks investors would have been disappointed if the apartment REITs didn’t raise their guidance.
“There will be a lot of optimism on the conference calls,” Acheson says. “I think the one thing that I’m most worried about is that expectations have been set so high. Everybody expects guys to raise guidance. If these guys don’t raise guidance as much as expected, it will fail to impress or out and out disappoint.”
Raising guidance is only one way analysts expect REITs to show their renewed confidence in the market. They expect continued to a development push from companies like AvalonBay Communities. “The developers are being led by companies like AvalonBay that have a fair amount of land,” Levy says. “It makes more sense for them to focus on development than acquisition.”
That’s because the quest to make acquisitions has become increasingly difficult. “There’s a dearth of investment opportunities and for the few deals that come to market, there is a lot of money chasing them,” says Alexander Goldfarb, associate director of equity research of REITs for New York-based Sandler O’Neill + Partners. “That’s the biggest hurdle. We still recommend that companies focus on restructuring and getting their balance sheets in order. But now you have companies that have done that. They have excess cash on the books and its challenging to find investment opportunities.”
A number of REITs did one-off deals in the second quarter. Paula Poskon, a senior research analyst with Robert W. Baird, doesn’t expect those deals to get much bigger. “People are getting some stuff done, but you won’t see huge portfolio transactions,” she says.
Even without plentiful acquisition opportunities, Goldfarb expects REIT stock offerings to continue. “I still expect them,” he says. “Clearly, it’s hard to find good accretive uses for that capital. But for companies that either want to get their debt down to better renegotiate their line or because they have unusually large maturities coming up, raising equity is an attractive option.”