Citing an “inflexion point” in property and operating fundamentals, Bank of America Merrill Lynch (BoA) raised its outlook on U.S. apartment REITs late last month from underweight to overweight and said that Wall Street estimates on performance are beginning to parallel more conservative outlooks provided by REIT management teams during earnings calls. Meanwhile, Fitch Ratings maintained its negative outlook on the multifamily sector due to high leverage and an expectation that operating fundamentals have yet to hit bottom.
“It’s our view that property level performance as measured by same store NOI growth is still going to decline between zero and five percent across the commercial real estate and multifamily sectors,” says Steven R. Marks, managing director of the financial institutions group at Fitch Ratings. “Fundamentals have not entirely bottomed out, and owners don’t yet have the occupancies and pricing power that they need to be able to increase rents.”
While Fitch still maintains a negative outlook across commercial real estate, it regards multifamily as one of the few stable sectors in the space. While multifamily is the highest levered sector at 7.5 to 9 times levered compared to the broader commercial real estate average of 6, much of the leverage and refinancing risk is mitigated by the liquidity provided by Fannie Mae and Freddie Mac. “The reason we’re more comfortable with higher leverage at a similar ratings level is the presence of Fannie and Freddie,” Marks says. “Should Fannie and Freddie pull back their commitments to the multifamily space, it would certainly be a significant factor as it relates to ratings evaluations.”
Looking at specific apartment REITs, BoA raised Camden Property Trust from “underperform” to “buy” and Equity Residential from “neutral” to “buy” and upgraded AIMCO, BRE Properties, Essex Property Trust, and UDR to “neutral” from “underperform.” BoA also noted that too many buyers were competing for assets currently on the market and pointed specifically to Essex and Equity as apartment REITs that will be able to execute on acquisitions due to brokerage relationships and ample cash on hand to get off market transactions done quickly and quietly. BoA analysts declined to comment further on their outlook.