REIT reporting heated up this week with both Chicago-based Equity Residential and Arlington, Va.-based AvalonBay Communities releasing their results. The multifamily heavyweights didn’t disappoint.
AvalonBay's same-store NOI increased 5.8 percent and same-store revenues rose 3.7 percent (which included a 3.7 percent increase in rents with occupancy staying flat). Equity, the biggest player in the apartment REIT space, saw same-store NOI increase 7.3 percent and same-store revenues increase 4 percent (driven by a 3.6 percent increase in rents and 0.4 percent increase in occupancy).
Of course, the two REITs had footholds in market such as the Washington, D.C., area (6.4 percent revenue growth for Equity and 4.5 percent for AvalonBay); Denver (5.1 percent revenue growth for Equity); New York (4.6 percent for AvalonBay); and Oakland/East Bay (4.5 percent for AvalonBay). Even lagging markets such as San Diego (1.3 percent for AvalonBay and 1.6 percent for Equity) saw revenue growth.
With few exceptions, other REITs haven’t pruned their portfolios as AvalonBay and Equity have. Both companies have focused on high-barrier-to-entry markets where they can maximize rent growth. But that doesn’t mean other REITs won’t enjoy similar gains.
“Overall, I think the apartment REITs will put up good numbers across the board,” says Alexander Goldfarb, managing director of equity research of REITs for New York-based Sandler O’Neill + Partners.
Analysts expect other companies to tell similar stories for the first quarter, but they’ll be more interested in any signs of how the rest of the year will play out. Here are the three key things they’ll be looking and listening for as the apartment REITs report their first-quarter results.
Analysts always love guidance for future quarters. But they don’t expect much from first-quarter reporting.
“I’m not sure anyone is focused on first-quarter numbers,” says Paula Poskon, a senior research analyst with Robert W. Baird & Co., a Milwaukee-based wealth management, capital markets, asset management, and private equity firm. “It’s more about tone and if they are expecting more guidance raises. This quarter’s earnings calls are all about getting visibility for this year.”
So far, AvalonBay is holding off on a guidance raise and Memphis-based Educational Realty Trust raised guidance 5 percent at the mid-point. “The real play for investors will be who is going to raise guidance and by how much,” says William Acheson, director of Equity Research at New York-based Ladenburg Thalmann.
Of course, if guidance isn’t what analysts and investors expect, there will be negative ramifications. “There have been a lot of conferences, roadshows, and meetings,” Acheson says. “These guys have been ebullient in their enthusiasm. So if [the guidance increase] is not what investors are looking for, you better not disappoint. It puts you in precarious position because you don't want to be too exuberant.”
2. External Growth
Many REITs added units and started developing in 2010. With Equity, AvalonBay, and Denver-based UDR making some high-profile buys already in 2011, analysts expect the deals to continue. However, the acquisition environment will be challenging. “There are too many buyers and not enough sellers,” Poskon says.
Analysts also think REITs will take advantage of the appetite for multifamily by selling assets. Equity sold in a couple of markets recently and Palo Alto, Calif.-based Essex Property Trust wants to “cull” its portfolio, according to Poskon.
With competition piling up on the acquisition side, REITs have turned to development (though competition is piling up there as well). They still have a lower cost of capital for construction than the private players do. But the question is if they see a window of opportunity big enough to beat the privates back in with development.
“There’s only so much development that any company can reignite without making a big reinvestment in growing the actual staff,” Poskon says. “Do they go out and ramp up and hire more people? Will the window last long enough to make that investment?”
3. Industry Temperature
Some analysts are eager to see what different REIT CEOs are seeing out in the market. For instance, there’s been a lot of talk about new development, but no one knows how widespread it is. “Some of that is real and some of that is noise,” says Haendel St. Juste, an analyst with Keefe, Bruyette & Woods (KBW), an investment banking and security brokerage firm based in New York. “I don’t know how much of that is one versus the other.”
The first-quarter calls could potentially provide some clarity. “I’m curious to hear how quickly private guys are coming back,” says Andrew J. McCulloch, an analyst for Newport Beach, Calif.-based Green Street Advisors. “It sure seems from what we’re hearing, that they’ll be back a lot faster [then we thought]”
The conference calls could also provide some insight into sources of funding available. In the past year or so, REITs have relied on At The Market (ATM) equity offerings and agency debt to finance growth. McCulloch wonders how quickly other sources of debt capital are regaining market share.
“I’m curious to see how much they’re diversifying away from the agencies and tapping life companies, banks, the unsecured market, and a resurgent CMBS market,” he says.