The quarterly parade of REIT conference calls begins this week as REITs report their fourth quarter and 2010 earnings. For analysts, though, that’s old news. They’re more worried about what lies ahead than what happened last year.
Others have the same focus. “I’m more concerned about guidance,” says Michael J. Salinsky, vice president of REIT equity research for RBC Capital Markets. “They trade off of forward expectations.”
So far, most companies have been quiet about their 2011 expectations, but analysts still expect these four themes to emerge:
1. Conservatism Reigns.
REITs have learned to keep expectations low. Analysts don’t expect that to change this year. “I think they’ll be conservative,” says Andrew J. McCulloch, an analyst for Newport Beach, Calif.-based Green Street Advisors.
Paula Poskon, a senior research analyst with Robert W. Baird, generally sees the same thing, but says there is a slight risk that some people may trade out if expectations are too low. “If people are pricing 10 percent NOI and the guidance comes in at 7 percent, there could be risk that you see people sell off because guidance is too conservative,” she says.
Despite the high levels of optimism in the sector, some people are a little concerned that, given the run multifamily stocks had in 2010, there may be more upside in some other commercial classes right now. “I think the valuation in this space has gotten a bit ahead of itself. Fundamentals and the growth outlook are strong,” Salinsky says. “It’s tough to get a dramatic of upside.”
2. Expenses Will Rise.
In a world where occupancies, rents, and revenues are rising, it’s not surprising that analysts expect expenses to follow. “The one thing I’m worried about is expenses,” says William Acheson, a REIT analyst with Benchmark Capital. “There’s no question we’ll have better revenue, but property taxes and G&A hold potential to hurt the bottom line.”
Localities see the rising valuations and revenue in the apartment sector as a way to raise revenue. "Towns and communities are under pressure,” Alexander Goldfarb, managing director of equity research of REITs for Sandler O’Neill + Partners. “They’ll continue to try to raise real estate taxes, which the landlords will fight.”
Employees, many of whom have been mired in two- or three-year pay freezes, could also be getting antsy for raises. Analysts expect that to influence larger G&A lines in 2011 expectations. “A lot of people at the property level haven’t seen raises in two years,” Acheson says. “If you don’t pay [site-level employees], they’re going to leave.”
3. Fundamentals Will Continue to Rise.
The one thing most analysts agree on, though, is that if 2010 was good for the apartment industry, 2011 will be better. They expect the first quarter conference calls to reflect this reality. “Clearly the recovery in the apartment in fundamentals happened a good quarter or two earlier than even most aggressive researchers would have projected,” Poskon says. “The general outlook is that trend will continue in 2011.”
Green Street expects apartment owners to enjoy 6 percent to7 percent gains in market rents. Salinsky expects revenues to be up 3 percent to 4 percent and NOI to be in the 4 percent to 6 percent range. Most analysts think REITs will talk about pushing rental rates harder, even if its puts some pressure of occupancy. But that shouldn’t be a major issue, especially considering that Salinsky says that fourth quarter occupancies seem to have held.
“I don’t think you’re going to see a dramatic backup in occupancy,” Salinsky says. “Most of these companies are running revenue management systems. They will backup the second they see some sensitivity in pricing.”
4. Development Makes a Comeback.
In 2010, a number of companies, even relatively smaller REITs like Memphis, Tenn.-based Mid-America Apartment Communities and Rochester, N.Y.-based Home Properties, scooped up multiple assets. REITs also started development, but not at the same pace. McCulloch expects development to catch up. “2010 was more of an acquisition story and 2011 is likely to be more of a development story,” he says.
Acheson thinks that, given the amount of competition in the market, it will become more difficult for REITs to make accretive acquisitions. “You may be able to find busted condo deals and unfinished deals to come out with 7.5 percent and 8.5 percent yields in a year-and-a-half,” he says.
But those deals are becoming harder and harder to find. And, with rents rising, lot of companies have had land sitting on their books the past couple of years. “Several REITs are looking to start monetizing their non-income producing land sites,” McCulloch says.
Despite this, some analysts don’t think the acquisition market will die off for REITs in 2010. “We’re starting to see the ice cracking in extend-and-pretend,” Poskon says. “As that starts, we will see more product [come to market].”