By the end of this month, the bulk of U.S. apartment real estate investment trusts will have wrapped up earnings calls for 2007, and the results—at least from a price-per-share standpoint—won't look pretty. According to year-end data compiled by the Washington, D.C.-based National Association of Real Estate Investment Trusts, returns on multifamily REITs declined by an average of 25.42 percent last year. Heading into 2008, mounting economic concerns are stressing the household and job creation necessary for multifamily success. What's more, the subprime lending crisis—once thought to be a benefit to multifamily—has constricted credit markets and made Wall Street investors distrustful of anything real estate-related.
Still, REITs could be better positioned to ride out the real estate rollercoaster in 2008 than their private peers. With dialed-down leverage, stabilized portfolios, and relative independence from private capital—or the lack thereof—many public CEOs are bullish on the ability of REITs to be staunch competitors in an uncertain 2008 mulitfamily economy. In as much as cap rates remain at all-time lows, severely undervalued REITs also have the opportunity to gain arbitrage with share repurchasing, a strategy not lost on Chicago-based Equity Residential, which bought back almost 27 million shares in 2007 for an aggregate purchase of nearly $1.2 billion. Last April, Dallas-based Camden Property Trust directors likewise approved a $250 million stock repurchase program that CEO Ric Campo said would allow the company to capitalize on stock purchase opportunities as they arise.
Campo reiterated his stance on Jan. 10 in New York City when he joined a power panel of apartment REIT executives—including Equity CEO David Neithercut, BRE Properties CEO Connie Moore, and AvalonBay Communities president Tim Naughton—at the Deutsche Bank 2008 Real Estate Outlook Conference. “In 2008, we will continue to sell our assets and buy back our stock,” Campo said. “It is a very simple arbitrage trade. As long as we can make a positive spread, we will be buying the stock.”
WELL BALANCED As the economy tightens, the stabilized portfolios demanded by Wall Street will also likely serve REIT players. “The beauty is that REITs have been disciplined in the past couple of years to maintain unencumbered portfolios and flexible balance sheets with moderate leverage,” says Chris Wimmer, a vice president and senior analyst covering the multifamily space for New York City-based ratings agency Moody's Investor Service. “They are well situated to ride out a storm, particularly a six- to 12-month hiccup.”
At San Francisco-based BRE, which focuses almost exclusively on core markets in California and Washington, Moore expects some insulation in 2008 from broader national economic challenges. “San Francisco and Seattle are still on fire,” Moore said at the Deutsche Bank event. “We have had very strong revenue growth in both of those markets last year, and I would expect that revenue growth will continue to be around 6 percent to 8 percent in 2008. For us, the Sacramento-type markets are a challenge and could be weak, but weak is probably 92 percent occupancy as compared to 96 percent occupancy.”
SUBPRIME SKITTISHNESS The key issue for BRE in Sacramento is the continued fallout from the subprime lending crisis, which will fuel single-family home foreclosures that depress regional economies and put so-called “shadow market” housing stock into the rental pool. While all multifamily players are dealing with the phenomenon, REITs are facing double-exposure as investors veer away from real-estate centric equity.
“Apartment REITs have been hit more than other equity REITs because of what is going on in the subprime credit markets,” says NAREIT chief economist Brad Case. “The problem is that there are investors who see general problems in housing and think, ‘Sell first; ask questions later.'”
Still, most REIT observers are cautiously optimistic on the 2008 fundamentals powering their balance sheets. “We maintain a stable ratings outlook for the multifamily sector,” Wimmer agrees. “While we expect fundamentals to cool off with average occupancies in the mid-90 percent, we don't see any significant trouble spots at this time.”
Unanimously, all concerned say the largest factor playing into the success of REITs and multifamily as a whole will be the ultimate course of the U.S. economy. “Obviously, that extends across all sectors, even beyond real estate,” Wimmer says. “A full-fledged recession is going to hurt everybody.”