Most analysts believe that the apartment REITs turned the corner in the first quarter of 2010, citing historically high sequential revenue growth. But that’s not all the analysts saw and heard from the first quarter results and conference calls. Here’s a look at three of the biggest highlights and takeaways.
1. Hopes are high for April and beyond.
After a strong first quarter, some analysts were concerned that pent-up demand had driven the numbers artificially higher, stealing renters from future quarters. While the jury remains out on that, so far things remained solid through April, according to the REIT first quarter calls.
“What the market was focused on was what companies were seeing in April and early May,” says Rod Petrik, managing director at St. Louis-based Stifel, Nicolaus and Co., a regional brokerage and investment banking firm. “What was impressive was the occupancy that the public companies had coming out of the first quarter.”
At the beginning of the year, Andrew J. McCulloch, an analyst for Green Street Advisors, a Newport Beach, Calif.-based consulting and research firm, expected it to take another two quarters. But he says the positive results only prompted four of the 12 REITs to increase their operating guidance. “Despite positive commentary across the board and indications they are trending toward the high side of their respective ranges, many operators held off from upping guidance this early in the year,” McCulloch says.
The reason for that trepidation is simple: There hasn't been real job growth. Without that growth, multifamily executives don’t have tangible evidence that things will stay on an upward course. But with continued job improvement, McCulloch expects the REITs to begin seeing positive year-over-year revenue growth in the third or fourth quarter, depending on the REIT.
Petrik agrees. “I think you’ll gradually start to see some positive revenue numbers in selective markets in the second quarter,” he says. “I think you see it [year-over-year growth] for the majority of markets by the end of the year.”
2. Strong results will lead to muted aggression.
Even with some questions about how the recovery can continue into future months, analysts think the strong first quarter will embolden the REITs.
"It made the REITs more aggressive," McCulloch says. "Multiple operators indicated that they were more comfortable with development now than just three months ago. If a project was on the fence in January, it is probably getting the green light today."
That doesn’t mean that the REITs will be rushing out to buy land, but it does mean they could start building on land they’ve been sitting on. As far as acquisitions, the first quarter saw a number of REITs, most notably Chicago-based Equity Residential and Palo Alto-based Essex Property Trust make buys in selected in markets.
“Apartment transactions have a pick up in activity, but it was primarily in New York, D.C., and California,” Petrik says.
Still, unless a flood of distress hits the market, analysts say the REITs will continue to pick their spots. "To buy an A quality product in an infill location where the REIT is the highest bidder out of 50, did they get a great deal?" McCulloch asks. "You have to be very selective. There's an awful lot of capital chasing few opportunities."
There's also the possibility of a REIT picking up an entire platform if the opportunity presents itself. "Some of the multifamily REITs have capacity to go after larger platforms," McCulloch says "Larger portfolios would likely not have as deep of a buyer pool. Not all of the money out there can bid on really large deals."
3. REITs have achieved balance sheet stability.
2009 was the year of generating liquidity for the REITs. They took out secured facilities from Freddie Mac and Fannie Mae, did equity offerings, sold assets, and cut overhead wherever possible. As 2010 picks up steam, analysts found that most everyone has their balance sheets in order.
"They have their maturities well-laddered now. They won't put on new debt for the sake of putting on new debt, especially considering many now have ample capacity built into their balance sheets,” McCulloch says.
Recently, when REITs have needed money, they’ve made “at the market” offerings (ATMs). But analysts seem to think ATMs will mainly occur if REITs want to buy.
“It depends on uses,” Petrik says. “If you’re buying a one-off deal, leaking shares into marketplace is a good way to finance an acquisition. If you’re going to do a bigger portfolio, you have to do a second offering.”
McCulloch thinks most REITs can buy now though. “There’s really no need to stockpile cash. If they do see deals, they have capital to go after those deals,” he says. “They could ramp up if more opportunities and distressed sellers come to market.”