As the apartment REITs begin reporting their mid-year results next week, analysts again expect fundamentals to be good. But the dour economic news of the last couple of weeks has some wondering if the sluggish economy may put a ceiling on the robust apartment recovery. Here are three things analysts are looking for in the second-quarter results and calls.
1. Guidance will go up.
In June, Arlington, Va.-based AvalonBay Communities raised guidance right before NAREIT. Haendel St. Juste, an analyst at Keefe, Bruyette & Woods (KBW), based in New York, expects more REITs to follow suit. “You expect more than half of them to raise operating and earning guidance,” he says.
Specifically, St. Juste expects Palo Alto, Calif.-based Essex Property Trust; Houston-based Camden Property Trust; Cleveland-based Associated Estates Realty; San Francisco-based BRE Properties; Birmingham, Ala.-based Colonial Property Trust; Chicago-based Equity Residential; and Atlanta-based Post Properties to raise their guidance levels for the year. Michael J. Salinsky, director of REIT equity research for U.S. Apartments, Lodging & Self Storage, a Toronto-based RBC Capital Markets company, expects increases from Rochester, N.Y.-based Home Properties and Memphis-based MAA, as well. “It’s well-known that most people need to raise guidance at this point,” he says.
The one thing holding back guidance increases has been the equity issuances. “A few REITs have been active with the use of ATM programs,” St. Juste says. “So maybe they would have raised their guidance if they hadn’t raised equity. But I think you’ll see operating guidance go up a bit.”
2. The economy looming large.
Analysts expect REITs to continue their strong growth in the second quarter. “Rent growth continues despite economic uncertainty,” St. Juste says.
With unemployment rising and other economic indicators pointing southward in recent months, there is some slight concern it could dampen the recovery. “You will need job growth at some point to keep the momentum going,” St Juste says. “Rents as a portion of income are getting closer to historic levels. You can’t push through materially higher until you get more income growth.”
In some markets, job cuts could become a concern. In fact, William Acheson, a senior REIT analyst at New York-based Ladenburg Thalmann, expects stress in some of the Eastern markets that many REITs occupy. “I think, eventually, the more frugal nature of government will hit home in D.C.,” he says. “In New York, the big investment banks are looking to cut jobs.”
But given the amount of growth seen in the past year, it will probably be difficult for REITs to match that growth just because the comps are so high. “In third quarter and fourth quarter, we will see growth slow a bit,” St Juste says.
3. Companies will add mass.
With Denver-based UDR’s announcement that it bought two assets in New York for $581 million and another in Washington, D.C., for $106 million, the REIT buying continues.
Selling has also been a big theme in the first half, though, as Chicago-based Equity Residential sold $1.3 billion so far this year, according to new York-based Real Capital Analytics. A number of REITs have been big sellers and buyers. “The last cycle was to get to the coasts,” Salinsky says. “This cycle is improving submarket positioning.”
Development, as has come up in past conference calls, is still a focus with the REITs. “Camden, Post, and Home are ramping up development,” Salinsky says. “Colonial restarted its development pipeline. Most of the guys have restarted building out their legacy pipelines. You’ll see them continue to work through that inventory.”
St. Juste says Colonial, Camden, and Avalon have development percentage of NAV [net asset value] in the mid- to upper-teens “At this point in the cycle, I don’t feel worried about it,” St Juste says.