Like just about every other sector on Wall Street, the apartment REITs have been beaten up the past couple of days, seeing their values move down about 4 percent on average. But that doesn’t diminish the positive results they’re seeing on-site. Even as the jobs picture continues to look shaky, the REITs produced solid quarters. Here are three main storylines.
1. Guidance Going Up.
As expected, a number of REITs increased their guidance for the remainder of the year. “The results were very strong,” says Haendel St. Juste, an analyst with Keefe, Bruyette & Woods (KBW), an investment banking and security brokerage firm based in New York. “A number of companies not only beat expectations but raised guidance.”
Despite the broader economic shakiness in the economy, St. Juste says a lot of factors continue to look favorable for the REITs, including high demand and asset values, availability of capital for acquisition and development, and little new supply. The only hang-up is the lack of job growth (though low job growth keeps inflation and interest rates down, he notes).
“It’s almost the perfect storm for apartment REITs as far as fundamentals and asset values,” St. Juste says. “They have strong fundamentals.”
In the past few months, almost every apartment REIT has increased its guidance. Even Denver-based AIMCO, which had been seeing growth in the 2 percent to 3 percent range on same-store renewal rates pushed those numbers up to the 5 percent to 7 percent range. The company’s portfolio did withstand the recession better than others.
Andrew J. McCulloch, a senior analyst for Newport Beach, Calif.-based Green Street Advisors, notes the that the recovery has been pretty broad based in the REIT sector. "High-barrier versus low-barrier means very little in terms of near-term rent growth,” he says. “Over the next year and a half we’ll see very little difference in operating fundamentals between high-barrier and low-barrier operators.”
The one outlier was San Francisco-based BRE, which lowered its revenue guidance 13 basis points, surprising analysts. “BRE was disappointing on the margin because they pulled in their top line growth,” McCulloch says. "“The change was small, but stood out because most operators have upped their revenue growth projections.”
St. Juste says the main driver was weakness in Los Angeles where it lowered growth projections from 4 percent to 2 percent. “The trends in Los Angeles were coming up a little weaker than they expected,” he says.
2. Asset Juggling.
The second quarter saw the return of the large transaction. Houston-based Camden Property Trust bought an 11-property Texas portfolio of 3,750 units from Verde Apartment Communities for $321 million.
Palo Alto, Calif.-based Essex Property Trust announced a joint venture with Wesco I to acquire up to $500 million in apartments. These joint ventures and funds help REITs earn fee from management and acquisition.
“You’re diffusing the risk, juicing your returns, and leveraging your platform by not keeping the ownership risk to yourself,” 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.
When it announced a $20.7 million share offering, UDR said it would continue seeking deals in high-barrier markets with initial yields in the 4 percent to 5 percent range. It used the funds to purchase two deals in New York and one in Washington, D.C., for $687 million. Poskon projects the REIT could still do $75 million to $300 million in acquisitions, $233 million to $333 million in dispositions, and $75 million to $225 million in new development.
Equity Residential, which was the biggest sellers in the first half of the year, also moved $286 million worth of assets to Starwood in the second quarter. Colonial entered into a purchase agreement where it would sell 5,700 units through the end of 2012. The transaction is dependent on what Colonial buys. It allows the company to refresh its portfolio by selling older assets and bringing in newer ones. “They have to find suitable replacement properties to do it [complete the deal],” McCulloch says.
Companies such as Arlington, Va. AvalonBay Communities, UDR, and BRE announced they’d be starting developments. “Cap rates are remaining low as rents go up,” Poskon says. “That will attract more development.”
3. Murmurs from Outside.
As the REITs were reporting, private companies that could soon be joining the public sector made moves.
King of Prussia, Pa.-based Morgan Properties, which announced that it’s planning to go public as a REIT called Morgan Properties Trust, according to the Philadelphia Business Journal. The paper reports that it wants to raise “$800 million to bolster its vast multifamily portfolio and pay down debt.” With 30,626 units, the company ranked No. 42 on the most recent Multifamily Executive Top 50. It could potentially have the oldest portfolio in the REIT space, according to one source.
While Morgan may have surprised some observers, Denver-based Archstone has long been rumored to eventually go public once again after being privatized in 2007. St. Juste thinks one of its recent moves reinforce that possibility.
Munich-based Allianz and Canadian-based CPP Investment Board (CPPIB), which is also developing a project in San Jose with Essex, teamed up to recapitalize two Archstone properties. They included Archstone North Point, a 426-unit property in Cambridge, Mass., and Archstone Woodland Park, a 392-unit property in Herndon, Va. CPPIB announced they’d receive a 40 percent interest in the two properties for an equity investment of $108 million. Archstone and CPPIB have also formed a three-year development joint venture program.
“[Archstone] is making some moves on the portfolio front,” he says. “They need to resize their portfolio because they’re so huge.”
The moves serve a second purpose as well. It helps the company establish values for its assets if it were to do an IPO or anything else. “That little bit of movement says something,” St. Juste says.