After a tough 2004, multifamily REITs landed at the top of their game last year. Just ask Ric Campo, CEO and chairman of the board of Camden Property Trust. "2005 was an awesome year for our company and for REITs," he says. "2005 was clearly the year that REITs turned the corner from an operational standpoint." And Campo has the numbers to prove it: The company experienced a 3.5 percent same-property NOI growth in 2005–its first positive NOI growth in three years.

Camden isn't alone in its high marks. Many apartment REITs recorded their best performances in several years, thanks to strong apartment market fundamentals such as sustained job growth, limited new apartment supply, and declining home affordability. "2005 was really a transitional year for the multifamily REITs," says David Rodgers, research analyst for Cleveland-based KeyBanc Capital Markets. "For a lot of the companies we cover, we saw a 5 [percent] to 7 percent same-store revenue growth by the fourth quarter, really indicating that we hit that inflection point and are on a good trend for 2006."

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One company posting such high results: Equity Residential. One of the largest REITs in the country, Equity saw its same-store revenue increase 3.9 percent from 2004, while its NOI increased 2.8 percent. The booming condo market proved to be a big factor in the company's high performance. While many REITs sold a large amount of property to condo converters, Equity and a handful of other firms also condo-converted some of their own properties. "We just had a sensational year in our condo-conversion business," says David Neithercut, president and CEO of Equity Residential, which converted and sold 2,241 condo units for a pre-tax profit of $100 million.

The strong condo market also helped REITs by limiting apartment supply and boosting NOI performance. Camden, for example, saw NOI jumps in markets with booming condo activity, including an 11.5 percent increase in Las Vegas and a 14.3 percent increase in Tampa, Fla. "The demand had to go somewhere else, and it went into existing rentals, which drove occupancy rents up and rental rates up," says Campo.

Condo activity wasn't the only hot topic in 2005. A handful of REITs disappeared from the scene due to mergers and deals taking companies private. A positive move for the valuation of public firms, this flood of capital kept investors focused on REITs despite rising interest rates, which typically cause investors to shy away from REITs, says Stephen Swett, an analyst and managing director with New York-based Wachovia Securities. "At the start of the year [2005], we thought a rising interest rate environment would hurt REITs overall and would make it tough for REITs to post a better total return than the rest of the market for a fifth, sixth year in a row," says Swett. "What was surprising to us was the capital out there for real estate remained so aggressive, which kept the valuations so high despite the rising rate environment."

Now focused on 2006, REITs expect to post equally high results at the end of this year. "The investment fundamentals still look good," says Campo. "We are going to finish building the pipeline out, and the same-store NOI growth and revenue growth looks like it is going to be higher in '06 than it was in '05."

–Rachel Z. Azoff