Apt. REITs susceptible to downturn, analysts say

Apartment real estate investment trusts, which have been outperforming many of their real estate peers in 2008, are expected to take a hit in 2009 as rising unemployment will likely cause both demand and rents to decline.
DEC 22, 2008
By  Bloomberg
Apartment real estate investment trusts, which have been outperforming many of their real estate peers in 2008, are expected to take a hit in 2009 as rising unemployment will likely cause both demand and rents to decline. “Apartment fundamentals will weaken materially in coming quarters,” Andrew McCulloch, an analyst with Green Street Advisors Inc. of Newport Beach, Calif., said in a research note. “Job growth is the most important driver for apartment demand,” he wrote. “With cumulative job losses for the current economic downturn on pace to be the worst in a half century, the apartment sector is expected to enter a period of materially weaker demand and reduced pricing power.” At the same time, property values are falling. “When pricing transparency returns to the market, apartment assets will be worth much less than they were in recent years,” Mr. McCulloch said. “The only question marks lie in the magnitude of these declines and how long it will take for the U.S. economy and the capital markets to right themselves.” Tony Paolone, an analyst with JPMorgan Chase & Co. in New York, slashed his funds from operations estimates for apartment REITs by 9% in 2009 (funds from operations are a common metric used to measure real estate performance). His revision is based on the belief that apartment REITs’ operating income will tumble 2.4% on average next year. “The rapid decline in U.S. payrolls suggests that landlords in virtually every market are likely to lose pricing power over tenants,” Mr. Paolone wrote in a note. Michael Bilerman, analyst at Citigroup Global Markets Inc. in New York, downgraded two apartment REITs — Equity Residential of Chicago and UDR Inc. of Highlands Ranch, Colo. — to “sell,” from “hold.” However, he upgraded Camden Property Trust of Houston to “hold,” from “sell.” “Deteriorating apartment fundamentals — long hidden in the coattails of the credit crisis — could emerge as the dominant negative catalyst for the group,” Mr. Bilerman wrote in a note. However, the group does have one advantage: It still has access to debt capital through Fannie Mae of Washington and Freddie Mac of McLean, Va. — a perk that its peers don’t have in the frozen credit markets. This advantage “materially reduces the probability of severe financial distress for the apartment sector,” Mr. McCulloch wrote. “The upshot for apartment REITs — and it’s a big one — is that liquidity risk is tiny because of the availability of Fannie/Freddie money,” Mr. Paolone said. “Opportunity would be at the unsecured-debt level where yields are in the double digits and could be refinanced far lower by the agencies.” Apartment REITs have been on a tear for much of 2008, with positive total returns of 17.4% at the end of September, according to the National Association of Real Estate Investment Trusts in Washington. As of the close of business Dec. 19, the sector was off 24.3%, which still outperformed its equity REIT peers, which were down 39% on average. However, the gloomy outlook doesn't bode well for 2009. “We find it hard to get excited about these stocks given the valuation premiums, underwater development pipelines and core growth that pencils to be among the weakest in the REIT space,” Mr. Paolone said.

Latest News

RIA moves: The Mather Group, Brand Asset Management announce deals
RIA moves: The Mather Group, Brand Asset Management announce deals

Consolidation continues in US wealth management industry.

US broker-dealer fintech aims for global footprint as it acquires international firm
US broker-dealer fintech aims for global footprint as it acquires international firm

Tech company democratizes access to US trading infrastructure.

Advisor moves: RBC swipes $1.7B UBS team, Baird duo departs for LPL's Linsco channel
Advisor moves: RBC swipes $1.7B UBS team, Baird duo departs for LPL's Linsco channel

RBC Wealth Management's latest move in New York adds an elite eight-member team to its recently opened Westchester office.

Stifel star broker, Chuck Roberts, leaves firm under cloud of investor complaints
Stifel star broker, Chuck Roberts, leaves firm under cloud of investor complaints

Stifel – so far - is on the hook for more than $166 million in damages, legal fees and settlements in investor complaints involving Roberts, a 35-year industry veteran.

iCapital secures $820M in latest funding, hits $7.5B
iCapital secures $820M in latest funding, hits $7.5B

The giant alt investments platform's latest financing led by T. Rowe Price and SurgoCap Partners, along with State Street, UBS, and BNY, will fuel additional growth on multiple fronts.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.