Apartment REITs sense bottom but caution remains
NEW YORK (Reuters) - Apartment REIT investors and executives are increasingly confident that they've hit a bottom after several lean quarters, but analysts warn that risks still seen in the sector has left the shares overpriced after a recent rally.
The MSCI U.S. REIT Index .RMZ, a proxy for real estate investment trusts (REITs) jumped 92 percent from early March to August 7, though it has retreated a bit in the last few days.
Among 11 major apartment REITs, eight beat second-quarter forecasts, including Aimco (AIV.N), Equity Residential (EQR.N), Post Properties (PPS.N) and Camden Property (CPT.N).
But nine either cut or maintained their full-year forecast, while only two -- Essex Property Trust (ESS.N) and Mid-America Apartment Communities (MAA.N) -- raised guidance.
AvalonBay Communities (AVB.N) cut its forecasts.
"Deteriorating apartment fundamentals will continue to put downward pressure on rental rates for the balance of this year and in 2010," AvalonBay Chief Executive Bryce Blair said on a conference call.
Many apartment REITs beat expectations because of cost cuts from salaries, renegotiated terms with vendors and marketing savings, rather than through any broader economic improvement.
"Given vacancy nearing a 20-year peak, REIT occupancy levels were impressive," Citigroup Global Markets analysts said in a research note. "While these increases largely had a cost (lower rents, higher concessions), the added buffer better positions the companies to weather a weaker second half."
UPBEAT SENTIMENT
Some investors see them as attractively valued.
Many stocks are trading at less than half their peak valuations, said Jay Leupp, portfolio manager of the Grubb & Ellis AGA mutual funds, which focus on publicly-traded REITs.
Leupp, previously a REIT analyst for 12 years, recommends Essex, Duke Realty (DRE.N), AvalonBay, as well as Aimco and Associated Estates (AEC.N).
Cap rates -- the expected rates of return on a property in its first year, which move inversely to the price of a property -- are between 7 and 7.5 percent. Leupp cuts exposure to REITs when the cap rate slides to about 6.5 percent.
"Fundamentals are going to remain challenged for the next two to three years," Leupp said. But there is "limited downside" to occupancy levels, partly because tight credit will curtail the supply of apartments over the next several years.
"That alone will keep fundamentals from weakening materially further," Leupp said, adding his funds are overweight apartments versus other REIT subsectors. Continued...
