New York City Bank of America
Multifamily REITs have underperformed the RMX index since the sector peaked in January, with a ratio of -10.5% versus -4.4%. The group is now trading at a 7% discount to the locally based firm's FW NAV estimates. Yet as visibility improves on 2007 earnings, the analysts believe the gap will narrow.
Same-store NOI growth for REITs peaked in the second quarter of 2006 at 8.5%, and the Q4 growth of 7.4% was disappointing. "Expectations were just a bit too high, in our view, and seasonality, tougher comps, condos returning to the rental pool, increased single-family inventory and lower job growth in several markets all played their part in the multifamily REITs recent underperformance," researchers say.
For 2007, don't expect to see another year of same-store NOI growth in excess of 8%. Rather, growth of 5.5% to 7.5% is more achievable--and "potentially beatable," the firm says. With new supply in check (285,000 units of new starts in January, the lowest since July 2002), single-family home prices on the rise (the monthly cost of owning versus renting is 1.8x-2.9x) and tighter lending standards in the mortgage market (particularly due to the recent sub-prime market collapse), occupancies should remain high, in the 94% to 95% range, giving landlords in many areas--especially those where the rent vs. own ratio is high--pricing power.
For now, however, it seems that most markets are holding up well, according to first-quarter results from a number of companies, reports BofA. Occupancy at Camden Property Trust, for instance, has risen 80 basis points to 94.8%, and AvalonBay Communities Inc. is experiencing rental rate growth in the mid-single to low-double-digit range in most areas. Seattle, for one, is seeing 12% growth, followed by the Midwest, at 10%, Northern California, at 9%, and the Mid-Atlantic, at 8.3%. The laggard seems to be the Northeast, though its growth of 4.2% so far this year is still considered healthy.
As a result of all of this, BofA recommends an overweight stance on multifamily REITs, since valuations will move higher as visibility improves on 2007 earnings. The firm also upgraded three apartments trusts. Camden and Equity Residential rose from neutral to buy, while Aimco rose from sell to neutral. The top pick remains Archstone-Smith, given its potential for normalized double-digit FFOPS growth in 2007, 10% multiple discount to its peers and its 4% discount to net asset value.
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