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Analysts Drop Apartment REITs to Underperform

The year-end earnings results make it clear that the downturn has finally hit the multifamily sector.

By Sule Aygoren Carranza | Updated on February 10, 2009

NEW YORK CITY-Reversing the trend of the past several quarters, analysts found that multifamily REITs were the worst performers out of all asset classes, based on last week’s results. The overall sector’s stock declined by 14.3% between Monday and Friday of the past week, according to Bank of America/Merrill Lynch. While individual REITs reported varying results, all failed to meet expectations and led analysts at the company to reduce the REITs’ ratings to underperform.

The largest multifamily trust, Equity Residential, lowered its forecasted 2009 NOI growth expectation by -3.75% to -9.25% due to the growing rate of layoffs, particularly in its largest market, New York City. The Chicago-based company also dropped its FFO guidance to $2-$2.30, which is 19 cents below Merrill’s estimate. The move, relates Steve Sakwa–a research analyst with Merrill Lynch–deals a blow to the entire apartment REIT group. “We expect the group to react very poorly to this outlook.” Merrill Lynch’s new NOI estimate of $2.14 assumes an NOI decline of 5.5%, versus a 3.6% drop previously anticipated.

During the fourth quarter, Equity Residential saw revenue and NOI growth of 2.4% and 2.8%, respectively. The firm’s normalized 2008 FFO of $2.58 was up 6.6%, but is expected to fall by 17% this year to $2.14 and 13% in 2010 to $1.86, due partially to shortfalls in development yields. Sakwa decreased the price objective for Equity Residential from $26 to $19. He also reduced the 2009 NOI growth expectations for Equity Residential from -3.6% to -5.5%, and the estimate for 2010 is -5%, down from -3.4%.

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