With the general belief that the apartment sector hit bottom in the final three months of 2009, several REITs upped their 2010 guidance, albeit conservatively. Given the latest optimistic figures and the somewhat measurable recovery—there was overall improvement in occupancy and effective rents across the board, even in the worst-hit markets—BofA-ML analysts expect most REIT management teams will revisit their expectations for 2010 over the next few quarters.
Revenues exhibited growth in the first quarter, and this trend seems to have been sustained into the second. A survey of more than 15,000 apartment managers across the country show that the pace of month-to-month revenue improvement per available unit held steady in April, rising by 0.9% for the nation's top 20 markets. That's after an 80-basis-point uptick in March and a 90-basis-point increase in February. On an annualized basis, revenue growth held flat in April, following a 1.6% decrease in March and 3.3% drop in February. Effective rents also grew for the top 20 markets by 0.6% in April, though that figure declined by 1.3% year-to-year.
If this pace continues, upward earnings revisions made by some management teams in the first quarter could turn out to be conservative. With the second quarter traditionally bringing with it high demand, BofA-ML believes most REITs will positively revise their 2010 guidance once again.
The most interesting point about the recovery, which came one to two quarters earlier than forecasted, is that it's occurring with little job growth, points out Michelle Ko, a research analyst with BofA-ML. The mitigating factors to the lackluster employment scenario, she says, are improving in consumer sentiment and a lack of supply in most markets, which has kept turnover rates at a minimum. Also of note is what she terms "unbundling," meaning young adults are moving out of their parents homes, or leaving roommates, to rent apartments of their own.
Still, more significant improvement cannot occur without employment growth. The greatest job gains are being seen in supply-constrained markets, such as New York City and technology hubs like San Jose, CA, San Francisco and Seattle, and those areas will also see the quickest and strongest improvement in fundamentals.
Taking into account revenue growth per available unit on a monthly basis, the strongest markets in April were Washington, DC (1.8% growth) and Chicago, Tampa, FL and Orlando (1.7% each). Down by 30 basis points, Los Angeles was the only market where RevPAU fell. From an annualized perspective, RevPAU rose for nine of the top 20 markets last month, with a 4.5% increase in Denver, 3.5% in Washington, DC and 2.6% uptick in Tampa, FL. On the other side of the spectrum were Houston, with a decline of 7.3% between April 2009 and 2010; Las Vegas, -4%; Dallas/Fort Worth, -3.2%; Phoenix, -2.2%; and Seattle, -2%.
Considering select multifamily REITs' exposure to these markets, as well as their product type, ability to increase rents and access to capital, BofA-ML analysts suggest investors buy into AvalonBay Communities, Equity Residential, Essex Property Trust and Home Properties.
The firm also suggests a Buy on Camden Property Trust, which it describes as a value play. "Although CPT has about 50% exposure to overheated markets, it also has a 25% exposure to supply-constrained markets," says Ko. In the REIT's first-quarter earnings call, Camden management states that it could have one of the best NOI environments in two generations due to extremely low levels of supply and demand from a strong job recovery. Fewer tenants are entering the homeownership pool, 12.2% in Q1 versus 15.6% in the final three months of 2009. Rents on new leases rose by 3.7% in April versus the fourth quarter; last April, new lease rents versus renewal rents were -2.2% versus -10.4%. Management indicated that it is committed to pushing rents "aggressively at the expense of losing some occupancy," and it expects same-store revenue to grow this quarter and year-over-year growth will emerge in late 2010 or Q1 2011.
Conversely, BofA-ML gave neutral ratings to three companies, Apartment Investment and Management Co., BRE Properties Inc. and UDR Inc., while two REITs, Colonial Properties Trust and Post Properties, ended up with Underperform ratings.
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