Apartment REITs Underperform Peer Group in Q4

Some warning signs have begun to flash on multifamily rents. December was the fourth straight month-over-month decline, according to ApartmentList and even in the Sun Belt — one of the major hotbeds of activity — apartment rents have been cooling.

Now BTIG’s latest report on apartment REITs raises more concern.

“Despite the positive same-store results throughout 2022, Apartment REITs underperformed the REIT peer group by 1140 bps during the fourth quarter. The group finished 2022 down 33.2% on a TR basis compared to the down 25.0% returns for the broader REIT space. The underperformance was in spite of 5.9% dividend growth in 2022, as well as the additional 300 bps of FFO/sh growth estimated for Apartments relative to REITs overall.”

REITs are not identical to the greater multifamily market, but they do have much in common and BTIG is resting its analysis and projections on the broader housing market. Job openings are beginning to slow and rent growth is decelerating. The company says that residential valuations have fallen from peaks and that the sector is trading at multiple “associated with negative SSNOI [same store net operating income] growth.”

The slowing of job and wage growth and falling consumer savings rates, combined with a growth of credit card usage again, could mean greater potential struggles with affordability.

Some actions that BTIG is taking that might be worth attention:

• Downgrading Equity Residential from buy to neutral “given concerns about the recovery Class A product in coastal markets.”
• “In 3Q, our coverage posted its strongest quarter of SSNOI growth at 14.3%, with Sunbelt portfolios performing well even given tougher yoy comps. We’ve begun to see a deceleration of T12M rent growth to 12.4% in November from the 13.7% July peak, as well as approximately 80 bps lower same-store occupancy compared to year-end 2021, although we expect 4Q SSNOI results to remain solid for most of our coverage. Given the challenging macroeconomic factors, we think there should be a higher % allocation of dollars toward non-discretionary spend such as shelter versus retail next year, and same-store growth should remain in positive territory, albeit at more sustainable single-digit growth rates.”
• Although multifamily permits and starts increased through November, “there could be some disruption between starts and completions due to financing hurdles after a backlog from the low rate period temporarily accelerates starts in 2023.”

BTIG thinks that companies in its apartment REIT coverage “should post solid, albeit moderated, same-store fundamentals through 2023.” The firm estimates 9.5% average SSNOI and anticipate same-store growth to be partly offset by inflation impacts on expenses.