Avoid Apartment REITs Now

Multifamily REITs are toxic in today’s market. Don’t expect their declining share prices to turn around any time soon.

Single home sales are slipping everywhere. Even here in Baltimore City where values had been holding firm, prices began dropping hard and fast in the past month.

My first thought was to look to apartment REITs (real estate investment trusts) for potential profits in this scenario, but lately I’ve noticed local rental communities offering “$100 cash back” offers, “free deposit programs”, and “2 free months of rent with a 12-month lease”.

Almost every apartment REIT I researched showed losses last quarter and has lowered earnings expectations for the immediate future.

And Tuesday morning, Apartments.com revealed the results of a national survey…

Apartment rentals are down for the first time in six years and nearly 96% of renters surveyed said they would be moving this year. Most said it was due a desire to be in a new neighborhood or city, but many simply wanted more for their money.

Then there’s the real cost-saver of rooming with another and splitting the bill. Listings for roommates on craigslist.org increased from 255,900 in 2007 to 421,000 in 2008.

A quick look at the Dow Jones Equity All REIT Total Return Index shows REITs crashed right along with the market in September.

These Trusts used to lay the investor’s golden dividend egg. If REITs distribute 90% of their income, they are not required to pay corporate taxes… so pay out they did.

But this profitable goose is cooked…

None of the following multifamily REITs have reclaimed anywhere near their Fall of 2008 share price. A quick snapshot of some of the bigger players since Oct. 1, 2008 is telling…

• Associated Estates Realty Corporation (AEC), Camden Property Trust (CPT), Home Properties, Inc. (HME), and Mid-America Apartment Communities (MAA) have slipped over 40%…
• American Campus Communities, Inc. (ACC), Equity Lifestyle Properties, Inc. (ELS), and Senior Housing Properties Trust (SNH) are down over 30%…
• AvalonBay Communities, Inc. (AVB), BRE Properties, Inc. (BRE), Equity Residential (EQR), and Essex Property Trust, Inc. (ESS) are down over 50%…
• Colonial Properties Trust (CLP), Post Properties, Inc. (PPS), and United Dominion Realty Trust, Inc. (UDR) have fallen by over 60%…
• And Apartment Investment and Management Co. (AIV) has plunged over 80%.

All companies in this asset class will most likely underperform in 2009. For now, I recommend you keep them out of your portfolio.

Stock position: None.

Comments

[KQforever:]

decent research, wrong conclusion.

Feb 12 03:59 AM

[jzkl1234:]

obviously rents are going down and vacancies are increasing, would you expect otherwise in this environment? Also the fact that all of these stocks are down does not mean they are a sell at this point, maybe they are a bargain? Shouldn't you instead base your analysis on price/NAV or price/ffo? Note, apartment reits are one of the few companies in this market with access to cheap financing (i.e. FNMA and FHLMC). That is why eqr, pps and cpt are buying back unsecured debt.

Feb 12 10:32 AM

[richandmer:]

You didn't mention the dividends these REITS are paying. Buying now could mean high yields as long as they can maintain the dividends.

Feb 12 11:09 AM

[Jeffrey Adler:]

Unfortunately, the author draws the "consensus" conclusion based on existing published data.Markets anticipate, and are a leading not lagging indicator. As a former Chief Property Operations Officer at AIMCO for seven years (just left in 10/08) , I've had a ring side seat to the apartment cycle. We are in a recession and NOI's will decline for 2 years- that's already priced into the stocks--and they are selling at 40%-60% discounts to their Net Asset Values (NAVs- what the apartments would sell for if sold off today in the private real estate market), and are priced currently at 8.5%-10.5% cap rates, which is 200 bps worse that the private market (the inverse of a price/earnings multiple). They are selling at historic lows. I am going to be moving back in to Apartment stocks shortly, given how beaten up they are--- once I see: 1) a decelertion in job losses, and 2) a narrowing of credit spreads. The fundamentals out a few years are very good-- there will be a lot of money made on the upturn in this cycle.

Feb 12 11:55 AM

[Fabien Hug:]

Mr Adler, you introduce you comment by implying the author is wrong where she simply says to stay away from REITS. However, you just plan to enter this market when ....
Effectively, it is certainly too early to put your money in this segment. For now, of course.

Feb 12 03:00 PM

[sr9web:]

Many REITs are switching to issuing stock shares for dividends. Better look carefully before you buy.


On Feb 12 11:09 AM richandmer wrote:

> You didn't mention the dividends these REITS are paying. Buying now
> could mean high yields as long as they can maintain the dividends.

Feb 12 08:53 PM

[Jonathan Bl...:]

AERO was a buy at $5? GE at $21, and now i shouldnt buy AIMCO at 5.5 when its yielding on its newly cut dividend almost 20%??? NAV on this company is in the high teens. Its down 80% and it has been selling assets which buyer can still get financing on. This stock will be back at 10 in any serious market rally.

Feb 18 06:43 PM

[papapaulk:]

Can anyone tell me if dividends on preferred shares can be discontinued at management's discretion if a REIT is bought out by a private entity? Does the preferred shareholder have any protection, since the new owners would presumably eliminate the REIT status, which, at a minimum, would remove any necessity to pay dividends of any kind, ever?

Mar 08 03:24 PM

[tedster98:]

Gotta disagree here with the author on this one. Now is the best time to get in. Most real estate market price drops have already been factored in on the market. Plus, with healthy dividends and cheap prices, this is a win-win. People also got to live SOMEWHERE, and if they cannot get a home due to poor or no credit, or the bank has tightened on lending, there are only 3 other alternatives, (back to mom's at age 40, a cardboard box, or an apartment). Most will choose the last. I see Apartment REITs going up and capacity to be full within 24 months.

position: WAY long and I am backing the truck up.

Jul 25 02:39 PM