Apartment REITs: The Big Bull Market in Housing

|
 |  Includes: AEC, AVB, BRE, CPT, EQR, ESS, PPS, UDR
by: Brad Case

Forbes magazine published an article by Stephane Fitch about "The Boom in Apartment REITs." Apartments have been the best-performing property type among publicly traded REITs, gaining 53.5% in the past year.

The article quotes Andrew McCulloch, an analyst at Green Street Advisors, talking both about demand ("apartment demand is rebounding in dramatic fashion") and the advantage that publicly traded REITs have over other owners of apartment units in terms of generating net operating income ("on a scale of one to ten for management skill, I rate all the companies I follow an eight, nine or ten versus the private guys").

I suspect he's right about both. The Moody's/REAL Commercial Property Price Index (CPPI) showed that apartment buildings were one of only two property types (the other was retail) to show an increase in transaction prices nationwide during the third quarter. In terms of comparing publicly traded REITs with other real estate investment managers, REITs produced dramatically higher returns during the last full real estate market cycle and during the bull-market part of it. (I can't yet compare their performance during the downturn, because it hasn't ended for the private side.)

Here's an especially good piece of info:

With little new development under way rents have risen 5% nationally in the past year, apartment-data firm Axiometrics says. McCulloch expects the gains to flow through as a 12.5% annual average increase over the next two years among the dozen U.S. apartment REITs he follows.

Even if future gains are more tempered, investors can enjoy average 3.2% yields on apartment stocks and good prospects that payouts will grow. That's partly because ... the number of renters will grow by 4.5 million, or 13%, by 2015, McCulloch figures.

Finally, the article gives info, including 2011 projected AFFO growth, for eight apartment REITs that it says are all rated "hold" or "buy" by Green Street:
Associated Estates Realty (NYSE:AEC)
AvalonBay Communities (NYSE:AVB)
BRE Properties (NYSE:BRE)
Camden Property Trust (NYSE:CPT)
Equity Residential (NYSE:EQR)
Essex Property Trust (NYSE:ESS)
Post Properties (NYSE:PPS)
UDR (NYSE:UDR)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I am long Vanguard REIT Index Fund and ING Real Estate Fund.

Disclaimer: The opinions expressed in this post are my own and do not necessarily reflect those of the National Association of Real Estate Investment Trusts ((NAREIT)). Neither I nor NAREIT are acting as an investment advisor, investment fiduciary, broker, dealer or other market participant, nor is any offer or solicitation to buy or sell any security investment being made. This information is solely educational in nature and not intended to serve as the primary basis for any investment decision.