Sector Picks: Apartment REITs

by: The Wall Street Transcript

On September 17, The Wall Street Transcript interviewed Alexander D. Goldfarb, a Director covering the apartment sector REITs at UBS Investment Research. Key excerpts, including his sector picks, follow:

TWST: What's at the top of your list at this point?

Mr. Goldfarb: Within the apartments, I would say Essex (NYSE:ESS) and AvalonBay (NYSE:AVB). Two other names that we also have buy ratings on are Colonial Properties (NYSE:CLP) and Apartment Investment and Management Co. (NYSE:AIV).

Essex first of all is just a fantastic company with a great track record. They have had dividend growth over the past 10 years or so, if I am not mistaken, of about 8%, which is very good, since most REITs are around the 5% mark, and then you have some other REITs that break 10%, but 8% is a very good number. They focus on coastal California and Seattle and they focus more on the B assets, which they redevelop and enjoy that upside there, plus they're doing some ground-up development, and because they are a small company, individual deals make a difference. So management has a track record of finding lots of little interesting ways to move the deal.

AvalonBay is clearly one of the best developers out there with a great track record of creating value for shareholders. They have very conservative management, a conservative balance sheet, good dividend growth, and it's just a very well run operation that we continue to like.

Colonial and Aimco are some differentiated calls. Colonial is in the Sun Belt. Their restructuring earlier this year when they sold the retail and office assets into a JV has made them more focused on the residential. We like the new business model and believe the market is coming around to realize that the properties are high quality and it's a well-run company with some very realistic growth expectations for this year. We believe that Aimco is a company that is undervalued from an NAV perspective and that the market isn't giving it enough credit for repositioning itself. The company continues to make strides to improve itself and also from a dividend perspective, it yields about 5.5%, which is pretty attractive in the current environments. So we think the combination of NAV, discounted dividend yield profile, it all works the same.

TWST: Are there any names in this space that worry you, where dividend is at risk or where they have got some real operating issues?

Mr. Goldfarb: Not of the major names that we cover. None of them have concerns about anything that you have just described. Certainly, I don't think that Equity Residential (NYSE:EQR) will outperform the others as far as earnings growth. I think that they likely face similar issues that drove Archstone to privatize.

BRE Properties (NYSE:BRE) I think will have some drag from exposure to Inland Empire, Sacramento and San Diego.

Camden (NYSE:CPT) is a great company. I think they're doing a fantastic job; they're great developers, but just unfortunately right now due to the exposure to markets like Phoenix and Vegas and parts of DC, I think that their growth is going to be slowed but otherwise that's a great company. So, by and large, most of the companies are fundamentally fine, but exposure to those areas I think could slow them down, and it's really EQR in particular, where they have done a lot of things similar to what Archstone did, a lot of the massive 1031 repositioning, which is not only a drag on earnings, but also carries over the low tax bases. Then also just the huge amount of share buybacks that they are doing and all the capital being redeployed on that front is a bit different from some of the other companies that are focusing more of their capital on future external growth.