Seeking Alpha
Old school analysis, special situations, growth at reasonable price, contrarian
Profile| Send Message| ()  

At the peak of the housing bubble, who would have thought that renting an apartment would be preferable to home ownership in 2012? That is the advice many advisors are giving to potential first-time buyers in the age range of 21 to 35 years. As a result of this change in the housing market, the stocks of REITs that specialize in multi-family development, ownership and management have been surging to new highs.

This article compares some of the Real Estate Investment Trusts that own multi-family properties, in an effort to discover if any good investment values remain in this pricey sector. Below is a chart indicating some of the important value metrics for these stocks:

 AECAIVAVBPPSRAS
PRICE$ 15.34$ 27.39$ 140.70$ 48.36$ 4.41
MARKET CAP652M3.32B13.42B2.60B220M
REVENUE176M1.08B999M319M142M
PRICE/REVENUE3.703.0713.4281.501.55
PRICE/BOOK2.1717.013.062.400.71
EPS 2012$1.26$1.78$ 5.46$ 2.38$ .56
PE 201212.1715.3925.7720.327.88
DIVIDEND YIELD4.70%2.60%2.60%2.10%7.30%
TARGET$ 19.25$ 27.87$ 145.84$ 51.43$ 5.50
% TO TARGET25%2%4%6%25%

Actually, we looked at ten REIT stocks that own apartment properties, but the market has been very efficient in pushing up their prices. The value measures for the other five did not differ substantially from the three largest companies in the table above. Those stocks were close to full value according to analyst targets. Obviously, this is not completely an apple-to-apple comparison as AEC and RAS are much smaller enterprises than the other three, and they all have other investment factors that are not part of our focus in this comparison.

We have marked in BOLD the two best readings in each of the five value measures that we are comparing: Price-to-Revenue, Priced-to-Book, PE, Dividend Yield and Appreciation Potential to reach the Analyst Target. The clear finalists for best value, according to these evaluations, are Associated Estates Realty Corporation (AEC) and RAIT Financial Trust (RAS). We will describe the five stocks in the table with special emphasis on the two finalists.

Of the three larger companies in the table, Post Properties (PPS) is the one that has the most room for appreciation (6%) to meet the Analyst Target price. PPS is a leading developer and operator of upscale multifamily communities in Texas and the Southeast and other areas. Its property age averages only 13 years, with a quality grade of A+/A, according to Green Street Advisors Residential Sector Update, 5/14/2012. PPS is best in class in these categories.

AvalonBay Communities, Inc. (AVB) engages in the development, redevelopment, acquisition, ownership, and operation of multifamily communities in the United States. It compares favorably with 17 year average age and a A-/B+ quality rating. It is currently within 4% of fair value according to analyst estimates. The company’s markets are located in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Midwest, the Pacific Northwest, and the Northern and Southern California regions of the United States.

Apartment Investment and Management Company (AIV) is a real estate investment manager that engages in the acquisition, ownership, management, and redevelopment of apartment properties throughout the United States. As redevelopment is part of its operations, the average age of the properties is 38 years and the quality rating is B/B-. AIV is nearly fully valued according to analysts with only room for 2% growth.

Our first finalist in this comparison is RAIT Financial Trust , which invests in, manages, and services real estate-related assets, both commercial and residential. RAS is not a pure play on the apartment boom, but it does own and operate 8013 units in 33 properties throughout the US. These account for about 1/3 of the company's cash generation, and the company also is a fee-based manager of other properties. Its largest operation is commercial, retail and multi-family real estate lending.

The stock price of RAS cannot be evaluated purely as an apartment developer, so it has not participated in the popularity of those companies. However, we do think it worthwhile to include RAS on our watch list as it clearly has the best value metrics of the five listed, including room for 25% appreciation on top of a 7.3% dividend yield. The company guidance indicates growth of more than 60% in net cash receipts for 2013.

Our other finalist, Associated Estates Realty Corporation, is an independent real estate investment trust. It specializes in owning and managing apartment communities in the Midwest, Mid-Atlantic and Southeast regions of the United States. Among the pure plays in apartment REITs, AEC stands out from a value perspective. It has a very attractive PE of 12, and its low price to book and revenue ratios place it in the value category.

AEC also has relatively fresh properties with an average age of 15 years and a quality rating of A-/B+. The company's presentation projects the 2012 funds from operation (FFO) to grow at 21%, which puts it at the top of all multi-family REITS.

AEC has 25% appreciation potential to meet the analysts' target price and pays a 4.70% dividend yield. Although AEC is smaller than its peers, it is aggressively expanding and adding properties.

Conclusion: The demise of the housing market, and its inability to rebound, has traditional first-time home buyers waiting and renting. Occupancy and rental rates for apartments are increasing, and revenue for REITS that own apartments is soaring. The stock prices of these REITS have been rising also, leaving few value options in this sector.

While RAIT Financial has exposure to the commercial property market, which is more reliant on a growing economy than the change in the renting paradigm, it does have some apartments. RAS also has the platform and financial stability to expand in this area, and it can garner management fees through its multi-family community management operations. It has paid a dividend fairly consistently, and recently RAS increased that by 33% to a juicy 7.3% annual yield. Finally, there has been insider purchasing of the stock which is usually a positive indicator.

In some ways, less exposure to apartments and some diversification may be a better long-term strategy. We have recently seen an uptick in house prices, and, if this becomes a trend, the renters may find some urgency to buy a home and move out. The apartment REITs are currently enjoying 95% occupancy and are making capital outlays on more properties, so they may find themselves vulnerable to a bubble deflation of their own.

The proposition of our study was to find the "last undervalued apartment REIT," and we think we have found that in Associated Estates Realty Corporation. A pure play on the apartment boom, AEC is also focusing in states that will flourish with an improving economy. The dividend has been increased this year to a plump 4.70% annual yield.

It should be noted that although the average analyst target for this company represents a 25% increase to $19.25, the PE and dividend yield at that price would still be much better than most peers, who generally have PE ratios of at least 18 and dividend yields of 3% or less. For the AEC stock to appreciate to those metrics, the price would be about $23, a 50% increase from its current level.

We think that any long-term retirement portfolio should have some exposure to the real estate market, and typically we have liked REITS, as they also provide some income. We prefer that all stock portfolios yield at least as much as treasuries, so including some good dividend stocks allows us to speculate with non-dividend payers in other sectors. If you do not have any REITS in your portfolio, you may want to see if the "Last Undervalued Apartment REIT" is appropriate for you.

Source: Discovered: The Last Undervalued Apartment REITs