Despite a big run this year, Apartment Investment Management's (AIV +1%) valuation "still does not reflect the attractive portfolio upgrades that AIV has completed since 2009," says analyst Nick Yulico, boosting to a Buy with $36 price target (from $32).
By his team's figures, AIV is trading at a 15% discount to its 1-year forward NAV as the market is pricing the company as if it still owned its lesser-quality 2008-era portfolio.
Yulico also suggests the possibility of a guidance hike this quarter thanks to industry data showing improving rent growth in the company's markets.
A check of apartment REITs finds the group little-changed amid a surge in multi-family starts and permits in April. Finance professor Amir Sufi says it's pretty simple - builders are well aware of the data represented in this chart showing rents easily outpacing inflation over the past few years.
Trulia's Jed Kolko says 93% of multi-family starts are intended as rentals and 89% of them were 20+ unit buildings. Both of these metrics were in the 60% range during the bubble years.
Apartment Investment Management (AIV +1.1%) is the strongest gainer in the multi-family REIT sector after Barclays has seen enough of the strong move in the stock this year, and pulls its Underweight rating on the name.
AIV is ahead 15% YTD, though still down a small amount on a Y/Y basis.
The broad averages are struggling following the jobs number, but the big decline in interest rates (the 10-year Treasury is now off 10 bps to 2.87%) has the equity REIT sector lit up bright green.
Ventas (VTR +4.4%) is having the biggest day, continuing to cruise through a couple of early-year downgrades (latest was Barclays on Wednesday). Among those also higher: National Retail Properties (NNN +3.1%), Realty Income (O +1.6%), Health Care REIT (HCN +2.5%), HCP (HCP +3.8%), RAIT Finanical (RAS +1.4%), Apartment Investment (AIV +2.9%), General Growth (GGP +1.6%), Inland Real Estate (IRC +1.5%), Government Properties (GOV +1.6%), American Campus (ACC +1.7%).
Morgan Stanley is neutral on the group despite some obvious headwinds as it's likely the bad news has already been priced into the stocks.
First, there's supply pressure - Axios estimates 323K new units in 2014 vs. the 275K historical average and 184K last year. Supply increases may not be as detrimental as thought, however, thanks to average growth of just 125K units per year from 2010-2012.
Second, there's rising rates: Morgan Stanley notes multifamily has historically been the least impacted in the REIT sector from higher rates thanks to shorter lease terms.
Valuation? Multifamily REITs trade at a 14% discount to NAV vs. a 1% premium historically. The FFO multiple is 16.1x vs. the 10-year average of 18x, and the relative FFO multiple sigma of negative 1.6x also suggests the group's undervaluation compared to the broader REIT sector.
"It’s very hard to grow in size by doing one-off property acquisitions and one-off property developments,” says REIT analyst Jeffrey Langbaum of the M&A shopping spree for apartment REITs. “If you want to grow in earnest, a big portfolio is one way to do that. You’ve had companies taking advantage of those opportunities.”
Essex Property Trust (ESS +0.3%) is the latest with its reported $5B bid ($64-$65 per share, though it would probably not be all-cash) for BRE Properties (BRE -0.1%). The deal - should it happen - would add to $22B in apartment REIT purchases in 2013. Before the report of the bid, BRE traded at a 13% discount to its NAV, and next up on the block could be Home Properties (HME +0.6%) and Post Properties (PPS +0.9%), both of which also trade as discounts. A November 22 Citi report pegs Post's NAV at $58.16 vs. a current price $46, and Home's at $73.17 vs. a current $56.
Associated Estates Realty (AEC -0.3%) is another takeout possibility, says Sandler's Alexander Goldfarb, who estimates NAV at $21.90 vs. the current stock price of $16.33.
While investors have complained about BRE management's performance, apartment REITs in general have been under pressure amid rising rates this year even as business remains strong. "You have a lot of mismatch in the valuation of apartment buildings or apartment REITs,” says “Long-term factors here are still very stacked on the side of solid growth.” says another analyst.
Others in the sector: Equity Residential (EQR +0.2%), AvalonBay (AVB +0.4%), UDR (UDR -0.7%), Apartment Investment and Management (AIV +0.4%), Camden (CPT -1.3%), Mid-America (MAA +0.4%).
Apartment Investment & Management Company is a self-administered and self-managed real estate investment trust, or REIT, engaged in the ownership and operation of a diversified portfolio of apartment properties.