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%).
Carlyle Group (CG -0.4%) is the latest Wall Street name to turn from buyer to seller in real estate, according to Robert Stuckey, the P-E firm's head of U.S. real estate. More than one-third of Carlyle's $2.3B in real estate is in apartments, and rising construction amid slower demand (in part as buying becomes a better deal) is not the best combination for higher rents.
"We went from an unusually high-growth market to a market that is growing and attractive but more stable,” says Stuckey. “Our capital was useful at the front edge of the recovery.”
Effective national rent of $1,073 per month at Q3's end is up 1% from last quarter.
Mid-America Apartment Communities (MAA) and Monster Worldwide (MWW) are switching S&P index listings; MAA will move into the S&P MidCap 400 while MWW replaces it in the S&P SmallCap 600 after the close of trading Oct. 1.
Other changes to the SmallCap 600: Newpark Resources (NR) will replace Arbitron (ARB) after the close on Sept. 27, Green Dot (GDOT) will replace Colonial Property Trust (CLP) and Santarus (SNTS) will replace Volterra Semiconductor (VLTR) after the close Oct. 1.
The REIT rout - (O, EQR, AVB, MAA, UDR, ARCP) - will likely cool property purchases from the sector as a key source of capital - share sales - has just gotten a lot costlier. Only 5 REITs completed offerings this month and Colony American Homes (CAHS, a unit of CLNY) postponed its IPO. Through June, property purchases by REITs of about $35B had about doubled the year-earlier period.
Multi-family consolidation: Colonial Properties Trust (CLP) and Mid America Apartment Communities (MAA) agree to merge, creating a larger Sunbelt-focused apartment REIT. The combined market cap of the two is about $8.6B. Under the terms, each CPT share will be converted in to 0.36 newly-issued MAA share. (PR)
Mid-America Apartment Communities Inc., is a self-administrated and self-managed real estate investment trust which owns, acquires and operates multifamily apartment communities in the Sunbelt region of the United States.