Multi-Family REITs: Which Way Is Up?

by: Judy Weil

Multi-family REITs and commercial real estate in general has survived the downturn relatively well so far. Last week, the news of a possible default on two major commercial loans that JPMorgan (NYSE:JPM) made last year hit the market.

So which way will multi-family housing go? A quick review of what's going on in the marketplace offers mixed possibilities with a tendency to the positive. Analysts are bullish on the major multi-family REITs and Fannie Mae and Freddie Mac are still funding multi-family projects. That would appear to be a plus for the REITs. But industry insiders seem to think that the worst is yet to come. Read on:

Green Park Closes on $1.5B in Fannie Mae Loans. Maryland: “Green Park Financial has closed on a $102.9-million addition to an in-place credit facility for Milestone Multifamily Investors LP--a joint venture between the Milestone Group and Invesco Real Estate. Green Park placed the facility with Fannie Mae--one of the largest transactions it has closed with the GSE this year. Andrew Tapley, SVP: This transaction… is giving Green Park a boost towards its projected goal of closing between $1.4B-$1.5 billion in Fannie Mae (FNM) loans for 2008. “Despite the agency’s difficulties, there have been no signs that it is pulling back from multifamily lending.” (Globe St., Nov. 21)

Cantor Fitzgerald Initiates Coverage on Essex Property Trust With a Buy. Cantor: "We are initiating coverage on Essex (NYSE:ESS) with a BUY rating... We feel ESS should outperform its peers due to high barrier to entry, California markets that are multifamily supply-constrained and consistently lack affordable housing alternatives, a relatively more affordable housing product and balance sheet strength/flexibility...We believe the company's current dividend yield of 6.42% is relatively attractive and secure, given the 81.9% 2009E AFFO payout ratio...Differentiating multifamily from other real estate, we feel, is available investment capital from Fannie Mae & Freddie Mac." (Street Insider, Nov. 20)

Grandbridge Provides $350 Million Fannie Mae Credit Facility For Seniors Housing Complex. “Grandbridge Real Estate Capital LLC today said it has arranged, closed and sold to Fannie Mae a credit facility worth up to $350 million for one of the largest REITs in North America. Grandbridge is a subsidiary of BB&T Corporation principal subsidiary Branch Banking and Trust Company (NYSE:BBT).” (MarketWatch, Nov. 20)

Stocks, Bonds Tumble to New Crisis Lows. “The hardest-hit market on Wednesday was for debt tied to shopping malls, office buildings and other commercial property. The value of bonds tied to such property hit new lows, pulling down shares of real-estate investment trusts, banks and insurance companies that own these securities. Bonds issued by Fannie Mae and Freddie Mac (FRE) also weakened. Yields on their two-year notes, which move in the opposite direction of prices, rose to around 1.8 percentage point above yields on Treasury securities -- a wider gap than before both companies were effectively taken over by the government in September.” (WSJ, Nov. 19)

Forest City Secures Financing for Three Projects. “Forest City Enterprises Inc. (NYSE:FCE.A) has secured financing totaling $167 million for three properties in California and Massachusetts. The projects include The Promenade in Temecula, a retail center in Temecula, CA; and the multifamily projects Presidio in San Francisco and 91 Sidney in Cambridge, MA.” (CoStar Group, Nov. 17)

Multifamily Joins REIT Stocks’ Slide in Q3. “The good news for investors in public apartment firms is that valuations for most multifamily REITs haven’t fallen as drastically as those in other segments… But apartment REIT management teams [say] the worst is yet to come for the sector… Fundamentals have deteriorated faster than expected in the third quarter; renters have become more price sensitive and are increasingly looking to move into lower-priced units or shack up with a roommate; and, on the investment front, cap rates have probably declined by 50 to 10 basis points for core product. Despite the gloomy outlook, there were some bright spots in the group. UBS recently upped Equity Residential’s (NYSE:EQR) rating from “neutral” to “buy,” calling the Chicago-based company the best positioned multifamily REIT.” (Globe St., Nov. 17)