Apartment Building REITs On Upswing, But Challenges Are Growing

by: Mick Weinstein

Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

HEARD ON THE STREET: Apartment REITs Go to Head of Class, For Now, but Tougher Tests Lie Ahead

  • Summary: Multifamily real-estate investment trusts (REITs) have performed particularly well recently, with rising rents amidst a slowdown in new home sales and a robust job market. Apartment REITs as a group reported strong operating income growth of 7.5% in the first quarter; stocks include Archstone-Smith (ASN) and AvalonBay Communities (NYSE:AVB). But the group is richly valuated -- 20 times 2007's funds from operations, as opposed to 16.6x for REITs overall -- in large part due to (1) expectations of aggressive M&A activity, and (2) high expectations for an ongoing bullish market that's by no means assured. There's growing concern that a number of factors will drive down earnings in the sector, among them: lower job growth, a cooling condo market, and oversupply of rental properties. Texas and Florida appear most vulnerable: publicly-traded Camden Property Trust (NYSE:CPT), Mid-America Apartment Communities Inc. (NYSE:MAA) and United Dominion Realty Trust (NYSE:UDR) are heavily exposed there.
  • Comment on related stocks/ETFs: The M&A activity that's sweeping the commercial REIT market has appeared in this sector as well, but may not continue. Yet if the Fed raises rates again in August and pauses for an extended period, rentals may continue to thrive, giving this group another momentum push.