Apartment REITs poised for strong performance

Given the dampened prospects for U.S. economic growth over the next several years, real estate investment trusts that specialize in apartments are a smart bet for investors, says a new report. Apartment REITs are poised to increase their net asset values, thanks to strong pipelines of multifamily projects that will create additional value when they’re completed, according to a research report from Keefe, Bruyette & Woods Inc. (KBW), an investment bank that specializes in the financial services sector. Analysts Haendel St Juste and Taylor Schimkat reiterated their favorable near-term outlook for the apartment industry and said it is “our view that the apartment sector, along with manufactured housing and student housing sectors, represent a relatively attractive safe haven for REIT investors in light of slowing GDP growth and economic uncertainty.” KBW recently slashed its forecast for U.S. gross domestic product growth to 1.4% for this year, down from 2.2%, and 0.6% for 2012, down by almost three-quarters from its previous projection of 2.3%. For 2013, the firm projects GDP will expand 2.3%, a modest decline from its earlier forecast of 2.5%. “Apartment fundamentals are on a roll, making development one of the most compelling ways an apartment REIT can enhance shareholder value,” said St Juste and Schimkat in their research report, adding that they expect AvalonBay Communities Inc. (AVB) and Equity Residential (EQR) to lead the way in value creation. While they have lowered their price targets, they predict net asset values for apartment REITs will rise an average of 1%. “Our analysis indicates that most recently completed development projects are poised to generate modest to meaningful positive present value, when stabilized to current market rents, assisted by recent market rent growth improvement, lowered development costs (10-15%), low debt costs and cap rate compression over the past couple years,” said the report. Cap, or capitalization, rates are a measure of a property’s net operating income divided by its price or market value. They give investors an idea of what kind of return a property will deliver. “Our view,” said St Juste and Schimkat, “is based on our assessment that apartment pricing and demand will remain robust in the near-term, in the absence of a double-dip scenario.” Write to Liz Enochs.