Time to Bail out of Apartments REITs?

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The apartments REITs invested in the west coast were negatively affected last week. Ten out of the fifteen apartments found themselves among the lowest performing REIT stocks. Essex Property Trust was the most affected with its stock falling by 6%. The episode was targeted towards a group of stocks as it happened in a week where most REIT boats have risen. Are investors going to bail out of apartments?

Investors have gotten worried about the Northern California real estate market as signs that the same growth rates will not remain. In a recent publication, Essex, which has heavily invested in the region, mentioned that Northern California’s growth rate has slowed down from Q1 figures. Revenue growth decreased from 9.1% (Q1) to 7.7 % (April/May), which was enough to set a brief selloff last Friday and yesterday.

Equity Residential, which has invested in both New York and San Francisco, announced last week that it had lowered its guidance for same property revenue growth. The company has noticed underperformance in its San Francisco portfolio. The company’s stocks fell by almost 6%, making it the second worst underperformer last week.

Multifamily have been darlings of the apartment markets especially on the west coast. San Francisco and Silicon Valley has caught investors’ attention for its higher average income and higher percentage of families earning six figures. High employment rate has also been a highlight, especially for millennials that are interested in paying off their school loans and delaying their plans to buy their first home right now.

Since both REITs (Essex and Equity Residential) have been in the chopping block, it is not shocking that they have had poor performance this year. What is stunning is that a stronger sentiment against multifamily has been forming. We believe that this is going to become more common as some subsectors (such as multifamily) have been overvalued.

Source: Equity Residential (NYSE: EQR), Essex Property Trust Inc. (NYSE:ESS)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Apartments REITs Declined Despite Good Results

f99fb780-1e11-4b54-8c6c-e012f0fccafa.jpgIt was a bittersweet week for apartments REITs – at the same time they have posted strong fourth quarter 2015 results, they also suffered losses. On average, apartments stock prices fell by 4.1%, almost as much as timber, which fell by 4.3%. Increased supply and deceleration of the West Coast market growth are some of the reasons why the shares declined.

Together with Aimco, Mid-America Apartment and Post Properties, the following apartments REITs have released Q4-15 results:

  • AvalonBay Communities increased its quarterly dividend by 8% and released strong results. Core FFO grew 14.4% for the quarter and 11.4% for the full year. In 2016, Core FFO is expected to grow slightly below at 9%. However, this was not enough to excite the markets and its share price decreased by 3% last week. AvalonBay showed caution when referring to the West Coast. The company has seen slowing job growth and, although it still believes the West Coast will outperform the East Coast, the difference in growth will narrow.
  • Essex Property Trust, which is focused on the West Coast, fell by 5% last week. The company confirmed expectations of a less heated market on the West Coast due to a moderate job growth rate. Specifically, they believe market rents will increase by 7.5% in Northern California in 2016, down from the 2015 average of 10.9%. Nonetheless, Essex closed the year of 2015 with an impressive 15% Core FFO increase. Since its highest share price ever on December 29, 2015, the share price has declined.
  • UDR increased its dividend by 7%. Despite its strong results and not being as exposed to the West Coast as Essex, its share price fell by 5% last Friday.

Other highlights:

  • Armada Hoffler Properties increased quarterly dividend by 6%.
  • Hersha Hotels entered into a joint venture partnership with Cindat Capital to which they will sell a significant stake of seven hotels in Manhattan. The company intends to use the funds to invest in other locations and reduce its exposure to New York City. The stock went up by 7% last week.
  • After posting good Q4-15 results, DuPont Fabros went up by 4% this week. It appears that management has contained losses regarding the replacement of a bankrupt tenant.

Check the reports for Dividend Yield by Sector and Weekly Returns.

Source: AvalonBay Communities (NYSE:AVB), Essex Property Trust Inc.(NYSE:ESS), Armada Hoffler Properties, Inc(NYSE:AHH), UDR, Inc.(NYSE:UDR), Hersha Hospitality Trust(NYSE:HT), DuPont Fabros Technology, Inc.(NYSE:DFT), Apartment Investment and Manag(NYSE:AIV), Mid-America Apartment Communit(NYSE:MAA), Post Properties Inc.(NYSE:PPS)

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on February 5, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of January 31, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Multifamily REITs – Expensive Becomes More Expensive

chart01Whenever I hear news reports regarding the U.S. rental market, whether urban legend or not, I tend to remember stories about people sleeping in their cars and showering at companies based in the San Francisco Metro Area. Recently the world has learned that the same principles apply to Washington, D.C. Speaker of the House, Paul Ryan, admitted that he sleeps at his office, and showers at the gym. Well, the next thought that comes to mind is that of Essex Properties Trust.

chart03There are not many multifamily REITs that have the ability to enjoy tailwinds as well as Essex. This Palo Alto, California-based company primarily invests in the same state that it is based out of. Essex has surfed the wave of the housing rental industry with high-end apartments. The company’s success has been fueled by a combination of millennials postponing their first home purchase, shortage of supply, and a presence in housing markets that enjoy high levels of job creation. There is no wonder that Essex made it to the top in our Q2 US equity ranking amongst apartment REITs.

Q3 Performance

Year over year Q3 figures are once again proof as to why this company shines in the sector. Essex has shown a 15 percent increase in Core FFO per share, 10 percent growth in same property net operating income, 12 percent bump in total revenues, and an 11 percent rise in their dividend per share. In summary, these figures are extremely similar to the results in Q2 that catapulted the company to the top.

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Locations

Essex owns and operates 245 properties totaling 58,000 homes that are divided into three areas: Southern CA, Northern CA, and the Seattle, Washington Metro Area.

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Multifamily Fundamentals

The company’s multifamily fundamentals could not be any better for businesses that operate on the West Coast. There have been several recent reports that name Florida metro areas as the best place for job growth, however not all jobs are equal especially in salaries. That being said, San Jose, CA has emerged as a region with one of the highest paying job creation potential.

chart04The cities in which Essex operates have been flagged as areas where demand is greater than supply. There do not seem to be any signs that this will change anytime soon. For example, many of the most expensive single-family home prices are in San Francisco, San Jose, and Oakland. Coldwell Banker formulated a list of the most expensive housing markets in 2014, and an incredible 9 out of 10 were in California. Renting as opposed to purchasing homes in those areas simply makes sense at this time.

When compared with its peers, Essex enjoys the highest same store net operating growth. In Q2, the company shared that title with Trade Street Residential, however that company was acquired by Independence Trust Realty in Q3 this year.

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Debt Profile

In most cases higher levels of leverage are linked to larger levels of default, however this is not a problem for Essex. The company certainly has a great debt profile with a total debt to total capitalization of 26 percent, one of the lowest in the apartment sector. Essex maintains the majority of its debt fixed to in order to reduce interest rate sensitivity. In addition, a significant portion of the debt is unsecured. The company has received investment grade ratings by three credit agencies, and last June Standard & Poor’s reaffirmed their BBB rating, “The outlook is positive. We believe favorable multifamily fundamentals will persist over the near term, with steady demand and manageable new supply in most of Essex’s core markets.”

Threat

A potential tech bubble burst may pose a threat to multifamily properties in Northern California, an area that generates approximately 40 percent of Essex’s net operating income. At last week’s NAREIT conference, Essex made the case for themselves that consolidated industry giants such as Google, Apple, and Cisco create far more jobs than billion dollar startups. Following that thought, analysts that are concerned about the strength of the fundamentals should shift their focus away from the riskier tech companies and towards the more mature.

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Valuation

Essex’s stock yield is currently at 2.5 percent, which is below the sector median of 3.5 percent. The stock does not appear to be attractive, however it needs to be taken into consideration that its total return is close to 12 percent year to date. Having invested in a low yield stock is not necessarily a bad thing after all.

Essex’s price-to-FFO, a P/E for REITs is 24x, higher than most of the company’s peers. This is a sign that Essex has been able to weather the storm of the REIT selloffs.

Takeaway

The apartment sector has been a top performer in terms of cash flow and profitability. Essex Properties have been one of the sector’s most coveted representatives. What was an expensive stock has become more expensive. Despite a high valuation and low yield, the company has been able to deliver stellar performance to its shareholders.

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Source: Fast Graphs, Essex Properties Trust (NYSE:ESS)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Investing In Residential Real Estate Properties vs. REITs (Part 2/2)

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Click here if you haven’t read Part 1

Purchasing REIT stocks is a much less hands-on approach to real estate investment. Once the investor has decided which REIT stocks to buy, all that is required is to track the stock value, get paid regular dividends and decide when to sell. There is no financial responsibility once the initial purchase has been completed, unless the investor decides to buy additional shares. Liquidation is easy: You just pick up the phone or enter the necessary information on your PC, tablet or smartphone.

Among residential REITs, our due diligence has spotted certain highly-ranked stocks with regard to dividend-generation potential. Essex Property Trust (NYSE:ESS), which invests in apartment communities on the West Coast, has greatly exceeded our expectations. It has no sole leading indicator that outperforms its peers; however, all distributing-boost components stand out as above average. The downside is its heavy price-to-FFO — around 24× vs. the sector median of 19×.

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Note: As of 23 October of 2015

Mid-America Apartments (NYSE:MAA), currently trading at 16×, is a cheaper choice, with a dividend-generation potential somewhat above the sector median — not little for one of the best-performing REIT space sectors at the moment. Additionally, dividend yield is at par with peers’, unlike Essex’s, which has the lowest. Also unlike Essex, Mid-America invests in Southeastern and Southwestern markets — about ⅔ in large markets, the rest in secondary ones.

Mid-America released strong Q3 results on October 28. The highlight has been its 2015 FFO guidance, which, compared with 2014 FFO, increased from 7 to 9 percent.

NexPoint Residential Trust (NYSE:NXRT) and Post Properties (NYSE:PPS) are also highly-ranked and will be subject to analysis in coming posts.

Source: Fast Graphs, Essex Property Trust, Mid-America Apartments

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.