Despite housing glut, REITs prosper

Despite the nationwide glut of single-family homes selling for bargain foreclosure prices, apartments are not losing occupancy. In fact, most multifamily REITs are seeing strong growth in both funds from operations and net operating income for apartment portfolios that almost universally boast occupancies of 95 percent or better and are pushing rents with minimal move-outs.

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On a year-over-year basis, AvalonBay Communities saw FFO per share growth in Q3 of more than 19 percent, the highest growth rate in six years for the multifamily REIT that, as of the end of September, owned and managed 47,279 apartments on both coasts, with a handful in the Midwest. NOI growth was more than nine percent, the best growth rate for that metric in five years, driven by same-store revenue growth of 5.8 percent and a reduction in expenses.

The REIT’s rate of annual growth as of the end of Q3 was 130 basis points greater than in Q2 and the highest since Q2 2007. And sequential growth of same store revenues was up a healthy 2.5 percent from Q2, driven by an average rental rate increase of 2.9 percent. Every region in which AvalonBay operates posted same store rental revenue growth rates above 4.5 percent on a year-over-year basis.

The strongest growth occurred in the REIT’s technology-oriented markets-San Jose, San Francisco, Seattle and Boston- which experienced healthy increases in employment opportunities over the past six months, while job creation in the company’s other markets was generally flat.

Driving those robust market fundamentals is a record level of renter household formation that is being met with historically low levels of new apartment deliveries, said AvalonBay’s Bryce Blair during his final earnings call as the REIT’s CEO at the beginning of November. Over the past two decades, the nation’s supply of multifamily units increased by about 300,000 units per year. New completions for 2011 will total just over 100,000, he predicted.

Blair, who is retiring from the top spot at AvalonBay at the end of the year, reported that over the past 12 months, rental household formations in the country have grown by more than one million, or about three times the historical average.

“The strong level of renter household growth is being driven by job growth, which, while modest, is positive and disproportionately benefiting the younger age segments, our primary customer base; secondly, by a weak housing market, which is resulting in continued decline in the homeownership rate and continued growth in renter households, and third, population growth, primarily in the younger age segments, all of which is being met by very little new supply,” he said.

And, while AvalonBay’s same-store revenue growth has benefitted from the improving fundamentals in every region in which the REIT operates, that growth has been a bit lumpy nationwide.

Southern California, which in recent quarters was lagging in the ongoing, somewhat muted recovery, showed some momentum in Q3. AvalonBay posted an increase in same-store revenues there of almost six percent with an increase in economic occupancy of 120 basis points year-over-year. The lower half of the Golden State, home to 4,003 AvalonBay apartments as of the end of the quarter, has seen rents rise 2.5 percent since the beginning of 2011, also increasing 2.5 percent from the same period last year to an average of $1,617, up from year-to-date figure of $1,578 from Q3 2010.

Washington, D.C., which has been the apartment industry’s darling market for a number of quarters, is showing some recent signs of deceleration, but even there AvalonBay’s same store revenue growth was positive-up 1.7 percent-below the portfolio average revenue growth of 2.5 percent and down from the sequential revenue growth of 2.3 percent the market posted in the previous quarter.

“After having outperformed other markets over the past few years, employment growth in D.C. has been flat of late, as the impact of increased public spending from the fiscal stimulus has worn off. With apartment deliveries picking up in 2012 and ’13, D.C. will need healthy recovery in its employment market to sustain solid rent growth and absorb the new inventory that is on the way,” he said, referring to the fact that virtually all of the nation’s apartment REITs have plans to start or have recently started new apartment communities in and around the nation’s capital.

UDR saw a similarly healthy picture in Q3 across its coast-to-coast portfolio of 49,674 apartments. Core FFO per share rose 14 percent year-over-year in the third quarter, driven by revenue growth that averaged five percent, with modest expense growth of 1.1 percent. NOI grew an average of seven percent from Q3 2010 to Q3 2011, with the 12,400 same store units in the REIT’s Western region portfolio leading the pack with nine percent NOI growth, followed by 6.1 percent in UDR’s Mid-Atlantic and Southwestern portfolios that are home to 10,418 and 4,477 same store apartments, respectively. The Southeast region, where 12,272 of UDR’s same store units are located, saw revenue growth of 4.9 percent.

Echoing the sentiments of most of his peers, CEO Tom Toomey reported at the end of the recent quarter that “while we are in a challenging and volatile macro environment, the effects on our business have been mitigated by the combination of declining homeownership rates, a multigenerational low in new supply, low turnover and solid job growth amongst younger-aged cohorts.”

Effective rental rates on new leases in the quarter averaged 4.7 percent higher than the prior resident was paying for a UDR apartment and renewing residents paid an average of 6.4 percent higher rents on an effective basis, with little pushback.

UDR’s Senior VP of Operations Jerry Davis reported at the end of September that new lease rates across the portfolio increased 3.2 percent in October, led by San Francisco, where rents soared a whopping 12 percent, and a slightly less, but still impressive, seven percent in Austin and Dallas.

Camden Property Trust is enjoying great results in Austin and in Houston, which, Camden President Keith Oden said have all the markings of a traditional recovery. “Both cities are seeing robust economic growth along with enough job creation to move the needle.” An increase of some 65,000 jobs is expected in Houston over the coming year, with 17,000 jobs projected for Austin, he said.

“All the conditions that would historically support strong single-family home sales are in place, yet single-family home demand is still weak,” said Oden, reporting that the homeownership rate in Houston saw “a huge decline,” falling a full percentage point between the first and second quarters this year. Only 9.3 percent of residents moving out of Camden apartments in Q3 did so to buy a home in the Lone Star State’s largest city.

“In Austin, the stats are even more stark,” he continued. “The homeownership rate fell 1.7 percent between the first and second quarters of this year and move-outs to purchase a home were only 8.5 percent.” In a normal recovery, Oden explained, those two cities would see move-outs to home purchases in the 18 percent to 20 percent range, adding, “Clearly, there are other impediments to home purchases at work.”

He said he has argued for some time that single-family homes “are a poor substitute for multifamily housing” for the demographic likely to rent a Camden apartment, 40 percent of whom are under 30 years old and favor lifestyles that are not compatible with a single-family home in the suburbs.

“By and large, our residents want to be near their jobs, friends and fun,” Oden said.

He doesn’t expect the huge inventory of single-family homes for sale right now to have much impact on Camden’s portfolio performance. “A recent Federal Reserve study found that 90 percent of single-family households that went into distress and/or foreclosure ended up staying in some form of a single-family home,” he said, adding that the average family size in a single-family home is three, versus 2.1 in multifamily.

“Combine this with the fact that 95 percent of multifamily homes have fewer than three bedrooms and that the average single-family home built since 1990 is 2,100 sq. ft., whereas the average apartment is only 900 sq. ft., and it’s easy to understand why these two cohorts live where they live,” said Oden.

“We continue to believe that the singlefamily housing overhang has been, is, and will continue to have only a marginal impact on multifamily demand,” he said.

Portfolio-wide, Camden’s Q3 results were solid, with 6.3 percent revenue growth and a 7.4 percent growth rate for NOI. The company’s best performing markets were Austin, Houston, Dallas, Phoenix and Charlotte. And, every one of Camden’s markets except Las Vegas posted 5.5 percent or better revenue growth in the quarter, compared to a year ago.

Camden’s sequential revenue growth rate hit a record high at 2.1 percent, the sixth highest growth rate in the 38 quarters the REIT has been reporting that metric.

Average renewal rents were up 8.5 percent, average rents on new leases rose 3.9 percent sequentially and continued strong traffic, which was up four percent from Q3 2010, along with the improving financial condition of its residents, are supporting the REIT’s ability to raise rents aggressively.

“We continue to push rents in our portfolio and we think we’re going to be able to continue that in the fourth quarter,” Campo told analysts during the REIT’s Q3 earnings call.

Pricing is less important to today’s renter cohort than location, he explained during a recent NAREIT conference. “People are leasing our properties because of transportation issues and lifestyle choice,” he told the audience. “Housing decisions are an issue of independence, rather than an issue of price. Not everyone wants to own a home.”

“Our average resident’s financial condition continues to improve. Despite pushing rental rates, the rent-to-income ratio actually fell from 18.5 percent to 18.1 percent, due to an increase of 4.5 percent in average household income from the second quarter to the third,” Oden said.

Equity Residential also is seeing strengthening in the economic health of residents in the REIT’s Sunbelt-focused, coast-to-coast portfolio of more than 119,000 apartments in 417 properties. The REIT’s healthy fundamentals mirror its residents’ economic vitality, said CEO David Neithercut, who doesn’t expect that trend to slow any time soon.

“Despite concerns about the economy, with the expectations of slowing job growth and worries about the possibility of a doubledip recession, we are continuing to post very strong operating results,” said Neithercut. “Only two other times in our company’s history have we delivered nine percent growth in quarterly NOI,” he said.