The recovery has been very kind to real estate investment trusts (REITs) that focus on apartments, according to the latest report from Moody’s Investors Service.
"We expect another four quarters of solid credit performance," says Chris Wimmer, vice president for Moody’s. He credits strong fundamentals for the good times, including high occupancy rates. On average, net operating income for apartments REITs has grown 5 percent year-over-year in each of the last six quarters, according to Moody’s.
The stock market has responded accordingly. Stock prices for apartment REITS are now more than triple their lows in the real estate crash. That’s much better than the improvement in the S&P 500, which has merely doubled, according to data from Marcus and Millichap.
So far, REITs have been using their money carefully. “The REITs have been judicious in their use of capital, funding new investments with equity or proceeds from the sale of older non-core assets,” according to the Moody’s report. “Additional supply will not become a widespread problem or a threat to REIT credit profiles in the near term… although growth will begin to level off.”
A look at the activities of leading REITs shows a strong focus on new development and redevelopment—though at least one REIT made a big play to buy an equity stake in a giant portfolio.
• Equity Residential tried to spend more than $1 billion in two attempts to buy an ownership stake in Archstone from Barclays and Bank of America this year. Archstone became a privately-held real estate company during the crash, though it still owns more than 50,000 apartments in markets across the country.
Though both deals fell through, Equity still has big development plans, including its partnership with Toll Bros. to develop 400 Park Avenue in New York City. The partners paid $134 million for the site in December 2011. As of June 30, 2012, Equity had five projects totaling 1,367 apartment units in various stages of development to be completed by March 2014.
Equity is also selling its less-expensive apartments and buying pricier units. The firm sold 12 properties over the six-month period, bringing in a total $336 million for 3,184 units, or $106,000 per apartment. Equity also agreed to sell another five communities, totaling 708 apartments. But the REIT bought five communities totaling 1,356 units—paying a whopping $694 million, or $512,000 per apartment.
• AIMCO plans to be a net seller in 2012 and “reinvest in higher rent properties,” with three acquisitions planned for this year totaling $130 million. Planned sales include more than 25 conventional properties and 60 government subsidized affordable properties. AIMCO plans to sell most, or potentially all, of its affordable portfolio in the next four to five years.
AIMCO also touts its “redevelopment strategy” in its latest financial statements. AIMCOs older assets in quality locations have appreciated over time, so that redevelopment provides returns “greater than acquisitions” with “less risk than ground up development.” AIMCO has 10 redevelopment projects planned for 2012, including five under construction at the end of the second quarter.
• Camden Property Trust also bought two new properties in the second quarter. The REIT paid $76 million for 477 apartments in Dallas, or $159,000 per unit. Camden also paid $25.3 million for 223 apartments in Atlanta, or $113,000 per unit.
Camden is also actively building, with seven development projects under construction as of June, totaling 2,208 new apartments set to open by 2014. Camden completed four development projects totaling 903 units in the first half of the year.
• AvalonBay Communities Inc. is building up a storm. As of June, the REIT had 6,114 apartments under construction at 20 communities. AvalonBay has also gathered enough land and rights to land to develop another 33 communities totaling an estimated 9,036 apartment homes, according to recent financial statements.
Compared to its development pipeline, AvalonBay acquisitions and dispositions are relatively modest. Over the last quarter, the REIT bought Eaves Cerritos in Artesia, Calif., for $195,000 per unit. AvalonBay also paid $67.2 million to buy out its joint venture partner’s interest in Avalon Del Rey, a 309-unit community in Los Angeles. The REIT sold Waterford in Oakland, Calif., and Arlington Heights, a Chicago suburb, for $174 million, or $183,000 per apartment.