Earnings Season Wraps Up, REITs' Optimism Dwindles

ARLINGTON, VA-The last of the multifamily REITs have released their midyear earnings reports, and it’s become clear that many of these trusts seem to be more realistic about economic and market conditions. Among the apartment REITs, Post Properties and Colonial Properties Trust were the only companies that raised their 2009 funds from operations guidance significantly. The firms upped their guidance by 10.4% and 6.5%, respectively. Meanwhile, AvalonBay Communities lowered its guidance for the period by 9.1%, citing impairments and lower net operating income assumptions.

PPS also raised its guidance for 2009 same-store NOI by a percentage point, or 5.25%, followed by Mid-America Apartment Communities, which had the biggest increase, at 150 basis points. AVB and Apartment Investment Management Co. were not as optimistic; the firms lowered their 2009 same-store NOI by 175 and 150 basis points, respectively.

The other REITs in the multifamily industry also cut their estimates by an average of 100 basis points. Most firms said this was a result of lower revenue predictions, according to Wilkes Graham, senior real estate analyst with FBR Capital Markets. In terms of overall performance, UDR Inc. came out with the best results for the first six months of the year.

On the whole, apartment companies averaged a same-store NOI growth of -2.2%, Taking UDR, PPS and Essex Property Trust out of the equation, that figure would dip down to 3.1%. Those three REITs collectively posted same-store NOI growth of 200 basis points.

Associated Estates Realty Corp. and Home Properties Inc. had the greatest year-over-year revenue growth among their peers, with upticks of 2.5% and 0.7%, respectively. PPS posted the greatest decline in revenue, at -2.5%, but its ability to reduce expenses–by 6.1%, the most of any other REIT–balanced that out.

The entire apartment REIT sector, notes Graham, is expected to see same-store NOI decrease by an average of 7.3% during the second half. This would follow an actual 2.2% decline over the first six months of the year, and account for an average dip in portfolio performance by 510 basis points.

Looking forward, expectations among multifamily REITs vary greatly, though all the figures landed in negative territory. HME, for instance, expects its same-store NOI for the balance of the year to fall by 1.2%. EQR, AVB, PPS and ESS have implied second-half same-store NOI values ranging from -9% to -12%.

What’s interesting, reports Graham, is that “although UDR’s portfolio NOI is up 0.4% on a same-store basis half-way through the year, management did not change its guidance range of -3% to -5%. Thus, the midpoint is unchanged at -4%.”

Moreover, “the 440 bps at which the portfolio is outperforming full-year 2009 guidance is second only to PPS,” he adds. Meanwhile, EQR and AVB are also outperforming, but their portfolio compositions are more vulnerable to challenges as they move toward the end of year.