Apt. REITs' FFO Reflects Sector's Strength

CHICAGO—With three of the five largest apartment REITs by market capitalization having announced their second-quarter results over the past week, it becomes clearer that although interest-rate jitters have taken their toll on returns across the sector, multifamily trusts' operating fundamentals have remained strong. In the most recent of the three earnings announcements, Equity Residential posted normalized funds from operations of 85 cents per share, in line with the Zacks Equity Research consensus and seven cents per share ahead of Q2 2014.

Zacks notes that EQR's year-over-year upside in normalized FFO was driven mainly by higher same-store  year-over-year NOI, as well as NOI from non-same store properties currently in lease-up mode. Revenues were $679.1 million for Q2, up 4.1% Y-O-Y.

“Fundamental apartment demand in the coastal, high-density urban markets targeted by Equity Residential continues to benefit significantly from extremely favorable demographics, steady improvement in employment and changing lifestyles,” says David J. Neithercut, CEO and president of EQR. He's expecting  “another very strong year of operating results and value creation in 2015 and for many years to come.” Accordingly, the company has boosted its full-year FFO guidance.

The multifamily sector's second-biggest REIT by market cap, AvalonBay Communities, beat the Zacks consensus by a considerable margin. The Arlington, VA-based apartment owner/developer posted FFO of $2.15 per share, better than 10% ahead of the Zacks consensus of $1.92 and up 27.5% Y-O-Y.

CEO Tim Naughton's comments during AVB's earnings call Tuesday morning reflected these results. “2015 is shaping up to be another strong year,” Naughton said Tuesday. “Core FFO growth is expected to come in at more than 11%, driven by strong same-store portfolio performance,” external growth from development and “a strong and flexible balance sheet that is allowing us to fund and support this growth with attractively priced capital.”

Highlands Ranch, CO-based UDR on Monday posted FFO of 41 cents per share, up 6% Y-O-Y and in line with the Zacks consensus. “We are increasing full-year earnings guidance in same-store growth ranges for the second time this year to reflect the strength evident in our operations,” CEO Tom Toomey said on a Q2 earnings call Tuesday. “Additionally, we now expect full-year FFO as adjusted growth to be close to 9% as compared to 6% at the start of the year. In short, we feel great about the reminder of 2015, and while it's early we think 2016 is lining up to be another great year for UDR.” Later this week, the other two top-five apartments REITs, Essex Property Trust and Camden Property Trust, will report their Q2 results.

Last week, SunTrust Robinson Humphries analyst Michael Lewis took a favorable view of the multifamily REIT sector. Lewis' reported cited “continued population/job growth, compelling demographic trends, favorable homeownership trends and increasing but manageable new supply” as growth drivers. He added that tenants are also renting for longer periods of time, “as people are marrying and having children later in life, and low affordability is weighing on homebuying.”

Similarly, a recent report from Canaccord Genuity analysts Ryan Meliker and Michael Kodesch also points to the strength of the sector's fundamentals. "We believe apartment fundamentals will continue to drive cash flows higher and support current valuations, even during a rising rate environment," Meliker and Kodesch wrote last week. They noted, however, that while they're positive on the sector in general, "we generally prefer the student housing names to the traditional multifamily stocks. Additionally, we prefer stocks with unique external growth characteristics that will drive out-sized FFO and NAV growth. However, a continued pullback in the group would make us more constructive on other names as well."