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NEW YORK CITY-Halfway into the second-quarter earnings announcements, the performance results of some of the nation’s largest apartment REITs has fallen a bit below expectations–at least, those anticipated by analysts at Bank of America. The locally based firm notes that, given the results, it’s becoming harder to predict the direction public multifamily companies are headed.

Of the results that have come in so far, the pace of year-over-year, same-store revenue growth, 3.1%, declined faster than the 3.5% originally estimated. Management teams are now focused on building and maintaining occupancy as job losses and the continually slumping housing market drag down apartment owners’ pricing power.

BofA compiled the earnings of five REITs so far: Apartment Investment and Management Co., AvalonBay Communities, Camden Property Trust, Equity Residential and Essex Property Trust. The results varied among the firms. Three of them–AvalonBay, Essex and Equity Residential–were cautious about the second half and kept their same-store growth outlooks somewhat low and, therefore, achievable. The other two are more upbeat and have same-store expectations that would require further growth in the second half, achievable either through accelerating fundamentals or easing comps. “We continue to believe that with the gap between renting & owning now below the 10-year average and a 0.95 correlation between jobs and same-store NOI, fundamentals will likely weaken further,” writes BofA analysts. “This is evidenced by our forecast for a continued decline in same-store revenue growth from 3.1% in the second quarter of 2008 to 2.9% by year-end.”

For Aimco, BofA had a neutral rating. Its FFOPS of 90 cents was 10 cents ahead of expectations, though it helped to offset same-store revenue growth of just 2.1%. Analysts believe Aimco’s stock will continue to trade at a significant discount to its counterparts since it’s unclear how future performance will pan out.

The REIT did manage to shed 40 properties between April and June for $900 million. “We believe management’s massive portfolio repositioning and focus on 20 core markets will pay off longer term, but we do not expect to see a repeat of the Q2 volume near-term as buyer appetite appears to be continuing to diminish given the increasing gap between buyer/seller expectations,” say BofA researchers. Aimco management raised its full-year 2008 FFOPS guidance to the $3.33 to $3.43 range from $3.22 to $3.38. Accordingly, BofA raised its estimate to $3.33, based on 1.9% same-store NOI growth and a 3.1% average LIBOR.

AvalonBay, meanwhile, posted strong Q2 numbers–FFOPS of $1.26, 5.6% same-store NOI growth and revenue growth of 3.7%–and a three-cent increase in its full-year guidance. However, BofA was hard-pressed to find any driver that would push the shares meaningfully higher over the next few quarters. Occupancy has remained steady for several quarters at 96.5%, and rents have gone up only 1.5% to 3% over the year, and just 1% to 1.5% in the REIT’s East Coast markets. In those locations, which account for about 60% of NOI, the slumping housing market and job losses seem to be impacting the performance of AVB’s rental properties. Add new development to that stew, and earnings could drag in the near term.

Still, analysts believe AVB’s shares are fairly valued, trading at a 2% premium to its peers. And while AVB has sold about $300 million year-to-date, “We remain concerned in the company’s ability to hit its disposition guidance of $700 million to $1 billion for full-year 2008, as the appetite for deals appears to be slowing.”

Also receiving a neutral rating is Camden Property Trust. Though the REIT’s same-store NOI growth came in lower than its counterparts, “we believe the sub-par growth outlook and development risk is already largely priced in as the stock has underperformed the multifamily peers by 12% year-to-date,” write analysts. CPT stock is already trading at a 15% discount to other REITs, based on estimated 2008 AFFO–versus a 10-year average discount of 5%–and an implied cap rate of 7.5%, compared to 6% for other apartment REITs. Same-store NOI grew just 80 basis points, thanks to 1.6% revenue growth and 3% growth in expenses.

Camden’s management team attributed the underperformance to the lackluster job market and weak economy, versus pressure from the single-family market and excess supply. “While we acknowledge that job growth remains the primary driver of multifamily fundamentals, we are hard pressed to ignore the impact that 2% to 5% potential supply growth in Florida, Vegas, and Phoenix is likely having on fundamentals,” note researchers. “All is not doom and gloom, however, as Camden appears to be finally searching for a bottom.” Indeed, revenues grew in many of the firm’s markets, along with occupancies.

Equity Residential’s second quarter was healthy, with occupancy up 20 basis points to 95% and rents up 3.7%. Though the REIT has done a good job of repositioning its portfolio, focusing on high-barrier-to-entry markets, economic pressures will make it difficult for its stock to move up over the rest of the year. After being pretty optimistic in the past few quarters and coming in at the high end of the REIT spectrum with 3.75% same-store revenue growth, Equity Residential’s management seems to have changed its tune and cut revenue expectations by 50 basis points. They were equally cautious during earnings calls when looking into the second half. “While pricing power remains relatively weak, the overriding concern appears to be job growth, or more appropriately losses, which points to a first-half 2009 bottom for multifamily fundamentals, based on our estimates,” writes BofA, which expects Equity Residential to post average 3.1% revenue growth in the second half, and 3.4% for the full year.

The firm may also face fewer challenges than other apartment REITs, says BofA. It reduced its acquisition expectations from $1 billion to $750 million, despite having its coffers quite full, and just 35% of its $1.5-billion ground-up development pipeline is due for delivery in the next six to nine months. As a result, “this somewhat insulates EQR from a weak lease-up environment and leaves the company well positioned to take advantage of what will likely be a stronger operating environment with limited new supply in 2010/2011.”

Meanwhile, Essex Property Trust is BofA’s top pick when it comes to the apartment REITs. Its lower-priced West Coast portfolio of class A assets in prime locations, say analysts, “should continue to be more immune to the impact of a prolonged deterioration in single-family housing and the economy. Essex remains well positioned to retain occupancy and more of its pricing power relative to many of its peers. We continue to see less risk to underlying asset value in a rising cap rate environment.”

Essex’s second-quarter FFOPS of $1.46 was two cents ahead of estimates, and the firm’s management team expects the full-year results to range a conservative $5.90 to $6.15. That should, according to BofA, see some upside due to healthy coastal markets. Essex’s same-store revenue growth of 5.4% also remained well ahead of the expected 3% to 4.5% in the first half. NOI grew 5.9% between the first and second quarters, while occupancy rose 60 basis points over the first half of 2007 to 96.4% and rents were up 4.6% during the same period. The REIT also continues to take advantage of redevelopment opportunities within its portfolio, with $133 million in projects under way, leaving room for future rental and occupancy growth.

For the multifamily REIT sector overall, BofA has a marketweight rating. “We remain cautious over the next four to six months as we see more headwinds than upside catalysts in the wake of more moderate economic growth and limited visibility on where property-level growth and cap rates will ultimately shake out,” the firm maintains.

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