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NEW YORK CITY-The bulk of REITs’ third quarter earnings reports are in, and it looks like many apartment firms are bracing themselves for a tough year ahead. While 2010 won’t be a complete bust for the multifamily market, conditions will likely continue to decline. The good news is that the pace of the decline is moderating and fundamentals have held up better than anticipated.

While these are encouraging signs, relates Michelle Ko, a research analyst with Bank of America, “Current pricing already reflects this trend and we still don’t believe we’ve hit the trough in the cycle yet.”

By all indications, apartment REITs are readying themselves to weather the next phase of the cycle–the bottom, which is still another quarter or two away. Having traded in effective rental rates to boost occupancy, many firms are now thinking of ways to hold rental rates steady and reduce concessions, she notes. But if property owners are looking to increase rents, they’re going to have to wait for jobs to return to the market.

Unfortunately for REIT management, the depth of that recovery will probably be modest, at best; BofA’s economics team expects unemployment to remain in the 9% to 10% range through 2011.

One byproduct of the downturn is that it is separating the wheat from the chaff among multifamily REITs. Those firms with strong management teams and operating skills, with properties in stronger markets, are standing apart from their counterparts; six REITs have maintained or upped their 2009 NOI guidance, while four have lowered it.

For the sector as a whole, BofA is lowering its cap rate by about 30 basis points, due to an decrease in the cost of GSE financing of 75 to 100 basis points, to 5% to 5.5%, on average. Also contributing to the tighter cap rate environment is a lack of supply and high investor demand.

In the wake of the Q3 reports, BofA has increased its FFO per share estimates and price objectives for select apartment REITs. Individual REITs’ management teams shed some light on their 2010 strategies in third-quarter conference calls.

Apartment Investment and Management Co. hopes to balance its acquisitions with its dispositions. Between this year and next, the firm is expected to shed some $2 billion in assets–with $800 million in contract, it’s already on its way to selling $1.3 billion in properties by year’s end–and its 2010 buys will likely account for 5%-10% of its $7-billion market cap.

By 2015, Aimco could have a larger portfolio of B to B-plus quality assets, mainly in the nation’s top 20 markets. In addition to repositioning its portfolio, the firm will use the proceeds from its sales to pay the balance of its unsecured debt, due in 2011. Unfortunately, Aimco is dealing with rent declines in the Washington, DC, Boston, Philadelphia, Miami, Dallas and San Diego markets, and rents continue to be compressed in Phoenix, Los Angeles, Orlando and Tampa, FL.

BofA has lowered its 2009 FFO estimate by 18 cents to $1.32 for Aimco, due to impairment charges, and has raised its 2010 and 2011 FFO estimates by 11 and nine cents, respectively, thanks to forecasted improvements in NOI. However, the firm hasn’t altered its $10.50 NAV-derived price objective, a 5% discount to its forward NAV.

The management team for AvalonBay Communities Inc. was cautiously optimistic, anticipating a tough year ahead despite slight improvements in overall economic conditions. The firm is even starting a handful of developments now to deliver new units when the market strengthens. Rents decreases on new leases signed in the third quarter declined from Q2, a 9% to 10% drop versus 12%, while renewal rates fell by 2.25% to 3%. BRE Properties reported lower same-store NOI by half a percentage point to -6%, along with lower same-store revenues, but did not provide any specifics for this quarter’s same-store revenue of expected guidance. The firm saw its rental rates decline by 7% on new leases, 10% with concessions factored in, and 1% to 5% on renewals, with small concessions. In an effort to cut concessions out, BRE indicated it will drop market rents by 4% to 5%, but it’s still facing headwinds in Seattle, San Diego, Orange County, CA and San Francisco.

Though BofA has upped its 2009 FFO estimate by three cents to $2.48, it has lowered its 2010 and 2011 estimated by 6 cents and 12 cents to $2 and $2.02, respectively. It is also raising its forward NAV-derived price objective to $26, from $19, to reflect a lower cap rate and reduction in GSE financing costs.

Job losses in Phoenix, Atlanta, Orlando, and Charlotte, NC are hurting revenues for Colonial Properties Trust, and it’s seeing weakening performance from new projects in Las Vegas and Austin, TX. More tenants are moving out in favor of buying homes, particularly in Orlando. And for new renters, it’s seeing rates 9% lower than the prior quarter. Management expects to see the market begin to recover sometime in the summer.

For Colonial, BofA has increased its 2009 FFO estimate by eight cents to $2.06, thanks to better-than-expected results in the third quarter, and reduced its 2010 and 2011 FFO estimates by 18 and 189 cents to 73 and 76 cents, respectively, reflecting the REIT’s latest equity offering. Analysts haven’t yet changed its $9 NAV-derived price objective. Down South, supply and demand imbalances have led to reduced cap rates for Camden Property Trust. High-quality properties are selling at caps below 6%, and caps for assets in secondary markets range from 7% to 8%. Add in financing, and the internal rate of return for a property with a 6.5% cap rate would be 15%.

BofA’s Ko points out that because Camden prefers to hold rental rates steady rather than trying to boost occupancies, it will be in a better position once the economy recovers since it will not have to raise rents to catch up to the market. New tenants are leasing at a rate that’s 7% to 8% less than what rents were at the beginning of the year, and Camden properties should see more rent cuts at least through the first part of 2010. Former problem markets, such as Houston, Dallas and Washington, DC, are now stabilizing, but weakness continues in others.

Between June and September, Equity Residential sold 24 properties in the South and Southeast at an average cap rate of 7.7%. Like other REITs, the firm’s rental rates for new leases fell 9% to 10%, though renewals remained relatively steady, but it’s same store revenue is expected to be one of the worst in the fourth quarter as rents continue to fall. EQR is seeing improvement in markets including South Florida, Orlando, Boston and Washington, DC, while conditions are deteriorating throughout the West Coast, namely, Los Angeles, Orange County, San Francisco, Seattle and Phoenix. Across its portfolio, it saw a move-out rate of 14.2% among its tenants choosing to go into the homeownership market.

Pricing is still an issue for Essex Property Trust when it comes to acquisition opportunities. In the fourth quarter, the firm will probably have $60 million to $70 million in acquisitions under contract, which it would buy at 5.5% cap rate, adjusted for financing, resulting in a 10% cash-on-cash return. It doesn’t expect to start any more developments this year; in fact, it makes more sense to simply buy properties. The REIT believes the market has already bottomed, and upped its market rents by 40 basis points in the third quarter. It will likely hold rents at their current level, or bump them up slightly, for the foreseeable future. Essex revised its same-store 2009 metrics and same-store revenue up by 50 basis points each to -5.5% and 3.5%, respectively.

The research team at BofA increased its 2009 and 2010 FFO estimates for Essex by 49 and 25 cents to $6.79 and $4.74. It also raised its forward NAV-derived price objective to $69 from $63.50, reflecting a lower cap rate.

Performance throughout Post Properties Inc.’s portfolio varied by market. For instance, Washington, DC, with its low supply and high employment rate, was the REIT’s top performer, while conditions remain difficult in Charlotte, NC, Atlanta and New York, though concessions are starting to improve in the latter market. Job losses are hitting Houston, Tampa and Orlando, FL are nearing a bottom, and new product deliveries are starting to put pressure on multifamily assets in Dallas, Austin and Houston. Across the US, the Post’s year-to-date blended average cap rate came in at 7.6%.

While they held its 2009 FFO estimate relatively steady–a one-cent uptick, BofA analysts pushed Post’s 2010 FFO estimate down by 10 cents to 86 cents and its 2011 number up six cents to $1.20. The NAV-derived price objective went up by $1 to $14.50, due to a lower cap rate.

And UDR Inc.’s management reported conservative same-store guidance of -3% to -5% for 2009. Investor demand is driving cap rates down, particularly for quality assets in premier markets; UDR sold a class A property in Washington, DC at a 6% cap rate after fielding offers from 30 bidders, particularly institutions and high net worth private players.

Like with Post, BofA held its 2009 FFO estimate for UDR somewhat steady, with a one-cent increase to $1.15, and it expects the REIT’s 2010 and 2011 FFO to rise by six cents per year. Meanwhile, it adjusted UDR’s forward NAV-derived price objective up by 50 cents to $12.

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