UBS on U.S. Multifamily REITs - Peaking Rent Growth Concerns Remain; Downgrading AIV & HME
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Rating Summary:
5 Buy, 16 Hold, 1 Sell
Rating Trend:
Up
Today's Overall Ratings:
Up: 12 | Down: 15 | New: 40
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UBS on U.S. Multifamily REITs - Peaking Rent Growth Concerns Remain
UBS analyst, Ross T. Nussbaum, said, "Following our September 19th downgrade of Multifamily REITs to Marketweight, we are turning incrementally more cautious as data continues to emerge showing both a slowing in the momentum of rental rate growth, and an actual slowdown in rate growth for lower priced units. We are downgrading Apartment Investment & Management (NYSE: AIV) ($23 PT) & Home Properties (NYSE: HME) ($56 PT) to Sell, the two companies in our coverage universe which primarily focus on lower-end Class B/C properties where we believe pricing power achieved over the last year will be difficult to maintain given tenant income constraints."
"Data continues to suggest peaking rents; lower-end units harder hit - While apartment landlords still have solid pricing power, and remain poised to continue raising rents for several years, data points over the past two months suggest rent growth is peaking. Market rent growth data from Axiometrics was +6.0% in July, +5.7% y/y in August, and +5.3% in September. While higher-end Equity Residential is seeing slightly better rent growth on renewals in Q4 vs. Q3, the upward momentum (ie 2nd derivative) is slowing. Lower-end AIMCO is reporting traffic down 20% Y/Y in October, with new lease rent growth slowing to +3% from +.7% in July and renewal rent growth stalling."
"Valuations have likely peaked - Over the past decade, multifamily valuations and rent growth have been strongly correlated (R-squared of 0.7). Apartment REITs are trading at a 5.2% implied cap rate and 24.3x 2012 AFFO. We believe sector multiples will either stall or contract modestly over the coming year in response to peaking rent growth. Lower quality names appear more exposed as rent growth has already slowed."
UBS analyst, Ross T. Nussbaum, said, "Following our September 19th downgrade of Multifamily REITs to Marketweight, we are turning incrementally more cautious as data continues to emerge showing both a slowing in the momentum of rental rate growth, and an actual slowdown in rate growth for lower priced units. We are downgrading Apartment Investment & Management (NYSE: AIV) ($23 PT) & Home Properties (NYSE: HME) ($56 PT) to Sell, the two companies in our coverage universe which primarily focus on lower-end Class B/C properties where we believe pricing power achieved over the last year will be difficult to maintain given tenant income constraints."
"Data continues to suggest peaking rents; lower-end units harder hit - While apartment landlords still have solid pricing power, and remain poised to continue raising rents for several years, data points over the past two months suggest rent growth is peaking. Market rent growth data from Axiometrics was +6.0% in July, +5.7% y/y in August, and +5.3% in September. While higher-end Equity Residential is seeing slightly better rent growth on renewals in Q4 vs. Q3, the upward momentum (ie 2nd derivative) is slowing. Lower-end AIMCO is reporting traffic down 20% Y/Y in October, with new lease rent growth slowing to +3% from +.7% in July and renewal rent growth stalling."
"Valuations have likely peaked - Over the past decade, multifamily valuations and rent growth have been strongly correlated (R-squared of 0.7). Apartment REITs are trading at a 5.2% implied cap rate and 24.3x 2012 AFFO. We believe sector multiples will either stall or contract modestly over the coming year in response to peaking rent growth. Lower quality names appear more exposed as rent growth has already slowed."
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