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Focus on Apartment REITS Property Magazine's Guide to REITs Apartment Valuations Winter 02
The calculation of a REIT's net asset value is more art than science. Typically, analysts and portfolio managers analyze a company's net operating income (making adjustments, such as assigning a much higher capitalization rate to fee income generated from managing properties for third-parties) and then assign a cap rate to that income based on their assessment of prevailing market values for similar properties. In part to cope with the limitations associated with the calculation of FFO, many portfolio managers and analysts calculate adjusted funds from operations, or AFFO. Some analysts, companies, and portfolio managers prefer the terms cash available for distribution (CAD) or funds available for distribution (FAD) to AFFO. More important than which acronym you adopt is how you get from FFO to AFFO. Though there is some debate, most industry veterans derive AFFO by adjusting FFO for the straightlining of rents, as well as after establishing a reserve for costs which, though necessary and routine, cannot be recovered from tenants. This includes certain maintenance costs and leasing costs. What is straightlining? Typically, a tenant's monthly rent will increase over the life of a lease. Straightlining averages the tenant's rent payments over the leasès life. Coverage Ratio is calculated by dividing a company's EBITDA by its interest expense. Risk-averse investors can scan payout ratios and coverage ratios to find companies that have a conservative balance sheet, as well as a safety net underlying their dividends. Property Magazine's Guide to REITs Apartment Valuations Winter 02
Property Magazine's Guide to REITs Apartment Valuations Winter 02
Apartment REIT Valuations by Unit (Q1-02)
IRP/Unit = Inventory in Rental Property per unit (to get cost per unit), Return = FFO/Unit divided by IRP/Unit times 4 (to get annual return) All the REITS sell at price levels higher than book value - which decreases the return for a new buyer of their shares. Given that most REITs have a 50-50 mix of debt to equity, 'Return on IRP' would suggest a Return on Equity of twice that figure. But that is not the case - based on other valuation tables done on this page. REITS that have units under construction should have relatively higher interest expenses because they would have interest expenses for both 'available for use' units and under-construction units. Units under construction did not effect IRP/Unit because only available/completed units were used in the valuations. But interest expenses (which should be higher for REITS constructing new property) had to cause a decrease in FFO because of those expenses. One thing that stands out (and to which I do not have an answer today) is AIV's low IRP/Unit number. AIV must 'manage' but not 'own' half of those 333,000 units. If so, then I would have expected a much higher reutrn on IRP. (Info listed in 'Random Info' article below says AIV had Revenue/Unit of $694/month - or $2082/quarter.) The IRP/unit numbers show a large range of valuations - showing which REIT is serving which economic section of the market. Note that ASN has a slightly higher IRP/unit than AVB, but a slightly lower Revenue/unit than AVB. I was somewhat surprised that all Return on IRP figures fell into a narrow range. Apartment REIT Random Info Various sources, Various dates EQR reported occupancy at apartments open at least one year fell to 94.2% from 94.6% a year ago. (Reuters 5-1) ASN occupancy ratio slipped to 94.9% from 95.9% a year ago. (Dow Jones Newswire 5-7) Aimco's weighted average physical occupancy for the 649 apartment communities was 92.4% for the first quarter, compared to 93.6% for the first quarter of 2001. Average monthly rent per occupied unit was $694 for Q1-02 compared to $687 in Q1-01. AVB, CPT and BRE did not list occupancy ratios. Note: From 1996 through 1998, UDR acquired other REITs, private portfolios and individual communities, growing its apartment portfolio from 34,000 to over 87,000 apartment homes by the end of 1998. Following this significant acquisition period, the Company has spent the last three years building infrastructure to catch up with the rapid growth, upgrading its portfolio and focusing on operational issues. The company currently owns over 78,000 apartment homes and is the develper for almost 450 homes under construction. (from UDRs Q1 statement) Valuations on Major Apartment REITs (listed in order of Market Cap)
Adjusted average omits numbers dramatically out of line - ex: Apart I&M's PE ratio.
Note: This table duplicates some of the data in the preceding table (ex: Return on Equity) - BUT the values of the data differ (Ex: EQR's ROE is 10.52 above - and 12.1 below). So it is posted as a reminder that different sources will give different data.
Note that ALL comparisons for return on equity is negative - do not know why. Stats for dividends at the site were also 'off'. Stats from stockselector.com 5-8 Mold & Insurance Increases Ray Smith, WSJ 4-24 Just about everywhere landlords look these days, they see the same thing: the makings of a lawsuit. The categories of potential liabilities for commercial real-estate owners - especially for apartment landlords - are growing, as are the number of tenant claims for harm or injury. And that is helping to bump up insurance premiums for apartment landlords. Premiums jumped an average 60% to 70% in 2001 from a year earlier, and 50% to 100% for policies expiring at the end of 2002, according to insurance broker Marsh. Perhaps nowhere is the growing liability problem more apparent than with mold. There are about 8,000 to 10,000 lawsuits pending nationwide for mold litigation, insurers estimate. In December, about 500 tenants of an apartment complex in New York, who alleged that mold exposure caused health problems, settled a suit against the building owner for a reported figure of as much as $1.8 million. Last November, a jury in Sacramento, Calif., awarded a family living in an apartment complex $2.7 million for health problems allegedly caused by mold exposure. More than 35 states have allowed insurance companies to exclude mold from homeowner and commercial insurance claims. If insurers stop offering coverage on mold, apartment landlords will either have to spend more to beef up their mold-mitigation programs, pay out a lot in litigation expenses - and possibly settlements - or all of the above. In 1999, the cost of liability insurance for an apartment property averaged $20 per unit with no deductible required, according to Eric Schake, a managing director with Marsh, the world's largest insurance broker, based on revenue. Marsh insures about 30% to 40% of the real-estate industry in North America. So a company with a portfolio of 5,000 units, for example, would pay a premium of $100,000. Nowadays, that cost averages $45 to $50 per unit, and requires a minimum $5,000 deductible. The average deductible is closer to $25,000, Mr. Schake says. That same company would now pay a premium of $250,000 or more. Are REITs a Good Option For Pension Funds? Dean Starkman, WSJ 4-18 Pension funds and their advisers have long argued that directly owning a portfolio of office buildings and owning stock in a company that owns office buildings are two different investments. Real-estate stocks are volatile and risky, they say, while actual real estate is stable and safe, offering diversification that a stock can't. But as publicly traded real-estate companies become more of a mainstream investment, advocates are becoming increasingly emboldened. They say direct real estate isn't as stable as it may appear. Its putative "stability" stems mostly from fact that real estate isn't bought and sold as frequently as stocks are and values are only assessed once a year - not day-to-day like REITs. The say buildings' main selling point - stability - is a function of how their value is measured, while REIT stocks have other attributes that make them more desirable. REIT advocates also argue that REITs have outperformed direct real-estate investing over the past 20 years, though much of the difference can be chalked up to the fact that REITs carry leverage of 30% or more, which adds to risk. But even if returns are the same - a Wilshire study of returns from 1991 to 2001 found that they basically were - stock advocates say direct real estate has plenty of other faults. It's expensive, requiring an office full of employees to manage it; it's illiquid, since buying and selling buildings takes months; and it lacks the accountability and transparency of public companies, whose moves are closely tracked by Wall Street analysts. The stakes in the debate are high. Public and private pension funds have about $200 billion invested in real estate, according to Jack Nowakowski, director of research for the Pension Real Estate Association, Hartford, Conn. That's more than the market capitalization of the entire REIT industry, now at about $168 billion, according to the National Association of Real Estate Investment Trusts. For now, though, direct investing in real estate dominates. [Pension funds, which have some $7 trillion in assets, typically devote about 4% to direct ownership of real estate, says Jack Nowakowski, research director for the Pension Real Estate Association in Connecticut. Their asset base grows as contributions flow into the funds, and fund managers are always looking for ways to invest it. Real estate - especially in light of investor outcomes associated with Enron and others - looks very safe right now, he says. (Shanon Simonson, San Jose Business Journal 3-11-02)] Total Return for All REIT Indices Reis.com 4-18
REITs are at a Premium Bloomberg News via LA Times 4-17 Merrill Lynch & Co. analyst Steve Sakwa said in a research note this week that REITs are, on average, offering a 6.2% dividend yield, down from 7% at the start of the year. He also said that they are trading at almost an 8% premium to their net asset value, a method commonly used to assess whether they are cheap or expensive. LA Office Vacency Rate Up Jesus Sanchez, LA Times 4-16 The greater Los Angeles office market continued to weaken during the first quarter as the vacancy rate rose in nearly all districts and most tenants remained reluctant to sign long-term leases, brokers said. The overall office vacancy rate rose to 16.29%, up from 15.45% at the end of 2001, said a report by Insignia/ESG, a commercial real estate brokerage and services firm. The vacancy rate was up substantially from Q1-01, when it stood at 12.65%. The average asking monthly rent of $ 2.28 a square foot remained unchanged from year-ago levels, according to Insignia/ESG. However, landlords have been offering a growing number of concessions to tenants - such as a period of free rent - that can result in substantial savings from formal asking rents, local brokers said. REITs Construct Strong Takeout Multiples Judy Radler Cohen, M&A Report 4-15 Takeout multiples in the U.S. real estate investment trust world, while not as rich as they were five years ago, have regained strength. REIT acquisition multiples are inching up and have been higher as of late, remarked a banker at a bulge bracket firm. And the reasons for REIT sellers enjoying higher multiples are the same reasons the Street has rewarded REITs this year in pushing up their trading multiples, he said. In 1997, a year several REIT bankers mentioned as a peak one for takeout multiples, EOP bought Beacon Properties Corp. for $ 4 billion, or 15.6 times cash flow or funds from operations (FFO). "It was expensive, but they were paying with highly valued currency, so it didn't really matter to them," said the banker. Therefore, continued the banker, it is no different now for a buyer to pay nine times FFO if its stock is trading at 10 times. And, he said, "as long as money keeps flowing in, higher trading/takeout multiples will continue." In a recent large deal, on Oct. 20, 2001, Vornado Realty Trust announced its $ 1.6 billion takeout of privately held Charles E. Smith Commercial Realty LP. That transaction, which closed Jan. 3, valued Smith at 10 times EBITDA. On Jan. 14, Westfield America Trust, Simon Property Group and The Rouse Co. entered into an agreement to take out Rodamco North America NV for 9.2 times FFO, or 6 billion euros. And in line with recent prices, General Growth Properties Inc. inked its planned $ 1 billion, or about nine-times-EBITDA, takeout of JP Realty (a mall-based REIT), on March 4. D-FW Apt. Occupancy Falling Steve Brown, Dallas Morning News 4-12 More than 4,000 renters moved out of Dallas-Fort Worth apartments in Q1 - the second consecutive quarter of large net declines in local apartment occupancy. While some move-outs were caused by the depressed job market, most were caused by renters buying homes, apartment analysts say. Builders sold 8,530 single-family homes in the area during Q1 - many to first-time buyers. "We've lost some 9,910 apartment renter households from March 2001 to March 2002," said Greg Willett, director of research products for M/PF Research. "There are not meaningful numbers of new prospects coming in (to the apartment market) because of the metro area's job losses. REITs are at a Premium Part 2 Janet Morrissey, Dow Jones Newswires 4-10 "REITs are now trading at a 10% premium to NAV (net asset value)," heralded buyside firm, Green Street Advisors of Newport Beach, Calif., in a recent report. "(And) this statistic should serve as a warning flag for REIT investors." The firm noted that it's been four long years since REITs enjoyed a premium exceeding 10%, and such premiums are few and far between to begin with. Salomon Smith Barney analyst Gary Boston estimates REITs historically trade at about a 4% premium to NAV on average. They hit bottom in the fourth quarter of 1999 at a 20% discount to NAV.Investors tend to pocket the biggest profits when they buy REITs at NAV discounts and sell them when they're trading at premiums, as opposed to simply buying and holding a REIT stock. Still, despite current NAV premiums, REITs still look like relative bargains when their pricing is compared with those in the broader stock market, analysts said. Banc of America Securities analyst Lee Schalop said NAVs are calculated using recent cash flows from the properties. And since the most recent data reflects "recessionary" conditions where rents and occupancies are falling, cash flows are low and therefore NAVs are also low. As a result, he said, current NAV levels don't truly reflect the properties' potential cash flow. Office Space Per Employee Rises Sheila Muto, WSJ 4-17 During the past decade, many companies jammed more workers into less space in an effort to keep real-estate costs in check, exacerbated by the hiring boom and demand for space during the Internet craze. Companies provided about 219 square feet of office space to each worker at the beginning of this year, down about 15% from 1992, according to Torto Wheaton Research. By year end, Torto Wheaton forecasts, office workers in the U.S. will have a little more room to spread out as the amount of space per worker inches up to 221 square feet. (In making the calculations, Torto Wheaton tracks all occupied office space, including common areas, so while the figures may show that space per worker is rising, it doesn't necessarily mean that each employee's workstation has expanded.) In large part, workers have the misfortune of their former colleagues to thank for any additional space. In many cities, the number of layoffs have outpaced the amount of office space companies have relinquished since many are locked into long-term leases. The amount of workspace per employee varies widely among cities. In Chicago space comes out to an average 186 square feet per worker, though Torto Wheaton expects that figure to rise slightly this year to 188 square feet. Los Angeles also pack in their workers tightly at 187 and Silicon Valley at 162 square feet of per worker. In New York, there's 272 square feet of office space per worker, up from 260 immediately following the destruction of 13.4 million square feet of office space on Sept. 11. Apartment Vacancies Increase Peter Grant, WSJ 4-11 The weak economy coupled with overbuilding in some regions pushed the national apartment vacancy rate up to 5.7% at the end of the first quarter, up from 4.8% the end of last year and 3.2% in Q1-01, according to figures not yet released by Reis Inc., a real-estate data company. More than 48,000 apartments were vacated in the first quarter, the largest number of move-outs since Reis began collecting data in 1980. Part of this was due to job cuts throughout the country, forcing renters to double up. The rental market also has been hurt by the home-sale market, which has stayed strong thanks to low interest rates. Office Vacancies Increase Peter Grant, WSJ 4-11 The nation's businesses vacated a vast 26.4 million square feet in the first quarter, roughly equivalent to 12 Empire State Buildings, according to Reis Inc., a real-estate research firm. This so-called negative absorption, coupled with 13.5 million square feet of new development, pushed the national vacancy rate up to 14.7% from 13.6% at the end of 2001, according to data not yet released by Reis. The current vacancy rate is the highest since the end of 1994, when it was at 15.3%. In an encouraging sign, though, the rate of vacancy growth and negative absorption is slowing from the high pace set in 2001, when technology companies and other businesses dumped a total 117.8 million square feet of space. In the first quarter, the vacancy rate grew by 1.1 percentage points, compared with the previous three quarters, when vacancy rose an average of 1.4 percentage points. Asking rents declined 2.2% in the first quarter, but effective rents, which include such landlord concessions as free rent and tenant improvements, dropped 4.3% - the biggest quarterly reduction in over 10 years. Landlords typically are quicker to increase concessions than cut rents because buyers and lenders are more likely to use rents to calculate a building's value. The growing vacancies and drop in effective rents are chipping away at the bottom line of both big and small property owners. This year, EOP, the nation's biggest office-building owner, will likely see a 3.9% drop in its adjusted funds from operations said John Lutzius, analyst at Green Street Advisors. 'Flex Space' Bob Howard, LA Times 4-23 Low-rise office space in Orange County that was filling as fast as it was being built two years ago is now 30% vacant according to at least one study, saddling that segment of the office market with one of the highest vacancy rates in Southern California. The low-rise, campus-style offices are known in real estate circles as flex office or flex-tech space because they consist of two-story concrete buildings that can readily be designed for either office or industrial use or a combination. Flex-tech space was in such demand in 1999 and 2000 that some buildings commanded rents approaching those of prestigious marble-clad high-rises, up to $2.75 per square foot per month. Flex-tech rents have since plunged by half in some buildings and by 30% to 40% in most. Flex space looked more profitable for developers, because they could build it for about $140 to $175 per square foot, compared with about $250 to $275 per square foot for high-rise space. Houston Office Vacancies Michael Brick, NY Times 4-24 Economists and real estate market analysts expect vacancy rates downtown to rise to the high teens in the next year or so from 8.87 percent at the end of last year. They have already reached 12.5 percent downtown and 15.2 percent over all, including 15.9 percent in the suburbs, by the end of March, according to CoStar Realty Information, which tracks market data. Taxes and Vacancies Neal St. Anthony, Star Tribune 4-23 Last year's property tax cuts on apartment buildings appear to be stimulating a surge in construction that should help to relieve a tight rental housing market in the Twin Cities area, where vacancy rates have dipped as low as 1.5%. The Minnesota Legislature in 2001 cut the property tax rate on multifamily housing from 2.4% of assessed valuation to 1.8% in 2002 and to 1.25% by 2004. The Legislature responded to developers and housing activists, who were alarmed by a slowdown in construction of new units. The lack of supply drove rents up at a double-digit pace to an average $816 month. New construction fell from about 6,000 units per year in the seven-county metropolitan area in the 1970s and 1980s to about 2,000 units during the 1990s. Focus on Cap-Ex Christopher Edmonds, TheStreet.Com 3-20 There is one issue that REIT investors need to focus. Capex, or the capital expenditures required to lease space in today's environment. Nobody is focused on what it is costing a REIT to release space today. If there is one thing I hear from private real estate companies more often than anything else, it is surprise at how many uneconomical leases REITs are signing in today's market. Moreover, analysts aren't focused on the capex number because it has little impact on the funds-from-operations calculation. That's OK when money is plentiful for these companies, but if that changes, capex could be the downfall of a number of REITs. (Carl Tash, the principal and portfolio manager at Cliffwood Partners, a LA real estate investment firm) Top 50 REITs / REOCs Sorted by Type and Ranked by Market-Cap NARIET.COM 4-30
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