Company Reports

We believe that there are several attractive opportunities across the US REIT sector for investors to consider. Following the recovery of many REIT sector fundamentals from the pandemic by mid-2021, we viewed the REIT sector as fairly valued through early 2022. However, the past two years have seen the rapid rise in interest rates and a slowing economy, which has led to major valuation declines across the sector. Our analysis of the REIT sector over the past 25 years suggests that the relative stock performance of REITs is negatively correlated with interest rate movements. The second and third quarters of 2023 saw large interest rate increases with the 10-year Treasury approaching 5%, which led to the sector underperforming. This occurred even as many REITs reported same-store net operating income, or NOI, growth at historical highs in 2022 due to high inflation. Higher interest rates, lower liquidity, tighter capital market conditions, and decelerating same-store NOI growth all led to a significant correction in the stock price for many REITs.

New single-family home sales increased 4% in 2023 to 666,000 units, as homebuilders capitalized on a dearth of existing for-sale inventory while also offering more sales incentives, cutting base home prices, and building smaller homes to improve affordability. By the fourth quarter of 2023, homebuilders began to pull back on sales incentives as the average 30-year fixed mortgage rate retreated from 7.62% in October 2023 to 6.64% in January 2024. However, mortgage rates have trended higher recently, and we now forecast the average 30-year fixed rate will be 6.50% in 2024, up from our previous forecast of 6.10%. Even so, that’s lower than the 2023 average of 6.81%, and we think homebuilders won’t hesitate to increase sales incentives if needed; they still enjoyed above-average gross profit margins last year with elevated incentives. As such, in 2024, we think new-home sales will increase 9% to 730,000 units and single-family housing starts will increase 4% to 985,000 units. However, we expect total housing starts will decline roughly 5% to 1,345,000 units due to a 23% decline in multifamily starts to 360,000 units, as there’s currently approximately 1,000,000 multifamily units under construction—the largest backlog in at least 50 years.

Apartment Income REIT has significantly slimmed down the portfolio of multifamily buildings it owns over the past decade to just its best assets. The company invests in metropolitan markets with solid demographic trends that allow the company to maintain high occupancies and pass along consistent rent increases. Demand for apartments depends on economic conditions in their markets like job growth, income growth, decreasing homeownership rates, high relative cost of single-family housing, and attractive urban centers. Apartment Income's portfolio is typically more suburban than its multifamily REIT peers, which has put it at a slight disadvantage over the past economic cycle but should favor growth in the company as millennials move from the urban centers out into the suburbs over the next few years. The company regularly recycles capital by selling noncore assets or markets and uses the proceeds to fuel targeted acquisitions with strong growth prospects, a strategy that has improved the company's performance over the past few years.

Fourth-quarter results for no-moat Apartment Income were relatively in line with our estimates, giving us confidence in our $50 fair value estimate. Same-store occupancy improved significantly, up 200 basis points sequentially, to 97.3%, which came in well ahead of our estimate of 95.9%. Rental rate growth was solid at 5.7%, in line with our estimate of 5.9% growth. As a result, same-store revenues were up 6.2% year over year in the fourth quarter. Expenses were only up 0.3%, leading to same-store net operating income growth of 8.1% that was in line with our estimate of 8.6% growth. Apartment Income REIT reported pro forma funds from operations, or FFO, of $0.64 per share, which matched our estimate for the fourth quarter and was 8.5% higher than the $0.59 figure the company reported in the fourth quarter of 2022.

New-home sales have rebounded since the spring of this year as sales incentives and price reductions have attracted buyers who have fewer options in the supply-constrained existing-home market. That said, homebuilder sentiment data tells us that smaller builders remain cautious. Even so, we forecast single-family starts to increase by 3% in 2024, to 0.92 million units. However, we project this increase in single-family starts will be more than offset by a 24% decline in multifamily starts, to 0.36 million units. Multifamily construction has been robust for the past three years, but a record construction backlog and higher construction and financing costs have tamed developers' appetite for new multifamily projects.

Apartment Income REIT reported third-quarter results that were relatively in line with our expectations, leading us to reaffirm our $50 fair value estimate for the no-moat company. Same-store occupancy fell 20 basis points sequentially and 60 basis points year over year to 95.3%, worse than our assumption of a 20-basis-point sequential improvement. However, rental rate growth of 7.5% was higher than our estimate of 4.7% growth for the third quarter, leading to same-store revenue growing 6.8%. Same-store expenses were up 8.0% in the quarter, so the company reported same-store net operating income growth of 6.3% that was slightly better than our estimate of 5.9% growth. Apartment Income REIT reported pro forma funds from operations of $0.64 per share in the third quarter, a penny better than our $0.63 estimate.

Apartment Income REIT has significantly slimmed down the portfolio of multifamily buildings it owns over the past decade to just its best assets. The company invests in metropolitan markets with solid demographic trends that allow the company to maintain high occupancies and pass along consistent rent increases. Demand for apartments depends on economic conditions in their markets like job growth, income growth, decreasing homeownership rates, high relative cost of single-family housing, and attractive urban centers. Apartment Income's portfolio is typically more suburban than its multifamily REIT peers, which has put it at a slight disadvantage over the past economic cycle but should favor growth in the company as millennials move from the urban centers out into the suburbs over the next few years. The company regularly recycles capital by selling noncore assets or markets and uses the proceeds to fuel targeted acquisitions with strong growth prospects, a strategy that has improved the company's performance over the past few years.

The share prices of U.S. real estate investment trusts have fallen by approximately 30% from their 2021 highs because of higher interest rates and stress in some commercial real estate sectors. We think that the correction is overdone and the current valuations offer an attractive entry point for patient investors. Our core REIT coverage is trading at a discount of approximately 25% to our fair value estimate. We estimate that the average REIT within our U.S. coverage is currently trading at a dividend yield that is 126 basis points higher than the historical average. We see marked differences in valuation across different REIT sectors in the United States. For instance, the industrial sector is fairly valued, with stock valuations already accounting for future growth, but other sectors like offices, hotels, and malls are trading at attractive discounts.

New-home sales have remained resilient despite worsening housing affordability in recent months amid rising mortgage rates, with little relief in home prices in most markets. Year-to-date new-home sales through July were about even with the year-ago period, compared with a 22% decline in existing-home sales. The key to homebuilders’ relative success this year has been their ability to improve affordability by offering sales incentives, lowering base prices, and building smaller homes. According to the National Association of Home Builders, the share of builders offering incentives was 55% in August, up from 52% in July but down from 62% last year. One fourth of homebuilders reported lowering base prices by 6% on average. Homebuilders have also boosted production of speculative homes to capitalize on the tight supply of existing for-sale homes. Spec building also helps builders better manage construction cycle times and costs.

Second-quarter results for Apartment Income REIT were mixed compared with our expectations, though we didn't see anything in the quarter that would materially change our $52 fair value estimate for the no-moat company. Same-store occupancy fell 190 basis points sequentially and 110 basis points year over year to 95.5% in the second quarter, well below our estimate of flat occupancy. However, average rental rates improved 10.0% year over year, above our estimate of 6.1% growth, leading to same-store revenue growth of 8.8% that beat our 7.8% growth estimate. Additionally, same-store operating expenses only increased 4.1% in the second quarter, below our estimate of 6.0% growth, leading to same-store net operating income growth of 10.6%, which was ahead of our 8.4% estimate. Apartment Income REIT reported pro forma funds from operations of $0.58 per share in the second quarter, which is $0.02 below our estimate of $0.60 for the quarter.

Through the first four months of 2023 (typically viewed as the “spring selling season” for homebuilders) new home sales significantly outperformed existing home sales. Indeed, April year-to-date new home sales declined roughly 10% year over year compared to over a 26% decline for existing home sales. New home sales improved sequentially during the first four months of the year, and April sales increased 11% year over year, albeit on an easy prior-year comparison (April 2022 new sales were down 24% year over year).

Apartment Income REIT reported first-quarter results that were in line with our expectations, leading us to reaffirm our $52 fair value estimate for the no-moat company. Same-store occupancy was up 50 basis points sequentially to 97.5%, slightly better than our 97.2% estimate. Average rental rates grew 10.6% year over year, also slightly better than our estimate of 9.5%, and led to same-store revenue growth of 10.1%. Same-store expenses grew only 3.3% in the first quarter, though some expense items saw large increases, like utility costs rising 10.1% and insurance costs rising 38.8%. As a result, same-store net operating income was up 12.7% in the quarter, slightly better than our estimate of 10.9%. Despite the better-than-anticipated portfolio results, Apartment Income REIT reported pro forma funds from operations of $0.55 per share in the first quarter, $0.04 lower than our $0.59 estimate, as it incurred higher-than-anticipated property management expenses.

Apartment Income REIT has significantly slimmed down the portfolio of multifamily buildings it owns over the past decade to just its best assets. The company invests in metropolitan markets with solid demographic trends that allow the company to maintain high occupancies and pass along consistent rent increases. Demand for apartments depends on economic conditions in their markets like job growth, income growth, decreasing homeownership rates, high relative cost of single-family housing, and attractive urban centers. Apartment Income's portfolio is typically more suburban than its multifamily REIT peers, which has put it at a slight disadvantage over the past economic cycle but should favor growth in the company as millennials move from the urban centers out into the suburbs over the next few years. The company regularly recycles capital by selling noncore assets or markets and uses the proceeds to fuel targeted acquisitions with strong growth prospects, a strategy that has improved the company's performance over the past few years.

U.S. home sales slowed significantly in 2022 as rising mortgage rates and elevated home prices made homeownership less affordable for more Americans. By mid-2022, the average 30-year fixed mortgage rate had increased roughly 300 basis points year over year to over 6%. According to estimates from the National Association of Home Builders, this rate increase priced out more than 16 million households. We also think higher rates and general economic uncertainty caused some qualified prospective buyers to move to the sidelines. All told, 2022 new- and existing-home sales declined 17% and 18% year over year, respectively.

Fourth-quarter results for Apartment Income REIT were in line with our expectations, leading us to reaffirm our $52 fair value estimate for the no-moat company. Same-store occupancy rebounded 120 basis points sequentially in the fourth quarter to 97.1%, slightly better than our estimate of 96.6%. Average rental rates increased 11.0% year over year, leading to same-store revenue growth of 9.9% that was relatively in line with our estimate of 10.5%. Same-store expenses actually declined 0.1%, better than our estimate of a 2.8% increase, as onsite operating expenses fell 0.3% and insurance costs declined 19.4%. As a result, same-store net operating income grew 13.5% in the fourth quarter, in line with our estimate of 13.3%. Apartment Income REIT reported pro forma funds from operations of $0.59 in the fourth quarter, $0.02 better than our $0.57 estimate and $0.03 ahead of the $0.56 reported in the fourth quarter of 2021.

After analyzing recent United States housing market data and industry commentary, we've made downward revisions to our near-term outlook for new residential construction, home prices, and repair and remodel spending.

Apartment Income REIT has significantly slimmed down the portfolio of multifamily buildings it owns over the past decade to just its best assets. The company invests in metropolitan markets with solid demographic trends that allow the company to maintain high occupancies and pass along consistent rent increases. Demand for apartments depends on economic conditions in their markets like job growth, income growth, decreasing homeownership rates, high relative cost of single-family housing, and attractive urban centers. Apartment Income's portfolio is typically more suburban than its multifamily REIT peers, which has put it at a slight disadvantage over the past economic cycle but should favor growth in the company as millennials move from the urban centers out into the suburbs over the next few years. The company regularly recycles capital by selling noncore assets or markets and uses the proceeds to fuel targeted acquisitions with strong growth prospects, a strategy that has improved the company's performance over the past few years.

Apartment Income REIT reported third-quarter results that were in line with our expectations, leading us to reaffirm our $53 fair value estimate for the no-moat company. Same-store occupancy fell 90 basis points in the third quarter to 95.9% and is now 220 basis points below the high point of 98.1% occupancy that the company saw in the first quarter of 2022. Despite the occupancy drop, average rental rates increased 10.3% year over year, leading to same-store revenue growth of 9.6% in the third quarter. While utility costs increased 16.3% and insurance costs increased 50.0% in the third quarter, the company managed to reduce direct operating costs by 4.0%, leading to same-store operating expense growth of just 0.1%. As a result, same-store net operating income grew 13.3% in the third quarter, slightly ahead of our estimate of 11.4% same-store NOI growth. Apartment Income REIT reported pro forma funds from operations of $0.58 per share in the quarter, in line with our expectations.

With the United States experiencing historically high inflation growth, many investors are wondering if real estate provides a natural hedge against inflation and if the REIT sector should therefore outperform the broader equity market. Many REITs in our coverage have reported rent and revenue growth at or near historic peaks over the past several quarters, with inflation being one of the largest reasons for the high growth. Given this and some historical evidence that REITs outperformed in the 1970s and early 1980s when inflation was similarly high, some investors are questioning why REITs have not outperformed in 2022.

Second-quarter results for Apartment Income REIT were ahead of our estimates, though we don’t see anything from the quarter that would materially change our $53 fair value estimate for the no-moat company. Same-store occupancy fell 130 basis points sequentially to 96.8%, which is below our estimate of flat occupancy in the second quarter but is a 160-basis-point year-over-year improvement compared with the second quarter of 2021. Despite the sequential occupancy decline, average rent improved 9.8% year over year, which was slightly better than our estimate of 9.4% rent growth and drove the company’s same-store revenue growth of 11.6% in the quarter. Meanwhile, same-store expenses grew only 0.1%, which was better than our estimate of 3.2% expense growth. As a result, Apartment Income REIT reported same-store net operating income growth of 16.4% in the quarter. The strong growth across the company's portfolio led to pro forma funds from operations growth of 26.8% to $0.66 per share in the second quarter, which was better than our estimate of $0.58.