Multifamily REITs outperformed last year, and 2011 calls for 10% to 12% total returns for the industry overall. But with much of the sector’s ability to drive NOI growth already built into the stocks’ valuations, Analyst Andrew DiZio of Janney Montgomery Scott is focusing on REITs that are earnings growth differentiators.
“We think if supply is going to be even and job growth is going to be lackluster everywhere, and the big driver of growth has been falling homeownership rates, again we’ve seen that everywhere,” DiZio said. “So we need to invest in multifamily REITs that have some sort of differentiated drivers besides just being to able to say, ‘Well, I’m raising rents.’ I think everyone is going to raise rents somewhere close to equally.”
DiZio’s two picks for multifamily are Essex Property Trust (ESS) and Home Properties (HME). While development wanes, Essex will benefit through 2011 from the purchase of vacant buildings leased up as Class A apartments. Similarly, Home Properties‘ strategy is to purchase Class C apartments and upgrade them.
“Home is really the only multifamily REIT that really has that strategic focus, and what that has historically done is it has resulted in about an additional 100 basis points of same-store NOI above where their peers are,” DiZio said. “When you go back and you look at the last 10 years in terms of same-store NOI growth, Home Properties has actually seen the greatest average annual same-store NOI growth of any multifamily REIT over that 10-year period — 3.7%.”