Student Housing Among Best Turnaround Stories; Analyst Names Top REIT Stocks
August 23, 2010 - The Wall Street Transcript has just published REITs Report offering a timely review of the Real Estate sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Michael Levy was, until recently, an Analyst covering real estate investment trusts for Macquarie Research Equities. Previously, he served as Sector Head Analyst, Financial Services & REITs, at Quattro Global Capital, LLC, and as a Senior Analyst at Lehman Brothers.
TWST: What are your favorite apartment REIT names right now and why?
Mr. Levy: Right now I really like the student housing REITs, Education Realty (EDR) and American Campus Communities (ACC). I think that the fundamentals have to some degree been left behind in the recovery because they didn't get hit as hard. Given an uncertain economic outlook, all the fears of double-dips and whatnot, you don't have to worry about that with student housing. They're relatively recession resistant, and they're trading at discounts to the group average. EDR in particular is a turnaround story; so they trade at the highest implied cap rate in the group and one of the lowest price-to-AFFO multiples. ACC is doing a lot in turning around an underperforming book of business that they bought a couple of years ago, and EDR is doing a good job of increasing the occupancy at a similarly underperforming group of communities that they bought a couple of years ago.
As well, within the traditional apartment space, I'd say my favorite name right now is Camden (CPT). They started the year with occupancy that was below that of their traditional apartment operator peers. They set out a goal to increase the occupancy, and they've done a very good job of doing that. At the same time, they're raising rents pretty aggressively. I think right now their occupancy is closer to 95.5%, and they started the year at 92%, so they've done a really good job of increasing occupancy. They're raising rents, and they are in markets that, should an economic recovery continue and should a general revival of the rental markets continue, they are in some of the markets that got hit hardest and are now coming out stronger. Miami would be a good example of that.
TWST: Are there any good opportunities for short-term value buys right now? Or should investors be thinking more medium- and long-term?
Mr. Levy: Short-term value, Education Realty and Camden would be the two names that come to mind as most obvious. But I wouldn't necessarily get aggressively negative on any of these names heading into the second quarter because we have the opinion that a lot of the operators are going to raise their 2010 full-year guidance and talk pretty optimistically about the recent fundamentals.
TWST: Generally speaking, do you think the apartment REITs have appropriate leverage levels?
Mr. Levy: Yes. Theoretically, I would be more comfortable with an apartment REIT that was financed entirely through the agencies and had a higher debt-to-capital ratio at higher leverage than a non-apartment REIT with the same higher leverage that didn't finance through the agencies, simply because the availability of the capital for refinancing is more at risk than for an operator that is financed through the agencies. One of our better calls over the past year was upgrading AIMCO (AIV), which a lot of the sell side had had concerns with because there was a belief that they had high leverage and because there were concerns about their ability to refinance all their mortgages and pay off a term loan. Our findings, based on our analysis, was that the liquidity concerns were largely overblown and they would be refinancing all their maturities that were maturing through 2013 with the agencies in a relatively short period of time. So there was not nearly the same level of concern on our end with a high leverage name like AIMCO as maybe there were with some other higher-leverage, non-apartment REITs. The AIMCO shares, when we upgraded them the stock was at $6.50, and now it's trading at $21 and change. So the stock has done really well.
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