SunTrust Initiates Apartment REITs - A Positive Outlook & 5 Buy Recommendations

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On July 20, SunTrust Robinson Humphries analyst Michael Lewis published a report initiating the apartment REIT sector with a positive view overall. Lewis noted, "…continued population/job growth, compelling demographic trends, favorable homeownership trends, and increasing but manageable new supply," as growth drivers. SunTrust likes the multifamily REIT sub-sector in a rising rate environment, in large part due to the relatively short nature of the leases compared to other REIT asset classes. Additionally he noted housing is a necessity, "Tenants are also renting longer, as people are marrying and having children later in life, and low affordability is weighing on home-buying," according to Lewis. SunTrust Ratings & Target Prices
SunTrust - Buy Rated REITs AIMCO
AIV
$6.2 billion cap, 3 percent yield. The SunTrust $45 PT represents a potential 12 month total return of 15.4 percent. AvalonBay Communities
AVB
$22.4 billion cap, 3 percent yield. The SunTrust $191 PT represents a potential 12 month total return of 15.4 percent. Camden Property Trust
CPT
$6.85 billion cap, 3.6 percent yield. The SunTrust $91 PT represents a potential 12 month return of 19.6 percent. Mid-America Apartment
MAA
$5.85 billion cap, 4 percent yield. The SunTrust $88 PT represents a potential 12 month total return of 18 percent. Post Properties, Inc.
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PPS
$3.15 billon cap, 3.1 percent yield. The SunTrust $65 PT represents a potential 12 month total return of 17 percent. Tale Of The Tape - 5 Buy Rated REITs
Camden Is SunTrust's Top Pick SunTrust's highest conviction idea is, "…CPT, which has one of the lowest PEG and net debt/EBITDA ratios in our office [sic] coverage universe, as well as an 8% discount to NAV." Notably, the SunTrust target price is almost 10 percent above the analyst consensus price target of $82.83. During the past 52-weeks Camden shares have traded in a range of $64.75 - $79.87 per share. Lewis sees slightly above average three and five year FAD (funds available for distribution) growth of 10.1 and 8.7 percent, respectively; driven by job growth and the second largest development pipeline. He also believes that Houston concerns are "overblown" and already priced into the CPT shares. SunTrust - Valuation Overview
Notably, Post Properties is trading at the largest discount to NAV. The lower cap rates for the three Neutral rated REITs underscore SunTrust's belief that much of the good news is already baked into the share prices. Important Metrics To Watch SunTrust estimates that there will be ~1 million new households created each year 2016 - 2020; and that "…the implied demand for multi-family rental units is about 365,000 units in 2015 and 225,000 units annually from 2016-2020."
Job growth is a key metric for investors to keep an eye on regarding demand. The number of building permits is a good indicator of future apartment supply on a market by market basis. "National building permits for housing with two or more units totaled about 412,000 units in 2014, which should be a good indicator of deliveries in 2015," according to Lewis. While noting that increasing supply could represent a risk, SunTrust believes "…there is still pent up demand from underbuilding from 2010 until now, and the stage is set for continued landlord pricing power in 2016 and beyond." SunTrust - Bottom Line SunTrust noted that top pick Camden and AvalonBay had the largest development pipelines, which should help drive FAD growth in the next couple of years; while Mid-America and AIMCO have excellent redevelopment opportunities, to augment their smaller development pipelines. Lewis also highlighted conservative balance sheets, "The apartment REITs in our coverage universe all have strong balance sheets with low leverage, ample access to multiple capital sources, little exposure to floating-rate debt and investment-grade credit ratings."
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Posted In: Analyst ColorLong IdeasREITDividendsPrice TargetInitiationAnalyst RatingsTrading IdeasGeneralReal EstateApartmentsFinancialsMichael LewismultifamilyResidential REIT'sSunTrust Robinson Humphrey
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