BMO Capital Downgrades UDR On Decelerating Multifamily Rental Growth

BMO Capital has downgraded UDR, Inc. UDR shares from an Outperform to Market Perform rating, citing the slow pace of growth in the multifamily rental sector. The firm thinks this could put pressure on the outlook for the 2016&ndah;2017 period. Therefore, the target price has also been slashed from $38 to $35 on the stock.

Analyst John Kim pointed out the lowering of outlook by AvalonBay Communities Inc AVB for the full year as also leading to a downgrade. He expects other coastal apartment REITS to follow suit in reducing their forecast for the current fiscal year and sees subsequent multiple compressions.

In a research note, the brokerage said, "We believe multifamily rental growth will continue to decelerate in the near term, leading to earnings downgrades and multiple compression. At its 3Q16 results, AvalonBay decreased its 2016 same-store NOI guidance by 60bps to +4.8 percent at the midpoint, a 95bps decline from its original guidance. It also lowered 2016 FFOps guidance by 0.6 percent at the midpoint."

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BMO Capital cited CoStar estimates of 2.8 percent rental growth in the third quarter suggesting 166 basis points from the LTM averages. The firm could not find any catalyst for revision in SS NOI forecast of 6.75 percent uptick, although the company is diverse in terms of geography and price point.

In the near term, the brokerage sees increasing market vacancy rates despite the stock trading at a discount of 11 percent to the firm's NAV estimate.

The stock closed at $33.60 on Monday and at last check Tuesday was down 0.86 percent at $33.44.

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