Market Overview

SunTrust Initiates On Apartment REITs With A Positive Outlook & 5 Buy Recommendations

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SunTrust Robinson Humphries analyst Michael Lewis on Monday 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. He also 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."

SunTrust Ratings & Target Prices

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SunTrust - Buy Rated REITs

  • Apartment Investment and Management Co (NYSE: 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 Inc (NYSE: 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 (NYSE: 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 Communities Inc (NYSE: 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 (NYSE: PPS) $3.15 billion 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

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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. Camden shares have traded in a range of $64.75 - $79.87 per share over the last 52 weeks.

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

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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."

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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 its 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."

Latest Ratings for CPT

DateFirmActionFromTo
Jul 2019MaintainsNeutral
Jul 2019MaintainsOverweight
Apr 2019DowngradesBuyHold

View More Analyst Ratings for CPT
View the Latest Analyst Ratings

Posted-In: Analyst Color Long Ideas REIT Dividends Price Target Initiation Analyst Ratings Trading Ideas

 

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