Apartment real estate investment trusts of all sizes have been soaring lately. After several years of seeing their tenants jump ship and become home buyers, apartment owners are boosting occupancies and rents -- and recent M&A activity has piqued investors' curiosity in the sector. This added interest in the group has been highlighted by a three-way bidding war that has surfaced for one lesser-known player. The Town & Country Trust an apartment REIT with a portfolio of mostly older apartments located on the East Coast, agreed in December to be bought by a joint venture of Morgan Stanley ( MS - Get Report) and Onex Real Estate for $33.90 a share in cash. Last week, though, two new would-be acquirers decided to shake things up by putting in
competing offers, and the stakes were again raised late Wednesday. A group composed of fellow REIT Essex Property ( ESS - Get Report), AEW Capital and UBS Wealth Management increased its offer for Town & Country to $39.50 a share from last week's bid of $36. The Morgan Stanley partnership had upped its bid to $39 Wednesday, right before the Essex group topped it once again. The other bidder who submitted a competing offer last week, privately held Berkshire Property Advisors, has yet to make a move on its informal offer of $37 a share. Shares of Baltimore-based Town & Country -- which has a market cap of $698 million and just one analyst covering it -- have jumped from $29.78 before the December deal was announced to trade at $40.70 early Thursday. (The shares trade above the offer price because unpaid dividends will be added to the offer.) The company has declared the Essex group bid superior, though Morgan Stanley has three business days to match or beat the offer. Industry watchers say the deal shows that apartment properties are being more highly valued in the private market than in the public sector. Now investors are scrambling to find the next M&A candidate among apartment REITs.
"With the exception of EQR (Equity Residential Properties), AvalonBay and Archstone, I think the entire space is viewed as being vulnerable," says one veteran investment banker. "Multifamily is giving the best possible value right now. Look at growth rates in NOI. The expectations are that growth rates will hold." Shares of Home Properties ( HME) are up 15% year to date to trade around $47. The company, like Town & Country, owns a portfolio of mostly older, moderately priced apartment buildings across the East Coast. Home Properties is in the process of selling off its less-desirable Michigan properties. Besides the M&A buzz, much of the surge in apartment REIT interest has been due to improving fundamentals in the sector. As residential home sales slow, largely because of unaffordable pricing, people are turning back to renting (which is cheaper than owning in most areas). "Clearly there is a perception that the whole sector is good," says Luis Sanchez, a senior research analyst with Adelante Capital Management, which owns shares of several apartment REITs, including Essex and Home Properties. "Generally speaking, operating fundamentals have been pretty good." Sanchez says apartment REITs that have reported results recently are typically seeing growth of 6% and up in net operating income, or NOI, at communities open at least a year. Some results look even better. BRE Properties ( BRE), which owns a portfolio of West Coast apartments, earlier this week said its same-store NOI increased 12% in the fourth quarter from a year earlier. While those numbers were healthy, they are a bit distorted based on weakness the prior year. Either way, the stock is up 13% year to date. Home Properties reports its fourth-quarter earnings later this month. Analysts expect fundamentals to remain strong in the sector this year. New supply remains low, and construction starts have been minimal, partly because of an increased amount of land being used to develop for-sale condos.
"Based on our analysis of near-term supply and demand, we believe that the support forfurther fundamental improvement in the multifamily REIT sector is firmly in place, withpositive job growth projected to surpass new supply easily over the next 12 months, evenexcluding any decline in housing affordability," Friedman Billings Ramsey analyst Craig Kucera wrote in a recent report. Luxury apartment developers like AvalonBay ( AVB - Get Report) and Archstone-Smith have long been investor favorites, and shares have gotten pricey. For investors looking to capitalize on the value inherent to smaller players, Home Properties, AIMCO ( AIV - Get Report) and Mid-America Apartments ( MAA - Get Report), could be the best bets. AIMCO, which owns moderately priced apartments in 47 states, was a beaten-up name that is now turning itself around. In December, the company removed a dark cloud surrounding it when it announced that the Securities and Exchange Commission had terminated its two-year inquiry into the company's calculation of monthly rental income results in 2003. No enforcement action was taken. Early Thursday, AIMCO said its same-store NOI rose 8.7% in the fourth quarter, even as its funds from operations, a common REIT performance metric, fell 15% year over year, hurt by property damage from Hurricane Wilma. Mid-America, which owns properties in the Southeast and Texas, last week said its fourth-quarter same-store NOI increased 8%, as occupancy improved to 94.7% from 93.7% a year earlier. The company also is considered an M&A candidate. "Given MAA's smaller market capitalization, its discount valuation, its improvingoccupancy and its multifamily asset class of desirable and easily financeable asset class bypension funds, we would not be surprised at some point to see MAA sell the company to realizeadditional value for shareholders," wrote Ryan & Beck analyst Sheila McGrath in a recent report. McGrath rates the stock outperform, and her firm does not provide investment banking services to MAA.