Rental REITs Look Ready to Reverse Course

NEW YORK ( TheStreet) -- Avoid multifamily REITs in 2012, Bank of Montreal recommends.

As the housing market looks poised to recover, with many expecting home prices to bounce off the bottom this year, BMO analyst Richard Anderson says multifamily REITs have a tough valuation to maintain.

While the next several years look to be good for the apartment rental business, Anderson said rent looks to be "plateauing" and that the chance of something " derailing momentum" is a distinct possibility.

"We are positive on the business of the multifamily REITs, but collectively negative on the stocks because we think valuations presume growth will accelerate during 2012," Anderson wrote in a note Monday. "So far, 2012 guidance has generally been in line with expectations, and absent the pizzazz of accelerating growth that we think is baked into stocks."

The multifamily sector has outperformed the REIT industry for the past three years, Anderson said, as the housing crisis led more Americans to rent as foreclosures soared and regulations regarding mortgages tightened. And the soaring rents that have accompanied the growing demand have benefited the sector as well.

Rental rates rose an average of 3.75% in 2011 while home prices dropped 1.83% for two-bedroom units in the 20 most populated U.S. metropolitan areas, according to a report by HotPads.com. Meanwhile, a report by real estate site Trulia said in January it was more affordable to buy then rent a two-bedroom home in 72% of the U.S.' largest cities.

If employment continues to expand, home prices stop declining and rates stay low -- as the Federal Reserve has implied they will at least through late 2014 -- more Americans may view 2012 as the ideal time to buy.

"In our view, part of what has elevated stocks has been the broad media attention toward the benefits of rental housing," Anderson wrote. "But if the drum starts sounding in favor of an improving single-family housing market (and we think housing will surprise to the upside in 2012), the media may stop blowing wind into the apartment business' same-store sails."

For those intent on getting a piece of the action in the rental sphere, Anderson recommends Mid-America Apartment Communities ( MAA) for its "valuation discount" and its "fast progress toward achieving an investment grade rating from S&P and Moody's."

Meanwhile, Guggenheim points to mortgage REIT as a strong alternative. Analyst Jay McCanless raised his valuation framework for the sector last month and boosted Apollo Residential Mortgage ( AMTG) and Invesco Mortgage Capital ( IVR) to buy from neutral.

This week will be a busy one for multifamily REITs, with 6 of 15 publicly-traded trusts reporting earnings. UDR ( UDR) kicked things off Monday by reporting earnings grew by 25% to 35 cents a share, beating estimates by 1 cent, while revenue came in lower than expected at $187.99 million. Analysts polled by Thomson Reuters expected income of $192.39.

After the close on Monday, BRE Properties ( BRE) is expected to report earnings of 23 cents a share on revenue of $96.37 million.

Tuesday Associated Estates Realty ( AEC) and Post Properties ( PPS) are expected to report a loss of 5 cents a share and earnings of 4 cents, respectively, according to Thomson Reuters. Apartment Investment & Management ( AIV) and Home Properties ( HME) follow up on Wednesday and Thursday.

-- Written by Kaitlyn Kiernan in New York.

>To contact the writer of this article, click here: Kaitlyn Kiernan

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