Apartment REITs underperformed in the second quarter by 320 basis points, but the sector remains attractive despite what looks to be a looming rent slowdown, according to analysts from BTIG.
“We understand the impetus, and historically a slowdown in SSNOI growth leads to decreased relative multiples for the group. However, in moving so far in advance of fundamentals we think that the sector has become attractive even in a potentially slowing environment,” BTIG analysts Michael Gorman and Sarah Barcomb write in a new report, adding that “the group trades at 18.7x 2023 estimates heading into 2Q22 earnings, a 1.39x relative multiple compared to the long-term average premium of 1.20x. Yet 2Q22 reports for the apartment sector are likely still to be strong.”
The pair say March may have been the peak of annual rent growth (15.26%)—the metric hit 13.35% in June—but say that “doesn’t tell the full story.”
“We would note that much of the deceleration appears due to base effects rather than a fundamental slowdown,” they say. “First quarter results benefited from comping against an average 80 bps rental decline in the prior year due to the continuing effects of COVID. By contrast, 2Q22 rent growth comps against a 4.2% increase as the apartment recovery accelerated rapidly in 2021. On a month over month basis, rent growth showed no decline in strength. Indeed, June was the best month for the REIT average since September 2021.”
TTM rent growth for apartment REITs ticked up to 16.4% in the second quarter, according to RealPage, as opposed to 11.6% in Q1. Gorman and Barcomb also say they “saw no meaningful difference” between Sun Belt and coastal markets in terms of potential growth deceleration in the coming months.
“While monthly rent growth shows signs of slowing, we think this is primarily associated with the base effects of tougher comps in the prior year,” the pair conclude. “Outright rents continue to grow at stronger levels. Indeed, month over month growth accelerated in 2Q22. Given the inflationary backdrop, we think that investors should continue to look for opportunities in the apartment sector, albeit selectively.”