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Industry Note: Multifamily Real Estate Investment Trusts (MF REITs)

Industry Note: Multifamily Real

Estate Investment Trusts (MF REITs)

Positive Sector Outlook against Lackluster Macro Backdrop and Initating With A BUY Rating On AEC, APTS, and IRT

August 12, 2014

John R. Benda

212.471.8127

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Investment Conclusion. We are initiating coverage of eight Multifamily Real Estate Investment Trusts (“MF REITs”) with a Positive sector outlook. We are biased positive on the multifamily rental sector due to an unfavorable macroeconomic climate with weak job growth and persistently high unemployment, stagnant wages of those currently employed, and an overall lack of availability of mortgage credit as Federal regulators tighten banking oversight, all of which are forcing would be homebuyers’ to remain rental tenants longer. Further complicating the matter is the significant rise in secondary education costs that has saddled a generation of graduates with onerous debt burdens which postpones their first time home purchase and pushes them into rentals. The aforementioned issues are all positives in favor of multi-family rental operators as their current tenants quite simply cannot qualify for a mortgage loan; therefore, this phenomenon is allowing the MF REITs to push rental rates on higher occupancy. Higher rental rates on increased occupancy drives top-line revenue and ultimately funds from operations, “FFO”, affording operators the ability to increase dividends to shareholders and for the firms to enjoy share price appreciation as their portfolio of real estate assets increase in value. Within our current universe of eight companies, we are initially recommending investors purchase shares of Associated Estates Realty Corporation, (NYSE: AEC - BUY), Preferred Apartment Communities Inc., (AMEX: APTS - BUY), and Independence Realty Trust Inc., (AMEX: IRT - BUY).

MF-REITSource: Capital IQ, National Securities Corporation Estimates

Macro Environment Favorable to Rental vs. Ownership. The culmination of tight mortgage credit, stagnant wages, weak household formation, and relatively high unemployment, though unfavorable for the economy and nation at large, have created an almost utopian like environment for MF rental operators as aspiring buyers are forced...


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