Two of the largest U.S. apartment landlords said on Thursday they see something in their sector that's been missing for the past few years -- a little optimism about the future.
While not declaring an end to falling rents and declining net cash generated by their properties, the heads of industry leaders Equity Residential
While we expect operating performance to remain weak near term, there are signs that the weaknesses in both the economy and in some of our operating metrics are beginning to moderate, Bryce Blair, AvalonBay chairman and chief executive, said during a conference call with analysts.
Both real estate investment trusts have buildings in key U.S. cities and held conference calls following the release of their third-quarter results.
The U.S. apartment sector has been in a nosedive for more than a year, as job growth, the key driver of apartment demand, has been replaced by hemorrhaging unemployment. Because of their short leases, the apartment sector is quick to feel market softness, yet also rebounds quickly.
To keep or attract tenants, landlords have been offering months of free rent and other concessions.
AvalonBay said its properties in Washington, D.C. seem to be improving, while those in the New York metropolitan area are about the same. The West Coast is still seeing deep declines.
Overall occupancy in its buildings improved throughout the third quarter to 96.2 percent in September from 95.9 percent in August and 95.8 percent in July. Early indications show October occupancy hovered in the 96 percent territory, it said.
The fourth quarter of last year and first quarter of this year, the world fell apart. Everything just fell off a cliff, Sandler O'Neill analyst Alexander Goldfarb said. We're past that. We're not seeing the bottom just fall out anymore. The base is sort of solidifying.
During the third quarter, AvalonBay's revenue was off 4.5 percent from a year earlier for properties it has owned for more than a year. Net operating income, or cash the properties generate before financing payments are made, fell 8.5 percent.
Despite the decline, AvalonBay noted some improvements in the third quarter. Occupancy and availability have returned to historically normal ranges.
Concessions fell by half compared with both a year ago and a quarter ago. The net rent for new move-in leases was 9 percent lower than a year earlier. But that was better than the 12 percent decline in the first half of 2009.
Still, AvalonBay said it expects rents to continue to fall into 2010. For the year, AvalonBay anticipates revenue down 3.5 to 3.75 percent while net operating income will be about 7 percent lower than last year.
We're beginning to see improvements in some leading indicators, yet we still have a way to go before returning to positive revenue growth, Blair said.
Equity Residential results were better because the company was able to keep operating expenses down by more than it had expected, and it raised its full-year forecast.
Investors rewarded the stock with a 5.4 percent pop on Thursday. Shares of AvalonBay, which reported an increase in expenses due to higher-than-expected tenant bad debt, eked out a 0.6 percent gain on a day when the REIT sector rose 4.7 percent, according to the benchmark MSCI U.S. REIT Index <.RMZ>.
Equity Residential, whose founder and chairman is real estate mogul Sam Zell, said its deteriorating markets are all in the western United States -- Los Angeles, Orange County, San Francisco, Seattle and Phoenix.
Its buildings in New York City and San Diego saw flat rents, minus concessions, compared with the first part of the year. Its rents in Boston, Washington, D.C. and South Florida were higher.
For apartments the company has owned for at least a year, net operating income fell 5.8 percent in the third quarter and revenue was off 3.9 percent. Chicago-based Equity Residential said it expects revenue to be down 3 percent for 2009 and net operating income to be off by 5 percent.
Equity Residential said it expects to close on a new building as early as Friday, and AvalonBay said it plans to slightly start development again to capture what it says will be a return of demand in about two years.
(Editing by Patrick Fitzgibbons and Steve Orlofsky)