US Multifamily REITs Marketweight
Analyst(s): Robert Stevenson robert.stevenson@fpk.com 212 857 6168
Initiating Coverage at Marketweight; MAA Top Pick
• Investment Thesis – Marketweight the Multifamily REITs. While acknowledging the operational challenges
facing the apartment industry in 2009, our evaluation of the risks and opportunities facing the multifamily REITs
today suggests an upside and downside for the stocks that is relatively balanced, and thus a Marketweight call
versus the overall REIT group appears warranted. We also have a Marketweight rating on the overall REIT
group versus the S&P 500.
• Individual Stock Ratings – MAA our only Outperform. We are initiating coverage of 10 multifamily REITs:
AIMCO (AIV), AvalonBay Communities (AVB), BRE Properties (BRE), Camden Property (CPT), Equity
Residential (EQR), Essex Property (ESS), Home Properties (HME), Mid-America (MAA), Post Properties
(PPS), and UDR (UDR). After factoring in their portfolios, balance sheets, and valuations, MAA is our only
Outperform-rated name. AVB, BRE, CPT, EQR, ESS, HME, and UDR are all rated In Line. AIV and PPS are
rated Underperform. Please refer to the company-specific comments for additional details.
• Why We’re Not More Bearish. We believe that the multifamily REITs’ issues are well known and that the
majority of the bad news has already been priced into the stocks. While we expect the group to remain volatile
(especially as 2009 FFOPS estimates are revised downward in the coming weeks), we expect the multifamily
REITs to perform in line with the overall REIT group over the remainder of 2009.
• Why We’re Not More Bullish. In addition to negative earnings revisions, we expect the multifamily REITs will
experience a significant deterioration in operating fundamentals over the next year because of the recession
and the continued fallout in the single-family housing market. Coupled with valuations that are not overly
cheap, we expect this will be an effective drag on stock performance.
• Where We Could Be Wrong. Our call will have been too conservative should the economy show signs of
recovery later this year, or if bankruptcies severely impact the other REIT asset classes. Conversely, we will
have been too aggressive if the recession is much longer and deeper than expected, the multifamily REITs’
access to FNM/FRE debt dries up, or the government attempts to fix for-sale housing at the expense of for-rent
housing.
• How we would play the group – MAA, EQR, and UDR. We currently see the greatest relative value in MAA,
given its solid balance sheet and dividend coverage, more defensive second-tier markets, and a reasonable
valuation; thus it is our only Outperform name. Of the larger capitalization names, we are partial to EQR and
UDR. We would also look for select opportunities on the debt side of the capital structure based on where the
multifamily REIT bonds currently trade.

SUMMARY AND CONCLUSIONS
Make no mistake – we believe the next 12-18 months are likely to pose nearly as
many challenges for the commercial real estate industry as for residential real estate.
A recession now entering its second year, mounting job losses, and a shuttered debt
market make for bad bedfellows. Layer on top of that reports that nearly $500 billion
of commercial mortgages will come due in 2009 (and nearly $3 trillion over the next
few years), and the stage appears set for additional real estate companies to hit the
proverbial wall. However, aside from a few well-documented examples, we believe
much of the carnage will be concentrated in the much more highly leveraged private
real estate market. Looking at the public U.S. REITs, leverage levels and debt
maturities appear much more reasonable (in many cases much better than in
previous downturns), and their portfolios and operations are generally stronger.
Out of the three major REIT asset classes (commercial, retail, and multifamily), we
believe the multifamily REITs are in perhaps the most unique position this cycle.
Their direct exposure to job losses, coupled with the short-term nature of their leases
usually means that they are one of the first and hardest hit asset classes when the
economy materially softens. While that has historically led to underperformance
during the early stages of the downturn, that has not been the case this time, which
we attribute largely to their access to Fannie Mae and Freddie Mac debt.
When taken as a whole, we believe the risks and rewards for the multifamily REITs in
2009 are relatively well-balanced and are therefore initiating coverage of the sector
with a Marketweight rating. We are initiating coverage on 10 multifamily REITs –
AIMCO (AIV), AvalonBay Communities (AVB), BRE Properties (BRE), Camden
Property (CPT), Equity Residential (EQR), Essex Property (ESS), Home Properties
(HME), Mid-America (MAA), Post Properties (PPS), and UDR (UDR).

MAA is our overall top pick in the group; EQR and UDR tops among the bigger
names. While at some point in 2009 we are likely to turn more constructive on the
higher beta stocks (as well as those with greater operating leverage to an improving
economy), for now our preference within the multifamily REIT space is for the more
defensively-oriented names. We currently see the greatest relative value in MAA (our
only Outperform name), given its solid balance sheet and dividend coverage, more
defensive second-tier markets, and a reasonable valuation. Of the larger
capitalization names, we are partial to EQR and UDR. Despite their more attractive
valuations, we believe multifamily REITs with high leverage, large development
pipelines, and greater exposure to the most challenging markets should largely be
avoided for now. Our best paired trade idea is long MAA short PPS, given the market
overlap. For those investors able to play across the capital structure, the publicly
traded debt of several REITs also appears attractively priced.