3 Stocks to Dump as Apartment Market Moderates in Q1

If solid job growth in recent months indicates more household formations and raises expectations for a robust revival of the apartment market fundamentals, then we should perhaps think twice.

This is because the latest report from the real estate technology and analytics firm - RealPage, Inc.RP - states that the national apartment market indeed moderated in first-quarter 2018, with occupancy shrinking and rent growth slowing down. And there seems to be no respite from this choppy environment any time soon, with aggressive deliveries anticipated to continue through early next year too.

Of course, the first quarter marks a slow leasing period, thanks to the cold weather that inhibits shift of households and limits growth in demand. However, a whole lot of new supply is the ultimate culprit, fueling competition and curbing landlords' pricing power.

Going by statistics, the annual rent growth pace shrunk to 2.3% in Q1. This not only marked moderation from the 2.6-2.9% growth rate experienced throughout 2017 but, in fact, denoted the slowest growth since third-quarter 2010. Notably, the market had achieved an annual price increase of 5.3% in the third quarter of 2015, which represented this economic cycle's highest rent growth.

Also, occupancy level of 94.5% this March edged down from the prior-year tally of 95%, with metros having subdued construction activity faring well and recording the strongest occupancy. Although the overall occupancy level is still healthy, the deceleration suggests that a competitive leasing environment is fast building up, and any robust upturn in occupancy seems elusive in the near term.

This is quite obvious when so much of new supply is likely to come on course. According to the RealPage report, during the last half of 2017, across the nation's 150 largest metros "annual pace of completions" climbed above the 300,000-unit level. Further, through early 2019, "scheduled new supply" will keep adding on to the flow at about the same annual pace.

Admittedly, the performance of residential REITs in recent quarters has been affected by elevated supply of new units in the market. The anticipation of continued stress in the environment might impact landlords' ability to command higher rents and fill up vacant spaces. So, pressure on new lease rates, occupancy as well as retention would persist, while concession activity to lure renters is expected to remain high.

Now it's time for investors to consider portfolio reshuffling and discard some stocks from the said sector, which are unlikely to bounce back in the near term. Among these are:

AvalonBay Communities Inc.AVB , a residential REIT, which owned or held direct or indirect ownership stake in 288 apartment communities as of Dec 31, 2017. The company's shares have underperformed its industry , in the past three months. During this time period, shares of the company have lost 4.8%, whereas the industry incurred a 2.8% loss. Additionally, the stock has seen the Zacks Consensus Estimate for 2018 and 2019 funds from operations (FFO) per share being revised 1.3% and 1.6% downward in two months' time, reflecting bearish analyst sentiment.

Apartment Investment & Management Co.AIV , better known as Aimco, has ownership stakes in 182 communities across 22 states and the District of Columbia. The company's shares have declined 3.8% and underperformed the industry it belongs to, in three months' time. Further, the Zacks Consensus Estimate for 2018 and 2019 FFO per share have both been revised 0.8% downward in a month's time.

Mid-America Apartment Communities, Inc.MAA - commonly referred as MAA - enjoyed ownership stake in 100,489 apartment units as of Dec 31, 2017. The company's shares have underperformed the industry it belongs to over the past three months, with a 4.1% decline. Moreover, the stock has seen the Zacks Consensus Estimate for both 2018 and 2019 FFO per share being revised 0.8% downward in the last month.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) - a widely used metric to gauge the performance of REITs.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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