The correlation between market fundamentals and apartment REIT performance

Abstract

This paper empirically examines the correlation between apartment REIT performance (as measured by Funds from Operations, Net Operating Income, Gross Rental Revenue, Net Income, Market Capitalization and CAP Rate) and market fundamentals (as measured by weighted average rent growth, weighted average employment growth, weighted average stock growth and weighted average excess demand). The objective of this paper is to explain the variance in historical apartment REIT performance based on historical market fundamentals. Market fundamentals are broadly defined as the employment growth, population growth, stock growth and rent growth. More detailed definitions of market fundamentals are provided within the paper. Independent variables are developed from market data collected from 57 MSAs. Using these data, weighted averages are generated in order to isolate geographical effects. These independent variables are regressed against measures of financial performance of apartment REITs as of December 31, 2000. The results show that weighted average rent growth (given NREI rent data) and growth in apartment units explain 37.1% of the variance in the percent change in FFO per unit and 37.8% of the variance in the percent change in market capitalization per unit across the sample of selected apartment REITs. Furthermore, weighted average rent growth (given government rent data) does a relatively poor job of explaining the variance in the percent change in FFO per unit.