^{MIZUHO SECURITIES USA INC.  |  US EQUITY RESEARCH}

Summary



Since our multifamily 4Q15 wrap-up report on 2/8/16, the eight stocks have rebounded as we expected -- collectively up ~12% (excluding EQR, which has been disrupted by its special dividend), or 200bps above the REIT average. Today we affirm our positive view on the roup (with spring leasing approaching), note key changes to the broader landscape (stronger oil and weaker US dollar), and make four rating changes: Raising AIV and CPT to Buy from Neutral, and lowering MAA and UDR to Neutral from Buy.

Key Points



The Changing Big Picture: At the time of our 4Q15 multifamily report, chief concerns were the increased threat of a recession, very low oil prices, and the risk of a technology-related disruption. These concerns remain on the table today, but the recent rally in oil prices (WTI is up 51% from the 2/11/16 trough) and recent decline in the US dollar, could send some incrementally positive sentiment toward the multifamily business, if not a real/tangible impact. These factors may very well me be short-lived phenomena and we aren't suggesting a sea change is underway. But they do come well timed for the group from a seasonality perspective, and could have positive implications on stock performance nonetheless.

Revised PT Methodology: In part to take some of the subjectivity out of the process, we are moving our price target (PT) methodology for the multifamily REITs away from cash flow multiples, and toward an NAV-based process. We also believe real estate prices and platform value will play an increasingly important role in stock performance, now with the sector in its sixth year of above trend growth. We expect investors to distinguish companies more on what they are worth from an asset value perspective, rather than future cash flow (which is largely known and visible at this stage).

Rating Changes: We are making four rating changes that take all of these factors into consideration, plus other company-specific issues. First, we view AIV and CPT as cheap for what each represent -- raising both to Buy from Neutral based on a 5% NAV premium target (ESS remains our other Buyrated multifamily REIT). Second, we cannot justify stretching our PTs further on MAA and UDR, following standout stock performance from these two top-tier REITs -- lowering both to Neutral from Buy despite both deserving a higher (10%) NAV premium, in our view.

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