High Quality Multi-family REITs - EQR, CPT, ESS, AVB

[thepupil]

Mentioned on other threads by me and a few others, but I think apartments deserve their own thread, but don't think they all individually deserve their own thread.

 

No hard science to my picks here, diversification is protection against ignorance and when these stocks fell at the pace they fell, I'm not going to kid myself and say I went through every companies filings or built up a property by property, city by city valuation.

 

Broadly, these companies have

a) very low leverage, thus a decline in share price is a decline in enterprise value/asset value

b) high occupancy in (mostly) higher barrier to entry high housing cost markets

c) high income yuppie renters (example: EQR's average income renter is makes $165K, that's not a waitress or uber driver), does a coder at GOOG lose her job from COVID-19, what about a big law associate in DC? maybe a financier in NYC does.

d) cap rates blew out to 6% or more (this changes by the day); investment grade spreads have blown out as well, but these have well-termed out debt. once credit stabilizes, these guys are going to print some incredibly low-cost debt as multi-fam debt (agency and corporate IG) will in my view be a safe haven in an otherwise tumultuous commercial real estate credit world (hotels, some office)

e) 4-5%+ divvy yields that appear sustainable.

 

Risks:

a) rents will surely come down as new supply hits a weaker economy (but these buildings will remain full, in my view)

b) I think one should haircut NOI 5-15%, not 30%

c) these weren't cheap beforehand from a public or private market perspective; i was previously an apartments hater as I thought it was one of the steamier parts of the real estate and real estate finance world. a 30%-40% move down in prices (which at low leverage flows straight to the asset level) makes me an apartment lover (in basket form at 10-15% lower prices than today's levels, but we'll probably get a few more bites at the apple)

 

 

[matts]

How do you think about how much rents these guys will be able to collect next 6 months or whatever?

 

i can see on social media people are passing around the message "don't pay rent even if you still have a job. they can't evict you"

 

I imagine lots of people who could probably afford it will be able to come up with a decent excuse of how the virus has affected them.

 

HUD mortgages can be deferred but only half the multi-res mortgages in the US are HUd guaranteed.

 

Have you looked at BSR REIT? TSX listed in USD (HOM.U.TO), but is pure sunbelt B apartment reit. The listing has historically led to a discount to peers.

 

Also listed on the TSX, Tricon (TCN.TO) has one of the largest portfolios of rental Single-family homes. how would you rate the economic impact to rents, apartments vs SFH rental?

 

Thanks. I'm also interested in owning RE here and your posts have been invaluable.

 

 

 

[matts]

Also, wanted to bring up Senior living companies. Not multi-family, but also essential RE

 

something like FVE of DHC. There are also some Canadian listed ones. EXE, SIA, CSH.UN

 

do people think demand will go up after the initial panic is over? Are seniors not safer in a home, where the policies are now changing (limit visits, screen everyone coming in/out) vs having a grandparent living with you and a bunch of kids?

 

I think covid will be with us for a long time and in that case the demand for retirement home/assisted living will go up.

 

thoughts?

 

[CorpRaider]

I wonder if there will be a lot of shadow-supply/AirBNBs/VRBOs coming on the market to drive down rents.  I keep seeing stories about people who are trying desperately to move their airbnbs to longer term rentals, some pretty troubling stories about people who are engaging in "rent arbitrage"  sounds like of like wework, but worse; of course that's all just narrative/anecdote.

[thepupil]

I wonder if there will be a lot of shadow-supply/AirBNBs/VRBOs coming on the market to drive down rents.  I keep seeing stories about people who are trying desperately to move their airbnbs to longer term rentals, some pretty troubling stories about people who are engaging in "rent arbitrage"  sounds like of like wework, but worse; of course that's all just narrative/anecdote.

 

 

stranger things have happened, but it's tough to sneak a pet at these types of institutional quality apartments, much less an Airbnb. The doorman/doorwoman/doorpeople? always knew every resident at each of my yuppie apartments. it may certainly increase overall supply, but I don't think there'd be material Airbnb arbitrage folks at EQR's type of properties.

 

 

matts, I can't answer your question with respect to how many people will stop paying rent. My anecdotal gut is a very small number. I am a member of the yuppie scum class; all my friends are paying their rent, have their jobs, and are just working remotely from ther $2/3/4K a month apartment buildings.

 

haven't looked at BSR, but will.

 

I just don't really know how to underwrite senior properties. to continue the anecdote fun, I used to trade agency CMBS which is backed by apartments and skilled nursing facilities/senior living. The financials on the senior living/nursing homes was just plain scary, low margins, low DCSR's, medicare volatility/noise. I am sure there are lots of opportunities and I'm missing A LOT of nuance between all the different property types (a 55+ community is very different than hospice/nursing home), but I'm not going to spend time learning about that stuff at this time.

 

Easier to rent to my fellow yuppie scum, I understand that market better...though these prices are peskily going up by the day. up 7% intraday on some of my adds today.

[johnny]

There's just so much emotion-driven anti-landlord sentiment. I don't get putting the best cap rates in the entire real estate world on what I think has the most frightening populist tail risks. You guys need to understand: 75% of dem primary voters under 40 voted for Bernie Sanders. Have you ever listened to Chapo Trap House? When every underemployed 25 year old is on Facebook leftist groups sort-of-joking about putting their landlords into gulags, doesn't this make you think maybe we should be adding a few hundred bps to our required yield to compensate for guillotine risk?

 

Real estate is the ultimate rule-of-law bet. I've seen way more deterioration in the social contract on that (from both parties) over the past few years than seems priced in by a 20% move.

[matts]

I wonder if there will be a lot of shadow-supply/AirBNBs/VRBOs coming on the market to drive down rents.  I keep seeing stories about people who are trying desperately to move their airbnbs to longer term rentals, some pretty troubling stories about people who are engaging in "rent arbitrage"  sounds like of like wework, but worse; of course that's all just narrative/anecdote.

 

 

stranger things have happened, but it's tough to sneak a pet at these types of institutional quality apartments, much less an Airbnb. The doorman/doorwoman/doorpeople? always knew every resident at each of my yuppie apartments. it may certainly increase overall supply, but I don't think there'd be material Airbnb arbitrage folks at EQR's type of properties.

 

 

matts, I can't answer your question with respect to how many people will stop paying rent. My anecdotal gut is a very small number. I am a member of the yuppie scum class; all my friends are paying their rent, have their jobs, and are just working remotely from ther $2/3/4K a month apartment buildings.

 

haven't looked at BSR, but will.

 

I just don't really know how to underwrite senior properties. to continue the anecdote fun, I used to trade agency CMBS which is backed by apartments and skilled nursing facilities/senior living. The financials on the senior living/nursing homes was just plain scary, low margins, low DCSR's, medicare volatility/noise. I am sure there are lots of opportunities and I'm missing A LOT of nuance between all the different property types (a 55+ community is very different than hospice/nursing home), but I'm not going to spend time learning about that stuff at this time.

 

Easier to rent to my fellow yuppie scum, I understand that market better...though these prices are peskily going up by the day. up 7% intraday on some of my adds today.

 

Thanks. Any thoughts on Single-family rental vs multi-unit?

 

[thepupil]

I wonder if there will be a lot of shadow-supply/AirBNBs/VRBOs coming on the market to drive down rents.  I keep seeing stories about people who are trying desperately to move their airbnbs to longer term rentals, some pretty troubling stories about people who are engaging in "rent arbitrage"  sounds like of like wework, but worse; of course that's all just narrative/anecdote.

 

 

stranger things have happened, but it's tough to sneak a pet at these types of institutional quality apartments, much less an Airbnb. The doorman/doorwoman/doorpeople? always knew every resident at each of my yuppie apartments. it may certainly increase overall supply, but I don't think there'd be material Airbnb arbitrage folks at EQR's type of properties.

 

 

matts, I can't answer your question with respect to how many people will stop paying rent. My anecdotal gut is a very small number. I am a member of the yuppie scum class; all my friends are paying their rent, have their jobs, and are just working remotely from ther $2/3/4K a month apartment buildings.

 

haven't looked at BSR, but will.

 

I just don't really know how to underwrite senior properties. to continue the anecdote fun, I used to trade agency CMBS which is backed by apartments and skilled nursing facilities/senior living. The financials on the senior living/nursing homes was just plain scary, low margins, low DCSR's, medicare volatility/noise. I am sure there are lots of opportunities and I'm missing A LOT of nuance between all the different property types (a 55+ community is very different than hospice/nursing home), but I'm not going to spend time learning about that stuff at this time.

 

Easier to rent to my fellow yuppie scum, I understand that market better...though these prices are peskily going up by the day. up 7% intraday on some of my adds today.

 

Thanks. Any thoughts on Single-family rental vs multi-unit?

 

I don't really believe in the long-run economics of single-family rentals. just less efficient/benefits of scale. When I think about my old apartment in DC metro. It occupied a very small piece of land above high quality retail, with 200 units paying on average $2500 / monthor $3K. That's $6-$7mm / year of high quality rent being serviced by not that much in costs: 3 front desk staff, 2 leasing professionals, occasional temps and maybe 2 or 3 full time garbage/repairs folks with the occasional external contractor coming in. only one roof.

 

I just think the long run capex needs and unit economics of SFR ownership are less attractive. I'll own anything at a price but haven't looked at SFR much lately.

 

in short, I don't really believe the NOI margins put out there by SFR rental when they say they can just as efficient. I simply prefer dense high income buildings in dense high income cities, like most of what these REITs own.

[Orchard]

I think most upper income buildings with doormen have cracked down on air bnb subleasing. I'd be surprised to find much of this going on in any bigger building.

 

From what i see, the air bnb subleasing tends to be in smaller buildings i.e. less than 10 units with no doormen.

[thepupil]

There's just so much emotion-driven anti-landlord sentiment. I don't get putting the best cap rates in the entire real estate world on what I think has the most frightening populist tail risks. You guys need to understand: 75% of dem primary voters under 40 voted for Bernie Sanders. Have you ever listened to Chapo Trap House? When every underemployed 25 year old is on Facebook leftist groups sort-of-joking about putting their landlords into gulags, doesn't this make you think maybe we should be adding a few hundred bps to our required yield to compensate for guillotine risk?

 

Real estate is the ultimate rule-of-law bet. I've seen way more deterioration in the social contract on that (from both parties) over the past few years than seems priced in by a 20% move.

 

interesting, haven't really felt the need to thoroughly quantify this risk as it relates to luxury/semi-luxury housing, saw it as more of a risk to my NEN which is more of a slumlord type in boston. (which I actually completely blew out of at a 25% loss to add to this basket). NEN is/was cheaper, thought this stuff was lower risk/more liquid/higher quality.

 

The most direct address of it I've seen is in Essex's deck (slide 21), text copied below:

 

 

 

Housing costs remain a key political and business issue across the country with many states implementing various forms of rent control legislation including Oregon, Colorado, Florida, Illinois, Massachusetts, and New York

California’s AB 1482 will cap renewal rents at CPI + 5%, providing renter protectionswhile not destroying the incentive for new home development

Essex has a long-standing guideline capping renewals at 10% and expects AB 1482 will result in approximately 10 bps impact to 2020 same-property revenues, primarily due to short-term rentals

California’s legislatures passed several housing related bills aimed at incentivizing affordable housing development

A referendum to amend Costa Hawkins will be on the November 2020 ballot. A similar proposal was soundly defeated by voters in 2018 and the apartment industry is aligned to protect the incentive to build new homes

It is highly likely that California’s 2020 ballot will contain a proposal to modify Prop 13 for Commercial and Industrial Properties, creating a rolling 3 year re-assessment for property taxes.  Fortunately, Apartment properties are not affected by the proposal

“Since 2005 California has only produced 308 housing units for every 1,000 new residents. Add in the fact that California will be home to 50 million people by 2050, and it’s obvious we’re not on pace to meet that demand…we need to generate more funding for affordable housing, implement regulatory reform and create new financial incentives” –

[matts]

What about the manufactured housing park owners? ELS, SUI, UMH

 

I understand that today they are a bit higher on the risk spectrum, but ELS and SUI have a great track record, and long term, they offer the most affordable kind of housing to a country where housing affordability is a problem for many.

 

They also own the appreciating part of RE, the land, while letting the "owners" pay for the depreciating "home". Similar to multi-family, they benefit from density and economies of scale (1 security guard, 1 pool etc.). the houses are technically mobile, but in reality, it costs 5-10k to move one, so the vast majority of tenants have no choice but to eat the regular rent escalations.

 

SUI and ELS have been great investments for years, and now you can get them at a 20-25% discount (from peak).

 

[thepupil]

have always thought those too expensive but awesome companies/biz models. maybe I'll have another look, thanks.

[shhughes1116]

I wonder if there will be a lot of shadow-supply/AirBNBs/VRBOs coming on the market to drive down rents.  I keep seeing stories about people who are trying desperately to move their airbnbs to longer term rentals, some pretty troubling stories about people who are engaging in "rent arbitrage"  sounds like of like wework, but worse; of course that's all just narrative/anecdote.

 

There is a bit of this in my area.  Anecdotally, I know a few of these coming to to the rental market were purchased at insane prices.  I went into these looking for additional rental properties at about 15-20X TTM AFFO.  These were purchased by AirBNB "speculators" at 25-30X TTM AFFO. 

 

Shortterm, I think there will be a little bit of downward pressure on rental prices in my area.  Longer term, I expect these AirBNB speculators to become insolvent, and these properties will come to the market, leading to some downward pressure on purchase prices.  The inventory for purchase and rental is pretty tight in the DC area (Virginia for me), so I don't expect much long-term impact.   

[matts]

have always thought those too expensive but awesome companies/biz models. maybe I'll have another look, thanks.

 

sure. would appreciate it if you give us a heads up about what you find. You have been looking very closely across the whole RE asset space so you are in a great position to speak to the relative value of the opportunities.

[thepupil]

have always thought those too expensive but awesome companies/biz models. maybe I'll have another look, thanks.

 

sure. would appreciate it if you give us a heads up about what you find. You have been looking very closely across the whole RE asset space so you are in a great position to speak to the relative value of the opportunities.

 

well... I think if you were to pop open the performanceanalyzer on my interactive brokers account, ya might feel differently!

[Scuttlebutt Plunger]

Manufacturer housing, ELS and SUI, is probably the best sub-sector among REITs.

 

Add NXRT to your list for multi-family apartments.  Smaller and more leverage though.

[matts]

Manufacturer housing, ELS and SUI, is probably the best sub-sector among REITs.

 

Add NXRT to your list for multi-family apartments.  Smaller and more leverage though.

 

In normal times that is true. but as pupil mentioned, in the short-term, upper-middle-class yuppies will keep their jobs and pay rent. The types of people that live in parks.... much more concentrated in blue-collar workers. UMH especially caters to the low-income crowd. i believe els and sui have much higher average rents.

 

If you look longer term, parks have the best economics, but I'm trying to figure out if they might not get even cheaper in the short term as they start reporting massive delinquencies across their portfolios.

[CorpRaider]

Trailer parks are great (unless covid-19 rages through sun communities ELS sunbelt retirement parks and takes out like 15% of the demand) and seem priced accordingly. 

[thepupil]

more negative headlines and these are starting to come down again, may get another bite at the apple/average down opportunity.

 

there's a Bloomberg intelligence article out today pointing out the following:

 

Property level expenses are about 30% of rents (70% NOI margin) in coastal markets, giving a big cushion and insulating from some rent/occupancy declines and or cost increase (property tax hikes). Costs are mostly fixed (property taxes and insurance are 40% of property level costs). Even the lower rent / non coastal ones like Camden are at 35% (65% NOI margin).

 

The apartment REITs on average have 5x EBITDA / Interest. They have low leverage that has low cost giving them an ample runway. In 2008 (before the crash), this number was 2.5x for perspective. Apartment REITs have locked in long and low leverage and (if spreads normalize) that costs is going lower, they've spent the past few years selling non-core assets to opportunity funds/locals and upgraded their portfolio quality / age through development and acquisition.

 

that a storm is coming is certain, that they are more than ready is my opinion.

 

that they are cheap..well I don't think they are SUPER cheap. EQR is at about a 5.7% cap right now. ($1.7 billion / $9B Debt + $21 Billion market cap); i like them more as that gets to a 6 or even (gasp) a 7 handle. think about what huge institutional pools of capital are going to be faced with rates at 0%-1%. What is TIAA traditional and TIAA real estate account going to buy? What about Metlife?

 

I'd say high quality multi-family in gateway cities at unlevered 5,6% yields fits that bill just fine (for a portion of the balance sheet). I don't think we're going to see multi-fam cap rates blow out to 8% or something, and if they do, then EQR and its friends are probably still going to have capital markets access and will be buying buildings.

 

EQR owns about 70,000 apartment units and trades for $30 billion. That's about $422K / unit.

 

Can someone please direct me to condo listings in NYC/DC/LA/Boston, where I can buy a new-ish condo next to the metro/soulcycle/sweetgreen for $422K? After you do that, can you provide me with 4% interest only financing at say 27 years (EQR's 2047's have a 4% coupon). Okay great, now can you buy 70,000 of those and manage it all professionally for me? K thanks. Oh wait, that doesn't exist in real life.

 

anecdotal survey for the crowd, has anyone heard of people with "good" jobs getting fired/laid off. Here is my anecdote: Marriott corporate HQ in Bethesda furloughed a large percentage of their corporate folks; that likley includes some very good jobs. I don't think people who rent yuppie apartments are completely immune, but I'd be surprised if a very large percent aren't able to make rent/lose their jobs; Ive been wrong before so we'll have to see.

 

 

[matts]

I agree with your general thought process. But I also agree that some of the headlines from property owners will be pretty dismal next few weeks so we might get chances at better prices.

 

Also wanted to add that I like how you try to simplify the value proposition. Like price/unit or the price/room as you did with HST.

 

What I really want to do is take advantage of this crisis to buy into real estate assets at cheap prices. The public market is falling faster than the private so maybe after the reits recover I'll roll the money into the deals on the private side. At the end of the day I'm agnostic to the avenue of purchase.

 

Big picture, western governments can't stomach residential RE falling more than maybe 20%. When the stock market falls, the (incorrect) perception is that only a few rich pricks get hurt. But falling residential RE hits many (most?) voters hard and they start sharpening the pitchforks. Politicians realize this.

 

 

 

 

[thepupil]

we are thinking about it the same way.

 

haven't pulled trigger on HST or anything hospitality related. There I think the EV / Key comparison is a harder to make at this time because you could be looking at a (maybe only slightly) different cap structure.

 

Big picture, if on January 1 you knew this was going to happen and you asked how much would EQR/HST/VNO be down, I would think that most would guess HST would be down the most (75-100% of its tenants aren't paying rent for the next 2-undefined months)

 

In actuality, HST is down 45%, VNO is down 51% and EQR is down 32%.

 

Now YTD stock moves is not indicative of price to "value" gap. HST traded at a discount to replacement costs beforehand and had issues beforehand (EQR arguably did not) and Host now trades at a (using a sell side estimate) 50-60% discount to replacement cost.

 

I'm not saying that HST isn't cheaper than the other two on a very long term basis, but I think the others (just using them as proxies for other type of RE and because I know VNO to an unfortunate degree) are safer and still offer upside.

 

In a year, stodgy institutional investors will be bidding for / lending to EQR type of properties, but I think hospitality will have a longer and stronger taint/increase in the cost of capital

 

[matts]

we are thinking about it the same way.

 

haven't pulled trigger on HST or anything hospitality related. There I think the EV / Key comparison is a harder to make at this time because you could be looking at a (maybe only slightly) different cap structure.

 

Big picture, if on January 1 you knew this was going to happen and you asked how much would EQR/HST/VNO be down, I would think that most would guess HST would be down the most (75-100% of its tenants aren't paying rent for the next 2-undefined months)

 

In actuality, HST is down 45%, VNO is down 51% and EQR is down 32%.

 

Now YTD stock moves is not indicative of price to "value" gap. HST traded at a discount to replacement costs beforehand and had issues beforehand (EQR arguably did not) and Host now trades at a (using a sell side estimate) 50-60% discount to replacement cost.

 

I'm not saying that HST isn't cheaper than the other two on a very long term basis, but I think the others (just using them as proxies for other type of RE and because I know VNO to an unfortunate degree) are safer and still offer upside.

 

In a year, stodgy institutional investors will be bidding for / lending to EQR type of properties, but I think hospitality will have a longer and stronger taint/increase in the cost of capital

 

Agreed. I only mentioned HST due to the method.

 

Have you looked at the manufactured housing space?

 

By that simple approach:

 

ELS - 12.2Bn EV / 156,513 sites = 78k per site (but 80k of the 156k sites is RV)  -  average rent $675, sites mostly on the coasts. 90% of revenue is annual recurring. only 10% is seasonal/transient RV.

 

SUI 14Bn EV / 141k sites = 99k per site        -  average rent 997, site mostly on coasts. half the communities are age restricted

 

UMH 1.3Bn EV/ 23,100 sites = 56k per site  - average rent $447, sites mostly in Pennsylvania and Ohio. UMH also has a growing business of buying and owning the homes in order to rent them. This speeds up the turnaround of their communities since they tend to buy crappy parks that are ~60% occupied when acquired. They demolish the old houses, stick their brand new houses for rent, and that then make the community much more appealing for regular clients who buy their own home. On the negative side, UMH is family-controlled and shareholders have been complaining about the value leakage to the family for years.

 

UMH and ELS look most attractive to me depending on your risk tolerance. The cheaper tenants at UMH are more likely to lose jobs, go delinquent etc.  ELS also has better management and shareholder track record.

 

[thepupil]

I would like to buy ELS at an $8 billion EV, but Bloomberg says $9.6 billion market cap and $12 billion EV. Likewise SUI is at $14 billion EV.

 

Is there some discrepancy on BBG or subtlety/ adjustment here that I’m missing or are your EV’s off?

[matts]

No. I just used a bad source. I'll update the post above

 

[rb]

Well EQR took in 2.7 billion in rents last year. At an EV of 30 billion. That's a 9% gross rent yield.

 

Now if you found a property in EQR's markets that gives you a 9% gross yield don't you buy it in a nanosecond?

 

 

I'm asking for a friend  ;)