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

[thepupil]

http://investors.equityapartments.com/Cache/IRCache/e03b3c04-78b4-8606-37bf-384a94da468a.PDF?O=PDF&T=&Y=&D=&FID=e03b3c04-78b4-8606-37bf-384a94da468a&iid=103054

 

looks okay to me. i mean definitely some impact, but the apocalypse is at least on the come rather than here. rents are dropping though. see slide 15 with the same store rent changes. -5% to -10%. that's how they're maintaining occupancy.

 

Pupil, what's your take on the offsetting effects of lower interest rates vs lower rent/occupancy?  I feel like they wind up being a draw.  Thoughts?  I'm talking specifically multi-family. 

 

Heck, maybe we should hedge our MF exposure with some homebuilders as post 2009, there was a decade where young people moved into the city to work and fornicate.  That huge demographics group now has kids and are likely looking to buy houses.

 

I think rates are an important consideration.

 

The most obvious would be in what EQR pays on its borrowing:

 

EQR primarily issues in the unsecured IG bond market and its bonds have spreads ranging from 52-170 which at current rates leads to absolute yields of 0.5% - 2.6%. the actual coupons are higher (3.5% or so), so over time EQR's cost of interest should come down. 

 

But whether EQR pays 3.5% or 2.5% on its debt isn't really that important from an income statement perspective in that EQR only has about $105K of debt per unit. So on a unit level it's a question of whther you are paying $2.5K or $3.5K/year (which isn't really important or material). Considering that each unit commands about $33K of rent / year and has $11.8K of cash opex + g&a / year, changes in either rent or opex are far more important. A 10% decline in rent has 3x the impact of a 100 bp decline in interest expense AND EQR's interest expense is mostly locked in because a lot of the "high" coupons of say 4% are locked in for as long as 30 years; EQR would have to tender for bonds at a premium.

 

Where low rates are important is simply supporting the whole market for high quality multi-family and helping control cap rate expansion. EQR operates with very low leverage, but obviously not all multifamily people do. As an example, we know that FRPH and MRP own Dock79 which has $295K / unit of debt ($90mm / 305 ) at 4.125% w/ 4 years of interest only. this is much more typical. As a former Agency CMBS trader, I can tell you that the vast majority of Fannie Mae DUS and Ginnie Mae project loans and Freddie K deals that I was buying for securitization / trading had DSCR's of 1.1-1.3x often with rosy occupancy assumptions.

 

The availability of that extremely low cost and favorable debt supports the whole multi-family market (and single family market for that matter) and is the reason why EQR can exit its lower quality apartments at <5% cap rates. They're selling to a leverage junkies running 80%+ non recourse LTV who still is getting a decent cash flow/total return to equity because of the great financing. I do not look down on the leverage junkies; I am one myself with my personal residence.

 

In sum, low rates are simply a market support for the value, but aren't important to the income statement, particularly for EQR. From a stock perspective, they also support the demand for yieldy REITs.

 

 

[rb]

http://investors.equityapartments.com/Cache/IRCache/e03b3c04-78b4-8606-37bf-384a94da468a.PDF?O=PDF&T=&Y=&D=&FID=e03b3c04-78b4-8606-37bf-384a94da468a&iid=103054

 

looks okay to me. i mean definitely some impact, but the apocalypse is at least on the come rather than here. rents are dropping though. see slide 15 with the same store rent changes. -5% to -10%. that's how they're maintaining occupancy.

 

No position here, but doesn't it seem like a 5-10% rent decline across the portfolio is already priced in at today's levels? Does anyone have a good sense for what kind of cap rate these assets would transact at in normal times on a stable rent base?

They would transact around a 4% cap. You can get a better idea from the annual reports as EQR does transact fairly regularly and release the info.

[thepupil]

http://investors.equityapartments.com/Cache/IRCache/e03b3c04-78b4-8606-37bf-384a94da468a.PDF?O=PDF&T=&Y=&D=&FID=e03b3c04-78b4-8606-37bf-384a94da468a&iid=103054

 

looks okay to me. i mean definitely some impact, but the apocalypse is at least on the come rather than here. rents are dropping though. see slide 15 with the same store rent changes. -5% to -10%. that's how they're maintaining occupancy.

 

No position here, but doesn't it seem like a 5-10% rent decline across the portfolio is already priced in at today's levels? Does anyone have a good sense for what kind of cap rate these assets would transact at in normal times on a stable rent base?

 

If Mr. Market was given perfect foresight ans was told that rents would decline by 7.5% and nothing else would change, then the stock would probably go up. But that's really not the extent of the risk.

 

I see EQR at a 5.8% cap rate right now with a high 6's cash on cash return to the equity. If I shock all rent down 10%, I get about a 5 cap. At 30%, I get a 3 cap. At 15% decrease in rent plus a 10% increase in opex / unit (from a 25% hike in property taxes for example), I get to a 4% cap. All of those are assuming current and high occupancy levels. 

 

For context, if I had to put one number on what cap rate high quality multi-family transacts, I'd say 4.5%; the lowest I've seen was 3.7% on national landing multi-family private deal after AMZN where the underwriting baked in big rent growth/redevelopment (shameless plug for JBGS here which trades FAR wider). Others can chime in. EQR generally prints 4-4.75 caps when they sell Search the Q's / K's for "disposition yield".

 

This data says its above 5 though.

https://www.nar.realtor/blogs/economists-outlook/2020-q1-nar-commercial-survey-shows-early-impact-of-coronavirus

https://mf.freddiemac.com/docs/multifamily_2020_outlook.pdf

 

If you start to tweak the cap rate up and bake in declines in rent/NOI, there's still plenty of downside that's not priced in.

 

But I think it's also important to consider it all on a per unit basis and what that would imply. For example, if someone said "i think rent goes down 15%, opex goes up 30% and it should trade at a 7% cap rate, this would imply a value of $217K per unit (down from $370K now and $530K at peak price of $87).

 

$217K per unit would represent an extreme value proposition for end users of highly amenitized well located modern apartments and the argument for EQR to start doing condo conversions would be compelling. Recall that EQR's tenants make $165K / year. Even if that drops, think how affordable such apartments would be with a 30 year mortgage at 3%.

 

I guess what I'm saying is, one can very easily dream up negative scenarios that are not priced in; these aren't insanely cheap and one could easily argue fundamentals are only starting to come down, but I think the underlying pure real estate value starts to bail you out at those negative scenarios (assuming urban living is desirable again at some point).

 

 

[rb]

Just thinking a bit about occupancy here. I don't have the numbers handy. But as I recall in ancient times (pre-covid) vacancy was really low in EQR's markets. So it doesn't make much sense that a big occupancy drop is coming. Where would these tenants actually go to live? No way you get a lot of new supply coming to mark if rents are soft.

 

I guess the only wild card is the airbnbs coming into the rental market. I have no idea how many of those are around.

[thepupil]

Just thinking a bit about occupancy here. I don't have the numbers handy. But as I recall in ancient times (pre-covid) vacancy was really low in EQR's markets. So it doesn't make much sense that a big occupancy drop is coming. Where would these tenants actually go to live? No way you get a lot of new supply coming to mark if rents are soft.

 

I guess the only wild card is the airbnbs coming into the rental market. I have no idea how many of those are around.

 

Well 50% of EQR's NYC moveouts gave an out of state forwarding address.

 

Be trigger warned of my overprivileged statements below, but just to give some anecdotal flavor

I live in wealthy DC Burbs. Two software engineers from NYC just bought a $2mm+ house down the street from me. they aren't going back. the headwinds are real as it relates to the 30+ year old accelerating their moves to the burbs. EQR has also noted international students as an issue. My sister went to school in Boston and rented at an Archstone owned apartment (now owned by EQR). She rented a $2K / month apartment. to the extent college kids aren't going back (temporarily) that hurts. I know some investment banking graduates that are training remotely. There's a a big disruption coming. Will this be important in 3 years or 5 years, maybe not (I would wager not). But we should acknowledge the headwinds. The 30+ year olds are buying houses and the 23 year olds are at their parents' house.

[Cigarbutt]

...

Be trigger warned of my overprivileged statements below, but just to give some anecdotal flavor

I live in wealthy DC Burbs. Two software engineers from NYC just bought a $2mm+ house down the street from me. they aren't going back. the headwinds are real as it relates to the 30+ year old accelerating their moves to the burbs. EQR has also noted international students as an issue. My sister went to school in Boston and rented at an Archstone owned apartment (now owned by EQR). She rented a $2K / month apartment. to the extent college kids aren't going back (temporarily) that hurts. I know some investment banking graduates that are training remotely. There's a a big disruption coming. Will this be important in 3 years or 5 years, maybe not (I would wager not). But we should acknowledge the headwinds. The 30+ year olds are buying houses and the 23 year olds are at their parents' house.

More anecdotal flavor.

i typically rent an apartment close to a metropolitan university that has a significant international student participation. Every year, at this time of year, the apartment is offered. Typically, there is significant pricing power and a very large number of applicants and it's possible to use a multi-layer filter process. This year: minimal "views" and zero demand. FWIW, i think this short term noise is likely to accelerate underlying trends, for the longer term.

https://www.spglobal.com/ratings/en/research/articles/200709-student-housing-in-the-covid-19-pandemic-era-school-s-out-but-for-how-long-11566259

---) back to REITs etc

 

[CorpRaider]

Any idea why EQR appears to be the dog in the apartment Reit space? MAA seems to be the top performer.

 

My (casual/tourist to the space) understanding is that EQR is perceived as more exposed to the urban flight risk/covid impacts and MAA is more exposed to second and third tier cities in the sun-belt which are perceived to be increasing in desirability if remote work truly comes to pass.

 

I haven't yet figured out who, if anyone, is in control/behind MAA.  I don't love rolling with organizations controlled by hired hand, sales guys.

 

I agree with the general sentiment in the thread that the sector ain't cheap enough now.

 

In my opinion, this covid, remote work, protests combo could really touch of a feedback loop of urban flight (maybe like in the 70's); this could include clobbered state and local budgets and ham handed (or otherwise) attempts to fix that with taxes combined with "eating the rich."  The covid thing and protests are almost worst case scenario for cities...like almost every reason to live there is moot right now, but we will just have to see if it touches off a little (or big) feedback loop. 

 

All that said, I guess I'm saying I could see it being an "intermediate term" problem; but I wouldn't bet against the power of the network effects of cities long term.  Can you imagine how awesome they could be with real live-work-play design and no commuter car infrastructure?  Oh yeah, sort of like Europe, but bigger and more functional.

[thepupil]

https://www.google.com/amp/s/therealdeal.com/2020/08/07/kkr-teams-up-with-dalan-on-big-brooklyn-multifamily-buy/amp/

 

KKR buying shiny new Brooklyn portfoli for $675K/ unit. It was rumored to be in talks originally at $980K/ unit. It didn’t mention average rent/unit.

 

Just a data point / context for EQR at $370K EV / unit and the type of haircut people are taking. Of course only 9000 of EQR’s 78K are in NYC they are at average $3900/month versus total EQR of $2800.  I’m not saying all of EQR is “worth” $675K just pointing out that there’s a real post COVID trade at that level.

[CorpRaider]

Alright, I'ma buy a little EQR. 

[thepupil]

 

 

https://seekingalpha.com/news/3612778-manhattan-rental-market-sinks-number-of-empty-apartments-triple

Manhattan rental market sinks as number of empty apartments triple

Sep. 10, 2020 5:19 AM ET|About: Equity Residential (EQR)|By: Yoel Minkoff, SA News Editor

There were more than 15,000 empty rental apartments in Manhattan in August, up from 5,600 a year ago, as more New Yorkers fled the city amid the coronavirus crisis, according to a report by Douglas Elliman and Miller Samuel.

 

The inventory of empty units is the largest ever recorded since data started being collected 14 years ago, dashing hopes for a rebound in the fall or the end of 2020.

 

Rental prices have come down - median rental prices fell 4% in August - but the discounts don't appear steep enough yet to lure new renters back to the city. The average rental price for a two-bedroom in Manhattan is still $4,756/month.

 

While REITs and real estate companies have more access to capital, smaller landlords with just one or two buildings may have trouble paying their mortgages and property taxes, which could impact banks and lenders.

 

Related: Equity Residential, (NYSE:EQR), AvalonBay (NYSE:AVB), UDR (NYSE:UDR), Apartment Investment and Management (NYSE:AIV), Essex Property Trust (NYSE:ESS), Camden Property Trust (NYSE:CPT), Mid-America Apartments (NYSE:MAA), Invitation Homes (NYSE:INVH)

[CorpRaider]

Thanks for head's up on this JGBS.  I am thinking about their focus on walkability.  In my ideal personal scenario, I have enough personal capital to justify an office space (maybe with a BBG) a couple of blocks away from my home, where I can walk or bike when I want (and store my junk, some books, and other stuff there).  As a compromise, working for someone else, I still like having that space, preferably with a view and some people standing by that I can get to help do stuff when I want/need.  If they are going to take that away, I'ma need a raise dawg (or I'm likely to look to hop to somewhere that does offer it that....all else being equal). 

 

[thepupil]

https://seekingalpha.com/news/3613573-apartment-investment-and-management-plans-spinoff-jv

 

https://seekingalpha.com/pr/18004279-aimco-announces-formation-of-apartment-income-reit-self-managed-10-billion-reit-and-closing

 

AIMCO splitting into a development company / stabilized company, since the market hates development and will probably value the stabilized better.

 

I'm not really familiar with AIV / AIMCO. Just skimmed.

 

Also, a nice 4.2% cap rate / $592K / unit california sale in the press release. That's a strong comp as it relates to ESS.

 

I found this the other day on twitter as it related to ESS.

 

https://www.privateeyecapital.com/why-would-any-long-term-investor/

 

Aimco also announced, as part of its longer-term strategy to reduce financial leverage and to rebalance its capital allocation among target markets, that it has entered into a ten-year joint venture with a passive institutional investor to own jointly 12 multi-family properties with 4,051 units located in California. The properties were valued at $2.4 billion, or approximately $592,000 per unit, equivalent to an implied NOI cap rate of ~4.2% and an implied free cash flow cap rate of ~4.0% (based upon NOI and free cash flow annualized for the six months ended June 30, 2020). The properties secure non-recourse property debt of $1.22 billion with a weighted average interest rate of 3.17% and have an implied equity value of $1.18 billion. In exchange for a 39% interest subject to $475 million of property debt, Aimco received $461 million cash plus an additional $24 million for future redevelopment spending. Aimco retains ownership of the remaining 61% interest and is responsible to operate the properties, earning property and asset management fees. The valuation is equal to 97% of the Gross Asset Value (“GAV”), as of 1Q20, previously calculated and published by Aimco.

[BG2008]

Pupil,

 

We are either on the cusp of making a ton of money investing in these REITs or we are too dumb and too stubborn for our own good

[CorpRaider]

https://seekingalpha.com/news/3613573-apartment-investment-and-management-plans-spinoff-jv

 

https://seekingalpha.com/pr/18004279-aimco-announces-formation-of-apartment-income-reit-self-managed-10-billion-reit-and-closing

 

AIMCO splitting into a development company / stabilized company, since the market hates development and will probably value the stabilized better.

 

I'm not really familiar with AIV / AIMCO. Just skimmed.

 

Also, a nice 4.2% cap rate / $592K / unit california sale in the press release. That's a strong comp as it relates to ESS.

 

I found this the other day on twitter as it related to ESS.

 

https://www.privateeyecapital.com/why-would-any-long-term-investor/

 

Aimco also announced, as part of its longer-term strategy to reduce financial leverage and to rebalance its capital allocation among target markets, that it has entered into a ten-year joint venture with a passive institutional investor to own jointly 12 multi-family properties with 4,051 units located in California. The properties were valued at $2.4 billion, or approximately $592,000 per unit, equivalent to an implied NOI cap rate of ~4.2% and an implied free cash flow cap rate of ~4.0% (based upon NOI and free cash flow annualized for the six months ended June 30, 2020). The properties secure non-recourse property debt of $1.22 billion with a weighted average interest rate of 3.17% and have an implied equity value of $1.18 billion. In exchange for a 39% interest subject to $475 million of property debt, Aimco received $461 million cash plus an additional $24 million for future redevelopment spending. Aimco retains ownership of the remaining 61% interest and is responsible to operate the properties, earning property and asset management fees. The valuation is equal to 97% of the Gross Asset Value (GAV), as of 1Q20, previously calculated and published by Aimco.

 

Haha!  I was just looking at that.  Terry Considine is CEO/founder (old guy).  Internally managed... AIR will hold stabilized/developed apartments and AIV will take development ops.  Lots of cross rights of refusal (to develop properties; right of first refusal to buy developed properties, etc).

 

Watched a couple of youtube talks he gave...comes off as a good guy, but is that a toupe'? 

 

Edit: wow they are doing a reverse (taxable) spin; citing potential changes in tax law...no vote and they are sending people a tax bill. 

 

I don't get why they are doing the spin.  Their combined estimated NAVs in the presentation are $7.8 billion for AIR (with a woooo 5% increase in distribution) and $1.2 billion for AIV; current EV (admittedly after a ~7% move on announcement) is ~10B.

 

CEO/Founder is going with AIR (apartment holdco).  Also going to be on board of AIV.

[thepupil]

Jonathan Litt is coming at AIV, speaking to potential motivations on the transaction:

 

https://landandbuildings.com/land-buildings-sends-letter-to-aiv-board-of-directors/

https://landandbuildings.com/wp-content/uploads/2020/09/LandB-Press-Release-Letter-to-AIV-Board-9-22-20.pdf

 

 

[CorpRaider]

Interesting.  Thanks for sharing. 

 

Bilerman @ citi pretty much reflects my impression of the deal, like wtf are they doing...they have all these cross-company options and other inter-party relationships they are setting up to "simplify" things and they are sticking holders with a phantom tax bill (!) because they think they can predict the future (wow that would probably be a malpractice suit for me) to close a discount to mgmt's estimate of NAV? 

 

Looks like L&B owns ~1.4% percent of the outstanding as of last q. 

[TrashIsCash]

I sell Class C apartment buildings in Southern California.  One of my `mom&pop' clients held an open house for a vacant apartment unit located in Long Beach, CA.  They had several interested people who are moving from San Francisco tour the unit.  The prospective tenants were WFM tech workers who wanted to live in a less expensive, lower density area.  I have a family member who owns a few small apartment buildings in San Francisco.  They have two vacant units, which are proving to be very tough to rent.

[thepupil]

I sell Class C apartment buildings in Southern California.  One of my `mom&pop' clients held an open house for a vacant apartment unit located in Long Beach, CA.  They had several interested people who are moving from San Francisco tour the unit.  The prospective tenants were WFM tech workers who wanted to live in a less expensive, lower density area.  I have a family member who owns a few small apartment buildings in San Francisco.  They have two vacant units, which are proving to be very tough to rent.

 

So are you saying that people are moving from where 21% of EQR's units are (SF) to where 27% are (SoCal)?

 

In all seriousness, I agree with you that the near term disruption in urban multifamily (NYC and SF) is bad and getting worse.

[fareastwarriors]

I sell Class C apartment buildings in Southern California.  One of my `mom&pop' clients held an open house for a vacant apartment unit located in Long Beach, CA.  They had several interested people who are moving from San Francisco tour the unit.  The prospective tenants were WFM tech workers who wanted to live in a less expensive, lower density area.  I have a family member who owns a few small apartment buildings in San Francisco.  They have two vacant units, which are proving to be very tough to rent.

 

Looking at Class C apartments, not even a SFH in a B neighborhood?

Geez.

 

I'm over in the East Bay so the world is not as crazy as SF. I rented out a 2bed/1bath unit back in August for $1,900. It's completely renovated. Pre-pandemic I was hoping to rent at $2,300-2,400 but I was getting little to no inquiries at $2,400 in June. Once I lowered it to $1,900, I had plenty of candidates.  Price matters.

 

As such, the average asking rent for an average apartment in the city, which measures 2.4 bedrooms when counting a studio as having one, is now 18 percent ($725 a month) cheaper than just seven months ago, with the average asking rent for a one-bedroom in the city having just dropped to around $2,800 a month (which is down from closer to $3,700 at peak).

 

At the same time, offers of complimentary rent and cash concessions haven’t waned, driving effective rents down even more.

 

And a we noted earlier this month, rents in Oakland are now dropping as well, with the average asking rent for an apartment in Oakland having just dropped to under $2,500 a month (versus nearly $3,000 a month at peak), which is down nearly 6 percent over the past month as well.

 

https://socketsite.com/archives/2020/09/drop-in-s-f-rents-accelerates-down-nearly-25-percent-from-peak.html

 

 

[rb]

potentially so. I'll give you an example in my backyard.

 

Behold this Zillow listing:

 

https://www.zillow.com/homedetails/5500-Friendship-Blvd-APT-817N-Chevy-Chase-MD-20815/37195057_zpid/

 

this is in a well-located but tired building, it is spitting distance from Whole Foods the Friendship Heights metro, etc.

 

$500K gets you a 1200 sq foot 2/2 with some outdoor space that would rent for $2,500 - $3000 (the listing shows a rental at $2,950, I assume someone would rent a little lower than that). If you paid cash, you'd still have a $1000 / month HOA. this is a decent albeit somewhat unhip location. the building was built in 1968. I think its a terrible investment proposition. $2600 /month rent less $1000 HOA = $1600 / month before any other expenses. We're already at an extremely low cap rate. Maybe it goes for lower, but I happen to know a lot of investors own units in this building (let's just say I know a former tenant very well); the units seem to move slowly but they do sell at prices indicating ridiculously low cap rates.

 

Let's walk across the street, to EQR's property (formerly owned by Archstone), Wisconsin Place. Wisconsin Place sits atop Whole Foods (shared parking garage) which also connects to the Friendship Heights metro, which connects to a little retail center that includes movie theater, department store, restaurants, gyms, etc. This was built in 2009 and is in good shape.

 

https://www.equityapartments.com/washington-dc/friendship-heights/wisconsin-place-apartments

https://www.equityapartments.com/washington-dc/friendship-heights/wisconsin-place-apartments##bedroom-type-section-2

 

A 1000 square foot two bedroom is listed for $3600 / month and up. studio's and one bedrooms $2,100-$2,200 and up.

 

this is kind of a contrived comparison using anecdotes, but the first one trades at an 6%-7% rental yield or so and as you point out EQR is closing in on a 9%. But the maintaince and capex and running cost of that 9% are LOWER because the building is newer and the room for error is higher because the rents are high because of the quality.

 

you are buying property in areas where even old kind of tired buildings still command high prices because (in this instance) this is metro-accessible high rent areas with amenities and stuff.

 

and jsut for shits and giggles, you all will be happy to know that GEICO's corporate headquarters is right next to both buildings:

I have to thank the pupil again for this excellent post. Especially for the fact that he placed some markers. From the longer post I'll pick this.

 

A 1000 square foot two bedroom is listed for $3600 / month and up. studio's and one bedrooms $2,100-$2,200 and up.

 

His post was made at the beginning of April and the numbers checked out. If you go now to the Wisconsin place website you'll see that the 1000 sqft 2 bedrooms are starting at $2400 (It was $2600 when I checked a few weeks ago). The studios are now at $1600.

 

I think this may be an indication that something very bad may have happened to the rental markets. I cannot remember any rental drops comparable to these in 08/09.

[thepupil]

Most of the large multi family operators all use the same occupancy management software / tool. I’m not sure exactly what it’s called, but as a renter, I’ve experienced this when trying to get apartments and the same building will vary their pricing by the day, sometimes by several hundred dollars/ month (pre covid).

 

It looks at the market and comparable and how full the building is and spits out a number for the leasing agent to tell you. I actually used this to time a lease in a FRT building where I rented a previously $3500/ month 2 bedroom for $3100 + free parking and locked it in for 24 months because a couple building opened up recently nearby.

 

The tool is designed to dynamically change prices to keep the building close to full.

 

Gateway multi family is rapidly taking pricing down because of this. They all operate in similar fashion and I imagine this is feeding on itself.

 

This is just a long winded way of saying that multi family reflects supply/demand in real time to

A much greater degree than say office or even retail.

 

For this reason, the near term looks pretty bad. And it’s easy to understand why: older yuppies bought houses, younger yuppies are at their parents, 30% of student deferred, few international students came back. Supply continues to come on line.

[thepupil]

there's a bloomberg intelligence article today that summarizes what we know about the apartment REITs robust financial condition.

 

AIV, AVB, CPT, EQR, ESS, MAA, UDR collectively have $9 billion of available credit on their revolvers and over $10 billion of cash and available credit. EQR, AVB, and ESS have over $1.5B each.

 

unsecured spreads have tightened from 280 bps (march peak) to 110 bps.

 

Since April, Camden, AvalonBay, UDR, Mid-America and Essex have raised a total of $2.8 billion at a blended 2.3% coupon.

 

and the agency mortgage market is wide open: 

Spreads on apartment mortgages are tighter than most other asset classes, especially for fixed-rate debt. In the commercial mortgage-backed-securities market, agency-backed apartment issuance is highest among all property types, even as overall volume has fallen in 2020.

 

since beginning of thread, I think we've seen fundamentals deteriorate more quickly and more severely than expected, but financing has also recovered more quickly than expected and is pretty much better than pre-covid.

 

I think this combination suggests that eventually these REITs become acquisitive; using their huge balance sheet capacity as an offensive, rather than defensive weapon. For now though, I think they're using it to keep the buildings full and pretty much engage in what could be called a value destructive price war to keep the buildings full.

 

All-in, my exposure to multifamily has decreased (ex JBGS). bought basket in March, took profits on the way up, and have not been averaging down.

 

I think we'll see lower, potentially significantly lower prices as the changes in rent make their way into the financials as pre-covid leases roll off. a peak rent 12 month lease signed in February has only 5 months left.

 

that said, it's not like every apartment these guys own is in Manhattan and San Francisco CBD and the situation is not nearly as bad as you move out from there. so i could be erring on the side of bearish.

[BG2008]

there's a bloomberg intelligence article today that summarizes what we know about the apartment REITs robust financial condition.

 

AIV, AVB, CPT, EQR, ESS, MAA, UDR collectively have $9 billion of available credit on their revolvers and over $10 billion of cash and available credit. EQR, AVB, and ESS have over $1.5B each.

 

unsecured spreads have tightened from 280 bps (march peak) to 110 bps.

 

Since April, Camden, AvalonBay, UDR, Mid-America and Essex have raised a total of $2.8 billion at a blended 2.3% coupon.

 

and the agency mortgage market is wide open: 

Spreads on apartment mortgages are tighter than most other asset classes, especially for fixed-rate debt. In the commercial mortgage-backed-securities market, agency-backed apartment issuance is highest among all property types, even as overall volume has fallen in 2020.

 

since beginning of thread, I think we've seen fundamentals deteriorate more quickly and more severely than expected, but financing has also recovered more quickly than expected and is pretty much better than pre-covid.

 

I think this combination suggests that eventually these REITs become acquisitive; using their huge balance sheet capacity as an offensive, rather than defensive weapon. For now though, I think they're using it to keep the buildings full and pretty much engage in what could be called a value destructive price war to keep the buildings full.

 

All-in, my exposure to multifamily has decreased (ex JBGS). bought basket in March, took profits on the way up, and have not been averaging down.

 

I think we'll see lower, potentially significantly lower prices as the changes in rent make their way into the financials as pre-covid leases roll off. a peak rent 12 month lease signed in February has only 5 months left.

 

that said, it's not like every apartment these guys own is in Manhattan and San Francisco CBD and the situation is not nearly as bad as you move out from there. so i could be erring on the side of bearish.

 

Wimp,

 

The way to make money in NYC is to buy and never sell through thick and thin.  With 2% financing, these bad boys will trade at 3% cap rate eventually.  :P :P  I'm joking, but kind of serious at the same time. 

[thepupil]

this guy is arguing that as well. the United States does actually have cheaper urban real estate compared to much of the developed world even though people (including me) like to complain / point out about how "expensive" it is.

 

I don't agree we'll see 3% cap rates, but I would assign a higher probability to that scenario than most market participants.

 

https://www.privateeyecapital.com/germanys-vonovia-the-case-for-cap-rate-compression-at-essex/

[thepupil]

https://www.costar.com/article/1866671625/apartment-tower-sale-smashes-atlanta-price-record

 

KKR and a partner paying $180 million for Hanover Midtown in Atlanta. This appears to be quite a sexy building, 350 units.

 

https://www.hanovermidtown.com/hanover-midtown-atlanta-ga/location

https://www.apartments.com/hanover-midtown-atlanta-ga/pfsrw7t/

 

another article says the building also has some retail and 2 floors of office leased to WeWork, so I'm not sure if the price includes or excludes that (I don't have acess t the costar article). If I chop off $0-$40mm for that, this is $400K - $515K / unit. If the retail and office is more then it's less per unit.

 

Nevertheless a strong print for multifamily.

 

Earlier upthread KKR paid $800K+ unit for brooklyn multifamily.