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

[BG2008]

I didn't save the tweet, but there a handful of RE Twittter personalities saying that they can find any MF at 4% cap rate in Dallas. 

[thepupil]

EQR results look pretty bad, as expected.

[BG2008]

I didn't save the tweet, but there a handful of RE Twittter personalities saying that they can find any MF at 4% cap rate in Dallas.

 

I meant to say "Can't"

[CorpRaider]

What's your @twitter BG?

[rb]

Wow! This thing looks like a slasher film today.

[thepupil]

$337K / unit, 5.8% cap on new fundamentals, bought a little more but by no means a material position yet. waiting for and expect more pain, many years of pain.

 

 

[thepupil]

https://www.privateeyecapital.com/essex-property-trust-3q-results-pretty-pretty-good/

 

 

[thepupil]

 

 

luxury building on union square south going for $884K / unit. without knowledge of the value of the retail, difficult to figure out an "apartment only" price.

 

an NYC bear say "you can't count this one, because it has high value retail near/on union square. that's not a real per unit price"...to which i'd respond" so you're saying well-located NYC retail has a  lot of value?

 

this is a pretty expensive building: https://streeteasy.com/building/1-union-square-south-new_york#tab_building_detail=1

 

a penthouse 1BR is $6K and a studio is $3.5K.

 

bonus points to who knows who owns the whole foods next door on Union Square, Whole Foods first location in NYC. i'll give you a hint. it rhymes with Tornado.

 

 

[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)

 

the bolded was wrong.

 

if we assign credibility to the apartment REITs guidance (and assume no further degradation), NOI peak to trough is going to be more like 20%.

 

since this post the apartment REITs returned 6-26% vs SPY of 56%, since I bought them the first time around, they returned 30-62%, but the S&P returned 77% (all rough figures, I've bot and trimmed them along the way as they've been volatile)

 

despite the underperformance, I don't think they're super interesting today, own them in basket form in smaller size than peak. I think financing and capital market conditions have been wonderful, better than they ever have been for these guys, and the cities are showing green shoots (and sunbelt is going nuts MAA/CPT), but even assuming full recovery they're not super attractive, unless you give FULL credit for the private market sub 4 cap craziness going on.

 

on the other hand, with single-family housing prices doing what they're doing, the value proposition of an amenitized $2,500 / month apartment is probably being further validated (if you want to live in these areas). and i do think multi-family is one of the few spots in real estate where it is a legit inflation hedge (1 yr lease length, 60-70% NOI margins, relatively low capital intensity (compared to office), increasing land/labor/materials cost increase cost of new supply)

 

 

 

 

 

[CorpRaider]

I'm about to dump my AIRC.

[fareastwarriors]

I'm about to dump my AIRC.

 

Why? Why now?

[CorpRaider]

I thought $50 was/is a fair price, but you're right I should probably sit on my duff and cash the dividends and just start monitoring the moving averages and stuff.

[thepupil]

On 10/4/2020 at 10:08 AM, rb said:

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.

to update on the Wisconsin Place tracking

April 2020:          2BR's: $3,600

October 2020:    2BR's $2,400

April 2021:           2BR's $3,100

Nature appears to be healing for yuppie apartments. 

where i used to live, my 2BR unit is now $3,100. this is what i rented it for in 2016 which had dropped from $3,400 ish due to some new supply that had recently came on, we locked this in for 2 years, it got raised to $3,300, then we chose to not renew in 2019 when it got bumped to $3,500 (and it was time for us to buy). 

using this anecdata, rents are staging strong recoveries from the lows, but aren't near peak (not sure if they get to peak for a while).

I think all this is mostly priced in and don't think the high quality blue chip MF REITs are terribly attractive (unless we go full Europe/Japan etc in terms of rates or Canada / Oz in terms of housing prices lol. 

 

[thepupil]

On 4/9/2021 at 8:30 AM, thepupil said:

to update on the Wisconsin Place tracking

April 2020:          2BR's: $3,600

October 2020:    2BR's $2,400

April 2021:           2BR's $3,100

October 2021    2BR's $3,500 - $4,800 for the penthouse! 

Nature appears to be healing for yuppie apartments. 

where i used to live, my 2BR unit is now $3,100. this is what i rented it for in 2016 which had dropped from $3,400 ish due to some new supply that had recently came on, we locked this in for 2 years, it got raised to $3,300, then we chose to not renew in 2019 when it got bumped to $3,500 (and it was time for us to buy). 

using this anecdata, rents are staging strong recoveries from the lows, but aren't near peak (not sure if they get to peak for a while).

I think all this is mostly priced in and don't think the high quality blue chip MF REITs are terribly attractive (unless we go full Europe/Japan etc in terms of rates or Canada / Oz in terms of housing prices lol. 

 

 

cycles are quick lol. 

https://www.equityapartments.com/washington-dc/friendship-heights/wisconsin-place-apartments?mkwid=sC8omg1vW_dc&pcrid=432501756441&pkw=wisconsin place apartments&pmt=e&utm_source=google&utm_medium=cpc&utm_term=Wisconsin+Place+Apartments&utm_campaign=&utm_group=Wisconsin+Place+Apartments&gclsrc=aw.ds&&utm_source=google&utm_medium=cpc&utm_campaign=EQR_DC_Properties_Search_Branded_Exact_Null&mkwid=sC8omg1vW|pcrid|432501756441|pkw|wisconsin place apartments|pmt|e|pdv|c|slid||product||pgrid|39963762959|ptaid|kwd-43356067367|&pgrid=39963762959&ptaid=kwd-43356067367&utm_content=sC8omg1vW|pcrid|432501756441|pkw|wisconsin place apartments|pmt|e|pdv|c|slid||product||pgrid|39963762959|ptaid|kwd-43356067367|&intent=DC_b&gclid=CjwKCAjw49qKBhAoEiwAHQVTo3nqfUyElYJNGewJrf3y5E-iyLUfvM8rt1LzZHTZePlocJJ0ZCokoxoCtccQAvD_BwE##unit-availability-tile

[Spekulatius]

1 hour ago, thepupil said:

 

cycles are quick lol. 

https://www.equityapartments.com/washington-dc/friendship-heights/wisconsin-place-apartments?mkwid=sC8omg1vW_dc&pcrid=432501756441&pkw=wisconsin place apartments&pmt=e&utm_source=google&utm_medium=cpc&utm_term=Wisconsin+Place+Apartments&utm_campaign=&utm_group=Wisconsin+Place+Apartments&gclsrc=aw.ds&&utm_source=google&utm_medium=cpc&utm_campaign=EQR_DC_Properties_Search_Branded_Exact_Null&mkwid=sC8omg1vW|pcrid|432501756441|pkw|wisconsin place apartments|pmt|e|pdv|c|slid||product||pgrid|39963762959|ptaid|kwd-43356067367|&pgrid=39963762959&ptaid=kwd-43356067367&utm_content=sC8omg1vW|pcrid|432501756441|pkw|wisconsin place apartments|pmt|e|pdv|c|slid||product||pgrid|39963762959|ptaid|kwd-43356067367|&intent=DC_b&gclid=CjwKCAjw49qKBhAoEiwAHQVTo3nqfUyElYJNGewJrf3y5E-iyLUfvM8rt1LzZHTZePlocJJ0ZCokoxoCtccQAvD_BwE##unit-availability-tile

You guys better make money by the boatload with these rents.

[thepupil]

today, i purchased a decent sized position in ESS in one go, using some BBB bonds and ALX as funding. Off 35% from pre-covid and 40% from post covid peak and at about the same price as early 2015, ESS has endured a nice drawdown and is trading at a high 5's cap rate. I get EV/Unit of about $360K with low ~$105-$110K/unit of debt all of which is well termed out and at relatively low cost. About 14x 2023E FFO / 4% divvy yield. 

 

ESS owns 57,000 (at share, 52K wholly owned then 50% of 10K) mostly suburban California and Washington apartments in LA/SF/Seattle metro areas. They command rents on average of $2500 / month and they own many buildings in ritzy areas where its more like $3.5-$5.0K. This is the cheapest way to buy California housing. No one is able to buy or build at cheaper price than on the stock market through ESS. Further, to assemble this portfolio and at its basis and margin (given the whole prop tax thing in cali) would be impossible. 

 

NEar term fundamentals will probably suck. tech layoffs, recession, California exodus. headlines will rage. but it's hard to build, it's the world's fifth largest economy, GDP/Capita in the areas where ESS owns RE is very high. ESS is an advantaged and well capitalized owner should distress arise. 

 

I started the year with big NEN and FRPH positions. I've trimmed those by 50% and 25%, respectively. FRPH is up 3% YTD, NEN up 15% YTD. ESS is down 38%. Each of these securities primarily own coastal apartments in DC, Boston, and Cali. that's a big swing and in my view should be taken advantage of. 

 

 

 

Edited November 10, 2022 by thepupil

[Dinar]

10 minutes ago, thepupil said:

today, i purchased a decent sized position in ESS in one go, using some BBB bonds and ALX as funding. Off 35% from pre-covid and 40% from post covid peak and at about the same price as early 2015, ESS has endured a nice drawdown and is trading at a high 5's cap rate. I get EV/Unit of about $360K with low ~$105-$110K/unit of debt all of which is well termed out and at relatively low cost. About 14x 2023E FFO / 4% divvy yield. 

 

ESS owns 57,000 (at share, 52K wholly owned then 50% of 10K) mostly suburban California and Washington apartments in LA/SF/Seattle metro areas. They command rents on average of $2500 / month and they own many buildings in ritzy areas where its more like $3.5-$5.0K. This is the cheapest way to buy California housing. No one is able to buy or build at cheaper price than on the stock market through ESS. Further, to assemble this portfolio and at its basis and margin (given the whole prop tax thing in cali) would be impossible. 

 

NEar term fundamentals will probably suck. tech layoffs, recession, California exodus. headlines will rage. but it's hard to build, it's the world's fifth largest economy, GDP/Capita in the areas where ESS owns RE is very high. ESS is an advantaged and well capitalized owner should distress arise. 

 

I started the year with big NEN and FRPH positions. I've trimmed those by 50% and 25%, respectively. FRPH is up 3% YTD, NEN up 15% YTD. ESS is down 38%. Each of these securities primarily own coastal apartments in DC, Boston, and Cali. that's a big swing and in my view should be taken advantage of. 

 

 

 

Thank you, why not EQR or ELS or AVB?  Thank you.

[thepupil]

7 minutes ago, Dinar said:

Thank you, why not EQR or ELS or AVB?  Thank you.

 

 

ELS: Recognizing that it's probably best biz model in all of housing and like the best REIT ever, still seems a little rich. 

 

EQR/AVB: maybe i should buy those too, but just wanted the pure west coast vehicle. I kind of view all of them as different flavors of the same thing. 

[realassetsvalue]

Now that all the major US MF REITs have reported, implied valuation metrics (including today's big move up for REITs) are below... Simple guesstimates for the value of other assets / property types owned so this view might be different than a more detailed U/W of Veris, for example.

 

 

Camden is a noticeable outlier within the more sunbelt focused REITs from a valuation perspective and Essex is slightly cheaper than either AvalonBay or Equity Residential. MAA has probably gotten expensive relative to the coastal REITs given the lower barriers to entry in their markets.

 

Pupil's reasoning on Essex vs. the other guys makes sense to me. Worth noting that development and other assets are 3% - 4% of EV for both AVB and ESS but ~1% for EQR.

[thepupil]

On 11/10/2022 at 1:39 PM, thepupil said:

today, i purchased a decent sized position in ESS in one go, using some BBB bonds and ALX as funding. Off 35% from pre-covid and 40% from post covid peak and at about the same price as early 2015, ESS has endured a nice drawdown and is trading at a high 5's cap rate. I get EV/Unit of about $360K with low ~$105-$110K/unit of debt all of which is well termed out and at relatively low cost. About 14x 2023E FFO / 4% divvy yield. 

 

ESS owns 57,000 (at share, 52K wholly owned then 50% of 10K) mostly suburban California and Washington apartments in LA/SF/Seattle metro areas. They command rents on average of $2500 / month and they own many buildings in ritzy areas where its more like $3.5-$5.0K. This is the cheapest way to buy California housing. No one is able to buy or build at cheaper price than on the stock market through ESS. Further, to assemble this portfolio and at its basis and margin (given the whole prop tax thing in cali) would be impossible. 

 

NEar term fundamentals will probably suck. tech layoffs, recession, California exodus. headlines will rage. but it's hard to build, it's the world's fifth largest economy, GDP/Capita in the areas where ESS owns RE is very high. ESS is an advantaged and well capitalized owner should distress arise. 

 

I started the year with big NEN and FRPH positions. I've trimmed those by 50% and 25%, respectively. FRPH is up 3% YTD, NEN up 15% YTD. ESS is down 38%. Each of these securities primarily own coastal apartments in DC, Boston, and Cali. that's a big swing and in my view should be taken advantage of. 

 

 

 

 

 

Essex only sold 1 building in Q4 2022. It was for 4.3% and $640K / unit. It's probably nicer than their average apartment and in the end who cares because it's just 250 / 57,000 units (0.4%), but for that teensy 0.4% the public company, the stock was/is basically at a 45% discount to PMV on an EV basis and moreso on the equity.

 

Edited February 8, 2023 by thepupil

[Gregmal]

I think you missed the memo. They claimed cap rates blew out big time but supposedly it’s a lagging indicator and they moved the original lag date from q2 to q4 2022 and then again to q3/4 2023. The proof is that some guy on Twitter bought a value add strip center with an apartment on top, somewhere in Missouri, at like a 7 cap….

 

Yes, it was always this amusing from day 1.

[Dinar]

I got solicited by Fidelity the other day for a private real estate fund, the first time that this has happened in two decades even though I have had roughly the same amount of money there for a decade plus.

[Ulti]

https://www.theatlantic.com/ideas/archive/2023/02/florida-new-york-housing-population-republican-democrat/672994/

[rosemontseneca]

Time to load up?

[LearningMachine]

13 minutes ago, rosemontseneca said:

Time to load up?

 

Might want to check how much money they would make assuming they have to refinance at 7-10% instead of 3-5%, and if debt service coverage ratio is not acceptable, which assets they give back to the bank.