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

[Dinar]

7 minutes ago, LearningMachine said:

 

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. 

Under what conditions do you expect 7-10% financing rates?   What do you expect to get them there?  Why not 10-20%?

[Gregmal]

1 minute ago, Dinar said:

Under what conditions do you expect 7-10% financing rates?   What do you expect to get them there?  Why not 10-20%?

This has been a thing with @LearningMachine for a few years now. 10% rates. It’s definitely not the most realistic assumption, but it’s worth considering. 

[LearningMachine]

21 minutes ago, Dinar said:

Under what conditions do you expect 7-10% financing rates?   What do you expect to get them there?  Why not 10-20%?

 

You just want to make sure you will be fine either way, i.e. (1) they have to refinance at high rates, or (2) they can refinance at low rates.

 

To do the exercise to protect yourself, you don't need to know whether #1 will happen with 100% probability. 

 

 

[thepupil]

the high quality multifamily REITs access 2 markets for financing. The corporate unsecured investment grade market and the agency multifamily market. These are both typically in the government + 100-200 bps area. Implied in @LearningMachine tail risk financing market is a 5-8% 10 yr yield. the world / banking sector started breaking at 4%. 

 

I personally view the probability of a 7% 10 yr as EXTREMELY low. but if it did happen, most of these MF REITs could trash their divvies and pay off their debt while the entirety of the RE market would effectively blow up. 

 

If we applied tail scenarios to most investments, we would not get comfortable with much. 

[LearningMachine]

 

46 minutes ago, thepupil said:

the high quality multifamily REITs access 2 markets for financing. The corporate unsecured investment grade market and the agency multifamily market. These are both typically in the government + 100-200 bps area. Implied in @LearningMachine tail risk financing market is a 5-8% 10 yr yield. the world / banking sector started breaking at 4%. 

 

I personally view the probability of a 7% 10 yr as EXTREMELY low. but if it did happen, most of these MF REITs could trash their divvies and pay off their debt while the entirety of the RE market would effectively blow up. 

 

If we applied tail scenarios to most investments, we would not get comfortable with much. 

 

So, if our limit is interest rates can go up 4% per year, you can easily see the possibility of getting to 7-10% over a few years.  Getting to 7-10% in some years might be deadly given relatively low average maturity of loans at some of these REITS. 

 

So, I don't see the probability of 7% 10 year as EXTREMELY low.  Not only do I see 7% as a significant enough possibility to do the exercise to make sure you don't lose a lot in that scenario, I also see 10% as a possibility enough to do the exercise to make sure you don't killed if that happens over years.  

[thepupil]

The whole world breaks at those govvy rates. 
 

it’s a pet theory of yours that’s probably my priced at a sub 1% probability. You should just roll options on futures because you’ll make like bajillion dollars if that comes to pass.

 

and l these REITs are 30-40% LTV and 4-6x ND/EVITDa when the private market is 1.5-2.0x more levered and sometimes with floaters 

 

 

[Spekulatius]

6 minutes ago, thepupil said:

The whole world breaks at those govvy rates. 
 

it’s a pet theory of yours that’s probably my priced at a sub 1% probability. You should just roll options on futures because you’ll make like bajillion dollars if that comes to pass.

 

and l these REITs are 30-40% LTV and 4-6x ND/EVITDa when the private market is 1.5-2.0x more levered and sometimes with floaters 

 

 

The economy might break, but it's not clear to me that MF Reits will break. 10% interest rates do not occur in a vacuum - they are likely are caused by high inflation. My guess is that 10% interest rates mean ~ 10% inflation which also likely means 10% (likely higher) rent increases. So, depending on the rate / inflation trajectory, it might not hurt then Reits as much as you would think.

[Gregmal]

12 minutes ago, Spekulatius said:

The economy might break, but it's not clear to me that MF Reits will break. 10% interest rates do not occur in a vacuum - they are likely are caused by high inflation. My guess is that 10% interest rates mean ~ 10% inflation which also likely means 10% (likely higher) rent increases. So, depending on the rate / inflation trajectory, it might not hurt then Reits as much as you would think.

Exactly

[LearningMachine]

3 hours ago, Spekulatius said:

The economy might break, but it's not clear to me that MF Reits will break. 10% interest rates do not occur in a vacuum - they are likely are caused by high inflation. My guess is that 10% interest rates mean ~ 10% inflation which also likely means 10% (likely higher) rent increases. So, depending on the rate / inflation trajectory, it might not hurt then Reits as much as you would think.

 

10% inflation takes more than 7 years to double rent. 

 

10% interest rates start more than doubling interest cost at the the next refinancing.

 

Once market starts learning the impact of not being able to get refinancing with some REITS at even 7%, market might start to price in that 10% interest rate cost much faster than 7 years.

Edited March 23, 2023 by LearningMachine

[LearningMachine]

4 hours ago, thepupil said:

it’s a pet theory of yours that’s probably my priced at a sub 1% probability. You should just roll options on futures because you’ll make like bajillion dollars if that comes to pass.

 

There is a big gulf between sub 1% probability and almost 100% certainty that would be needed for some to go play with options. 

 

For that big gulf in between, especially if someone thinks it is a possibility much higher than 1% even if not 100%, to protect yourself, it makes sense to do the exercise on how a REIT would perform in a 7-10% interest rate environment. 

Edited March 24, 2023 by LearningMachine

[CorpRaider]

Logic and history indicate that REITs would likely respond similarly to long duration bonds, but somewhat better.

Edited March 24, 2023 by CorpRaider

[formthirteen]

Saw this on Tweeter:

 

 

Business as usual. Debt has to be paid by someone, probably the taxpayers as it looks now.

 

Quote

The CMBX indexes are reconstituted every six months to bring in new securities and thereby continuously reflect the current health of the CMBS market.

…

Because CMBS trade over-the-counter. they tend to be opaque, illiquid, and unregulated. The CMBX provides a way to track CMBS prices and provide transparency and accountability.

…

There are five separate CMBX indexes for ratings ranging from "AAA" to "BBB-"

 

https://www.investopedia.com/terms/c/cmbx_indexes.asp

 

Not an expert, and I don't know what this means, but I would guess it means stick to quality.

Edited March 24, 2023 by formthirteen

[Luca]

@LearningMachineJust watched a video about Vonovia, German Reit. Stock Price completely collapsed, Liabilities 4x marketcap, Longterm Debt 3x Marketcap. Leveraged cheap in low rates and now is faced with a new environment. German Rents are growing much more slowly than US due to regulation. They also could face lots of costs due to green regulations. Dont know how long they financed but prices are going down down down too for properties. Looks scary. 

[Aurel]

1 hour ago, Luca said:

@LearningMachineJust watched a video about Vonovia, German Reit. Stock Price completely collapsed, Liabilities 4x marketcap, Longterm Debt 3x Marketcap. Leveraged cheap in low rates and now is faced with a new environment. German Rents are growing much more slowly than US due to regulation. They also could face lots of costs due to green regulations. Dont know how long they financed but prices are going down down down too for properties. Looks scary. 

I might add that Vonovia is not leaglly a REIT. So they don't have the tax privileges and payout-regulationof of a REIT.

 

They own roughly 550.000 flats in germany and the overall rent is quite low compared to market standarts.

So the EV of ~60B looks quite low to me.

 

And they face political headwinds in Germany, but I think that's easy to handle.

 

 

Edited March 24, 2023 by Aurel

[Spekulatius]

12 hours ago, formthirteen said:

Saw this on Tweeter:

 

 

Business as usual. Debt has to be paid by someone, probably the taxpayers as it looks now.

 

 

Not an expert, and I don't know what this means, but I would guess it means stick to quality.

Yep, found a similar chart from MS. Shows the BBB- (lowest investment grade) CMBX price which apparently correlates with Reit prices.

[Spekulatius]

17 hours ago, CorpRaider said:

Logic and history indicate that REITs would likely respond similarly to long duration bonds, but somewhat better.

Reits are not bonds. Some like NNN are very much like bonds or even office Reits with long duration leases often are, but others like MF reits that reprice yearly clearly are not.

 

For example since the 1990's, I believe commercial property as a group traded at higher Cap rate than the 10year risk free treasury. However, in the 70's, commercial property actually traded a lower cap rate than the 10 year treasury. Why - because commercial property owners could generally raise rent with increasing inflation, so there was an inherent inflation protection build in which of course was appreciated by property owners.

 

Reits as an asset class did not exist yet in the 70's as far as i know, so we can't look at that part of the stock market history.

[CorpRaider]

I think we said the same thing?  "Somewhat better" ->  you're saying (at least with respect to the private RE proxy) was recognized by the market buyers via paying lower cap rate.  I do remember the 90s.  If you buy at a high starting yield your return looks a lot like that starting yield + a little.  Even Buffett was buying REITS in his personal account IIRC.  Probably better idea than me buying GOOG at 50 trillion market cap with Bard sucking ass.    

 

Disclosure, I also still believe the CAPE will continue to exhibit a high correlation (~.80 R squared) with returns of stonks over long periods and am reading Prof. Schiller's new book right now. 

Edited March 24, 2023 by CorpRaider

[thepupil]

I added MAA and CPT to my existing ESS today. I was a touch aggressive in buying 5.0% ers in each given the low leverage of these bad boys. 

 

For learning machine's sake CPT has $1B of 2023E NOI. and $3.6B of debt paying 4.0%. Here's how the WA rate changes with no paydown if they had to refi everything at 10%. It would add about $215mm of interest and decrease AFFO by 30% over the next decade or so. 

 

In the real world, CPT's debt yields 4.8-6.0%. If they renew at 6% over next decade about 10% of today's AFFO goes away over a decade (so a 1% / yr each headwind, assuming no offsetting increase). Note that if they have to renew at 6%, you're still at 5.1% wgt average rate in 2029. 

 

the flip side of this is the returns on these bad boys (absent m&a which MAA is too big for) can't be all that great because there's just so little leverage relative to private market, but think they're good r/r down here and very average down-able in the event of an extended downturn (which we may be entering). 

 

 

 

 

 

if they renew at 6%

 

Edited March 27, 2023 by thepupil

[LearningMachine]

16 minutes ago, thepupil said:

For learning machine's sake CPT has $1B of 2023E NOI. and $3.6B of debt paying 4.0%. Here's how the WA rate changes with no paydown if they had to refi everything at 10%. It would add about $215mm of interest and decrease AFFO by 30% over the next decade or so. 

 

In the real world, CPT's debt yields 4.8-6.0%. If they renew at 6% over next decade about 10% of AFFO goes away over a decade (so a 1% / yr each headwind). 

 

 

Thanks @thepupil for doing the exercise with 10% interest rates :-). 

 

Just so that I understand fully, what did you mean by "1%/yr each headwind"?  That weighted average interest rate goes up by 1% each year? 

 

Regarding net cash from operating activities, I see it was $744.7M in 2022. 

 

For 2023, assuming we believe their midpoint FFO per share, at 106,700,488 shares, FFO would be $747M for all shares in 2023. 

 

Taking $215M of interest from 747M would be $532M.

 

At that point, if the market prices CPT at 7-10% leveraged yield (in line with unleveraged risk-free 7-10% treasuries at the time), CPT market cap would be $5.3B to $7.6B.

 

That said, CPT would have an edge over treasuries to be able to increase rents. 

 

[thepupil]

The 1% / year comment is in reference to incremental interest expense if they have to refi their 3.9% get average debt at 6%. It increases interest expense by cumulative $75mm over 10 years which was about 10.5% cumulatively, which was about 1%.

 

it’s higher at 10%. The 30% of AFFO comment. 
 

there are 2 tables in the post which show how the wgt average rate changes at 10% and 6%.

 

 

Edited March 27, 2023 by thepupil

[LearningMachine]

1 minute ago, thepupil said:

The 1% / year comment is in reference to incremental interest expense if they have to refi their 3.9% get average debt at 6%. It increases interest expense by cumulative $75mm over 10 years which was about 10.5% cumulatively, which was about 1%.

 

it’s higher at 10%. The 30% of AFFO comment. 

Got it, thanks @thepupil.

[thepupil]

43 minutes ago, LearningMachine said:

 

At that point, if the market prices CPT at 7-10% leveraged yield (in line with unleveraged risk-free 7-10% treasuries at the time), CPT market cap would be $5.3B to $7.6B.

 

 

this scenario contemplates high quality apartments trading to 9-11% cap rates and $150K / unit - $190K / unit on today's NOI. I can only find data to 1986, but the absolute peak CR on multifamily was in early 90's at around 9% according to what i can find. and that's before the institutionalization of the asset class. 

 

Said differently, this scenario contemplates apartments trading to 1.5-2.0x it's tenants' income and like 1/2 replacement costs (which would theoretically be increasing at inflation as well). In such a scenario, no apartment will get build (few are being approved now at current prohibitive short term financing rates). 

 

ALL risk assets will decline significantly if the risk free rate goes up by 350 - 650 bps. it's kind of like saying "what if stocks PE goes to 7x?". It's like "yea, then I'll lose a lot of money". 

Edited March 27, 2023 by thepupil

[LearningMachine]

11 minutes ago, thepupil said:

ALL risk assets will decline significantly if the risk free rate goes up by 350 - 650 bps. it's kind of like saying "what if stocks PE goes to 7x?". It's like "yea, then I'll lose a lot of money". 

 

What if you could feel joy when your stock's PE goes to 7x? 

 

You'd feel that

• #1. if you had cash ready to deploy into the stock, or
• #2. if the company you own is making even more money hand over fist in that environment, and either
  • (a) the market has realized it and bid it up, and you can exit it to buy those other stocks at 7x, or
  • (b) the market has not realized it but the company you own is making so much free cash hand over fist that it is buying back that stock at 7x hand-over-fist and adding even more value to you as a shareholder. 

So, I think you would want to be in one of the above categories. 

 

CPT so far doesn't meet 2(b) for me given their history of dilution, and also doesn't meet 2(a) for me because it won't be making money hand-over-fist in that environment. 

Edited March 27, 2023 by LearningMachine

[thepupil]

10 minutes ago, LearningMachine said:

CPT so far doesn't meet 2(b) for me given their history of dilution, and also doesn't meet 2(a) for me because it won't be making money hand-over-fist in that environment. 

 

well sure, I'd like a stock like that, but that doesn't exist. If you think it does, I'm all ears. What stocks do you think fit that criteria?

 

Of course, stocks collapsing would increase the return on redeployment, but I can assure you if risk free rates go to 7-10% and PE's go to 7x, I and everyone else is going to lose a shit ton of money and not be happy. 

 

 

CPT has been around since 1993. According to bloomberg, In 1994 it had 9.1mm shares. Today it has 106mm. In 2013 it had 84mm. 

 

Despite all that share issuance and "dilution", after a 44% drawdown from peak, CPT has returned  9.4%/yr over the last 10 yrs (behind S&P 500's 11.9%/yr and ahead of broad RE 6.3%/yr) and 11.4%/yr for the last 30 or so years (ahead of S&P500's 9.8%/yr and REIS 9.5%/yr.

 

What you call "dilution", I would describe as "value accretive issuance"

 

 

Edited March 27, 2023 by thepupil

[LearningMachine]

5 minutes ago, thepupil said:

 

well sure, I'd like a stock like that, but that doesn't exist. If you think it does, I'm all ears. What stocks do you think fit that criteria?

 

Of course, stocks collapsing would increase the return on redeployment, but I can assure you if risk free rates go to 7-10% and PE's go to 7x, I and everyone else is going to lose a shit ton of money and not be happy. 

 

 

CPT has been around since 1993. According to bloomberg, In 1994 it had 9.1mm shares. Today it has 106mm. In 2013 it had 84mm. 

 

Despite all that share issuance and "dilution", after a 44% drawdown from peak, CPT has returned  9.4%/yr over the last 10 yrs (behind S&P 500's 11.9%/yr and ahead of broad RE 6.3%/yr) and 11.4%/yr for the last 30 or so years (ahead of S&P500's 9.8%/yr and REIS 9.5%/yr.

 

What you call "dilution", I would describe as "value accretive issuance"

 

 

 

Let's start with P/E of 7, i.e. earnings yield of 14.3%.

 

In what environment would the earnings yield be 14.3%? 

 

• Maybe when risk-free interest rate is 7-10%?  What types of companies will be making a lot of earnings at interest rates of 10%?
• Maybe when inflation is also baked in at 7-10%?  What types of companies will be making a lot of earnings at inflation of 10%? 
• Maybe when there is a big calamity and there is a lot of fear in the market? What would our democratically elected politicians be doing in that environment?  What types of companies will be making a lot of money in that environment?