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

[Gregmal]

11 hours ago, thepupil said:

Anyways back to MF. for those who didn’t see this, large landlord  (CEO of 26K unit owner) tweeted this today and said the posted cap rates were not representative of the market and were unrealistically HIGH. while we sit here and wonder if 6.5% is going to 8%, private market still in the 4’s and 5’s, with maybe even high 3 handle here and there.

 

that’s basically the opportunity/disconnect.

 

https://twitter.com/MRossG199/status/1640338388459876352?s=20

Yup. I already had great disdain for Twitter and the financial press. Last year Ive just begun completely tuning it out. Theyre self serving shitbags and by and large total liars who are pushing something. Youd think MF units were distressed and trading a 6-7 caps for class A or that no residential SFH are moving listening to most of these assholes. And that couldn't be further from the truth. You still cant buy a desirable MF complex without paying the numbers you mentioned, and while Ive stopped looking at acquisitions locally, recently was shocked to hear several friends and family members in the market for a home, detail to me what the NYC suburb area market looks like. Same in Philly. Its bonkers. 

[thepupil]

6 minutes ago, Gregmal said:

Yup. I already had great disdain for Twitter and the financial press. Last year Ive just begun completely tuning it out. Theyre self serving shitbags and by and large total liars who are pushing something. Youd think MF units were distressed and trading a 6-7 caps for class A or that no residential SFH are moving listening to most of these assholes. And that couldn't be further from the truth. You still cant buy a desirable MF complex without paying the numbers you mentioned, and while Ive stopped looking at acquisitions locally, recently was shocked to hear several friends and family members in the market for a home, detail to me what the NYC suburb area market looks like. Same in Philly. Its bonkers. 

 

he is saying the market is much tighter than posted. he is a credible person who owns 26K units (or runs a company that has investors which own 26K units more accurately). I'm not sure who you are referring to. 

Edited March 28, 2023 by thepupil

[Gregmal]

5 minutes ago, thepupil said:

 

he is saying the market is much tighter than posted. he is a credible person who owns 26K units (or runs a company that has investors which own 26K units more accurately). I'm not sure who you are referring to. 

Anything on financial news shows/sites, the majority of the "big follows" on Twitter. There arent many who are saying what this guy is, which is weird, because what this guy is saying is the truth. 

[thepupil]

my zip has an interesting bifurcation going on. the moribund condo market seems pretty bad (because of folks like JBGS who constantly build nice new  buildings which hurts the 1960's / 1970's buildings the most. still have a few more years of working through this, high short term rates and decreasing return on development will allay the supply. 

 

single family on the other hand. you'll pry the good inventory from everyone's cold dead hands. Transactions down 43% LOL. 

 

 

 

[Gregmal]

Yea I dont know how well you know the NJ suburbs of NYC, but my sister in law is looking for a starter. 28, nurse with good w2, wants to be around $400-500k. Willing to be travel a bit too for a good place. Just nothing. From Dumont to Parsippany, Verona, Midland Park, Scotch Plains, etc. Same shit. No inventory. On why are you looking in that area.."Im not, im just looking at a price range and theres not much showing up anywhere so I am willing to go where theres houses". And still, when you find them, theres dozens of bids right off the bat, ask or better. Seems $400k is the new $250k, which is crazy considering theyre also many cases 1920-1950s built homes and often 2/2 or 3/2 at best. Brother is in Philly, same thing in a decent area. Same in most of FL where I look. Meanwhile....on the airwaves... "housing is frozen/crashing"....

Edited March 28, 2023 by Gregmal

[Gregmal]

Twitter summed up

 

[Dinar]

1 hour ago, Gregmal said:

Yea I dont know how well you know the NJ suburbs of NYC, but my sister in law is looking for a starter. 28, nurse with good w2, wants to be around $400-500k. Willing to be travel a bit too for a good place. Just nothing. From Dumont to Parsippany, Verona, Midland Park, Scotch Plains, etc. Same shit. No inventory. On why are you looking in that area.."Im not, im just looking at a price range and theres not much showing up anywhere so I am willing to go where theres houses". And still, when you find them, theres dozens of bids right off the bat, ask or better. Seems $400k is the new $250k, which is crazy considering theyre also many cases 1920-1950s built homes and often 2/2 or 3/2 at best. Brother is in Philly, same thing in a decent area. Same in most of FL where I look. Meanwhile....on the airwaves... "housing is frozen/crashing"....

Houses for $1.8-$1.9MM in Millburn and Ridgewood still get 6-7 bids within a week of listing.

[lnofeisone]

2 hours ago, thepupil said:

my zip has an interesting bifurcation going on. the moribund condo market seems pretty bad (because of folks like JBGS who constantly build nice new  buildings which hurts the 1960's / 1970's buildings the most. still have a few more years of working through this, high short term rates and decreasing return on development will allay the supply. 

 

single family on the other hand. you'll pry the good inventory from everyone's cold dead hands. Transactions down 43% LOL. 

 

 

 

We had dinner with our realtor and he said this. The condo market is absolutely dead in the DC area. Harsh rental rules (no renting allowed) are partially to blame. He also said anything in the $1.2-$2M range consistently gets 5-6 bids. 

[Gregmal]

42 minutes ago, Dinar said:

Houses for $1.8-$1.9MM in Millburn and Ridgewood still get 6-7 bids within a week of listing.

Yea Glen Rock and Ridgewood combined have like 30 homes for sale LOL. Even worse, everyone knows if you’re under $800k in that area you’re buying someone’s long held “As Is”…there’s nuffin and the market is just that strong.
 

Higher rates have just added to the pressure cooker. Liars told us demand was crushed. Even today on CNBC there’s an article that states demand has tempered. This is wholly untrue. The Fed just created a situation where people are at an impasse; sellers have no reason to sell, builders have no reason to build excess or give on price, and buyers just sit here and compete in a death match for scraps. But demand continues to be pent up, big time for housing. And at some point our champion of the people, Elizabeth Warren, is gonna channel her inner Indian and scalp Jerry Powell for being a dumbass with the rates…and at that point the Kraken gets unleashed on areas that have held tight…..or just the market corrects on its own. With 10 year at 3.5 the current 30 year fixed should theoretically be low 5s. 

[thepupil]

3 minutes ago, lnofeisone said:

We had dinner with our realtor and he said this. The condo market is absolutely dead in the DC area. Harsh rental rules (no renting allowed) are partially to blame. He also said anything in the $1.2-$2M range consistently gets 5-6 bids. 

yep, i've found some at what I'd call borderline attractive levels after a 17 year de-rating (plot some of the older building DC condo prices against the median american home over time and you'll see that on average a tired condo on Connecticut used to trade for MORE than typical home and now trades for less, in some cases much less). 

 

But I just don't want to deal with that and would rather just buy the stocks on this thread. 

[thepupil]

Just to continue on the CPT train. You can currently buy CPT for what looks to me to be a $240-$250K / unit (depending on how you count the development pipeline. CPT has been consistently upgrading portfolio over last decade and has been buying apartments in >$200K / unit since 2013 (and shedding lower value properties) and has been delivering new units to the market at >$250K for a decade.

 

The going rate for shiny CPT units that they are developing is $400K/unit. 

 

 

 

this is why when you look at a chart like this below and see that the EV/unit has come down from $350K to $245K but also note that it was $110K/unit in 2012, you have to be careful because they've been consistently upgrading the quality of the portfolio. if you look at their acquisitions and dispositions by year, generally they've been selling old stuff and buying new stuff and obviously any development they've been doing is new stuff. In 2012, the typical CPT apartment was renting for $1000/month, now its $2,200/month. that's a combo of same stor growth, but also the massive amount of change the portfolio has undergone over that time frame.

 

they do the work for you and note that since 2011 they sold $3.4B of assets w/ average oge of 20+ years, developed $4B of assets w/ average age of 6 years and bvought $2.7B w/ avg age of 4 years. 

 

CPT almost meets the "1% rule" which I associate w/ low quality, subscale non institutional real estate and has not been available for this type of asset in a long time. 

 

 

 

 

 

 

Edited March 28, 2023 by thepupil

[Dinar]

2 minutes ago, thepupil said:

Just to continue on the CPT train. You can currently buy CPT for what looks to me to be a $240-$250K / unit (depending on how you count the development pipeline. CPT has been consistently upgrading portfolio over last decade and has been buying apartments in >$200K / unit since 2013 (and shedding lower value properties) and has been delivering new units to the market at >$250K for a decade.

 

The going rate for shiny CPT units that they are developing is $400K/unit. 

 

 

 

this is why when you look at a chart like this below and see that the EV/unit has come down from $350K to $245K but also note that it was $110K/unit in 2012, you have to be careful because they've been consistently upgrading the quality of the portfolio. if you look at their acquisitions and dispositions by year, generally they've been selling old stuff and buying new stuff and obviously any development they've been doing is new stuff. In 2012, the typical CPT apartment was renting for $1000/month, now its $2,200/month. that's a combo of same stor growth, but also the massive amount of change the portfolio has undergone over that time frame.

 

they do the work for you and note that since 2011 they sold $3.4B of assets w/ average oge of 20+ years, developed $4B of assets w/ average age of 6 years and bvought $2.7B w/ avg age of 4 years. 

 

 

 

 

 

 

Yes, but at a 15% on a 10 year treasury, this is a ZERO

[LearningMachine]

1 hour ago, thepupil said:

Just to continue on the CPT train. You can currently buy CPT for what looks to me to be a $240-$250K / unit (depending on how you count the development pipeline. CPT has been consistently upgrading portfolio over last decade and has been buying apartments in >$200K / unit since 2013 (and shedding lower value properties) and has been delivering new units to the market at >$250K for a decade.

 

The going rate for shiny CPT units that they are developing is $400K/unit. 

 

 

 

this is why when you look at a chart like this below and see that the EV/unit has come down from $350K to $245K but also note that it was $110K/unit in 2012, you have to be careful because they've been consistently upgrading the quality of the portfolio. if you look at their acquisitions and dispositions by year, generally they've been selling old stuff and buying new stuff and obviously any development they've been doing is new stuff. In 2012, the typical CPT apartment was renting for $1000/month, now its $2,200/month. that's a combo of same stor growth, but also the massive amount of change the portfolio has undergone over that time frame.

 

they do the work for you and note that since 2011 they sold $3.4B of assets w/ average oge of 20+ years, developed $4B of assets w/ average age of 6 years and bvought $2.7B w/ avg age of 4 years. 

 

CPT almost meets the "1% rule" which I associate w/ low quality, subscale non institutional real estate and has not been available for this type of asset in a long time. 

 

@thepupil, thanks for contributing to joint learning culture through your insightful posts.

 

Is development pipeline your main reasoning for picking CPT over EQR, ESS & AVB, even though CPT seems to have been diluting the most out of the big MF REITs?  Is there more to your reasoning?

 

When interest rates were low, it made sense to be a developer that develops for $250K/unit, get $13,200 (half of $2000*12) net-operating-income and sell at 3.3% cap rate (given low interest rates) for $400K/unit. 

 

When interest rates/inflation/cap rate are high, say 7%, $13,200 of net-operating income translates to $188K/unit.  So, it doesn't make sense to be a developer. 

 

It would be better to be able to buy apartments at below replacement cost of say $150K/unit after there is some more fear on the streets when articles start popping up of smaller operators with higher leverage and lower maturities not being able to refinance as they can't meet debt service ratios. 

Edited March 28, 2023 by LearningMachine

[thepupil]

to steal from @realassetsvalue who just posted a comp sheet on twitter (pasted below), I'm liking CPT because it's approaching a 7 cap making it one of the highest cap rate with the lowest leverage.

 

I like basically all of these. 7 cap for blue chip multifamily in my opinion prices in a lot going wrong. NOI disappointing or cap rates expanding substantially. 

 

You have to pick your poison.

 

You can invest in california (ESS, EQR/AVB to lesser extent, but also 7% of CPT too) and have no supply growth but deal with stormclouds of tech layoffs and blue state outmigration and all that stuff...but no supply growth...Or you can invest in "sunbelt" and have a rosier economic/demographic picture but with  more supply growth. 

 

don't really have a SUPER strong view and am open to all of them, I started w/ ESS in 4Q2022 because it fell a lot for obvious reasons and am now adding sunbelt. I'll add urban coastal (EQR/AVB) too if things keep going down. the problem w/ EQR / AVB is if you already have ESS, it just becomes a big california bet.

 

I have NEN (Boston workforce), FRPH (DC riverfront / developer), the MF side of JBGS (DC). I'm an all you can eat apartment buyer at the right price. 

 

If you want to wait for 10 caps, you are welcome to do so. I'm buying right now. I may be early, I may be wrong. But I prefer to buy things in the real world and not some apocalyptic fantasy scenario. I'm a permabull at heart. 

 

 

 

Edited March 28, 2023 by thepupil

[BG2008]

7 hours ago, thepupil said:

Just to continue on the CPT train. You can currently buy CPT for what looks to me to be a $240-$250K / unit (depending on how you count the development pipeline. CPT has been consistently upgrading portfolio over last decade and has been buying apartments in >$200K / unit since 2013 (and shedding lower value properties) and has been delivering new units to the market at >$250K for a decade.

 

The going rate for shiny CPT units that they are developing is $400K/unit. 

 

 

 

this is why when you look at a chart like this below and see that the EV/unit has come down from $350K to $245K but also note that it was $110K/unit in 2012, you have to be careful because they've been consistently upgrading the quality of the portfolio. if you look at their acquisitions and dispositions by year, generally they've been selling old stuff and buying new stuff and obviously any development they've been doing is new stuff. In 2012, the typical CPT apartment was renting for $1000/month, now its $2,200/month. that's a combo of same stor growth, but also the massive amount of change the portfolio has undergone over that time frame.

 

they do the work for you and note that since 2011 they sold $3.4B of assets w/ average oge of 20+ years, developed $4B of assets w/ average age of 6 years and bvought $2.7B w/ avg age of 4 years. 

 

CPT almost meets the "1% rule" which I associate w/ low quality, subscale non institutional real estate and has not been available for this type of asset in a long time. 

 

 

 

 

 

 

 

What is the 1% rule? Can you expand? 

[thepupil]

1% months of purchase price per month in rent. It’s used by Bigger Pockets types as rule of thumb. $CPT is like 0.85% using last Q. 

[RedLion]

2 hours ago, thepupil said:

1% months of purchase price per month in rent. It’s used by Bigger Pockets types as rule of thumb. $CPT is like 0.85% using last Q. 

I’ve been looking at buying an investment property and running numbers til I’m blue in the face, and you’re going to be hard pressed to find a deal like this on the private market, and then all the bullshit that comes along with being a landlord. It sure seems tempting to load up on these reits which look quite attractive from my vantage point. 

[thepupil]

so having consulted the twitter hive mind, it's fair to say that CPT is not exactly at a 6.8% cap rate. It is cheaper than private market value, but the 6.8% number overstates that. You can see thread here. 

 

So what I was doing was $1000/$14,700. Some corrections. CPT owns 93% of OP so effective SO is more like 117mm, so market cap is more like $11.7B, not $10.6B.

 

Unadjusted for developments in progress EV is $15.3 billion,. People can decide what to do with the $500mm ish of devs in progress. 

 

You then have headline NOI of $1B or so (4Q annualized and 2023E for the sell side). CPT adds back $30mm of porperty mgt expense in calc of NOI. I think that's dumb because someone has to manage them. So $970mm. There's then a number of expenses where people can choose/not choose to deduct them. $60mm of G&A (Matt/owner of 26K units deducts this, though I'm not aware of any other private market operator doing so)

 

. Some amount of "operating capital" and if you want to really compare it to private market you potentially adjust for increase in property taxes upon sale. I frankly don't know precisely how to do this but some PE RE guys insist it's the right way to do for comparability to reported private market cap rates. 

 

The bottom line is that CPT is somewhere between 5.6% cap rate and 6.5% cap rate. And the private market is definitely lower. Same guy who said my 6.8% was totally wrong and it was more like 5.6% threw out $300K/unit as reasonable (which is $122/share). Green Street/sell side seems closer to $140.

 

But the point is it's not like $160 or $200 and not high 6's (which was a bit too good to be true). 

 

As i said there, he is CEO of a company that owns/manages 26K units. so his view has MUCH more weight than mine. What I can't really reconcile with all this (which is effectively that REIT reported NOI is materially different from private market) is that when REITs do interact with private market they report buys/sales at cap rates consistent with my more dummy/simplified way of looking at things.  

 

 

 

 

Edited March 29, 2023 by thepupil

[Mephistopheles]

https://amp.cnn.com/cnn/politics/live-news/trump-new-york-court-arraignment-04-04-23/index.html
 

Curious what sort of affect this would have with RE and REITs. One of the greatest if not the greatest real estate developer in history. 

Edited April 5, 2023 by Mephistopheles

[Spekulatius]

6 hours ago, Mephistopheles said:

https://amp.cnn.com/cnn/politics/live-news/trump-new-york-court-arraignment-04-04-23/index.html
 

Curious what sort of affect this would have with RE and REITs. One of the greatest if not the greatest real estate developer in history. 

[thepupil]

I think it might finally be time to buy ELME. Don’t love the mgt, don’t love the assets, but we’re closing in on a low leverage 8% cap rate…

[lnofeisone]

On 9/21/2023 at 9:39 PM, thepupil said:

I think it might finally be time to buy ELME. Don’t love the mgt, don’t love the assets, but we’re closing in on a low leverage 8% cap rate…

This is a net new name for me. Anywhere you'd recommend to start reading up on this one (specifically the mgt). Assets I can somewhat ballpark. 

[thepupil]

14 hours ago, lnofeisone said:

This is a net new name for me. Anywhere you'd recommend to start reading up on this one (specifically the mgt). Assets I can somewhat ballpark. 

 

ELME used to be called "Washington REIT". It was (is) a perennial underperformer and was previously a multi-asset, regional focused REIT, an oddball in world where REIT mafia wants large liquid single asset, but multi-geography REITS. In the 10 years before covid (12/31/2009-12/31/2019) Washington REIT returned 5.5% whereas REIT index returned 12.5%. 1999-2009 it atually slightly OP'd (12.3%.yr vs 10.9%). 

 

Washington REIT became "ELME" after they fire saled all but one of their remaining office buildings to Brookfield in '21. At the time it looked like WRE was optimizing optics by selling to BAM fro an 8.5%+ cap rate. BAM then put like 80% leverage on half the portfolio and decreased their equity consideration considerable. I assume BAM will lose every single one of those buildings given the floating rate high LTV debt they put on it. WRE took the proceeds from that and paid off debt and bought two or three multifamily properties in atlanta at steep prices. 

 

with hindsight, the office sales were probably good. 

 

So WRE basically did what all the cool kids were doing, bought sunbelt multifamily at peak values. 

 

they changed their name to ELME and are trying to improve their margins/operating platform. 

 

I think what matters more than the past is that you have a low leverage portfolio of 8,900 units. 

 

The question I'm trying to answer is "wreckability". Can an activist get involved and what roadblocks can ELME put up. I can't find if they've elected MUTA in their bylaws and need to understand the board a little better. 

 

But even absent any kind of event, I think there's a case to be made for just owning it in its current mediocre state. Just buy it and make a 5.2% divvy + growth of a few percent. 8% / yr with optionality on much more w/ some kind of positive change. It's only a $1.2 billion company, easy to be swallowed up or fought. 

 

DC is an unglamourous investment destination and people will say none of the public guys want this portfolio (true) and that PE guys don't want to add to their DC weighting. I don't have evidence to refute that, but there's a price at which I just hold my nose and buy and <$200K / unit for units that rent for $1,900/month...that just feels too afforable to me. housing shouldn't be that cheap. 

Edited September 25, 2023 by thepupil

[realassetsvalue]

Have been thinking about ELME because when @thepupil gets serious about a real estate name, you should too.

 

I have been thinking about this and the discount to NAV / peer set thesis here. It feels like relative to the private the assets, while not of the highest quality (we all know this) are undeniably cheap both on an implied cap rate and price / unit basis. The metrics below exclude the 600 Watergate office, which I value at an 8% cap rate so we can try to get closer to an apples to apples comparison for the multifamily assets.

 

When comparing across the peer set, ELME is also cheaper from a portfolio point of view but a good amount of that cheapness is reduced by the scale of their business vs. their operating costs. For example, while not a perfect comparison, UDR trades at a 6.2% cap rate (~170 bps inside ELME) but a 14.8x FFO multiple / 4.7% dividend yield vs. ELME's 14.3x FFO multiple / 5.2% dividend yield. I'd argue that UDR has a better operating platform and you don't have to believe that UDR's same store rent growth / OPEX / CAPEX is much better than ELME's to make up that difference.

 

 

Continuing the arbitrary comparison, there's also a cost of capital difference between the two companies. ELME doesn't have balance sheet issues and is arguably underleveraged but UDR has a very good balance sheet and greater access to lower cost capital through both debt and JV markets. I'd guess they have a better opportunity to play offense in the current cycle vs. ELME.

 

This is a long-winded way to get at I think one has to take a view on the potential for either some sort of change in the market's evaluation of the company, its assets, markets, etc. or more likely, M&A to close the valuation gap between the portfolio valuation and private market / peers. I am not sure I am positive on management's desire to do this given they've staked their reputation and investing a lot of time, energy, and money into moving towards a pure play multifamily platform but the board may decide they've run out of rope at some point.

 

A major reason I've gone through this exercise is trying to think through listed real estate positioning in this environment as opposed to the pre- and post- COVID low interest rate environment... As a recovering "NAV boi" who saw success seeing discounted small REITs get acquired by PE, now that the spigot of very cheap debt has been turned off, maybe the better hunting grounds are in larger, higher-quality (and as a result, more expensive) REITs with an operating platform / cost of capital advantage instead of deep discount to NAV / M&A targets. Definitely not arguing for all one or the other - and the best opportunities can offer both - but wanted to try to refine my thinking on this a little through the multifamily lens.

[thepupil]

You're buying this for $200K/unit

 

 

Edited September 25, 2023 by thepupil