Zelman on housing

[Gmthebeau]

7 minutes ago, ERICOPOLY said:

Are there any divorce statistics available?  Any links?

 

Anecdotally my wife and I know of a few couples who seemed to get along alright until they started working from home in 2020 due to covid-19.  Now they are separated or divorced.  Now each prior couple requires an additional housing units and it is typically a rented unit.

 

That kind of event can spur new household formation and I think it is reasonable to call it a one-off.  Later, these free floating singles will eventually pair up again.

 

yes, this would be true that divorces would at least temporarily create demand.  Like you pointed out, most of the time people seem to pair up again.  Millennials are causing the divorce rates to plummet though so they get married later and stay married so far.   Most of the divorces are people 55-65 now.

[Gregmal]

Theres so many variables that its pointless to get bogged down on just one or two. As I mentioned previously, with the UBI, er, child tax credit, and current labor shortage, even poor people now can easily afford $1200 a month rent. The prices, as detailed in the APTS thread, current prices, dont even begin to reflect the real market prices and won't til you get a full 12-18 months of rolls. A high end luxury Tampa/Orlando unit two years ago was $1200-1500. You'll never see rents at those levels again for a tier 1 city/suburb. 

 

If you're an institution underwriting 10% annual rent increases for 5-10 years you're a moron. But I ve never really found the institutions all that smart or worth listening to anyway. But voila, today and for the past 15+ months, you can go into the market and buy companies that own these sorts of prime assets, for 50/60/70% of their private market value. 

[ERICOPOLY]

The strange thing about the apartment REIT market and the well publicized jump in rents is that the REIT stocks discussed on this board have not responded.  They have snapped back from their covid lows but look at their stock prices 24 months ago vs today.  

[FCharlie]

9 hours ago, ERICOPOLY said:

The strange thing about the apartment REIT market and the well publicized jump in rents is that the REIT stocks discussed on this board have not responded.  They have snapped back from their covid lows but look at their stock prices 24 months ago vs today.  

Makes me wonder why there aren't institutions simply bidding on REITs at this point.

[Gregmal]

If the BRG sale happens(NYC based firm, price action bullish..both point to it having legs) that should be a spark for a lot of these. But the simple answer is that any real estate, not pretty, weird capital structure, management question marks, etc....got thrown out during covid and for most of the institutions, put int he "never look at again" bin. Especially the ones that fell sub $500 or $250M market cap. Standard institutional behavior.

Edited October 20, 2021 by Gregmal

[thepupil]

Quote

Founded in 2011, Preferred Apartments is a US-based Real Estate Investment Trust (“REIT”) that predominantly owns class-A multifamily properties and grocery-anchored shopping centers in the Sun Belt region. More specifically, the company owns (i) 11,400 multi-family units that were 96.8% leased at an average rent of $1,400 per month and (ii) 54 shopping centers were 91.1% leased with Publix and Kroger as the primary anchors—with more than 80% of its properties in Florida, Georgia, Texas, North Carolina, Virginia, and Tennessee. While the company’s portfolio is largely located in strong submarkets and comprised of assets that provide predictable cash flows, Preferred Apartments has taken a less traditional route to accumulate these investments. To wit, at its inception, company was managed by an external adviser that pursued a strategy of issuing substantial amounts of preferred equity to fund the acquisition of a wide set of property types (e.g., multi-family, retail, office, student housing, etc.). The company also engaged in making selective loans for new construction, oftentimes with an option to acquire the properties from the developer upon completion. However, Preferred Apartments changed paths in 2020 recognizing that companies with such a strategy rarely attain a competitive cost of capital (e.g., a stock price at, or above, NetAsset Value or “NAV”). Since that time, the company has acted swiftly under its new CEO and (i) internalized its manager, (ii) monetized the vast majority of its office and student housing investments, and (iii) meaningfully reduced the amount of preferred equity outstanding with the proceeds. Despite the progress, Preferred Apartments common stock continues to trade at prices that represent a discount to its peers—as well as Fund Management’s estimates of NAV. This is likely due to its continued diversified nature (the public markets tend to place a premium on single property-type enterprises) and higher than normal levels of preferred equity remaining (preferred equity typically accounts for 5-10% of company’s capital base relative to nearly 30% for the company today). With that being the case, Preferred Apartments may very well take advantage of the strong “bid” for income-producing assets to further streamline its portfolio (as outlined in more detail in the Fund Commentary section), while also continuing to convert preferred equity to common stock. In the meantime, it seems likely that Preferred Apartments stands to benefit from the aforementioned fundamental backdrop. In fact, the company has reported that the rates for new leases in its multi-family portfolio had increased by +21.3% relative to the previous year through July 2021.

 

 

 

Quote

During the quarter, the Journal of Portfolio Management released its Special Real Estate Issue where its authors examined the historical performance of real estate private equity funds over a 20-year period (1999-2019). In addition, the authors carefully compared these results to other real estate alternatives such as (i) publicly-traded real estate (herein “listed real estate”) and (ii) open-ended core property funds (herein “private-REITs”) over the same period. The materials from the study which most resonated with Fund Management included the findings that there was “a similar overall performance between real estate private equity funds and private-REITs” whereas “private equity real estate funds have underperformed listed real estate funds even before adjusting for risk, leverage, illiquidity and the uncertain investment timing associated with unfunded capital commitments.” The study also noted that this report “provides additional support for the superior performance of listed real estate relative to a private market alternative.”Despite the findings, readers well versed in the real estate capital markets will likely recognize that there are tradeoffs associated with each type of allocation. For instance, real estate private equity funds are oftentimes able to undertake activities that listed real estate companies tend to eschew—which may provide outsized returns under skilled managers, such as large scale repositioning projects. Further, the returns generated by private-REITs may not have matched listed real estate on a historical basis, but the overall returns to its investors may have ended up being superior to the extent they remained invested throughout the period. That is not always the case in listed real estate, as the daily “mark-to-market”7 of real estate securities oftentimes leads participants to exit at moments of uncertainty. The simple fact is that all three types of allocations have their own merits and serve as critical components of the real estate ecosystem. Moreover, tracking the patterns of capital flows amongst these vehicles can oftentimes have important implications. This is especially the case today as allocations to real estate and other “real asset” strategies are on the rise given the perceived combination of offering current yield and inflation protection—at the same time that the return prospects for more traditional allocations seem less attractive (as outlined in more detail in the Fund’s recent shareholder letter).

 

 

To put that in context, it is reported that the amount of “dry powder” in real estate private equity funds has reached record high levels exceeding $300 billion on a global basis (per Preqin). Further, the amount of capital flowing into the private-REIT format is accelerating with new subscriptions exceeding $3 billion per month in the US alone (per Robert A. Stranger & Co.).

 

In Fund Management’s view, these capital shifts are likely to have two major ramifications for the Third Avenue Real Estate Value Fund.

 

One, the Fund has important investments in certain real estate (and real asset) managers that are receiving a significant share of these allocations, thus expanding the value of their franchises in the process (e.g., Brookfield Asset Management, Prologis, Patrizia Immobilien, CBRE Group, and Savills).

 

Two, it seems as if buying portfolios from listed real estate players (or even public companies outright) will be the path of least resistance for the sponsors of these private vehicles to deploy such large sums of capital. The latter point here is particularly notable. More explicitly, the Fund’s decades-long strategy of investing in the securities of real estate enterprises that control desirable assets (but trade at discounts to the private market value of their corporate values for temporary reasons) often means the “catalyst” for surfacing value is some type of resource conversion event (e.g., mergers, acquisitions, privatizations, spin-offs, et al).

 

 

Therefore, Fund Management anticipates that the pace of corporate actions involving the Real Estate Value Fund’s holdings will gather momentum in the ensuing quarters (please see the historical list below). Not only would such activity highlight value for certain positions, it would also supplement the Special Real Estate Issue’s noted appeal of listed real estate with one other compelling aspect. That is, the proposition of being able to buy into very-hard-to-replicate real estate enterprises at prices that are substantially less than what a “control buyer” would pay for the assets in a negotiated transaction.

 

 

 

 

 

 

 

 

 

 

https://thirdave.com/wp-content/uploads/shareholder-letters/TAREX-Shareholder-Letter.pdf

Edited October 20, 2021 by thepupil

[bizaro86]

15 hours ago, Gmthebeau said:

 

yes, this would be true that divorces would at least temporarily create demand.  Like you pointed out, most of the time people seem to pair up again.  Millennials are causing the divorce rates to plummet though so they get married later and stay married so far.   Most of the divorces are people 55-65 now.

 

I had a number of millennial tenants split up and move out to two separate addresses during covid. Although I don't think any of them were legally married. I'm a millennial, and it seems in general among my friends that the people who actually get married are pretty serious about it. But many people are cohabiting (using less housing as a result) without being married.

 

[ERICOPOLY]

I'd rather have the newbuild apartment complex with today's financing lows rather than the REIT stuffed with old mortgages carrying higher rates.  So there's that.

 

How much of a discount that should bring depends on when those old mortgages come due and who can say where rates are in 7 years for example.

 

So the REIT isn't apples to apples with the market prices of multifamily for that reason if no other.  

 

However, but that was all true two years ago and rents are 20% higher now.  I can't explain the total apathy.

 

 

Edited October 20, 2021 by ERICOPOLY

[ERICOPOLY]

I mean, in 12-18 months time if these 20% higher rates flow through the APTS multifamily portfolio they'll be able to stop the issuances and pay a sizable real dividend.  However, this is worth nothing to Mr. Market because cash flow doesn't matter?  WTF.

Edited October 20, 2021 by ERICOPOLY

[thepupil]

15 minutes ago, ERICOPOLY said:

I mean, in 12-18 months time if these 20% higher rates flow through the APTS multifamily portfolio they'll be able to stop the issuances and pay a sizable real dividend.  However, this is worth nothing to Mr. Market because cash flow doesn't matter?  WTF.

 

APTS trades at a leverage , management , and multi-asset class discount. it's very common. We will only know w/ time if it's justified. We are being paid to bear the risks that come with that. 

[ERICOPOLY]

2 minutes ago, thepupil said:

 

APTS trades at a leverage , management , and multi-asset class discount. it's very common. We will only know w/ time if it's justified. We are being paid to bear the risks that come with that. 

 

That was more true 2 years ago than it is today.  And rents are 20% higher when they roll over.

[ERICOPOLY]

Investors in other REITS:  what if rates are 6% when we refi 9 years from now?

 

Investors in APTS:  almost half of it already is.. the name is 'preferred'.

 

[ERICOPOLY]

Anyways... it's clear that leveraging 4% cap rate assets with 6% coupon preferred is not lifting the market's skirt.  Nobdy's going to pay the liquidation value unless a liquidation is on the table.

Edited October 20, 2021 by ERICOPOLY

[thepupil]

It is still very much true.

 

• there are still 2.5 asset classes (stub office+mg+grocery anchored), please name a leading REIT that trades at above comps multiples with this combination. 
• net debt + preferred / EBITDA or NOI is FAR FAR FAR higher than peers 
• disclosure sucks Part I: they announce they bought units as if we should give them a gold star, never disclosing price paid (per unit or cap rate), creating fear that APTS is the one paying steamy prices (which they are, which validates the value of the resto of portfolio but creates capital allocation fears)
• disclosure sucks Part 2: tough to tell anything regarding the actual returns from the loan program. 
• disclosure sucks part 3: a basic capitalization table in the supplementals with preferred ourstanding is not there. 
• APTS does not have access to the unsecured bond market due to lack of history and its unusual cap structure, 
• aforementioned capital allocation fears are exacerbated by the return of capital unearned dividend and lack of articulation regarding getting to a REIT appropriate leverage level
• people like a good stock chart. APTS management has made some right moves, but the reason this is flat over 5 years versus MAA and CPT at 16% -19% / year is pretty clear 
• it's still rinky dink and small 

 

Let's not delude ourselves. this is a shitty REIT. purpose built to repel the establishment and only NAV boyz (like 3rd Ave and myself), Sunbelt/apt bulls (Gregmal), and leverage junkies (you) are interested.

 

Until they do something about that, why should it trade for an MAA/CPT price? Much less NAV or a premium thereto. 

Edited October 20, 2021 by thepupil

[Gregmal]

I mean isn’t that a high class problem? If we re talking MAA or CPT type valuation you’ve probably got a double from here at least. 
 

Again just look at the in progress rerate happening with BRG from 10.70 on word they’re actually gonna look at shopping the company. 
 

the key IMO is you have a big head start and if the growth happens and nothing changes you get 50-70% credit for the massive growth taking place and if the changes already in motion occur then add multiples to those 50-70c dollars. 

[ERICOPOLY]

I switched most of mine out for BABA options on October 6th.  Not regretting it.

[ERICOPOLY]

But I do like the preferred structure of APTS for the purpose of holding in a taxable account.  It effectively pays out the taxable income to the preferred holders and leaves the common stock with additional capital gains.

Edited October 20, 2021 by ERICOPOLY

[KJP]

17 hours ago, Gmthebeau said:

  a 100 years of data proves housing prices rise at the rate of inflation.  It will rise slow or faster at certain times, but over the long run thats all it does.

 

I took a quick look at this claim, and it certainly seems to have been true for a very long time (centuries).  See, for example, the data on US, UK, and Amsterdam real housing prices reproduced here:  https://valuabl.substack.com/p/housing-market-part-8-a-very-long

 

Two questions jump out from that long-term data:

 

1) What caused real housing prices to remain flat for such a long time?  For example, if real gdp per capita rises over time, that long-term data implies people spending a smaller percentage of their income on housing over time.  What did the percentage of income going to housing fall, rather than remain constant or rise?

 

2) What has changed (apparently throughout the US, UK, and Western Europe) over the last several decades to send real housing prices off the historical charts?

 

Is the real housing price time series going to mean revert back to zero growth, which would seem to imply either a significant nominal decline or a long period of price growth significantly trailing inflation?  If so, why is that going to happen?  I don't know the answer to question (1), so I don't know whether the underlying economic relationships that generated it still hold.   

[thepupil]

58 minutes ago, Gregmal said:

I mean isn’t that a high class problem? If we re talking MAA or CPT type valuation you’ve probably got a double from here at least. 
 

Again just look at the in progress rerate happening with BRG from 10.70 on word they’re actually gonna look at shopping the company. 
 

the key IMO is you have a big head start and if the growth happens and nothing changes you get 50-70% credit for the massive growth taking place and if the changes already in motion occur then add multiples to those 50-70c dollars. 

yes, it's the opportunity and problem, and APTS mgt could solve it if they want. we'll see. 

[Gmthebeau]

31 minutes ago, KJP said:

 

I took a quick look at this claim, and it certainly seems to have been true for a very long time (centuries).  See, for example, the data on US, UK, and Amsterdam real housing prices reproduced here:  https://valuabl.substack.com/p/housing-market-part-8-a-very-long

 

Two questions jump out from that long-term data:

 

1) What caused real housing prices to remain flat for such a long time?  For example, if real gdp per capita rises over time, that long-term data implies people spending a smaller percentage of their income on housing over time.  What did the percentage of income going to housing fall, rather than remain constant or rise?

 

2) What has changed (apparently throughout the US, UK, and Western Europe) over the last several decades to send real housing prices off the historical charts?

 

Is the real housing price time series going to mean revert back to zero growth, which would seem to imply either a significant nominal decline or a long period of price growth significantly trailing inflation?  If so, why is that going to happen?  I don't know the answer to question (1), so I don't know whether the underlying economic relationships that generated it still hold.   

 

Over time housing rises with the rate of inflation due to the fact that its a depreciating asset.  It does have to be maintained/upgraded to even keep up with inflation.  Replacement costs driven by labor costs to build and the building materials themselves cause the prices to rise with inflation.   It sometimes will rise faster due to speculation like the housing bubble we saw due to easy credit.  Now we have super low rates that caused it to rise faster in 2020 and early/mid 2021.  The rise appears to be over, but if not it will mean revert eventually.

[KJP]

3 minutes ago, Gmthebeau said:

 

Over time housing rises with the rate of inflation due to the fact that its a depreciating asset.  It does have to be maintained/upgraded to even keep up with inflation.  Replacement costs driven by labor costs to build and the building materials themselves cause the prices to rise with inflation.   It sometimes will rise faster due to speculation like the housing bubble we saw due to easy credit.  Now we have super low rates that caused it to rise faster in 2020 and early/mid 2021.  The rise appears to be over, but if not it will mean revert eventually.

 

Based on the charts in my prior post, the deviation above zero in changes in real housing prices appears to have begun in the US in 1975 and in the UK sometime around 1960.  So we appear to have 50+ year trends away from zero real housing price growth.  So, are those data series inaccurate in some way?  If not, why haven't the forces you note already asserted themselves?

 

Regarding replacement costs, note that the US housing prices appear to have decoupled from inflation around the same time (roughly 1975) as the peak in US construction labor productivity, and have continued to head in opposite directions (real housing prices up; labor productivity down or perhaps flat):  https://noahpinion.substack.com/p/what-happened-to-construction-productivity

[LounginMKL]

Ok- y'all have convinced me to go out and get a SFH, pronto!

[Gregmal]

People will always quote ridiculous academic papers as fact. Go to NYC or SF or South Florida even and tell all the totally normal, regular run of the mill real estate millionaires there is no benefit/growth/return above inflation in housing.....real world vs academic always offer varying narratives and often there is truth to both but a high skew towards the real world. And yet, still, the academics will always point to "yea but in '06" or some exception to the rule scenario. 

[ERICOPOLY]

1 hour ago, Gmthebeau said:

 

Over time housing rises with the rate of inflation due to the fact that its a depreciating asset. 

 

I have always been bidding on homes against the market.  In my experience it has always been tied to income, not inflation.

 

[ERICOPOLY]

That's why homes in Redmond WA increased in value after Microsoft and it's high income earners moved in.