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

[thepupil]

Tough to summarize all my thoughts on RESI.

At the risk of carpet-bombing you with a bunch of stuff, I'm going to copy a string of e-mails from 2016 re RESI to provide background on my thoughts.

For additional background (the prequel?), I suggest the AAMC thread.

I'd focus on the leverage and the nature thereof, the money from Amherst may mitigate this and they may have already addressed it, but a decent portion of the assets are still funded with repo that needs to be rolled, right?

Also, I think RESI's lower margins are structural and that the properties are lower quality because of the terribly misaligned structure throughout RESI's life where they were encouraged to grow very quickly to grow AAMC's fees.

it's probably cheap, but I'd rather be buying other stuff (less leverage, higher quality, is this still seriously the same management?)


January 15th 2016

$9.70, 45% of Book, management was talking $30.00 NAV like 6 months ago, this thing is trading like it will have liquidity issues (which it may given it owns a lot of assets that don't cash flow reliably).

sketchy accounting and sketchy people, i literally got into a long internet argument about why this was a terrible risk reward and the problems with the structure. it was paying a crazy unsustainable dividend and resembled a ponzi scheme, thankfully that's been cut

owns NPL's and houses, levered with securitization financing.

getting incredibly interesting here...buying this creates crappy houses at WAY below market.

January 20th 2016

we now have activists, a concentrated shareholder base (all of whom have taken a bath), 45% of tangible, 1/3 of $30 management's guesstimate of NAV (but take that w/ a grain of salt), the external manager (AAMC) trades for peanuts ($35MM) and is worthless, the largest  owner of AAMC's preferred and common (Luxor Capital) owns a greater amount of common stock at market value and is therefore aligned with the common.

the cash burn and liquidity are scary, but they have a TON of available financing.

just as an example of the math here. if you just do a simple total liabilities / assets, RESI is levered w/ a 55% LTV and trades 1/2 of book. they just bought 1,324 shitty homes from Blackstone in the atlanta area for $85K / home.

So that home has $46K of liabilities  and $40K of equity. But you are paying $20K by buying the stock at 50% of book (you are actually paying less because of the portion of the balance sheet in cash and they sold 15% of their NPL's for book value in Q4.

So buying RESI is like going to shitty part of atlanta and buying an $85K home for $65K w/ 70% financing that leaves some  room for error.

January 20th 2016

his has been accelerated to the top of what i'm working on by the activists.

this is a complex beast...attached is my attempt to re-build the balance sheet in a way that makes sense. you have to divide RESI into two beasts.

Beast 1 has $813MM of assets and has issued $684MM non-recourse debt against those assets, which is pretty levered.

Beast 2 has $1.8B of assets or so and $900MM of repurchase agreement liabilities (financing facilities) so that's less levered. BUT $449MM of that expires in 3/2016 or 4/2016!!! So there is some serious risk here with respect to rolling their financing.

To make things fun $111MM of the $1.8B of Beast 2's assets are debt of Beast 1's securitizations. RESI retained some of the securities from their securitizations  and put them in the collateral pool for the CS facility. $70/$111MM are the senior tranche.

it looks like you've got a serious maturity here. But thankfully they should have a lot of cash from this sale:

During the third quarter of 2015, 871 non-performing mortgage loans with a carrying value of $250.3 million were transferred to mortgage loans held for sale and offered for sale to interested bidders. Following the bidding process, in September 2015, we agreed in principle to sell such 871 non-performing mortgage loans, with an aggregate UPB of $346.9 million, or

approximately 15% of our aggregate loan UPB, to an unrelated third party for an aggregate purchase price of approximately $250 million, which is within the range of 1% to 2% of our balance sheet carrying value for the loans. Subject to confirmatory due diligence and negotiation of a definitive purchase agreement, we expect to consummate this transaction in the fourth quarter of 2015. No assurance can be given that we will consummate this sale on a timely basis or at all.

January 28th 2016

NAME REDACTED, they are indeed doing that, but no one knows why on earth they would and shareholders are attempting to force some kind of change. 

this is basically a ponzi scheme that ran out of buyers, so it had to switch strategies to figure out a new way to get people excited about its stock when it could no longer issue above NAV, pay a dividend/grow NAV, issue again, etc.

it will take you a bit but I recommend the VIC write-ups for starters, then read the COBAF thread on AAMC in its entirety. the history/context is important.

http://www.valueinvestorsclub.com/idea/ALTISOURCE_RESIDENTIAL_CORP/110919
http://www.valueinvestorsclub.com/idea/ALTISOURCE_RESIDENTIAL_CORP/108911
http://www.valueinvestorsclub.com/idea/Altisource_Asset_Management/88060
http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/aamc-altisource-asset-management/

I'm still torn on this one. it's so opaque and the repo facilities scare me a little. I imagine it will take a while to sort out all these NPL's.

February 11th 2016

how low can it go! 39% of book, definitely pricing in some serious liquidity issues...too much risk here to make it big though (in my opinion), but I think this is very well compensated risk.

May 11th 2016 (in response to shift in strategy)

This is disappointing. While the intended buyback of $100MM is certainly good news given this trades for about 1/2 book and $100MM is over 15% of the shares at current prices, I think a more sweeping change in management/strategy would be better, or an outright sale of the company. And they haven't bought back that much stock yet, so I'll believe it when I see it.

In the end I don't think the activists had enough muscle or shares (2.5%). I trimmed the lots I bought in the $8's and $9's at prices above $12 and am sitting on a 6% position.

I am probably going to trim a little more. It's cheap and interesting, but look like management is here to stay.

June 16th 2016

RESI is dropping like a rock despite a pretty hard rally by the single family REIT's.

Industry leader Colony Starwood is trading at a substantial premium to book and probably pretty close to NAV which is a big shift from the begining of the year.

Meanwhile RESI has continued to sell portfolios of loans and increase allocation to single family rental.

While I think management is shitty and I don't like the strategy and the activists lost, I think buying $2.1B of assets levered with $1B of low cost repo and securitization financing for a mere $480mm is a great set up.

June 2016

continues to drop like a rock, 43% of tangible book. I am not sizing this up (but am instead maintaining constant dollar size). It is not a huge position because of the opacity, but Brexit probably doesn't change the outcome of a low quality NPL / single family rental operation.

December 2016

FWIW, I'm selling this. I believe it to still have a lot of upside (like 50%+), but I know it the least well, it's the most opaque, pretty levered, and not positive on a cash flow basis yet, so I consider it to be relatively risky and it to be my lowest quality/least aligned management team.

 In the spirit of intellectual honesty, it's probably also a bit of suboptimal yearly performance management (wanting to lock some in and de-lever).

I was going to wait to next year for tax purpose, but I'm only up 20%, so the difference b/w short term and long term is not incredibly dramatic.

March 2017

this is up another 20% since I sold. They've basically liquidated the entire loan operation and it now trades at 70% of management's stated NAV of ~$20...they've paid out some divvies along the way but it's telling that they used to say NAV was $30...the economics of the NPL operation was worse than expected and it's taking a while to get to cash flow positive on renting out those shitty houses. they seem to be pretty close. 

I am not tempted to get back in.

[thepupil]

just read the results and the call transcript.

my thoughts on RESI are more or less unchanged.

$216mm of revenues
$43mm taxes, insurance, HOA
$47mm of repair maintaince, turn

$126mm of annualized 1Q NOI
$61mm of interest (3.7% rate wgt average, pretty short in nature)

$65mm to pay G&A / give to shareholders / de-lever, maintain the houses
$25-$30mm of G&A
$40-$45mm to maintain the houses / give to shareholders/de-lever.

I mean that's kind of interesting when the equity is $370 million but they own 14.5 thousand homes that aren't in the most wonderful of neighborhoods, that are old and RESI's been a shit show for 7-8 years so I would imagine there's a bunch of deferred maintainance and roof replacements and blah blah blah on the horizon. $1000 / year per home on that is $14 million and that could be too low (potentially very low).

It just doesn't feel like a lot of cash is left over to de-lever or true "owner earnings"

just to throw out a bit of a strawman, Paramount Group owns 1633 Broadway which generates $190 million of rent and $120 million of NOI (63% NOI margin). One building in NYC generates the same amount of NOI as this entire collection of 14,000 homes. 1633 Broadway has a 10 year mortgage at 2.99% interest only maturing in 2029 with the bulk of its IG tenants leases extending well out. I'd rather rent to Allianz, Morgan Stanley, Warner Music Group, New Mountain Capital, etc. for 7,10, 15 year leases and only have to manage one building then have to deal with 14,500 lower to lower middle class renters in  bunch of 40 year old homes that have either been NPL's or owned by this thing for a long time. I'd rather borrow for 10 years at 2.99% interest only with 50% (using bulled up LTV) then borrow in all these 70-80% levered securitizations/repo that mature over the next few years. Now its an unfair comparison because NYC (and particularly NYC office) is super scary right now, but I would be more scared of the RESI's tenants (who are all losing their jobs) than 1633's.

[ratiman]

Why does RESI pay a management fee to AAMC? It's like $4M a quarter or something, IIRC.

[Spekulatius]

Externally managed REITs are almost as bad as SPACS especially when the external managers are AAMC crooks.

[matts]

Thanks for the input guys.

I found another possible way to play it. would appreciate any input.

Bluerock reit Pref shares BRG.PR.A trade at 20.62 (around 10% yield). Bluerock is a multifamily reit mostly in the sunbelt. They just had their Q1

Quickly put together highlights:

Occupancy at April end - 94%
Collected 97% april rents, 92% may rents through May 12 (includes 2% on payment plans)

These guys are constantly buying new buildings, renovating new units etc, so they are constantly issuing new prefs. They said that even in april, they were issuing new prefs at an annual run-rate of 200MM. I think for the next little bit they will keep diluting common and raising new prefs in order to pay the old prefs.

cap structure ooks like this:

2.5B assets (2B of depreciated buildings)

1.45B Mortgages (80% of that is GSE)

100MM revolver

715MM in pref shares

many pref shares recovered, but these still trade at a good discount which i think should close leading the way to a decent IRR

rents look like they are getting paid (if not, they can always stop paying the GSE mortgages for a few months) and they will likely keep issuing prefs to retail investors that want the yield.


Any thoughts appreciated.

[KJP]

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)

Another bite at the apple is now here as EQR approaches the 3/23 low.  Have your thoughts changed at all?

[thepupil]

My original idea was based on a few things

1. Yuppie High income renters were good credit risk and would mostly keep their jobs and pay their contractual rent.

I think this was valid and played  out in the results.Collections have been good.

2. Multi-family is the one of the most finance-able CRE classes out there and these REITs have access to very cheap, bank, bond, and agency financing

I think this was and is valid and will continue for the foreseeable future. Their bonds trade at very low yields and others have accessed the agency market successfully (see recent JBGS press release re non recourse Freddie K loans at L+275 w/ 5 year IO.

3. High quality yuppie apartment have high NOI margins and use dynamic pricing to keep the buildings full; leading to less volatile NOI in the face of decreasing rents / increasing concessions. NOI will go down and there will be disruption, but it will be manageable.

I think this has been somewhat proved  out in the short term numbers but I have less conviction on this going forward based on anecdote and intuition. Summer, is the primary leasing / re-leasing season and I think that this summer is going to prove pretty bad for these guys as your older yuppie scum have been catalyzed to buy burbs houses a little earlier than they otherwise would and your younger yuppie scum are working remotely from their parents homes/second homes. I am a 31 year old member of the yuppie scum class. My wealthiest of friends have kept their apartments in SF/NYC but are living with their parents or renting Airbnb’s in less dense places. Others have let their leases lapse or paid a contractual break fee. And the throngs of new employees that move into cities are also at home with their jobs either remote or deferred.

I probably expect more disruption to demand than I did a few months ago, and unlike office, the leases here are all 1 year. Office is more scary from a secular perspective, but I actually think urban multi family may see more short term fundamental issues.

I haven’t bought any more multi family since my initial slug and used the rally to de risk substantially. I will probably catch the falling knife to keep it at similar size, but am not aggressively buying. Very long term, I love the idea of buying REITs with the lowest cost of capital, low leverage at cheaper than PMV and I think they fit this description.

[KJP]

 I am a 31 year old member of the yuppie scum class. My wealthiest of friends have kept their apartments in SF/NYC but are living with their parents or renting Airbnb’s in less dense places. Others have let their leases lapse or paid a contractual break fee. And the throngs of new employees that move into cities are also at home with their jobs either remote or deferred.

I agree that there may be some short-term pain here, but what you wrote is why this is still compelling to me longer-term.  No need to repeat what BG has written about the unique appeal of cities for the 21-35 crowd.  The suburbs or their parents' basement cannot compete. 

Deals like this suggest the private market (for now at least) agrees:  https://therealdeal.com/2020/07/23/record-setting-multifamily-deal-comes-together-in-brooklyn-for-1-25b/ 
Portfolio of Brooklyn apartments selling for ~$1 million/unit or $833/sq ft.

And as you have mentioned, what cap rate would a life insurer or pension plan pay for a high quality residential building in the very best US cities when the 30-year Treasury is yielding 1.25%?

[BG2008]

My original idea was based on a few things

1. Yuppie High income renters were good credit risk and would mostly keep their jobs and pay their contractual rent.

I think this was valid and played  out in the results.Collections have been good.

2. Multi-family is the one of the most finance-able CRE classes out there and these REITs have access to very cheap, bank, bond, and agency financing

I think this was and is valid and will continue for the foreseeable future. Their bonds trade at very low yields and others have accessed the agency market successfully (see recent JBGS press release re non recourse Freddie K loans at L+275 w/ 5 year IO.

3. High quality yuppie apartment have high NOI margins and use dynamic pricing to keep the buildings full; leading to less volatile NOI in the face of decreasing rents / increasing concessions. NOI will go down and there will be disruption, but it will be manageable.

I think this has been somewhat proved  out in the short term numbers but I have less conviction on this going forward based on anecdote and intuition. Summer, is the primary leasing / re-leasing season and I think that this summer is going to prove pretty bad for these guys as your older yuppie scum have been catalyzed to buy burbs houses a little earlier than they otherwise would and your younger yuppie scum are working remotely from their parents homes/second homes. I am a 31 year old member of the yuppie scum class. My wealthiest of friends have kept their apartments in SF/NYC but are living with their parents or renting Airbnb’s in less dense places. Others have let their leases lapse or paid a contractual break fee. And the throngs of new employees that move into cities are also at home with their jobs either remote or deferred.

I probably expect more disruption to demand than I did a few months ago, and unlike office, the leases here are all 1 year. Office is more scary from a secular perspective, but I actually think urban multi family may see more short term fundamental issues.

I haven’t bought any more multi family since my initial slug and used the rally to de risk substantially. I will probably catch the falling knife to keep it at similar size, but am not aggressively buying. Very long term, I love the idea of buying REITs with the lowest cost of capital, low leverage at cheaper than PMV and I think they fit this description.

If anything, I think we know that the public market just can't stomach YOY declines.  If you hold out 2-3 years, things tend to work out best.   I generally like this asset class as there are less long term secular 4-D chess that you are playing.  Sure YOY rent, occupancy, etc will look bad.  But if you own stuff that has 5-6% yield.   You can create your own form of share buybacks. 

[thepupil]

i think we are all in agreement, I'm just saying i'm not going to be super aggressive on the average down; that may have more to do with the state of the rest of my portfolio and inflows more than the merit of the idea!