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

[CorpRaider]

Interesting.  Thanks for sharing. 

Bilerman @ citi pretty much reflects my impression of the deal, like wtf are they doing...they have all these cross-company options and other inter-party relationships they are setting up to "simplify" things and they are sticking holders with a phantom tax bill (!) because they think they can predict the future (wow that would probably be a malpractice suit for me) to close a discount to mgmt's estimate of NAV? 

Looks like L&B owns ~1.4% percent of the outstanding as of last q.   

[TrashIsCash]

I sell Class C apartment buildings in Southern California.  One of my `mom&pop' clients held an open house for a vacant apartment unit located in Long Beach, CA.  They had several interested people who are moving from San Francisco tour the unit.  The prospective tenants were WFM tech workers who wanted to live in a less expensive, lower density area.  I have a family member who owns a few small apartment buildings in San Francisco.  They have two vacant units, which are proving to be very tough to rent.

[thepupil]

I sell Class C apartment buildings in Southern California.  One of my `mom&pop' clients held an open house for a vacant apartment unit located in Long Beach, CA.  They had several interested people who are moving from San Francisco tour the unit.  The prospective tenants were WFM tech workers who wanted to live in a less expensive, lower density area.  I have a family member who owns a few small apartment buildings in San Francisco.  They have two vacant units, which are proving to be very tough to rent.

So are you saying that people are moving from where 21% of EQR's units are (SF) to where 27% are (SoCal)?

In all seriousness, I agree with you that the near term disruption in urban multifamily (NYC and SF) is bad and getting worse.

[fareastwarriors]

I sell Class C apartment buildings in Southern California.  One of my `mom&pop' clients held an open house for a vacant apartment unit located in Long Beach, CA.  They had several interested people who are moving from San Francisco tour the unit.  The prospective tenants were WFM tech workers who wanted to live in a less expensive, lower density area.  I have a family member who owns a few small apartment buildings in San Francisco.  They have two vacant units, which are proving to be very tough to rent.

Looking at Class C apartments, not even a SFH in a B neighborhood?
Geez.

I'm over in the East Bay so the world is not as crazy as SF. I rented out a 2bed/1bath unit back in August for $1,900. It's completely renovated. Pre-pandemic I was hoping to rent at $2,300-2,400 but I was getting little to no inquiries at $2,400 in June. Once I lowered it to $1,900, I had plenty of candidates.  Price matters.

As such, the average asking rent for an average apartment in the city, which measures 2.4 bedrooms when counting a studio as having one, is now 18 percent ($725 a month) cheaper than just seven months ago, with the average asking rent for a one-bedroom in the city having just dropped to around $2,800 a month (which is down from closer to $3,700 at peak).

At the same time, offers of complimentary rent and cash concessions haven’t waned, driving effective rents down even more.

And a we noted earlier this month, rents in Oakland are now dropping as well, with the average asking rent for an apartment in Oakland having just dropped to under $2,500 a month (versus nearly $3,000 a month at peak), which is down nearly 6 percent over the past month as well.

https://socketsite.com/archives/2020/09/drop-in-s-f-rents-accelerates-down-nearly-25-percent-from-peak.html

[rb]

potentially so. I'll give you an example in my backyard.

Behold this Zillow listing:

https://www.zillow.com/homedetails/5500-Friendship-Blvd-APT-817N-Chevy-Chase-MD-20815/37195057_zpid/

this is in a well-located but tired building, it is spitting distance from Whole Foods the Friendship Heights metro, etc.

$500K gets you a 1200 sq foot 2/2 with some outdoor space that would rent for $2,500 - $3000 (the listing shows a rental at $2,950, I assume someone would rent a little lower than that). If you paid cash, you'd still have a $1000 / month HOA. this is a decent albeit somewhat unhip location. the building was built in 1968. I think its a terrible investment proposition. $2600 /month rent less $1000 HOA = $1600 / month before any other expenses. We're already at an extremely low cap rate. Maybe it goes for lower, but I happen to know a lot of investors own units in this building (let's just say I know a former tenant very well); the units seem to move slowly but they do sell at prices indicating ridiculously low cap rates.

Let's walk across the street, to EQR's property (formerly owned by Archstone), Wisconsin Place. Wisconsin Place sits atop Whole Foods (shared parking garage) which also connects to the Friendship Heights metro, which connects to a little retail center that includes movie theater, department store, restaurants, gyms, etc. This was built in 2009 and is in good shape.

https://www.equityapartments.com/washington-dc/friendship-heights/wisconsin-place-apartments
https://www.equityapartments.com/washington-dc/friendship-heights/wisconsin-place-apartments##bedroom-type-section-2

A 1000 square foot two bedroom is listed for $3600 / month and up. studio's and one bedrooms $2,100-$2,200 and up.

this is kind of a contrived comparison using anecdotes, but the first one trades at an 6%-7% rental yield or so and as you point out EQR is closing in on a 9%. But the maintaince and capex and running cost of that 9% are LOWER because the building is newer and the room for error is higher because the rents are high because of the quality.

you are buying property in areas where even old kind of tired buildings still command high prices because (in this instance) this is metro-accessible high rent areas with amenities and stuff.

and jsut for shits and giggles, you all will be happy to know that GEICO's corporate headquarters is right next to both buildings:

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.

[thepupil]

Most of the large multi family operators all use the same occupancy management software / tool. I’m not sure exactly what it’s called, but as a renter, I’ve experienced this when trying to get apartments and the same building will vary their pricing by the day, sometimes by several hundred dollars/ month (pre covid).

It looks at the market and comparable and how full the building is and spits out a number for the leasing agent to tell you. I actually used this to time a lease in a FRT building where I rented a previously $3500/ month 2 bedroom for $3100 + free parking and locked it in for 24 months because a couple building opened up recently nearby.

The tool is designed to dynamically change prices to keep the building close to full.

Gateway multi family is rapidly taking pricing down because of this. They all operate in similar fashion and I imagine this is feeding on itself.

This is just a long winded way of saying that multi family reflects supply/demand in real time to
A much greater degree than say office or even retail.

For this reason, the near term looks pretty bad. And it’s easy to understand why: older yuppies bought houses, younger yuppies are at their parents, 30% of student deferred, few international students came back. Supply continues to come on line.

[thepupil]

there's a bloomberg intelligence article today that summarizes what we know about the apartment REITs robust financial condition.

AIV, AVB, CPT, EQR, ESS, MAA, UDR collectively have $9 billion of available credit on their revolvers and over $10 billion of cash and available credit. EQR, AVB, and ESS have over $1.5B each.

unsecured spreads have tightened from 280 bps (march peak) to 110 bps.

Since April, Camden, AvalonBay, UDR, Mid-America and Essex have raised a total of $2.8 billion at a blended 2.3% coupon.

and the agency mortgage market is wide open: 
Spreads on apartment mortgages are tighter than most other asset classes, especially for fixed-rate debt. In the commercial mortgage-backed-securities market, agency-backed apartment issuance is highest among all property types, even as overall volume has fallen in 2020.

since beginning of thread, I think we've seen fundamentals deteriorate more quickly and more severely than expected, but financing has also recovered more quickly than expected and is pretty much better than pre-covid.

I think this combination suggests that eventually these REITs become acquisitive; using their huge balance sheet capacity as an offensive, rather than defensive weapon. For now though, I think they're using it to keep the buildings full and pretty much engage in what could be called a value destructive price war to keep the buildings full.

All-in, my exposure to multifamily has decreased (ex JBGS). bought basket in March, took profits on the way up, and have not been averaging down.

I think we'll see lower, potentially significantly lower prices as the changes in rent make their way into the financials as pre-covid leases roll off. a peak rent 12 month lease signed in February has only 5 months left.

that said, it's not like every apartment these guys own is in Manhattan and San Francisco CBD and the situation is not nearly as bad as you move out from there. so i could be erring on the side of bearish.

[BG2008]

there's a bloomberg intelligence article today that summarizes what we know about the apartment REITs robust financial condition.

AIV, AVB, CPT, EQR, ESS, MAA, UDR collectively have $9 billion of available credit on their revolvers and over $10 billion of cash and available credit. EQR, AVB, and ESS have over $1.5B each.

unsecured spreads have tightened from 280 bps (march peak) to 110 bps.

Since April, Camden, AvalonBay, UDR, Mid-America and Essex have raised a total of $2.8 billion at a blended 2.3% coupon.

and the agency mortgage market is wide open: 
Spreads on apartment mortgages are tighter than most other asset classes, especially for fixed-rate debt. In the commercial mortgage-backed-securities market, agency-backed apartment issuance is highest among all property types, even as overall volume has fallen in 2020.

since beginning of thread, I think we've seen fundamentals deteriorate more quickly and more severely than expected, but financing has also recovered more quickly than expected and is pretty much better than pre-covid.

I think this combination suggests that eventually these REITs become acquisitive; using their huge balance sheet capacity as an offensive, rather than defensive weapon. For now though, I think they're using it to keep the buildings full and pretty much engage in what could be called a value destructive price war to keep the buildings full.

All-in, my exposure to multifamily has decreased (ex JBGS). bought basket in March, took profits on the way up, and have not been averaging down.

I think we'll see lower, potentially significantly lower prices as the changes in rent make their way into the financials as pre-covid leases roll off. a peak rent 12 month lease signed in February has only 5 months left.

that said, it's not like every apartment these guys own is in Manhattan and San Francisco CBD and the situation is not nearly as bad as you move out from there. so i could be erring on the side of bearish.

Wimp,

The way to make money in NYC is to buy and never sell through thick and thin.  With 2% financing, these bad boys will trade at 3% cap rate eventually.    I'm joking, but kind of serious at the same time. 

[thepupil]

this guy is arguing that as well. the United States does actually have cheaper urban real estate compared to much of the developed world even though people (including me) like to complain / point out about how "expensive" it is.

I don't agree we'll see 3% cap rates, but I would assign a higher probability to that scenario than most market participants.

https://www.privateeyecapital.com/germanys-vonovia-the-case-for-cap-rate-compression-at-essex/

[thepupil]

https://www.costar.com/article/1866671625/apartment-tower-sale-smashes-atlanta-price-record

KKR and a partner paying $180 million for Hanover Midtown in Atlanta. This appears to be quite a sexy building, 350 units.

https://www.hanovermidtown.com/hanover-midtown-atlanta-ga/location
https://www.apartments.com/hanover-midtown-atlanta-ga/pfsrw7t/

another article says the building also has some retail and 2 floors of office leased to WeWork, so I'm not sure if the price includes or excludes that (I don't have acess t the costar article). If I chop off $0-$40mm for that, this is $400K - $515K / unit. If the retail and office is more then it's less per unit.

Nevertheless a strong print for multifamily.

Earlier upthread KKR paid $800K+ unit for brooklyn multifamily.