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

[thepupil]

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)

[matts]

How do you think about how much rents these guys will be able to collect next 6 months or whatever?

i can see on social media people are passing around the message "don't pay rent even if you still have a job. they can't evict you"

I imagine lots of people who could probably afford it will be able to come up with a decent excuse of how the virus has affected them.

HUD mortgages can be deferred but only half the multi-res mortgages in the US are HUd guaranteed.

Have you looked at BSR REIT? TSX listed in USD (HOM.U.TO), but is pure sunbelt B apartment reit. The listing has historically led to a discount to peers.

Also listed on the TSX, Tricon (TCN.TO) has one of the largest portfolios of rental Single-family homes. how would you rate the economic impact to rents, apartments vs SFH rental?

Thanks. I'm also interested in owning RE here and your posts have been invaluable.

[matts]

Also, wanted to bring up Senior living companies. Not multi-family, but also essential RE

something like FVE of DHC. There are also some Canadian listed ones. EXE, SIA, CSH.UN

do people think demand will go up after the initial panic is over? Are seniors not safer in a home, where the policies are now changing (limit visits, screen everyone coming in/out) vs having a grandparent living with you and a bunch of kids?

I think covid will be with us for a long time and in that case the demand for retirement home/assisted living will go up.

thoughts?

[CorpRaider]

I wonder if there will be a lot of shadow-supply/AirBNBs/VRBOs coming on the market to drive down rents.  I keep seeing stories about people who are trying desperately to move their airbnbs to longer term rentals, some pretty troubling stories about people who are engaging in "rent arbitrage"  sounds like of like wework, but worse; of course that's all just narrative/anecdote.

[thepupil]

I wonder if there will be a lot of shadow-supply/AirBNBs/VRBOs coming on the market to drive down rents.  I keep seeing stories about people who are trying desperately to move their airbnbs to longer term rentals, some pretty troubling stories about people who are engaging in "rent arbitrage"  sounds like of like wework, but worse; of course that's all just narrative/anecdote.

stranger things have happened, but it's tough to sneak a pet at these types of institutional quality apartments, much less an Airbnb. The doorman/doorwoman/doorpeople? always knew every resident at each of my yuppie apartments. it may certainly increase overall supply, but I don't think there'd be material Airbnb arbitrage folks at EQR's type of properties.


matts, I can't answer your question with respect to how many people will stop paying rent. My anecdotal gut is a very small number. I am a member of the yuppie scum class; all my friends are paying their rent, have their jobs, and are just working remotely from ther $2/3/4K a month apartment buildings.

haven't looked at BSR, but will.

I just don't really know how to underwrite senior properties. to continue the anecdote fun, I used to trade agency CMBS which is backed by apartments and skilled nursing facilities/senior living. The financials on the senior living/nursing homes was just plain scary, low margins, low DCSR's, medicare volatility/noise. I am sure there are lots of opportunities and I'm missing A LOT of nuance between all the different property types (a 55+ community is very different than hospice/nursing home), but I'm not going to spend time learning about that stuff at this time.

Easier to rent to my fellow yuppie scum, I understand that market better...though these prices are peskily going up by the day. up 7% intraday on some of my adds today.

[johnny]

There's just so much emotion-driven anti-landlord sentiment. I don't get putting the best cap rates in the entire real estate world on what I think has the most frightening populist tail risks. You guys need to understand: 75% of dem primary voters under 40 voted for Bernie Sanders. Have you ever listened to Chapo Trap House? When every underemployed 25 year old is on Facebook leftist groups sort-of-joking about putting their landlords into gulags, doesn't this make you think maybe we should be adding a few hundred bps to our required yield to compensate for guillotine risk?

Real estate is the ultimate rule-of-law bet. I've seen way more deterioration in the social contract on that (from both parties) over the past few years than seems priced in by a 20% move.

[matts]

I wonder if there will be a lot of shadow-supply/AirBNBs/VRBOs coming on the market to drive down rents.  I keep seeing stories about people who are trying desperately to move their airbnbs to longer term rentals, some pretty troubling stories about people who are engaging in "rent arbitrage"  sounds like of like wework, but worse; of course that's all just narrative/anecdote.

stranger things have happened, but it's tough to sneak a pet at these types of institutional quality apartments, much less an Airbnb. The doorman/doorwoman/doorpeople? always knew every resident at each of my yuppie apartments. it may certainly increase overall supply, but I don't think there'd be material Airbnb arbitrage folks at EQR's type of properties.


matts, I can't answer your question with respect to how many people will stop paying rent. My anecdotal gut is a very small number. I am a member of the yuppie scum class; all my friends are paying their rent, have their jobs, and are just working remotely from ther $2/3/4K a month apartment buildings.

haven't looked at BSR, but will.

I just don't really know how to underwrite senior properties. to continue the anecdote fun, I used to trade agency CMBS which is backed by apartments and skilled nursing facilities/senior living. The financials on the senior living/nursing homes was just plain scary, low margins, low DCSR's, medicare volatility/noise. I am sure there are lots of opportunities and I'm missing A LOT of nuance between all the different property types (a 55+ community is very different than hospice/nursing home), but I'm not going to spend time learning about that stuff at this time.

Easier to rent to my fellow yuppie scum, I understand that market better...though these prices are peskily going up by the day. up 7% intraday on some of my adds today.

Thanks. Any thoughts on Single-family rental vs multi-unit?

[thepupil]

I wonder if there will be a lot of shadow-supply/AirBNBs/VRBOs coming on the market to drive down rents.  I keep seeing stories about people who are trying desperately to move their airbnbs to longer term rentals, some pretty troubling stories about people who are engaging in "rent arbitrage"  sounds like of like wework, but worse; of course that's all just narrative/anecdote.

stranger things have happened, but it's tough to sneak a pet at these types of institutional quality apartments, much less an Airbnb. The doorman/doorwoman/doorpeople? always knew every resident at each of my yuppie apartments. it may certainly increase overall supply, but I don't think there'd be material Airbnb arbitrage folks at EQR's type of properties.


matts, I can't answer your question with respect to how many people will stop paying rent. My anecdotal gut is a very small number. I am a member of the yuppie scum class; all my friends are paying their rent, have their jobs, and are just working remotely from ther $2/3/4K a month apartment buildings.

haven't looked at BSR, but will.

I just don't really know how to underwrite senior properties. to continue the anecdote fun, I used to trade agency CMBS which is backed by apartments and skilled nursing facilities/senior living. The financials on the senior living/nursing homes was just plain scary, low margins, low DCSR's, medicare volatility/noise. I am sure there are lots of opportunities and I'm missing A LOT of nuance between all the different property types (a 55+ community is very different than hospice/nursing home), but I'm not going to spend time learning about that stuff at this time.

Easier to rent to my fellow yuppie scum, I understand that market better...though these prices are peskily going up by the day. up 7% intraday on some of my adds today.

Thanks. Any thoughts on Single-family rental vs multi-unit?

I don't really believe in the long-run economics of single-family rentals. just less efficient/benefits of scale. When I think about my old apartment in DC metro. It occupied a very small piece of land above high quality retail, with 200 units paying on average $2500 / monthor $3K. That's $6-$7mm / year of high quality rent being serviced by not that much in costs: 3 front desk staff, 2 leasing professionals, occasional temps and maybe 2 or 3 full time garbage/repairs folks with the occasional external contractor coming in. only one roof.

I just think the long run capex needs and unit economics of SFR ownership are less attractive. I'll own anything at a price but haven't looked at SFR much lately.

in short, I don't really believe the NOI margins put out there by SFR rental when they say they can just as efficient. I simply prefer dense high income buildings in dense high income cities, like most of what these REITs own.

[Orchard]

I think most upper income buildings with doormen have cracked down on air bnb subleasing. I'd be surprised to find much of this going on in any bigger building.

From what i see, the air bnb subleasing tends to be in smaller buildings i.e. less than 10 units with no doormen.

[thepupil]

There's just so much emotion-driven anti-landlord sentiment. I don't get putting the best cap rates in the entire real estate world on what I think has the most frightening populist tail risks. You guys need to understand: 75% of dem primary voters under 40 voted for Bernie Sanders. Have you ever listened to Chapo Trap House? When every underemployed 25 year old is on Facebook leftist groups sort-of-joking about putting their landlords into gulags, doesn't this make you think maybe we should be adding a few hundred bps to our required yield to compensate for guillotine risk?

Real estate is the ultimate rule-of-law bet. I've seen way more deterioration in the social contract on that (from both parties) over the past few years than seems priced in by a 20% move.

interesting, haven't really felt the need to thoroughly quantify this risk as it relates to luxury/semi-luxury housing, saw it as more of a risk to my NEN which is more of a slumlord type in boston. (which I actually completely blew out of at a 25% loss to add to this basket). NEN is/was cheaper, thought this stuff was lower risk/more liquid/higher quality.

The most direct address of it I've seen is in Essex's deck (slide 21), text copied below:



Housing costs remain a key political and business issue across the country with many states implementing various forms of rent control legislation including Oregon, Colorado, Florida, Illinois, Massachusetts, and New York
California’s AB 1482 will cap renewal rents at CPI + 5%, providing renter protectionswhile not destroying the incentive for new home development
Essex has a long-standing guideline capping renewals at 10% and expects AB 1482 will result in approximately 10 bps impact to 2020 same-property revenues, primarily due to short-term rentals
California’s legislatures passed several housing related bills aimed at incentivizing affordable housing development
A referendum to amend Costa Hawkins will be on the November 2020 ballot. A similar proposal was soundly defeated by voters in 2018 and the apartment industry is aligned to protect the incentive to build new homes
It is highly likely that California’s 2020 ballot will contain a proposal to modify Prop 13 for Commercial and Industrial Properties, creating a rolling 3 year re-assessment for property taxes.  Fortunately, Apartment properties are not affected by the proposal
“Since 2005 California has only produced 308 housing units for every 1,000 new residents. Add in the fact that California will be home to 50 million people by 2050, and it’s obvious we’re not on pace to meet that demand…we need to generate more funding for affordable housing, implement regulatory reform and create new financial incentives” –