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

[matts]

What about the manufactured housing park owners? ELS, SUI, UMH

I understand that today they are a bit higher on the risk spectrum, but ELS and SUI have a great track record, and long term, they offer the most affordable kind of housing to a country where housing affordability is a problem for many.

They also own the appreciating part of RE, the land, while letting the "owners" pay for the depreciating "home". Similar to multi-family, they benefit from density and economies of scale (1 security guard, 1 pool etc.). the houses are technically mobile, but in reality, it costs 5-10k to move one, so the vast majority of tenants have no choice but to eat the regular rent escalations.

SUI and ELS have been great investments for years, and now you can get them at a 20-25% discount (from peak).

[thepupil]

have always thought those too expensive but awesome companies/biz models. maybe I'll have another look, thanks.

[shhughes1116]

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.

There is a bit of this in my area.  Anecdotally, I know a few of these coming to to the rental market were purchased at insane prices.  I went into these looking for additional rental properties at about 15-20X TTM AFFO.  These were purchased by AirBNB "speculators" at 25-30X TTM AFFO. 

Shortterm, I think there will be a little bit of downward pressure on rental prices in my area.  Longer term, I expect these AirBNB speculators to become insolvent, and these properties will come to the market, leading to some downward pressure on purchase prices.  The inventory for purchase and rental is pretty tight in the DC area (Virginia for me), so I don't expect much long-term impact.   

[matts]

have always thought those too expensive but awesome companies/biz models. maybe I'll have another look, thanks.

sure. would appreciate it if you give us a heads up about what you find. You have been looking very closely across the whole RE asset space so you are in a great position to speak to the relative value of the opportunities.

[thepupil]

have always thought those too expensive but awesome companies/biz models. maybe I'll have another look, thanks.

sure. would appreciate it if you give us a heads up about what you find. You have been looking very closely across the whole RE asset space so you are in a great position to speak to the relative value of the opportunities.

well... I think if you were to pop open the performanceanalyzer on my interactive brokers account, ya might feel differently!

[Scuttlebutt Plunger]

Manufacturer housing, ELS and SUI, is probably the best sub-sector among REITs.

Add NXRT to your list for multi-family apartments.  Smaller and more leverage though.

[matts]

Manufacturer housing, ELS and SUI, is probably the best sub-sector among REITs.

Add NXRT to your list for multi-family apartments.  Smaller and more leverage though.

In normal times that is true. but as pupil mentioned, in the short-term, upper-middle-class yuppies will keep their jobs and pay rent. The types of people that live in parks.... much more concentrated in blue-collar workers. UMH especially caters to the low-income crowd. i believe els and sui have much higher average rents.

If you look longer term, parks have the best economics, but I'm trying to figure out if they might not get even cheaper in the short term as they start reporting massive delinquencies across their portfolios.

[CorpRaider]

Trailer parks are great (unless covid-19 rages through sun communities ELS sunbelt retirement parks and takes out like 15% of the demand) and seem priced accordingly. 

[thepupil]

more negative headlines and these are starting to come down again, may get another bite at the apple/average down opportunity.

there's a Bloomberg intelligence article out today pointing out the following:

Property level expenses are about 30% of rents (70% NOI margin) in coastal markets, giving a big cushion and insulating from some rent/occupancy declines and or cost increase (property tax hikes). Costs are mostly fixed (property taxes and insurance are 40% of property level costs). Even the lower rent / non coastal ones like Camden are at 35% (65% NOI margin).

The apartment REITs on average have 5x EBITDA / Interest. They have low leverage that has low cost giving them an ample runway. In 2008 (before the crash), this number was 2.5x for perspective. Apartment REITs have locked in long and low leverage and (if spreads normalize) that costs is going lower, they've spent the past few years selling non-core assets to opportunity funds/locals and upgraded their portfolio quality / age through development and acquisition.

that a storm is coming is certain, that they are more than ready is my opinion.

that they are cheap..well I don't think they are SUPER cheap. EQR is at about a 5.7% cap right now. ($1.7 billion / $9B Debt + $21 Billion market cap); i like them more as that gets to a 6 or even (gasp) a 7 handle. think about what huge institutional pools of capital are going to be faced with rates at 0%-1%. What is TIAA traditional and TIAA real estate account going to buy? What about Metlife?

 I'd say high quality multi-family in gateway cities at unlevered 5,6% yields fits that bill just fine (for a portion of the balance sheet). I don't think we're going to see multi-fam cap rates blow out to 8% or something, and if they do, then EQR and its friends are probably still going to have capital markets access and will be buying buildings.

EQR owns about 70,000 apartment units and trades for $30 billion. That's about $422K / unit.

Can someone please direct me to condo listings in NYC/DC/LA/Boston, where I can buy a new-ish condo next to the metro/soulcycle/sweetgreen for $422K? After you do that, can you provide me with 4% interest only financing at say 27 years (EQR's 2047's have a 4% coupon). Okay great, now can you buy 70,000 of those and manage it all professionally for me? K thanks. Oh wait, that doesn't exist in real life.

anecdotal survey for the crowd, has anyone heard of people with "good" jobs getting fired/laid off. Here is my anecdote: Marriott corporate HQ in Bethesda furloughed a large percentage of their corporate folks; that likley includes some very good jobs. I don't think people who rent yuppie apartments are completely immune, but I'd be surprised if a very large percent aren't able to make rent/lose their jobs; Ive been wrong before so we'll have to see.

[matts]

I agree with your general thought process. But I also agree that some of the headlines from property owners will be pretty dismal next few weeks so we might get chances at better prices.

Also wanted to add that I like how you try to simplify the value proposition. Like price/unit or the price/room as you did with HST.

What I really want to do is take advantage of this crisis to buy into real estate assets at cheap prices. The public market is falling faster than the private so maybe after the reits recover I'll roll the money into the deals on the private side. At the end of the day I'm agnostic to the avenue of purchase.

Big picture, western governments can't stomach residential RE falling more than maybe 20%. When the stock market falls, the (incorrect) perception is that only a few rich pricks get hurt. But falling residential RE hits many (most?) voters hard and they start sharpening the pitchforks. Politicians realize this.