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)
the bolded was wrong.
if we assign credibility to the apartment REITs guidance (and assume no further degradation), NOI peak to trough is going to be more like 20%.
since this post the apartment REITs returned 6-26% vs SPY of 56%, since I bought them the first time around, they returned 30-62%, but the S&P returned 77% (all rough figures, I've bot and trimmed them along the way as they've been volatile)
despite the underperformance, I don't think they're super interesting today, own them in basket form in smaller size than peak. I think financing and capital market conditions have been wonderful, better than they ever have been for these guys, and the cities are showing green shoots (and sunbelt is going nuts MAA/CPT), but even assuming full recovery they're not
super attractive, unless you give FULL credit for the private market sub 4 cap craziness going on.
on the other hand, with single-family housing prices doing what they're doing, the value proposition of an amenitized $2,500 / month apartment is probably being further validated (if you want to live in these areas). and i do think multi-family is one of the few spots in real estate where it is a legit inflation hedge (1 yr lease length, 60-70% NOI margins, relatively low capital intensity (compared to office), increasing land/labor/materials cost increase cost of new supply)
