My Top 10 Takeaways From 15 REIT Earnings Calls

Sponsored by: Madera Residential

Welcome to the first edition of the Rental Housing Economics newsletter! I’m a bit late to the party on this, but want to kick off this newsletter with a look back at the REITs’ recent round of Q1’24 earnings calls – both for multifamily REITs and single-family rental REITs. I read through the call transcripts from 15 different REITs of all sizes, and here are 10 trends that jumped out to me. (Note: Quotes have been lightly edited for clarity.)

My Top 10 Takeaways:

#1 Strong Leasing & Retention, Yet Moderating Rent Growth – Even for SFR

From coast to coast and everywhere in between, multifamily and SFR REITs reported strong demand for new and renewal leases essentially across the board – pushing up occupancy rates. This is a big deal because an outsized share of leases get signed in the spring and summer months. As one example, MAA said 50% of their leases re-price between May to August.

But rent growth levels cooled or held flat-ish nearly across the board both for new leases and renewals, as REITs (like most private operators) prioritized occupancy over rent growth.

New lease rent growth remained flat or slightly negative across the board, with the exception of American Homes 4 Rent, but most REITs reported improving numbers in early part of Q2 as they look to take advantage of low vacancy.

On renewals, the SFR REITs both reported very high retention but renewal rent growth below 6% for the first time 2021. Apartment REITs were in the 3-5% range, where they’ve been for a while.

REIT executives noted that affordability was not the issue (and I’d agree with them on that, given rent-to-income ratios in low 20% range), but blamed normalizing growth and/or “rent fatigue” as operators prioritized occupancy.

Many REITs still expect 4%+ renewal rent growth going forward. They’re betting, in part, that relocation costs will dissuade moves. It’ll be interesting to see if that materializes given diminishing loss-to-lease (narrowed gap between asking rents and in-place rents). Even Invitation Homes on the SFR side noted that risk, with Charles Young commenting: “I could see renewals moderating slightly in the summer as loss-to-lease is a little lower.”

And some apartment REITs could potentially run against a gain-to-lease scenario if they’re not able to push up new lease asking rents as much as anticipated. We shall see.

#2 Coastal Suburbs > Coastal Cities

We often oversimplify the REIT market as Sun Belt versus Coastal, but such broad brushes obscure critical nuances. One of those: Some (not all) Coastal cities have Sun Belt-like supply issues plus a mix of lifestyle and/or regulatory issues. At the same time, coastal suburbs are the belle of the ball these days (as are Midwest markets, but outside of Centerspace, REITs don’t have much Midwest presence), with lesser supply and fewer regulatory headwinds.

Read these takes from Equity Residential’s Michael Manelis:

• In Washington, DC, “the District has recently begun lagging our suburban assets, likely due to nearby supply.”

• In San Francisco: “The South Bay, East Bay and Peninsula continue to perform better than our Downtown portfolio.”

• In Seattle: “The East Side is performing better than the City of Seattle.”

AvalonBay’s Sean Breslin shared similar sentiment:

• “Some of these urban submarkets have plentiful supply and still some quality-of-life conditions that are challenging.”

• “While the Mid-Atlantic is generally doing pretty well, that is driven by our suburban portfolio… The same thing could be said about urban Seattle and Downtown L.A.”

#3 Move-Outs to Purchase are Very, Very Low

Not a surprise given high mortgage rates and sticky home prices, but move-outs to purchase are hitting record lows in many portfolios. I’d argue this is more a tailwind for SFR than for multifamily, since apartment renters unable to buy could likely end up renting single-family homes instead as life stages evolve.

• AVH’s Bryan Smith: “Q1 represented our lowest move-out-to-buy that we’ve seen. It’s about 27%. For context, from a historic perspective, it was in the mid-30s.”

• MAA’s Tim Argo: “The 12.9% of move-outs in the first quarter that were due to a resident buying a home was the lowest ever for MAA.”

• Camden’s Ric Campo: “9.4% of our move outs in the first quarter were attributed to residents’ buying a home, lowest in our history.”

  INVH’s Charles Young: “We see people moving out to buy homes as low as it's ever been in the last few years.”

• EQR’s Mark Parrell: “The percentage of our residents leaving us to buy homes was 7.8%, a continuation of all-time lows.”

• AVB’s Sean Breslin: “During Q1, only 7% of our residents moved out of one of our communities to purchase a home. It wasn’t that long ago that we highlighted 12% to 13% of move-outs to purchasing a home as being low.”

• ESS’s Angela Kleiman: “The percentage of our turnover attributed to purchasing a home has fallen from around 12% historically to 5% today.”

#4 Rent Collections Continue to Improve, Pushing Up Revenues

Lots and lots of chatter around improving bad debt, as REITs have learned to better protect against leasing fraud and have benefited from expired eviction moratoria. New renters coming in are paying rent every month, pushing up collections – providing further evidence that there remains ample qualified demand for rental housing at today’s rents.

• UDR’s Joe Fisher: “We’re seeing collections continue to improve and be some of the strongest that we’ve seen throughout COVID.”

• Camden’s Alex Jessett: “All the municipalities in which we operate have now lifted their restrictions on our ability to enforce rental contracts … As a result, we experienced 80 basis points of bad debt in the quarter as compared to our budget of 120 basis points.”

• AvalonBay’s Sean Breslin said that in Southern California, “roughly 40% of the revenue growth was related to just better underlying bad debt,” removing long-delinquent residents and “re-renting those units to people who are paying.”

• MAA’s Tim Argo: “Collections outperformed expectations with net delinquency representing less than 0.4% of billed rents.”

• IRT’s Scott Schaeffer: “Last year, for all of 2023, bad debt in Atlanta was about 5% of the Atlanta market revenue, and that has certainly trended better. So far in the first quarter, we’re down to about 4%” thanks to improving eviction backlogs as well as ID and income verification tech.

• Invitation Homes’ Charles Young: “It’s great to see more of our markets returning to pre-pandemic normal levels of bad debt.”

• Young added that among Invitation’s new residents over the last 12 months, average household incomes increased to $158k/year.

#5 Sun Belt Multifamily is Not as Bad as Advertised

No one is denying that the Sun Belt has a LOT of new apartment supply to work through and that’s impacting rents, but the death of the Sun Belt’s multifamily sector has – once again – been highly exaggerated.

• MAA’s Eric Bolton: “We continue to believe that our high-growth markets are producing solid demand sufficient to absorb the new supply in a steady manner that will enable continued stable occupancy, strong renewal pricing, strong collections and overall revenue results.”

• UDR’s Michael Lacy: “We remain cautious on the Sun Belt in the near term but have been pleasantly surprised by its recent trajectory.”

• Camden’s Ric Campo: “When the (Sun Belt) markets right themselves from a supply perspective, the same thing that drove outperformance of revenue growth in the past – job growth and household formation – is going to continue.”

• BSR’s Dan Oberste: “While we recognize the impact of short-term increase in apartment supply in our markets, it is important to recall that this is a natural response to a surge in housing demand, and that demand reflects extremely strong fundamentals.”

• IRT’s Scott Schaeffer: “I’m still a believer in the Sun Belt long term. I think that’s where you will see above-average population growth and job growth. And we’re coming through a bit of a rough patch here because of all the new supply, but that’s coming to an end. And I believe you’ll see continued above-average growth in the Sun Belt markets.”

• Even traditional coastal REITs, EQR and AVB, re-emphasized their commitment to the region long term while noting suburban coastal outperformance in the short term.

#6 Insurance Premiums are No Longer Soaring

Skyrocketing insurance premiums provided a major headwind to operating expenses over the last few years – primarily in markets like Florida and Houston, yes, but not exclusively. Soaring replacement costs pushed up premiums across the country. But the news of late has been much better.

• Camden’s Alex Jessett: “Insurance represents 7.5% of our expenses and was originally anticipated to increase 18%... We just completed a very successful insurance renewal and we are now anticipating insurance will be flat year-over-year.”

• NexPoint’s Matt McGraner: “We completed our insurance renewal at the end of March, and I’m happy to report that our premiums will remain flat.”

• Others reported similar news. Across the industry, efforts to meet face-to-face with underwriters in London and Bermuda (tough trip, right?) appear to be paying off.

#7 Minimal Expected Impact from New York’s Rent Law Changes

Analysts asked REITs with New York exposure about a new law putting more apartments under rent controls while also attempting to incentivize new development. REITs greeted both items with a shrug.

• Asked about the development incentives, AvalonBay’s Matt Birenbaum said: “We’re not looking to grow our capital investment in New York” and later added that New York remains a market where “we’re rotating capital out of as we redeploy capital into our expansion regions” (which had been previously announced).

• EQR’s Mark Parrell noted that 40% of their New York apartments would be exempt from the rent caps due to property age or existing rents above the law’s “luxury” thresholds.

• Parrell pointed out out that the new rent caps would only be restrictive in a high-inflation period like 2021-22 when operators were burning off concessions and bringing rents back to pre-COVID levels, indirectly implying (my words, not his) that the new rent law may dis-incentivize such large rent cuts and concessions in the future since it’ll now take longer to bounce back.

• UDR’s Chris Van Ens said: “We’ve lived with similar restrictions in California and Oregon for a number of years now” and done very well, while also noting potential slippery slope risk where restrictions tighten over time.

#8 SFR REITs Aren’t Yet Worried About National Legislation

Given the shortage of homes leaving many Americans unable to purchase, there’s been misdirected blame put on SFR investors – and especially on institutional investors who control a whopping ~3% of the SFR inventory. The SFR REITs addressed a recent barrage of negative headlines, including proposed federal legislation that would restrict institutional ownership of single-family homes. Great commentary from Dallas and David below:

• INVH’s Dallas Tanner: “Attempts to restrict companies like ours seem to be misguided. It’s also counterproductive. I think that’s why none of the anti-leasing and anti-professional management bills actually get very far, to date, at both the national and state levels. It’s a populous thing to try to point fingers at companies that are providing housing solutions … What we can do is our best to encourage new supply coming into the market, which is why we’re working with so many of our homebuilder partners – helping them start large new communities that often include a mix of for-sale and for-lease housing.”

• AVH David Singelyn: “All of (the proposed federal legislation) have been introduced by individuals that are up for re-election. I look at them as campaign bills or messaging bills. These bills have not even received votes in committee. They’re not moving through the committees … Contrast that to what has actually been accomplished at the state level. And there’s been some successful legislation passed over the last three-to-six months that are pro-housing bills, both from an operational standpoint – like dealing with squatters – and also with respect to growth, dealing with zoning and construction to address housing availability.”

#9 Common Themes with Problematic Markets

REITs spoke of most markets in upbeat terms, but made a few exceptions.

• Several REITs noted that multifamily supply issues are most challenging in Austin and Nashville – two ultra-hot growth markets where demand remains strong (even if normalizing to some degree) but insufficient to keep pace with supply in the short term.

• Essex singled out Los Angeles and Alameda County (Oakland) SIX (6) different times in its earnings call as problematic relative to the rest of its portfolio. Essex labeled them as “delinquency-related challenges,” but noted revenue upside now that eviction moratoria have expired and backlogs are starting to thin. Other REITs continued to single out Atlanta for similar issues, while also noting improvement starting to kick in.

• On the SFR side, Invitation Homes singled out a few markets that are “coming down to earth” – listing Phoenix, Las Vegas, Tampa and Orlando – but labeled it as a return to normalcy as in-migration has reverted back to more sustainable levels.

#10 REITs Don’t Like Their Valuations

No surprise here, right? Several REITs claimed their companies are undervalued, with some pointing to recent portfolio trades (including Blackstone’s announced acquisitions of two REITs – Tricon (SFR) and AIR (multifamily)) as evidence that net asset values on the private market exceed REIT stock values.

• Camden’s Ric Campo: “I don't understand the 100 basis point gap between the implied cap rate for Mid America and Camden versus Equity and Avalon Bay.”

• NexPoint’s Brian Mitts: “There is still a clear gap between public and private market values. It’s significant, almost 150 basis points – in some cases, 200 basis points – as it relates to our company.”

Other Tidbits:

• MAA is slowing down renovations for now. “Given the number of units in lease-up across our portfolio currently, we expect to renovate fewer units in 2024 than we would in a typical year, but would expect to reaccelerate the program in 2025.”

• Invitation Homes is going heavy into third-party management of SFR as it sees new revenues, potential acquisition opportunities, and expanded data-driven insights. Meanwhile, rival American Homes 4 Rent is going the opposite way, concluding that “this is a low-to-very-low-margin business with a lot of distractions” and therefore “the incremental revenue was not beneficial in relationship to the distraction to our operations.”

• UDR’s internal research indicates that 50% of resident turnover is “controllable.” UDR’s Joe Fisher noted that rent increases were not the top reason for move-outs, but instead “it comes down to trash, pet leases, noise, the move-in experience. You have to make sure that it’s bulletproof. As well as even pest issues. And so a lot of things are very controllable, and that’s why we’re leaning into it.”

My Favorite Chart of the Week

Here’s What Caught My Eye This Week

• Rick Palacios Jr. has a great chart here showing homebuilder profit margins over time.

• Peter Grant writes in The WSJ about Chicago’s efforts to save its downtown office market, with some notes on potential conversions.

• Carl Whitaker shared a great post and chart highlighting how 2nd quarter has historically been the critical period for net apartment leasing.

• Paul Briggs highlights how the government’s homeownership data dispels common myths around investor purchases of single-family homes.

• Bobby Fijan nails the reasons why most developers prefer to build larger apartment properties instead of smaller ones.

• Max Dubler writes about a non-profit affordable housing group that apparently is actively opposes new affordable housing developments.

• The WSJ writes about declining birthrates and long-term implications, while noting that the U.S. isn’t down as much as other developed nations.

Disclaimer: The contents of this newsletter are for informational purposes, not investment advice. No recommendation or advice is being given.

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