← The Rent Roll with Jay Parsons
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Foreign welcome. It's episode number 46 of the Rent Roll, your podcast on all things rental housing, apartments, SFR and BTR. Today's episode Top 5 takeaways from the apartment REITs Q2 2025 earnings calls which just wrapped up over the last couple of weeks. These calls always offer us a lot of good color on the market. You know, one of the benefits of having public traded REITs and is all the good intel and color that they share publicly. And of course those of you in this business, you know that the REITs actually represent a pretty small chunk of the market, a small chunk of the pie in the apartment world. But they do include some of the nation, some of the industry's biggest names in the nation, and many of them are forward thinkers around innovation and investment strategy and whatnot. So we're going to touch on what the apartment REITs are seeing operationally. And of course one of those things.
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We all know at this point is.
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That new lease rent growth remains compressed. So how are the REITs driving value or trying to drive value? Absent that, and they do share some pretty interesting insights in that regard, some key themes across many of the REITs that we're going to touch on. And also how are the REITs thinking about acquisitions, dispositions, development, renovations and some positive surprises. By the way, they're going to share as well on the expense side among other things. Then later in today's program, I'll be welcoming in my friend Rich Hightower to talk about how Wall street views the apartment REITs these days. Rich is the managing director of U S REIT Equity Research at Barclays. He's been tracking the apartment REITs for a long time, a few cycles now, and has a strong pulse on the REIT market. We'll talk to him about what jumped out in the Q2 earnings calls, how investors are thinking about apartment REITs right now versus other options. We'll talk about the how the public markets value apartments relative to the private market, which is always a thorny topic for REIT executives. And I'll also ask Rich why we keep contracting the number of apartment and SFR REITs while not really adding much in terms of new ones in recent years, the latest of course being Elm Communities, formerly Wash REIT from many years ago, a smaller partner REIT with a presence in D.C. and Atlanta, selling off its assets and unwinding its business. And so we'll get Rich's take on all this. And by the way, if you missed last week's episode and that one we shared five key takeaways from the single family rental REITs, earnings calls, invitation homes and AMH. So check that one out if you're interested in the SFR market as well.
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All right, one more quick housekeeping note.
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Before I move on and it's a little bit self congratulatory, so it's a little weird, but I wanted to share this because it's pretty cool. CRE Daily, one of the commercial real estate industry's top media outlets or newsletters. They surveyed its reader base, asking readers to rank the top podcast in commercial real estate. And the Rent Roll came in at number three, behind only the CRE Daily's own podcast and of course the Fort with Chris Powers. And obviously Chris does a great job with that one. Anyway, we've been doing this less than a year now with the Rent Roll podcast and already getting thousands of plays each episode, especially on Apple and Spot Spotify. So thank you for all of you who support program and if I could be, if I could ask, just keep those likes and five star ratings coming on your podcast app and that helps us out. All right. Before we dive in further, big thanks to our sponsors, first and foremost to jpi, a leading apartment developer with a stated purpose to transform building, enhance communities and improve lives. And JPI is active across Texas, Southern California now in the Pacific Northwest and the Southeast as well. And then also to Waymaker, the multifamily investment group focused on class A and attainable apartments, partnering with best in class apartment builders or across Texas and the Southeast. All right, here's a chart. Kick it off with five key takeaways from the apartment reads Q2 25 earnings calls and I talked about this one quite a bit in our Q2 Q3 apartment market outlook a few weeks ago and heard it consistently from the REITs as well. Number one is strong retention, strong renewal rents, strong occupancy, strong renter health, strong macro demand. A lot of good things before you enter the but. There is a but. We're going to hold off on that. A lot of good indicators here. First and foremost, renters are in strong financial shape, at least among market market rate renters who are, you know, tend to be mid and upper income levels. Camden noted their rent income ratios are down to just 18.9% as one example. That's certainly far below the numbers we see in headlines. Equity Residential said their new renter incomes are up 8.5% while their rent income ratios are down to 20%. Macro apartment demand remains strong. We've talked about that a lot and all the REITs talked about the big absorption numbers in Q2. Occupancy rates are tight. Even with all the supply, most are seeing very healthy occupancy rates. Maa, they're in some of the most high supplied markets. And yet their CEO, Brad Hill, he said that in the midst of still elevated supply, we have maintained stable occupancy, achieved higher renewal rates and increased our retention. And retention does remain high across the board. Just about everybody is talking about low turnover. And I've said this before, and I'll say it again, you know, while it's natural to all want to give credit to the stalled out homebuyer market, it's not just that. Because remember, even if you're not buying a house, if you're a middle to upper income renter, in most markets you got options, okay, a lot more options than you did in 21 and 22, thanks to all this supply that we've been adding in these markets. And so if you're not happy where you are, you're probably going to move out to another place. And some people say, well, it's the frictional cost of moving. Well, they've always been there too. You know, moving is always a pain. It just suddenly become a pain in the last year or two. And nor is there any evidence that some suddenly got prohibitively expensive. It's a hassle. It's always been a hassle. So clearly I think we have to give some credit to the operators, the REITs and non REITs, they're doing something right and should give them some credit for that. You know, UDR talks about it, EQR did. I mean, really, they all do. Camden, they had a good stat. They noted their internal measure for customer satisfaction as the highest levels on record. Wouldn't surprise me, that's true for others as well. There's just so much focus on protecting that back door, maintaining occupancy. Occupancy is cash flow. You know, apartments and sfr, contrary to conspiracy theories, are no different than any other business. You know, you want happy customers who want to stay with you. And what's also interesting is that it's not like apartment operators and REITs are just giving it away to talk renters into staying put. They're actually renters are sometimes paying a premium to do that and certainly seeing more renewal rent growth than we see on the new lease side. But even on the nominal rent side, UDR shared an interesting stat. They're seeing very high retention. In fact, it's gone up while still pushing renewal rents that they said are often about a hundred dollars more per month above market rents. And so their overall renewal rents were up 5%. New lease rents were just above flat, yet Occupancy was very tight, 96.9%. Mike Lacey EDR said annualized resident turnover was 420 basis points below the prior year period and more than 1,100 basis points better than our second quarter average over the last 10 years. And it's a similar story across the REITs EQR renewals at 5.2% despite seeing slight new lease rent cuts and still occupancy high at 96.6%. So some interesting data. All right, so I, I, I teased this earlier. There is a but there's an and yet so great demand, great retention, great renewal rents, great, you know, least healthy occupancy for most, for the most part strong renter financial health in the mid and upper incomes who are renting market rate units. And yet the but new lease rent growth continues to soften. Okay so despite all those fantastic indicators, we're still seeing softening and new lease rent growth rates are seeing the same thing. That's oftentimes paired with more concession usage in a lot of these markets. And some of it's a sun belt for sure. With all the supply competition, we're seeing more concessions even among stabilized properties. But it's not just the sun belt. And I did talk about this quite.
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A bit in the Q3 apartment outlook.
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Episode A couple weeks back, so I'm not going to repeat it all here. If you want to dive into that more, you could go get dig up that episode from a couple of weeks ago. It but a lot of it traces to and we don't think it talked about it. I'll mention it briefly. A lot of it traces to sentiment, nervousness, uncertainty on top of this historic wave of new supply. Working through lease up Rick Campo at Camden Camden mentioned this as well. He talked about this big focus on protecting occupancy given all the uncertainty even if it means giving on rents to do so you're playing defense. And also it's, it's just a competitive market right now. So even if renters can afford the rent, they're, they're still, if all else be equal, they're going to chase the better deal. Another REIT with a heavy Sunbelt presence. Next point, smaller REIT Matt McGregor. He said this. He said in late June and July we have seen new lease growth slow modestly as operators remain defensive amid economic uncertainty and soft consumer sentiment. So Again a lot of that supply driven too. Just a ton of lease up activity, a lot more than we had this time last year. And that'll put downward pressure on rents as well. But the sentiment factor is very real both among operators and among renters. Now like I said, it's not like sentiment is just soft in the Sunbelt. I mean this is a factor across most of the country. We heard a new lease rent softening for many of the REITs in Washington D.C. for example, due to uncertainty around federal layoffs. Still solid demand and healthy occupancy there by the way. And a lot of mixed signals. Different things you heard among the REITs, but generally still healthy numbers, especially occupancy. Just nervousness among renters more than like move outs being triggered by layoffs. It's more just kind of just that again that, that sentiment factor and that's that's leading to a defensive posturing on the new lease rents. And then also in places like Los Angeles we heard this continued demand side softness in LA and other parts of SoCal keeping new lease rent growth below expectations in many cases.
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You know, of course LA has been.
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A challenged market for much of these last five years for all the REITs been a recurring theme. But of course there are some exceptions, some big exceptions. The REITs continue to report strong rent numbers in places like New York City and San Francis to markets that were among the hardest hit by Covid during the downturn, but now seeing outsized bumps. Now this has been the case in New York City for a while, but now it's really coming on strong in San Francisco. That's become the big story. It's finally kicking into gear after a long stay down in the doldrums. And let me read you a few quotes here At Equity Residential, Michael Manella said this. He said the real standout market for this year is San Francisco. Our blended rate growth of 5.8% Here is the best in our portfolio driven by strong new lease and renewal increases with sequential gains in occupancy. This is a great example of where we saw a recovery in full force and drove very robust seasonal price acceleration including the pullback on concessions. Tech jobs are steady with a lot of continued focus AI focus in the market. At Avalon Bay, Sean Breslin said San Francisco continues to lead the region with almost 97% occupancy during Q2 and strong rent change of 8% at UDR, Mike Lacy said San Francisco is probably the one that's leading the pack for us. Second quarter we had 97 and a half percent occupancy. And our blends, meaning rent blends, were actually 5.5%. So this was leading the way in terms of blends throughout through the second quarter. Concessions have actually come down to about a half a week, which is the best I've seen in years in San Francisco. This is Mike talking, and a lot of it has to do with just the return to office as well as the migration patterns within the msa. We're seeing people go from, say, the east side or down along the peninsula. They're migrating back up towards Soma and downtown back to the office. And that strength also, by the way, seems to be extending into Silicon Valley as well. Over at Essex, Angela Kleeman noted that the suburban markets of San Mateo and San Jose were notable outperformances with 5.6% and 4.4% blended rate growth, respectively. We attribute the outperformance to limited housing supply, increased enforcement of return to office, and likely better job growth than what has been reported by the bls. Now, of course, that's a hot button topic in itself these days, BLS data. So I'll leave that one there. All right, takeaway number three from the Q2 25 REIT earnings calls. Renovations are delivering ROI even in a high supply environment. Now this one has been a pretty interesting trend. Intuitively, you might think that when there's a lot of supply in the market, you probably won't, don't want to be doing a lot of value add renovations and risk competing with all that new supply. But we're seeing a bunch of the rates, particularly in some of these higher supplied markets, are talking about finding value in value ads. And again, you might think it's harder in an environment that's putting down pressure on rent, but it's not playing out that way. There are exceptions. If you could, if you can do that value add and deliver into that sweet spot of higher quality units than those at comparable rent levels while still having rents that are comfortably below the effective rents for these new units in lease up. And so here's a really good quote or some really good color from Alex Jesset at Camden. I'm going to read to you this. He said we continue to go after repositions, meaning renovations. It just makes a ton of sense to us. If you look at what we're doing this year, we're going to do around 3,000 units and we're generating an to 10% return, which works out to about $150 per door in additional rent. And so this is, this just makes so much sense to us. And in addition, it makes sense no matter where you are in the cycle. But when you're at a point in the cycle where you've got a lot of excess supply, realize if you go in and you can do the kitchens and bathrooms program, you can effectively make an asset that's 15 years old look like it's brand new. And that is huge a competitive advantage when you've got a lot of brand new assets directly next door to us because that brand new asset that has got a much higher basis than we have and therefore they've got to charge a much higher rent. Our asset has a lower basis but it looks just like a brand new asset because we've gone in, we've refreshed the kitchen, we've refreshed that bathroom. Maa, they made a similar comment. Tim Argo at Maa said this. He said throughout the second quarter of 2025, year to date we've completed 2,678 interior unit upgrades, achieving rent increases of $95 above non upgraded units and a cash on cash return in excess of non 19%. This was an acceleration above volume and rent growth achieved from the first quarter. Despite this more competitive supply environment, these units leased on average 9 and a half days faster than non renovated units when adjusted for that additional turn time. So this is a really interesting point that reminds us that despite all the slowness in the market right now related to supply, there is no sign of a flight to affordability. Because if there was there, this stat that MAA just shared would not be true. That's not flight to affordability he's talking about, that's flight to quality. Now at the very, very top end, there's a lot of new supply competing for that demand. But again, if you can be remodeling assets and still be below those new build rents, that could be a sweet spot. So again, renters are willing to pay that premium for a nicer quality unit. That demand is there. IRT another one. Scott Schaefer there said we completed 454 value add renovations during the quarter in a total of 729 completions for the first six months of the year, achieving a weighted average return on investment of 16.2% for both periods. At next point, Paul Richards said we completed 555 full and partial upgrades leased 181 3, I'm sorry, 381 upgrade units, achieving an average monthly rent premium of $73 and in a 26% return on investment. All right, so there you go. Let's go to number four, the fourth takeaway from the Q2 25 REIT earnings calls. Expense growth is cooling more than expected, and is AI playing some role? All right, so first and foremost, let's touch on this really quickly. It's not particularly sexy, but it's important. Everyone talked about expenses growing less than expected, and almost all of it has been driven by lower than expected numbers on property tax appraisals and property insurance. So that is a big win. That seemed to be the case pretty much everywhere across the country. For the most part. A lot of the REITs reduced their expense growth outlook because of favorable tax and insurance numbers. And that's a total reverse, of course, what we heard at the height of the height of inflation a couple of years ago. So that's good news. But also kind of think a subplot is this. You know, obviously continued a lot of buzz about AI and prop tech, and I tend to downplay a lot in these earnings calls most time, but this camp a lot in this round of calls. And, and it reminded me, you know, one of the big questions around AI and prop tech and centralization multifamily has been, okay, it's awesome. It's, it's nice, but does it actually reduce expenses? And so Mark Perrell at EQR was asked this question, and, and I'll paraphrase his answer, but it was a good one. He said, he basically said, AI won't necessarily cut your expenses, but it does slow down your rate of expense growth. And his colleague Michael Manelis added some color. He said, the opportunity to apply artificial intelligence into our business is really exciting. Our AI leasing application pilots have reduced overall application completion time by over 50% while significantly improving fraud detection, resident underwriting, and user satisfaction. Given the success, we are accelerating the rollout, aiming for full deployment by end of year, which is about a quarter earlier in the original timeframe. Additionally, our new delinquency management AI will be fully deployed by the end of this month. And so far, we can see that consistent engagement with customers improves overall payment behaviors. All of these automation and conversational AI initiatives are set up to dramatically improve both our customer experience and operational efficiency. All right, so, you know, those are some real wins you can measure in terms of NOI impact. Faster leasing, less fraud, less delinquency. These are things that we see, you know, various tools across the industry now trying to do. And I think that's been the real barometers. Can you measure it in terms of noi IMPACT and I interpret this as, yeah, we're starting to see that across some different tools, different platforms. Udrs. Joe Fisher talked about this too. He said UDR is, this is a big number. UDR has invested $150 million in various PropTech investments. So it's a, it's huge. And probably, you know, I'm assuming obviously a lot broader than just AI, but now I'm sure AI is part of it. And he said that this prop tech, they've lifted margin, lifted other income, constrained expenses, overall, just driven cash flow. And that's really why we're in those, is to find partners and new ideas and new innovative aspects to the business. And so again, that comes back to the big focus on tech, not just for convenience, but for bottom line impact. NOI and now, you know, we're, we're hearing that it's not just a promise like our hope, like it seems to could really be happening based on things that we're hearing from not only UDR and EQR, but other REITs as well. All right, fifth and final takeaway from the Q2, 25 earnings calls. REITs are active buyers and builders, but maybe not quite as much as planned. All right, so in the previous few earnings calls, a lot of the REITs had talked about lower cost of capital, eagerness to recycle capital. They want to buy good deals. Others can't start new construction projects in order to deliver into the lower supply environment of 27 and 28. And most still want to do that and they're still generally finding ways to do that. But they're also saying that it's tough, limited volume of stuff, trading what does trade tends to get premium pricing, sub 5% cap rates for a lot of well located class A development. Still tough to pencil out. Some of it still does, but not a lot, you know, given today's rates and flat falling rents in a lot of markets. So, you know, again, they all want to be active for the most part and they're all looking to be. Most of them are still getting at least some deals done right now and some starts. I'm gonna highlight some of that activity in a minute. But still somewhat slow market, maybe not as accelerating as quickly as hoped for a variety of reasons, namely sticky prices, high rates, lack of distress hitting the market and, and that stalled rent momentum. So eqr, you know, of course they earlier announced the acquisition of eight suburban properties in Atlanta, but they also revised down their guidance on acquisition targets for 2025. So here's a quote from Mark Perrell, he said, while we continue to look for opportunities to add to our portfolio in our expansion markets and certain suburban submarkets of our established markets, the transaction market is not as active as we had hoped it would be at the beginning of the year. As a result, pricing has become very competitive with cap rates for desirable assets we wish to acquire, often in the high 4% RA, significantly lower than the cost of debt even for us with our highly rated balance sheet. As you saw in our release, we have lowered our acquisition expectations for the full year to 1 billion from $1.5 billion and expect to match sales and acquisitions this year. Nonetheless, we certainly have the ability to accelerate our acquisition should attractively priced opportunities arrive. And then on the West Coast, Essex I mean, they've been an active buyer in Northern California, but they're noting it's now getting a lot more competitive as that market's rebounded. That's bringing a lot more buy as well. And they even cited a sub four cap deal, which is pretty wild. At maa, Brad Hill said the acquisition market remains relatively quiet. Transaction volumes are still muted as bid ask spreads persist and capital remains cautious given elevated interest rates. That said, we are evaluating several opportunities. MAA did start a new construction project in Charleston. They said they have another 12 sites owned or under control with approvals totaling 3,300 units. And they do expect to start four to five of those projects in the next six to 12 months. Camden they did buy a 2020 vintage deal in Tampa while continuing their strategy of recycling out of older assets to buying new ones. They sold, in this case, four older properties in Texas with an average age of 25 years old. And they're also active in new development as well. They're trying to do some new starts, but they also said, quote, they're just more cautious just because of the uncertainty in the marketplace today. That's from Rick Campo, Avalon Bay. They did start $610 million new development projects in the first half of the year, and they actually upped its target for new development by another $100 million for the year to 1.7 billion. So they remain particularly bullish on development. Really. Avalon Bay and MAA are probably the two most bullish. They're also Avalon Bay also said they're working to sell some assets in D.C. seattle and New York and said they have some pending acquisitions on top of the already announced acquisitions of those BSR assets in suburban Texas earlier this year. Now, speaking of bsr, they did that disposition to Avalon Bay. Most of that was Houston suburban Houston servant Dallas, but they said they're still looking to be a buyer in those markets, particularly for newer construction. They bought two 2023 vintage assets in Houston in Q2 and they also bought one in Dallas in Q1 and looking to do more center space. The Midwest and Mountain West REIT they did some capital recycling as well as they seek to expand into more institutional grade markets. They're selling 12 communities in Minnesota including all five of their properties in St. Cloud which totals 832 units and also an additional seven properties in Minneapolis totaling 679 units. Looking to sell those? Well now they're buying two. One is a 2021 build in Salt Lake City which is a new market for center space and certainly market's gotten a lot more institutional appeal in recent years. Another one in Loveland, Colorado that's near an existing deal they have as well. IRT they said they're under contract on two deals in Orlando, both near existing IRT properties and IRT also said they're which is Independence Realty Trust. They all said they're targeting $315 million in acquisitions second half of the year. But they did note they canceled a pending acquisition in Colorado Springs citing slowed lease up velocity and sub pro velocity forma rents. So that's a higher supplied market. So perhaps that's playing a role there. And then udr they've got a couple starts ready to go they said and but they're they took a little more optimistic tone on the transaction market as well. So a little more they see a little more healthy in terms of the total transaction than most of the other REITs do right now. All right, that's going to wrap up our recap of the Q2 25 multifamily REIT earnings calls. And if you want to get more details, I'm going to have more in our newsletter. You find that@jparsons.com if you're not already subscribed to it's called Rental Housing Economics. I'll have a little more detail on that as well as some links to detailed takeaways from each that I've posted on X. All right, next up, rental Housing Trivia Foreign Today's trivia question is brought to us by Elise AI, which is bringing AI powered tools into the property management space. And by the way, I'll be joining Elise AI for webinar webinar on August 20th. That's going to be next week. Talking about navigating today's market of compressed noi. What the road to recovery might look like sharing a lot of market data, talking strategy as well. And it's a free public webinar. You can sign up for that@eliseai.com webinars so today's question is I mentioned earlier that we have lost more apartment SFR REITs to take privates and to kind of asset sell offs than we've added. So that leads us today's question is which is what was the last apartment REIT to IPO in the US So give that some thought and we're going to answer that in a bit. But first in the news. All right, we've got a few headlines, actually, four headlines this week. And speaking of, of of of REITs going away, one that's on that path, Elm Communities. This happened last week, but I saved it from for this week given this episode's focus on the apartment REITs. Not going to rehash all the details you probably know by now, but let's give this one a quick review. Headline here From BizNow says Elm Communities reaches deal to sell $1.6 billion portfolio and plans liquidation. All right, so this first transaction, 19 assets in total being sold to Cortland. And you know, it appears that these were clearly the more marketable assets in the ELM portfolio because I think you glean a lot based on what wasn't included in this transaction. And by the way, ELM says it'll separately sell from this deal those remaining assets as it unwinds itself as a publicly traded company. Of those 19 assets Cortland is buying, 15 are in Northern Virginia. That, of course, is still a hot spot for institutional capital. It's the favored part of the D.C. region by far for various reasons, job market, regulatory reasons, demographics. Interestingly, there's only one ELM deal in Northern Virginia that Cortland did not not buy. And so I did look it up. Just got a curiosity and it's a 1970s vintage mega tower in Alexandria with 1,222 units. So that's a beast in terms of size advantage and lower rent levels. So it'll be interesting to see where that one ends up as ELM sells sells off its remaining assets. Also another one that was a notable exclusion, Cortland is completely avoiding Montgomery county, which re which is suburban Maryland, which recently enacted rent control. You know, high good demographics in the market, good jobs, higher incomes. But, you know, rent control makes that a makes that pretty much red line for a lot of investors. I'm going to touch on Moco a bit later with another headline. Cortland also is buying Only one of Elm's three assets in the District of Columbia. And it's the newest one, a 2011 construction while passing on two deals that are 50 plus years old. And then lastly, Cortland's picking up three of Elm's six Atlanta deals scattered the region from Bear Cliff to Smyrna to Henry county, all pretty much in that middle tier class B range where Elm carved its niche. And to the, to, to the, you know, naked eye here, not a real rhyme or reason to the three deals that Cortland got versus the remaining three. So maybe just part of the package to close on the Northern Virginia assets that Cortland presumably really targeted here. But again, I couldn't say that for sure. But anyway, the punchline here is that Cortland is now a major player in Northern Virginia with this deal. And so after this all closes, Elm's going to have nine remaining apartment properties plus one office building. Again, Elm plans to sell those two and unwind the company. And that aligns with the previous announcement we've talked about here for a strategic review given frustrations with its valuation on the public market as a reit. All right, next headline comes from the Wall Street Journal. How an NYC New York City suburb is actually managing to bring rents down. New Rochelle embraces development and makes it easy to build, leading to thousands of new apartments. So I'll read a little bit from this as a New Rochelle has completed more than4,500 new housing units over the past decade. Another 6,500 units are either in the pipeline or the planning stages for the next several years. New Rochelle median rents are only 1.6% higher than 2020, well below the 25% or higher increases in New York City and outer markets like New New Jersey's Newark, Hoboken and Jersey City. According to Apartment List, city officials say they relied on a policy framework that encourages residential building. New Rochelle streamlined environmental reviews, offered developers tax incentives and created standardized zoning rules to make it easier and cheaper to build homes. Well, what do you know? Novel concept. So kudos to New Rochelle for doing it the right way, trusting the science. And thank you to the Wall Street Journal for the excellent article reminding us that of what actually works to improve affordability. It's not conspiracy theory, it's not disproven science, it's just supply. So build, build, build.
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All right, so on the flip side.
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We still have science deniers in our country, unfortunately. And you know, I mentioned this, I mentioned Montgomery county earlier with the Cortland deal and how Cortland is Not buying any of Elm's assets there. And again I don't have first hand knowledge this, I assume this might be a big reason why because we hear this talked about quite a bit is the rent control that Montgomery county passed a while back. So headline from Bethesda Today magazine that says incredibly worrisome colon Moco planners concerned by drop off and request to build multifamily rental housing. Builder advocates point to rent stabilization efforts say they do not want to risk investing in over regulating markets. Over regulated markets. Excuse me. All right, so it's worth noting that while Montgomery county did carve out new construction but it was only for 20 something years which you know seems a bit silly because it's like Montgomery county thinks that apartment investors who fund new construction can't read a calendar. You know that deal is worth less every year gets closer to the expiration date. So that's kind of crazy. So what's the inevitable result? Told this a big drop of construction. That's what happened. The article says the county awarded 38 permits multi million housing units from October to June and permitting is falling faster here than in most of the region and most of the country as well according to local media reports. So no surprise unfortunately. You know, when Montgomery county chose to St Paul itself with rent control the evaporation development capital was a foregone conclusion. And again I, I, I think that Montgomery county has basically been redlined by a lot of market rate developers and also investors on the acquisition side. So not a real surprise. Capital goes where it's wanted and it just ain't wanted in Montgomery county or in neighboring Prince George County, Maryland either for that matter. All right. And last headline comes the New York Times. And speaking of science deniers, this is.
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A good one from the New York Times.
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It says rent for $1 a month. Egypt says no ending a system that aid the poor. Officials say a new law will rebalance a housing market long distorted by rigid rent controls. But many residents could be pushed out. All right, so I, I continue to be amazed that in the era of trust the science that articles like this can just completely ignore it. You know there's a, there's obviously a reason why the the famous socialist economist Sar Lyn Beck famously said the most efficient technique presently known to destroy a city except for bombing is rent control. So I don't know how you can write a whole article on rent control especially for $1 a month rents and not once mention the dozens and dozens and dozens of studies on it with 90 something plus percent of them all concluding that it backfires on the very people it's pretended to protect, intended to protect. So that's pretty wild. And let's come back to today's trivia question.
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Again.
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It was what was the last apartment REIT to IPO in the US So today's trivia question again brought to US by Elise AI what was the last Harmon REIT to IPO in the US so, a little bit of history here. Most apartment REITs, they went public back in the 1990s. That was the golden era for IPOs. Very few in these past couple of decades, we've lost more to take privates. We've added to new IPOs. But the most recent one in the answer to today's tribute question was Clipper Realty, which is a small REIT operating 10 apartment properties in all of New York City, specifically Manhattan and Brooklyn, as well as some commercial property as well. And it's kind of a quick aside. Some of you may, may remember that Morgan Properties, which is a large privately owned operator based in Pennsylvania, they did explore an IPO back in the early 2010s, but ultimately backed out, withdrawing plans for an IPO, choosing to stay private. And that obviously has not stopped them from continuing to grow. All right, so that takes us to today's interview. Our guest today knows the apartment REIT business very well. He's Rich Hightower, managing director for US REIT Equity Research at Barclays. He's been tracking the REITs through multiple cycles. If you follow the REITs calls or read the transcripts, you'll often see his name among Wall street analysts in the queue, firing off questions to read executives. So Rich is always one who's well informed, asking good, asking good questions. And now it's my chance to ask him questions, and I hope they're good ones. So please welcome in Rich. All right.
- [35:18]
B
Now we enter the interview portion of today's podcast.
- [35:21]
A
And I am honored to welcome in Rich Hightower. So, Rich, thank you so much for being here.
- [35:25]
C
Thanks, Jay, for having me. It's great.
- [35:27]
B
All right. So you've been in this game for a little, for, for a little while now. Not to date you, but you're one of the veterans. So tell us a little about how you got into REIT research, analysis, and specifically into multifamily rental housing.
- [35:42]
C
Sure. And I'll keep this. I'm 20 years into this experiment, so I'll try to keep it as brief as I can. But, you know, I joined an investment bank out of college, and I actually did real estate investment Banking for the first three years. So, you know, REITs kind of found me at that point in time. It was, you know, kind of fortuitous in that sense. So did investment banking and then went to work for a credit fund kind of right as the world was about to end, you know, in that 0809 timeframe. You know, departed from the credit fund as the world was blowing up, took a little bit of time and then landed in research in 09. Started covering REITs more formally in about 2011. And so it's been about 14, 15 years since I've kind of been involved in REIT research specifically and across, you know, almost every sort of REIT food group that you could think of. You know, so multifamily, you know, since 2015, I've covered lodging, retail, net lease, a bunch of stuff. And so did that through 2022. Worked for a great firm, Evercore ISI, which was kind of the bulk of my research experience. Worked for a terrific mentor, Steve Sacwa, who's still in the business. He might be watching this when we sort of publish it, but Steve's a great friend and mentor, so I was really fortunate to learn from him for many years and then went to a hedge fund for a couple years through the end of 23 and then got back on the sell side in late 24 working for Barclays, which is my current position as a managing director and senior REIT analyst for Barclays. So I tried to keep it short. That's 20 years worth of stuff. And so here we are.
- [37:24]
A
Yeah.
- [37:24]
B
And before we move on, I'm curious to ask you, covered in all these different types of REITs, for those of us who just think about multifamily and single family rentals, just very high levels, like how does that, how does the rental housing REIT world differ from all the other types of REITs out there?
- [37:38]
A
And from, from your seat, that's, it's a great question.
- [37:42]
C
And, and it's important to kind of understand the nuances. And I think, you know, first and foremost, every sector, I mean, and you, I know that you know this and your audience knows this. You know, you read stuff in the press that says that paints some broad brush about, you know, quote, commercial real estate is doing this or whatever. And of course, every sector, every subsector, every, you know, ticker within the subsector is probably on its own, you know, sort of growth trajectory that you have to sort of be aware of. You know, obviously there are cyclical components. There are, you know, company specific components related to geography and whatnot. Right. So you gotta have to understand the nuances. But, you know, there's short duration, long duration. Right. You know, multifamily. And hotels, for instance, kind of sit at the short, you know, lease duration end of the spectrum. You've got net lease, office, retail, you know, kind of at the longer end. You know, some are going to be more sensitive to interest rates, to, you know, changes in the economy. And so it's, it's really kind of a fascinating mix and you have to understand the nuances of all of them. And, you know, what happens to earnings if XYZ happens in the economy? What happens to valuations if the same thing. Right. So, you know, we're always constantly trying to be aware of those things. So it, it is there, there are some important differences, for sure.
- [38:57]
B
Yeah, they're all REITs, all real estate, but they're obviously very different in terms of drivers and dynamics. Even terminology could be different.
- [39:03]
C
That's right. That's right.
- [39:05]
B
So, Rich, I'm curious to ask you this. So I, I love following the re earnings calls. I pour through the transcripts every quarter for the apartment REITs and the SFR REITs. And, and I am always interested to see what are you and your peers asking. And so I want to just, if you don't mind, take us behind the curtain a little bit. What goes into the process of thinking about what you want to ask on these calls?
- [39:26]
A
How do you determine that?
- [39:27]
B
And I'm also just curious, like, what do you say? Like, what do you say? I want to ask this on a public call versus something I'm going to just ping the IR guy about later.
- [39:36]
C
Great question. So, and I'll say that, you know, we've got some, some kind of new people on our team, and we had a summer intern this summer. And so a lot of this is sort of fresh on my mind, sort of how to think about, you know, the earnings cycle cadence and that sort of thing. So I'll maybe I'll just kind of start from the top and get to those specific questions. But, you know, when a company reports earnings, obviously, you know, we have to have an opinion before that. You know, there's a whole embedded set of expectations for the quarter, for the year. Right. That's reflected in the stock price and this and that, and that's ultimately kind of what we care about. But, you know, when you're reading an earnings release, you know, did the company beat or miss for the quarter? Why did they beat or miss for the quarter? Was it, you Know, something about operational acceleration, deceleration. Was it a one timer thing, you know, was it a high quality, low quality, you know, sort of beat miss, what, what have you. And so that's first and foremost just what happened. Right. Second thing is, you know, did they raise or lower guidance for the year? And if they did, why did they raise or lower guidance for the year? Where are they, you know, and is again, is it a high quality raise, a low quality raise? What does the full year imply about, you know, in this case we just wrapped up second quarter, what does it imply about the back half now that we've completed the first two quarter? Right. So you're constantly sort of trying to like fit these puzzle pieces together and, and ask those sorts of questions. And so I think that's, that's probably the main inspiration for what you might want to ask on an earnings call. But you know, typically it's going to be something around operations, it's going to be something around, you know, development. Right. If the company is a big developer, it's going to be something around, you know, what ultimately sort of contributes to earnings growth or you know, same store operational growth or things like that. And you know, you're trying to, you're trying to sort of build the mosaic that way. So I mean it, if you kind of look at the questions that we ask, I mean it could really run the gamut, you know, capital allocation, etc. Etc. And I would say too, you know, I've kind of noticed over the years, you know, the first five or six questions tend to be the most sort of directly hard hitting, informational quality questions. And then, you know, sometimes there's a bit of a drop off after maybe five or six, but you never know. So it's, you know, and these company management teams sort of sit through the whole thing and you never know what they're going to, you know, sort of be confronted with. So they do a lot of prep too. I mean, I've seen sort of this process too where they'll have, in addition to their own earnings release which we see, and the supplemental which we see, there's probably a book hundreds of pages thick with questions and answers and detail and things that they have to sort of be prepared for. So that's kind of the process there, I think. Did I hit everything?
- [42:20]
B
Yeah, I was going to say, are there specific rules? I know there's obviously some dialogue with the IR team later on. So are there certain, certain things you just, you have to, if you're going to ask him, he has to be on a public format like that.
- [42:31]
C
Yeah, I mean there are certainly things they can say and they can't say. Right. In a public format. I think certainly on an earnings call just about anything goes and you'll notice that they preface the call usually with some sort of warning about the forward looking statements and may or may not come true, that sort of thing. So, so the earnings call, given that it's a public forum is pretty much anything that they want to say they can say. Conversely, if we are not in a public setting they are subject to what's called reg. Fd full disclosure or fair disclosure rather meaning that they really can't be giving I guess what would be material non public information out in investor meetings or even to the sell side. So there's ways of sort of communicating in a way that's above board that still kind of gives you as an analyst or an investor the fulsome picture that you need to sort of understand what's going on with the company. And I think nowadays everybody kind of does a pretty good job of knowing what those limits are and still kind of getting what they need.
- [43:41]
B
One other question on these questions, so you mentioned sometimes the like hard hitting questions are asked first. Sometimes I've noticed like later on like somebody will ask a question about like some obscure line item really like the debt terms or some one off property. Are they just, are they just running out of things to ask about and need to get it on or is there a real reason for those types of obscure questions?
- [44:00]
C
It's, I can only speak for myself and I would say that if my sort of top three or four questions, and usually you should be able to come up with a few questions. If my top three or four questions have been answered, I'm probably taking myself out of the queue. Now what you don't want to do in my opinion is get bogged down on sort of a very detailed modeling, you know, something that's not going to help everybody on the call type of question. You know, that's something that can be taken offline and, and that, that's, that's pretty typical as well. So you would, so there, there's a balance. Yeah.
- [44:32]
B
I'm sure some of you have to be irritated sometimes the questions are like, come on, really we're asking this.
- [44:38]
C
I'm not going to name names, but yes, I've absolutely.
- [44:41]
B
Yeah, you don't have to name names.
- [44:43]
C
Yeah, pretty much every quarter.
- [44:44]
A
Yeah.
- [44:45]
B
All right, so we've wrapped up the apartment REIT calls at this point. What key Themes jumped out to you from this quarter's calls?
- [44:55]
C
Yeah, I mean, look, it's, I don't think it's any secret that, you know, trends are slowing. Right. Rent growth and sort of the, that seasonal rent curve that everybody is kind of aware of peaked I think a little bit earlier than is typical. Right. And you know, we started to notice deceleration, seasonal deceleration in a lot of sort of the KPIs, the rent numbers that we get separately, you know, from different industry sources. I mean, that started really kind of in maybe May, May, June and you know, so you did get sort of an indication that, that things were slowing. And it's on a combination of factors. Right. Obviously there are supply prone markets that we're still kind of working through. And if you've got a lot of properties and lease up, that's going to impact the numbers at a stabilized property. And a lot of the REITs suffered from that. That's no secret to you and your audience. The other thing that's kind of interesting is the demand side. The demand has been strong, absorption's been strong, but jobs are slowing. You know, there's a lot of, you know, sort of tariff related and other related uncertainty. So we're really trying, I think that's the part of the puzzle I'm trying to figure out. But you know, let's fast forward, you know, to kind of what the picture for 26, even 27 and beyond look like. You know, we know with pretty good certainty that supply is dropping off a cliff in a lot of these markets. That's good for existing operators. I think it's just, it's the demand side and the job side and the absorption side that's really going to sort of make the difference as we think about 26 and 27. And I guarantee you investors at this point are thinking about 26 and 27. Like we're not so fixated on what happened during the quarter. Markets are forward looking, right?
- [46:38]
A
Yeah.
- [46:38]
B
And every apartment wants to push you forward too, right.
- [46:41]
A
At this point.
- [46:42]
B
26 and 27.
- [46:44]
C
That's right. That's right.
- [46:45]
B
So what stood out to me, I want to run this by a little bit. I was, I think it's been boiling up these past few quarters is this balance of the kind of short term headwinds versus the long term opportunities which you kind of alluded to here. I mean, we've heard about mitigating expense headwinds, especially around taxes and insurance. We've heard about increased efficiencies with centralization AI Macro demand absorption, like you mentioned, retention rates, occupancy isn't holding pretty steady. Renewal increases are still steady. The discount to rent versus buy, but still the soft new leasing environment, particularly in the high supplied markets. So as you analyze these companies, and obviously lower supply going forward, which then could be better rent growth. 26, 27. So as you analyze these companies, you're giving guidance to your clients. How do you think about the balance.
- [47:31]
A
Of these competing forces? The short term supply headwind versus the long term optimism?
- [47:36]
C
It's a really good question and I gotta be focused on both depending on sort of the audience I'm talking to. But you know, look, we do our best to get the short term correct in terms of earnings and that sort of thing. But you know, effectively we're valuing these companies on a, on a, on a much longer term, you know, sort of framework. And so I would say at least the way I value the apartment REITs and I think you might find some differences across, you know, kind of my competitors. But I mean I underwrite Equity Residential or Camden or any of these guys probably the same way that Blackstone or any other private equity firm would value a company. And you say, okay, what do I think I understand about that cash flow trajectory not just this year, not just next year, but you know, over, let's say a seven to ten year hold period, you know, and do it the best you can based on the factors you just mentioned. Right. We know that supply is, you know, heavier here or there. We try to overlay the supply and the demand picture on each portfolio, you know, geographically speaking. And you can come up with, I mean, and we do this when, you know, when we publish, you can come up with a pretty good sense of, you know, it's going to look like this and then it's going to look like this and it's going to kind of, you know, the exit is going to look like this. And so you forecast the cash flows and then you, you're solving to what's effectively an unlevered irr in how we do it. And that's, you know, partly going to be a function on your going in cap rate in addition to the cash flows. And so, you know, we're, I'm pegging cap rates based on private market values, based on the risk free rate based on relative sort of quality and growth and volatility in the cash flows of Mid America versus a Camden versus an Avalon Bay versus whoever. And so there's a lot of inputs that go into those models to try to Come up with that sort of evaluation framework and then it's you value the company that way. Come up with an nav, and I'm sure we'll talk about NAV in a second. And you know, roughly speaking, where is the stock trading relative to that and what set of assumptions are embedded in the market's expectations implicitly based on the stock price? I see on my screen and do I think there's opportunity there on one side of the trade or the other. Could be long, could be short, could be, you know, nothing. Right. So it just depends. So we're always kind of making those adjustments and assessments and recalibrating this set of assumptions and that's right. So it's, it's all of the above.
- [50:06]
B
I'll go back to something you mentioned. You said you look at not only the supply but also demand in these markets individually. And I got to tell you, like, that's been, I think one of the things, if you go back before 2023, even poor before COVID the last decade, these Sunbelt markets, one thing I would, and I think you're one of the best. But there's been some, I think a general view from some of the REIT analysts where it's like, hey, I'm going to take the top five supply markets. And these are bad because they lead the nation supply, but they've underweighted the demand side. And my argument's been it's like until.
- [50:36]
A
Recently, these last two years, we've not.
- [50:38]
B
Really seen that high of supply. Now it's really high supply. But previously those markets are actually doing pretty well despite the supply because there's more demand.
- [50:46]
C
That's right. Yeah. I mean, and this is tough to put into a model because you had extraordinary demand absorption and rent growth in that sort of COVID and post Covid period. And understanding what the sort of, you know, the normalization effect off of that is very, very difficult. Right. And then the supply response function kicks in and the debt markets are amenable to construction. And I think that's what those markets are living through now. But yeah, look, it's to be clear, I would, you would never hear from me as far as, you know, picking stocks. And that's. You'd never hear me say, I like the Sun Belt. I don't like the Sun Belt. I like coastals. I don't like coastals. I would never ever say that. What I would say is based on what we think we know about supply, demand and rent growth and those sorts of things, here's what I think the market is embedding in terms of the set of expectations around that company. And I think the market's overshooting in this direction or undershooting in that direction. And so when you look at my sort of ratings distribution across all REITs, but certainly within multifamily and single family, it really is like underwriting the stock and saying, okay, where is it trading relative to that? And even if I think earnings are going to go down next year, I could still like the stock or whatever. Right. Or if earnings are accelerating, I could say, yeah, but I mean, it's really super expensive and everybody's kind of already there. Right. So it really just depends. And you know, you might not hear that from other analysts. That's how I think about it.
- [52:12]
B
No, I'm a research nerd like you. I like the nuance. I don't like the broad brushes. So sometimes even when I feel like I'm having to defend the Sunbelt, it's like, oh, you're a Sunbelt apologist, Jay. I was like, no, I'm trying to counter something here. It's not, there's not opportunity in the coast. It could be both.
- [52:30]
A
Right?
- [52:30]
C
Yeah, listen, the purchase price of any asset or security, and again, you guys would know this is probably the chief determinant of the outcome. Right. And so if a stock is attractively priced, even if you don't like their geography, you know, for the next year or two or whatever, it could still be an attractively priced stock. Yeah, right. And in fact, that's, I mean, the Sunbelt stocks were massively outperforming to start the year, despite the fact that we knew that, you know, this wave of supply was. You're going to have to burn through that this year. And you know, so those things can happen. Markets or markets are kind of funny. And again, they're constantly forward looking, constantly forward looking. And so if you can sort of see the light at the end of the tunnel on the Sunbelt supply situation, stocks will, will move on that many months, many quarters in advance. Right. Just as an example, that's a good.
- [53:19]
B
Segue talking about short term versus long term. Sunbelt and coastal. So that's a good transition. Another topic, I think we're at a.
- [53:26]
A
Really interesting moment, not only in the.
- [53:28]
B
REIT community, but also, I think, more broad in the private sector as well, where they're seeing better revenue growth, better performance in the coastal markets are generally lower supplied. But the capital focus has really, since COVID well, probably before COVID too, public and private shifting into lower regulatory risk markets. Sunbelt, some of the mountain markets. And as you know, with the exception of Essex, even the big traditional coastal REITs, EQR, Avalon Bay, they're doubling down on their Sunbelt expansion strategies. I think they're targeting about 25% exposure in part due to the diversification, increased regulatory risks. So question is, how do you view that strategy from your seat and how to REIT investors balance that? Big difference between, hey, good stuff here right now, but long term, we like this.
- [54:16]
C
Yeah, yeah. So you probably heard a couple analysts ask precisely that question of the management teams of eqr. Avalon Bay kind of is in particular, I would say this. I certainly understand the thesis around diversification. And it's not, it's not just fundamental diversification. It's not just, you know, kind of the basic supply demand stuff. I mean, a lot some of it has to do with, I guess what, what might be called regulatory arbitrage where, you know, yeah, if you were, if you were in a coastal, you know, if you had a coastal sort of footprint during COVID you got burned in a lot of ways, right. Whether it was shutdowns or eviction, moratoria or what have you. And I think there's some muscle memory that goes with that. And so from a management team's perspective, thinking, okay, how can I either maximize the growth and, or minimize the volatility of my cash flows going forward? Diversification can be just like a stock portfolio can be an answer to that question. And so I think that's the, you know, that's part of the thesis behind, you know, why EQR wants 20% of its portfolio in Sunbelt and expansion markets. You know, the other part of it is the job and the income and the demographic profile of the renter in Dallas, Atlanta, Tampa, Orlando, Phoenix, et cetera. Austin is just basically fundamentally different from what was true 10 years ago or 20 years ago.
- [55:50]
A
That's a good point.
- [55:51]
C
Right. And it's higher income cohorts that have moved to these places that are companies relocating, all those things. And I'll just continue to use EQR as an example here. They have among the highest rents, basically the highest rents in the sector because of, you know, their kind of urban coastal footprint. And that's where you see high rents and absolute dollars, you know, in a high income renter, they are seeing their high income renter move to these other places and they want to kind of be where that renter goes and you know, where the knowledge workers go and this, that the other. And so that's, you know, I get the thesis, I think, you know, to close the loop from my perspective and from a public equity investor's perspective, you know, people like to be able to make concentrated bets. I think it would be a bad outcome if everybody's portfolio in the sector sort of melded into the same set of markets in the same concentrations. And again, that's just kind of an investor preference because oftentimes, and maybe we can get into this in a little more detail, but oftentimes you're looking for more what we call idiosyncratic risk and sources of potential return. And if everybody's got the same portfolio apartment wise, it's going to be very, very hard to do that. And so investors are constantly trying to parse out the differences in the portfolios and what does that mean for rent growth and what does that mean for all these other factors? And again, if everybody's sort of gravitating to the same markets and paying very low cap rates to do so, I mean, are they actually creating value? That's really the question. Right? So there's pluses, there's minuses. I think it depends on your perspective and who you're asking.
- [57:42]
B
Yeah, that's a really good point. And it's obviously also invest REIT investors say have fewer options. As you know, we've seen a number of apartment SFR student housing REITs taken.
- [57:52]
A
Private in recent years.
- [57:53]
B
Air most recently Tricon, ACC.
- [57:56]
A
I'm just going to read a few.
- [57:57]
B
Before that we had Post Forest City, edr, Monogram Preferred, Pure Blue Rock. I'm sure I'm missing some.
- [58:03]
C
That's a good list.
- [58:05]
B
Now we have the unwinding of Elm communities which is obviously a smaller apartment RE just sold a bunch of its best assets to Cortland and marketing the remainder. So we're losing a lot more rental housing rates than we're adding. What do you make of that trend?
- [58:19]
C
I It depends. I mean, obviously you don't want a sector to shrink too, too much, you know, and become irrelevant. And we have seen that with some other REIT sectors. You know, historically I think it's a good thing if you have, you know, at least half a dozen, maybe, you know, six to eight or nine, sufficiently liquid, sufficiently differentiated strategy, sufficiently high quality, efficiently managed companies. Right. In terms of the gna load and all that kind of stuff. I think if you have that kind of mix of companies, that's a good thing. You don't want 20 companies doing the same thing. You don't want two companies. Right. Single Family stuff, because you really, at this point you've only got two companies that you're sort of picking from. And so, I mean, the trade is always crowded. It's always someone's long invitation, short AMH or long AMH and short invitation. And it's very hard to sort of diversify outside of that. So I think again, 6, 8, 9, 10 maybe differentiated liquid efficient companies is a pretty good outcome for every REIT sector up and down the board. So in that sense, M and A can be a good thing. Some companies really shouldn't exist, you know, sort of separately as a public company, we see that, you know, it's not, it doesn't exist so much in multifamily anymore. It did at one point. There's been consolidation, there's been take privates. It does exist in some other REIT sectors. And you know, I think the, the naturally optimal outcome in those sectors will occur over time, but it takes time. It takes time for all sorts of reasons. Right, so, so do you think we're.
- [60:04]
B
Going to see more of that coming in the relative near term, more REIT.
- [60:08]
C
Take privates and consolidation in multifamily specifically or in multifamily? Yeah, well, let me look at my, let me look at my screen and I'm not going to name any names, but listen, I think you could see in the next. Well, I mean, it's a dumb prediction, right, because there's so many factors that sort of contribute to this. But I mean, you could see one or two perhaps that might make sense, but it depends on where, you know, where are debt markets, where are, you know, what's the status of capital flows? Obviously, discounts to NAV are a big feature of why a company might want to go private or sell itself. Right. I mean, if a company is perpetually trading at a discount to a reasonable valuation for its assets, it's going to have a bad cost of capital, it's going to have a tough time growing, it's going to have a tough time getting attention from investors, you know, from, from what I would call high quality investors. Okay. And so, you know, when that happens, something has to be done. The something could be selling assets and sort of, you know, bridging the gap between, you know, public and private nav or selling the company or buying stock. Right. And sometimes it's a combination of all three. So. But a lot of things have to sort of come together, you know, for, for, for that particular outcome.
- [61:29]
B
So, and part of that, of course you allude to this is navs and of course, I'm sure this is not unique to REITs, but every REIT seems to think they're undervalued, right or wrong. And that seems to factor into some of the take privates that they're. The view that as, you know, displaying this, the audience, that the assets they own are worth more that private market than the public market. Do you think there's any legitimacy to those gripes? Or if not, why do you think, why do you think that persists?
- [61:57]
C
Yeah, I mean, it's a legitimate gripe. The question is, you know, one, is it, is it so strange relative to history that it, that it, you know, all of a sudden matters now? And two, what do you want to do about it? Right, so, so we just talked about things you can do about it. You can sell assets, you can buy stock, you can sell the company. And, you know, I'm waiting to kind of see, you know, more of that activity take place, I guess. But yeah, look, I mean, if you look at so multifamily is kind of interesting. And again, in the context of the broader sort of REIT universe, I would say the delta between public and private and multifamily is relatively tight, like versus other sectors. I mean, like hotels are a great example where, yeah, I mean, these are 20 to 40 to 50% discounts to quote, unquote, private market value. Again, for an investor to sit there and say, okay, I'm going to give you credit for that sort of a difference, I need to have some sort of belief that you're going to do something about it. And in hotels, not a lot of companies do something about it. That's the problem in multifamily. You know, I would say, you know, it's not unusual to see plus or minus 5 or 10% discounts to NAV kind of through history. And I think that's the opportunity for a REIT management team or for a REIT investor because, you know, if you're trading at or above navigation, you could issue equity and buy assets and do it accretively. For trading below nav, you're probably selling assets, you're possibly buying back stock, and those can be NAV accretive. And I think if the market sort of believes constantly that no matter where your stock price is trading that you're going to try to do the right thing, then, you know, typically that gap won't be too large. Now you can always say, well, I've got Camden trading at a, you know, at a 6 implied cap. And I'm seeing, you know, Dallas multifamily trade, like, you know, with a hot, with a high four handle. I mean, you know, like, what are you going to do? Well, I mean, is that one off, you know, that asset? Is it the whole market? Is it the whole, I mean, is it everything in Camden's portfolio? Is it like, whatever, Right. So, you know, so you have to be very careful sort of how we, how we talk about those things. But yeah, I mean, anyway, it occurs, it's a natural thing about real estate and REITs. And, you know, a good management team will use that to its advantage.
- [64:11]
B
That's a great point. That's a good point. So your clients are investors who I assume have fairly diversified portfolios across multiple sectors.
- [64:20]
A
They're looking to you for guidance.
- [64:22]
B
What are the biggest questions and concerns that you get from them specific to apartment REITs relative to other investment options, other alternative asset types.
- [64:35]
C
So apartments relative to the other sort of REIT sectors, or just in general.
- [64:40]
B
What makes them more or less interested? What are they pinging you about apartments?
- [64:46]
C
It depends. Right. So I mean, clearly everybody is interested in what the sort of short, medium, longer term outlook for earnings and cash flow growth is and obviously where stocks are trading relative to that. I mean, I'll, I'll maybe give you a little bit of inside baseball too. What's, what is really important for public equity investors is trying to understand how other investors are positioned, if that makes sense. Because, you know, sometimes long this name, short this name, or overweight this name, underweight, that can become a crowded trade sometimes. And so a good, a good, and this is, you know, maybe a little more hedge fundy. But, you know, a lot of the times the hedge funds will talk to someone like me or my competitors, you know, across the sell side to try to get a sense of how other investors are positioned so that they're not sort of, you know, in this crowded trade that can very quickly sort of move the other way, and that's really not a good outcome. So that's, you know, that's one thing, but other, otherwise, like, look, do you have a good model? Do you model the company properly? You know, do you, do you have a, you know, either better information or analysis that your, your peers don't have about what this company's cash flows are going to look like or what, or, you know, how it should be valued or things like that? Right. So I mean, you know, it's all of the above. It's all the above. It's on a short, medium, long term. It's all the above.
- [66:10]
B
So they're looking at as much more macro, you know, in terms of outcomes. They're not looking at, you know, the operational nuances that might drive those outcomes. It's like the type of things, it depends.
- [66:20]
C
I mean, like, there are investors who are really, really interested in whether, like, you know, Avalon Bay is going to beat its same store guidance by 25 basis points. I mean, I mean, there are investors who really care about that stuff, you know, be it or miss or whatever. There are investors who probably care a lot less about that. And they're like, look, you know, Avalon's got a big development pipeline. You know, what do you think that does for ffo, you know, growth over the next three years? And if we think that that gives them another 100 to 150 basis points of incremental FFO growth that their peers don't have, there are investors who are really interested in that too, and they could care less about the quarter. Right. So anyway, it kind of keeps someone like me on my toes because depending on who you're having the conversation with, it can be really granular about your model and the assumptions that are sort of embedded in the model and that sort of thing. Or it could be much bigger picture. You know, it could be, it could be, hey, how do you like multifamily versus single family? Yeah, and then we'll have that conversation. Right? So just as an example, so you.
- [67:22]
B
Mentioned like the beat or miss. That makes me curious about this. So us outsiders, we sometimes still see. I'm going to exaggerate the argument here. You know, so and so, missed, miss, missed by 10 bips. And the market just, just, just tanks on. I'm like, is it.
- [67:35]
A
Yeah.
- [67:35]
B
Is that 10 or 25? Is it that big of a deal? Because it seems like it's within the margin of error to most of us on the outside.
- [67:42]
C
Well, to go back to my earlier example, if, if, if, if a particular name is a crowded long and there's something about the earnings, print that so that, so you can have, you can have, you know, outsize moves in the stock price that are way overblown versus what actually just happened fundamentally. I mean, you know, a good, a good rule of thumb is, you know, when a company reports earnings, did FFO per share change in terms of, let's say, the annual outlook or whatever, by how much, percentage wise, and that's probably about how much the stock should trade, all else equal on that particular item of news. But almost without exception, you'll see moves that are much more pronounced than Just what the fundamentals would. Would otherwise imply. And again, that has to do with positioning. It has to do with. It could have to do with something that is completely unrelated to apartments. It could have to do with what the Fed just talked about in its meeting or what Trump is doing on any number of things. Right. And everything's sort of connected. So anyway, just as an example.
- [68:56]
B
No, that's interesting. So our last question for you. So aside from macroeconomic factors like a rate reduction or job growth, what would get REIT investors more bullish on multifamily?
- [69:07]
A
Is it the return of rent growth or is it something else?
- [69:10]
C
Yeah, I think specifically, if you wanted to point to one thing, it would be sort of a re acceleration in blended rent growth. Right. Which is so, you know, your kind of monthly blended numbers are sort of the high frequency data point that everybody looks at. That's not the same thing as reported same store. Right. Reported same store involves leases that were signed, you know, many months ago. But what's happening on the ground now? Is it getting better or worse? You know, you mentioned earlier that, you know, renewals have been very strong. That's true. New lease growth has been a little weaker for a lot of reasons. You know, if you start to see sort of an inflection positive in new lease growth and still pretty good renewals and the blends, you know, start to accelerate, I think that's probably what gets the stocks moving again, because it's been a pretty tough earnings season for the apartment stocks. Now, on the other hand, we all know that there's a seasonal component to this and you are unlikely to get significant reacceleration in the months of August, September, October, November, December because you don't have as many people moving into apartments. And so we're really kind of waiting for what happens next spring at this point. And so, so I mean, there's a lot of distance between now and then, and people are kind of making bets based on what some outcome that they expect six, seven, eight months from now. So anyway. But that's what it would take.
- [70:34]
B
Yeah. And really the last part of Q1, really, I mean, it's really March.
- [70:36]
A
We'll know much, I think.
- [70:37]
C
Yeah, that's right. That's right. That's right. Spring leasing into peak summer leasing. I mean, that's really where kind of people get focused.
- [70:45]
A
Yeah.
- [70:45]
B
Well, Rich, this has been great. Thanks for letting me pick your brain and appreciate your time.
- [70:49]
C
Well, thanks, James. Great. Great to be with you.
- [71:06]
A
And that's wrapping Episode number 46 of the Rent Roll big thanks to Rich for being our guest today. Thank you to to jpi, to Waymaker, and to Elise AI for sponsoring portions of today's episode. And thank you to all of you for spending part of your day with us. We'll see you next week.