← The Rent Roll with Jay Parsons
The Rent Roll with Jay Parsons
EP#58 Haendel St. Juste | 5 Takeaways From Q3 '25 Apartment REIT Calls
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Foreign welcome to episode number 58 of the Rent Roll your podcast on all things rental housing, multifamily single family rentals, and Build to Rent. Today's episode, our top five takeaways from the apartment REITs Q3 2025 earnings calls which just took place this week and last week. These calls, I, you know, I love and hate them because it's a lot of work, but they give us so much great color and intel on the market. Now we don't have as many public REITs as we used to, but even with those we have, it's a good source for market intel because these are the few companies that are legally required to tell us what they're seeing and actually show their work, too, through their financials. So I've parsed through hours and hours and hours of earnings calls, transcripts so you don't have to, and I skipped through all the formalities and pleasantries, the financial jargons and the talking points to share with you. What are to me, the top five takeaways from these calls and what they mean for the sector overall, both public and private alike. And Obviously the public REITs represent just a small share of the overall market, but they have an outsized influence by nature of being public and they're generally pretty well run companies as well. The others look to so we'll see what we could glean from those and and then today's interview will be with a guy who's tracked the apartment REITs for a couple of decades now. REIT analyst Handel St, Just formerly of Morgan Stanley, now with Mizuho, will get his take on the current state of apartment REITs, how investors think about the apartment REITs versus the alternatives, and where he thinks the sector's headed for 2026. So today it's all about the multifamily REITs. Next week, programming note here, we'll be diving into the Single family rental REITs. So AMH and invitation home. Join us again next week for that one. And also next week I'll make a point to share some color from the one big apartment REIT that hasn't yet had its earnings call, and that is Camden Property Trust, which is having its call this quarter later than its peers. In fact, the earnings call is Friday, November 7th, which is the day after this episode comes out, unfortunately. So I'll be sure to touch on that one next week to make sure we cover our bases. All right, before we jump in, I want to give a big thank you to our sponsors first and foremost, as always, thank you to jpi, a leading apartment developer with a stated purpose to transform building, enhance communities and improve lives now from coast to coast. And also thank you to Madera Residential, a leading owner and operator of apartments based in Texas. So check them out@maderaresidential.com all right, so let's dive in. Here's a chart. Instead of charts, you get five key takeaways on a department REITs and their Q3 earnings calls that just took place. Now, before I dive in, before I do the grand, unveil these five things. Quick reminder, I am. And a disclaimer. I am not a financial advisor. I'm not a CFA. I'm not offering investment advice. These are just five themes that I found interesting from the Q3 2025 earnings calls among the apartment REITs. I'm not trying to tell you buy, sell, hold analysis. I'm just giving you the color things that I think are interesting and to be telling on the current state of the market and its direction. So let's jump in. Number one, number one takeaway from the recent round of earnings calls. Renter health is still strong, but potential renters are increasingly commitment phobes. All right, so with all the jitteriness in the economy, the weaker employment, some major layoff announcements, federal government shutdown, it's natural to wonder, is renter financial health deteriorating now? Certainly this last month or so I've spent quite some time talking about potential cracks in the market and whatnot. And now we're going to, for the first time, really get some better data in intel because of these publicly traded REITs and earnings calls. And so far what they're sharing is it's actually good news, at least on renter health. There's no sign of weakening financial health at all. Rent to income ratios are still low and in some cases have gone lower. No one's talking about redoubling up of households. No evidence of a bunch of renters giving back the keys and breaking leases to move out because of job loss. No reports of increased delinquency, unpaid rent. In fact, it's gotten better year over year, I think, for a lot of these REITs. Let me read what Equity Residential said. On the plus side, Equity Residential's CEO Mark Perrell, he said, we see our existing residents as having a generally stable employment situation and good wage growth. We see continued improvements in delinquency and no sign of customer financial stress. We've also seen incomes rise for new residents by 6.2% year over year. And then his colleague Michael Manelis added this he said we're running just below 20% rent income ratios, which gives us a lot of confidence in the financial health of our consumers and the ability for them to absorb whatever the market rate growth is. So obviously talking about future rent growth as the market start to recover. Other Reeds said similar things about renter financial health maa, they said that renter incomes continue to climb up. Brad Hill, the CEO there, he said, quote, that's driving favorable rent income ratios, which remain healthy, low of 20%. A healthy low of 20%. So Avalon Bayes, Sean Breslin, he said that bad debt, which is basically unpaid rent, he said it's improved dramatically, which counters any narrative about worsening financial health. He said, quote, the number of accounts that we need to work our way through compared to the end of 2024, we're down 20%, 25%. So somewhere in that range. But at the same time I mentioned this in the lead up to this, renters in good financial shape. But there's a big but here. They're increasingly commitment phobes. There's the REITs are seeing some real nervousness and commitment phobia in the market and for justifiable reasons, by the way, I'm not saying commitment phobia phobia as an insult. There's justifiable reasons for this. And that factor, that nervousness is primarily among prospective renters. Prospective renters. Now remember, I've talked about this all the time. When consumer sentiment is weak, when business sentiment is weak, when we feel nervous, human nature is to do what it's to do nothing. It has a freezing effect on major decisions. We want to kind of wait and see how things play out. And the Reeds talked about this. UDR's CEO Tom Toomey, he said that they're quote, seeing a very cautious customer. And you can see that from the time we take send out a notice to the length of time. Let me rephrase that. We take seeing a very cautious customer and you can see that from the time we take from sending out a notice, the length of time it takes to respond to the traffic patterns, how long they spend on our communities websites and end quote. And that's leading to continued emphasis among the REITs and among private sector operators as well on giving on rent to protect occupancy rates. So a cautious customer. At EQR, Michael Manelis said this is particularly true in Washington D.C. which obviously there's been unique challenges there related to the federal government shutdown and prior to that, the cutbacks and federal Spending and some job reductions. But he also said this could likely be a, or this is a factor to a lesser degree, other markets as well. So he said, quote, there was just a little sense of urgency. Let me just rephrase it. There was just a little less sense of urgency to buy and sign on the dotted line and commit to move in dates. So that manifested itself as we worked our way through September into October, which a lower volume of new leases occurring now. The retention side held up strong. In other words, renters are doing their leases. That's been a story for all year past couple of years. He said, we're not seeing folks who lost their job with the government turning in keys. We're not seeing any of this increase in lease breaks. In other words, they're not canceling their leases and moving out. He said, you're just seeing an overall slowdown in the top of the funnel and this willingness to commit to a lease. So that nervousness, that commitment phobia, that's gonna lead right into our second takeaway from these earnings calls. The Q3 leasing season may have ended earlier than usual, triggering softer rents and more concessions. Okay, now we got some nuanced takes on this. Not everybody actually would say this the way I just did. I'm going to walk through that a little bit. I think you see different degrees of beliefs and abnormal seasonality here, but I'll walk you through that. But I think that's a high level, fair takeaway. Avalon Bay. Sean Breslin said this. He said we started to experience some softening in key revenue drivers during the quarter. Economic occupancy was generally consistent with expectations in July and August, but fell below our previous outlook in September and has continued to be below our previous expectation for October. Similarly, rent change started to trend below our mid year outlook in August, driven primarily by weaker move in rents. And Sean said the deceleration was most pronounced in D.C. louisiana and Denver. UDR reported similar themes too. UDR's Michael Lacey said that retention rates are still improving, occupancy still high, but rents, quote, decelerated beyond typical seasonality, which we largely attribute to to the economic uncertainty and eqr. They noted, quote, we began to see weakness in traffic during the back half of September. This was most pronounced in Washington D.C. but did manifest itself in other markets as well. The best way to think about this for us is to say that our normal pattern of seasonal decline in traffic began one month earlier than usual. Okay. And a couple others did mention the same kind of idea of the leasing season ending a little bit earlier. But this is where we get a little bit more nuanced because we again, as I mentioned earlier, we did get several different flavors of this story around seasonality, depending on who you asked. IRT Independence, Realty Trust and a couple of others noted that while this leasing season ended a little earlier than usual in 2025, it also started earlier than usual in 2025. So maybe demand just shifted up earlier in the year. In fact, if you go back to the first half of the year, especially the Q1, early Q2, the the story was really about strong momentum through what's normally a seasonally slow period. And so it does feel like maybe, you know, the if your glass half full, the season just pushed forward. If your glass half empty, the season ended earlier. So again, I think time's going to have to tell us which one it really is. And I think the next obviously spring leasing season will be particularly indicative of that. Maa, let's talk about them for a moment. They've they've of course got very different from geographic footprint than the other REITs. I've talked about being all Sun Belt. And again, we don't have cam's earnings call yet. So we they're another big Sunbelt read. So MAA is the key indicator here. They're all Sunbelt 100,000 plus units. And they struck a more optimistic tone. They said Q3 was just normal seasonality. MAA's Tim Argo said this. He said we've seen generally pretty typical seasonality. We're actually on the new lease side, saw our new lease decline decline a little bit less than normal From QT Q Q2 to Q3. It's normally in the 60 to 70 basis point moderation. We moderated 40 basis points and then we did even better on the renewal side. So I think broadly we're seeing normal seasonality. All right. And so when you dig into the data, what they're showing and kind of aligns with broader Sunbelt data is that new lease rents are less negative than they were a year ago. So they're still softer in the Sunbelt for sure relative to other parts of the country, the Midwest and the most of the coastal markets. But but they're attributing that to high supply competition and saying which has been the case for last few years and saying now that the rents while still negative are trending in the right direction. Next point, they're a smaller apartment REIT but also very Sunbelt focused. They also had a pretty similarly bullish tone demand. Matt McGregor at next point said, quote, demand is still there. We're absorbing units at a very strong clip right now. Irt, which has a Sunbelt presence as well as some Midwest and mountains. Scott Schaefer, their CEO, he noted, quote, green shoots are emerging in several of our markets as supply pressures ease. Okay, so again, a little bit of nuance, depending on who you ask. No one is saying that the market's absolutely on fire right now. But, but is it seasonality or did the seasonal leasing season end early than usual? That may depend who you ask what markets they're in. And that's a perfect segue into our third, third key takeaway from the apartment REITs earnings calls. And that's this coastal versus sun belt. It's getting complicated. All right, so obviously, you know that in REIT world and really beyond REIT world and all of real estate, everybody loves a good coastal versus Sun Belt comparison. And certainly coastal markets have outperformed these last couple of years following an extended period pre and during and post Covid where the Sun Belt outperformed. And broadly speaking, I think in broad brushes, I think most REITs and RE analysts expect coastal markets as a category to outperform on revenue growth again in 2026 before the Sunbelt markets charge back as supply drops off. And you'll get different takes on the degrees of that, but I think it's generally a consensus way of thinking, but it is getting complicated. And I think some ways this coastal versus Sun Belt is, is. I've never loved it, and I think it's, it's a, it's a pretty big oversimplification, and that's becoming more true today. While we all like to paint in these big, broad brushes, I think it, it's a little bit less relevant or less accurate to do so today. And why? Because there's very divergent trends across different markets on the coast and different markets across the Sun Belt. Now, on the upside, the one market everybody's very, very bullish on right now, all the REITs talk about who are, who are there is San Francisco or really the California Bay area overall, especially San Francisco, Silicon Valley, San Jose area, East Bay maybe to a lesser degree, but certainly San Francisco and San Jose. And we see it in the private sector data as well. EQR said, quote, the recovery in San Francisco, particularly downtown, is real. And then at Essex, Angela Kleeman said the same. She said that the Bay Area so far, she said it's, it's, it's more of a recovery story than a growth story so far and that growth is still to come. She said the market still has a lot of legs. What she's saying is that rents have just they're still getting back to pre Covid levels. That's how hard this market got hit. So it's still a recovery, not a growth story. Growth story EQR they made a similar point. They, they said their rents are now flat to where they were in 2019 pre Covid but the incomes in the area are up 22% which suggests a lot of upside. UDR said some similar things. And then New York, that seems to be the clear number two mark at this point. REITs noting steady demand, minimal new supply in that market and remember for the most part with just a couple of exceptions on a very small scale, you know, the REITs don't have properties that are really going to be impacted by the mayoral election in New York. And, and, and the leading candidate there, Mamdani, who's focused on emphasizing or proposing a rent freeze which is only applicable to rent stabilized units, not to units aren't in that program. So for the most part the REITs in New York are not directly subject to that and we're still seeing some good strength in that market. But in this round of calls we still heard bullish tones on San Francisco, New York, which have been hearing for a while now. Obviously we also heard souring takes on other coastal markets, especially Washington D.C. which I talked about earlier, but also Boston and Seattle. Boston had been a top market of late, but it's cooled off. Seattle's been one that's people talking about on a rebound. We've got some different takes on Seattle, but we started to hear some a little bit of souring news on that one as well. Back to D.C. for a moment. I think everybody knows that story. D.C. been one of the top markets of the country these last few years and it really held up well even during some of the Doge cutback news and all that. But the government shutdown I think has had a much bigger impact on leasing activity and rents still saw it, occupancy rates and retention. But that one seems to be taken on the chin for now. Now I think long term everybody's still bullish in that market and have several REITs noted that hey, we've been through this before but certainly some short term vulnerability. Boston EQR they attributed the slowdown to quote weaker biotech sector pullback in university and research funding. And also I think it's worth noting that Boston is obviously a heavy market for International students who tend to rent while in school. And I've highlighted this previously in the podcast in the news section, but we've seen some local media reports stating that there's been some pullback there in the Boston area, where property managers aren't seeing the demand they're used to seeing from international students. And then Seattle, that one showed signs of a rebound. But Essex said that Essex has a good presence there. And they said that some of that's stalled out for now. Demand's coming in softer now. Naturally, a big thing came up in Seattle. The conversation on these earnings calls is Amazon and the potential impact of Amazon's big downsizing announcement. Amazon and Equity Residential, I'm sorry, Amazon, Essex, excuse me, and Equity Residential both said they don't think Amazon layoffs will be especially impactful to them there. They noted that Amazon's had passed major layoff announcements with minimal impact to their rent rolls. They've also noted that the cutbacks will be spread across the country, not necessarily disproportionate to Seattle, which is where the HQ is, obviously. And they also noted that Amazon said that those impacted by the job reductions will have ample time to apply for other openings that Amazon still has. And by the way, they do still have openings. And Amazon's been pretty clear that the cutbacks they're having are more about operational efficiency, operational excellence, than they are about cost cutting. And so they're really just kind of maybe repositioning where they have, where they have jobs. So obviously a major, major employer. And as big as these job cuts are, it's still a small percentage of the overall job base. There's. And on that, by the way, here's a crazy stat that Equity Residential shared. They said that about 3% of their entire resident base worked for Amazon at least the time they moved in. That's pretty amazing, and it shows just the broad reach of that company. But EQR also said they don't see layoffs as a big concern and for the reasons I just noted. All right, down south on the west coast, Los Angeles, that one remains a drag on a lot of portfolios. I've spent a lot of time beating up on LA in this podcast, in past episodes, on REIT reviews and whatnot, I think I won't add to that, but it's still a challenge. And then let's jump to the Sun Belt. And I referenced this with the comments from MAA earlier and also on the kind of Sunbelt versus Coastal story. So here's the thing. While most Sunbelt markets are still seeing negative new lease rent change. They we are starting to see number one that it's the cuts aren't as deep and number two, we're starting to see more divergence across markets in the region. Now as everybody knows, the main challenge in the Sun Belt has been high supply. We have in some of these spots the highest supply ever and, and the rest of them is at least the highest in three or four decades or five decades. Some of the REITs noted a big challenge has been and I think accurately so a big challenge has been these extended lease up challenges there. Meaning that like it's, it's not a 12 month lease up process for a lot of developers. And so you're trying to renew your first leases at the same time you're still trying to fill units for the first time. And that's a really tough situation to be in because you're trying to burn off concessions, trying to get full, you're trying to get going and that's a, and, and just taking longer to reach that stabilized occupancy. So properties, because of the sheer volume of them being built in the cycle, they're taking longer to lease up and to fill up. And you have a lot of developers who are eager to get stabilize occupancy because as many of you know, they can't refinance off that expensive construction debt onto, you know, somewhat less expensive permanent debt until they get to stabilize occupancy. So that's that, that those strategies, high concessions and rent cuts that's impacting the rest of the market. A lot of the retailated Denver, Austin and Nashville as especially challenging. Denver of course not, not technically Sunbelt, but an honorary member there, especially by supply standards. But MAA, which again has the biggest presence of all the REITs in the sun Belt and, and one of the biggest Sunbelt owners in general, maybe the biggest in the country, they said they're starting to see some green shoots in certain markets. They highlighted Houston, Dallas and Atlanta as having positive upward momentum that was especially driven by improved performance in the urban cores of these, of these markets. They're seeing supply coming down faster in those cases and, and a few new deals breaking ground in urban submarkets right now. And so more concession burn off a little bit earlier there as well. MAA's Tim Argo, he said, quote Dallas and Atlanta are certainly the standouts and that Houston continued to be steady. Tim also noted strength in smaller markets like Richmond, Savannah, Charleston and Greenville. And then IRT. They highlighted Atlanta as well. They said occupancy improved by 60 basis points in January 1st and their asking rents are up 5% since then as well. And we and Atlanta's one too, we see in the private sector data again still rent cuts at a metro level, but the depth of cuts has come down pretty significantly. And a couple other REITs highlighted Tampa as another improving market in the Sun Belt. So, you know, you get different takes on different markets. I mean who you ask and where they're located, what they have, et cetera. You know, as I mentioned earlier, we got some mixed reviews on Seattle. Dallas is one we heard some mixed stories about as well. But certainly it's interesting to hear that how some of these markets start to stand out for certain REITs. So again though, again was talking about the Sun Belt. It's still overall that's where you tend to see bigger rent cuts. That's where the supply is going. The story seems more supply driven than economy driven. But, but the pace of rent cuts is, does appear to be moderating, maybe not as fast as we want to see, but it is moderating in all these high supplied markets that are not named Denver. All right, so that takes us to number four, our fourth big takeaway from the apartment REIT earnings calls. And this is a big one. This is different from things we talked about previously. This is this REITs are buying back their stocks, which potentially means buying fewer apartment assets in the short term. So here's the deal. REITs are betting on themselves, maybe for good reason. Stock buybacks came up on, I think pretty much every earnings call this quarter. And a bunch of REITs announced pretty significant buyback programs. Now again, to be clear, I'm not a financial advisor, I'm not getting financial advice here. But I don't think it takes a CFA to understand the logic here. So think about it. For most apartment rates, their value implied by their stock price equates to a cap rate of somewhere in the low to mid 6% range. And yet if the REITs sold any of their individual apartment properties, most of them are going to trade between four and a half to five and a half. And that's a big gap, obviously, which means that they view their stock as greatly discounted relative to net asset value. And we'll talk about this with Hendell later when we bring in Handel, our REIT analyst for today's conversation. But that's obviously a big theme. So here's what some of the REITs said. Avalon Bay 150 million in stock buybacks EQR 100 million repurchasing of stock. Their CEO, Mark Perrell, he said, quote, we see our company with its high value asset base and sophisticated operating plat and forward growth prospects as greatly undervalued versus asset prices in the private market. MAA and Essex said they're considering buybacks. Estex said, quote, if you look at where we are today, where we're trading today, it's much more compelling from a stock buyback perspective than it was in the third quarter. IRT said similar Scott Schaefer there, he said, quote, we clearly recognize the disconnect between where the markets are trading and where properties are trading relative to our implied cap rate at our share price. And so we have a strong appetite for buybacks. UDR is Dave Bragg, the CFO there. He said his company's round of buybacks were quote, executed at an average discount to consensus nav, just net asset value of 20%. So that means they're buying their stock back at discount of 20% relative, roughly relative to what they can buy with the same amount of capital in acquisitions for comparable apartment properties. And so what I think the REITs hinted at, some more directly than others, is that when there's such a big discount to their stock values versus net asset values, it makes less sense to invest new capital into acquisitions versus buying back stock. And so while REITs have been fairly active buyers of apartments in the last year or two, there's been some pretty big trades, obviously. And to be fair, there were a few handful of small deals in Q3. I, I think in general though, what they're suggesting is that some of them are going to be less active for a bit. Maybe not entirely, but maybe less active than they were more selective looking for better value, which is hard to come by because, you know, think about it, when you're buying a property at a, at a, you know, high property, high 4 cap rate, you're not getting credit for it by Wall Street. In fact, you know, technically that property is worth less the moments that acquired, it's acquired by a reit, at least on paper for a reit. So, so you know, and also too you think about when a buyer, whether it's a read or somebody else and they buy a property, typically every buyer thinks, hey, we can operate this property better. We're going to put our secret sauce on it, we're going to, we're going to extract some value out of it, we're going to increase the value of it. But even for the best property operators, it's tough to unlock value to the tune of 20% you know, the discount versus stock prices, that EDR reference, for example. So that's why stock buybacks may be attractive in new development, too. That's something that Avalon Bay and MAA continue to emphasize as better value, better yields in construction compared to stabilized acquisitions. So that's an interesting one to watch, both on stock buybacks and also on acquisition activity. And that takes us to our fifth and final takeaway. REITs are cautiously optimistic about 2026, and this probably comes as no surprise. You might expect them to say that, but I still want to share their thinking here. Nonetheless, I think it's helpful, first of all, just, you know, just, just to get this out of the way. Everyone was reluctant to provide any type of formal guidance on 2026. Yeah, and that's normal. It's still early. Typically don't get that till after the Q4 calls, which are late January, early February. But they did give us some clues on how they're thinking. And all the REITs, as you'd expect, they, they talked about supply, how it's been the big headwind for most markets, not the economy, but supply. The big fact, three years. And we've talked about that a lot in this podcast. Supply is going down. So assuming the economy is even somewhat decent shape, that's going to help backfill all those new units, burn off concessions, get some upward momentum on new lease rents while maintaining some solid renewal rent growth. Avalon Bay Sean Breslin noted that new supply in our established regions is expected to decline to roughly 80 basis points of existing stock in 2026, which is not only less than half the 10 year average, it's also a level we've not experienced since 2012. And while Sean's talking about his markets, that same thing is true across most of the country. At maa, Tim Margo said, assuming demand hangs in where it is now, we would expect rents to continue to get better and particularly strengthen as we get into the spring and the summer of next year. EQR's Mark Perrell said that more markets could follow the trajectory of New York and San Francisco with rebounding rents as supply drop off. Supply drops off, he said, quote, we believe more markets we operate in will trend in that direction in 2026, assuming the job situation is reasonably constructive. And obviously that's everyone's big assumption that the economy remains in somewhat decent shape among smaller reads. Next point, Matt McGregor there. He said market fundamentals are coalescing to support a more bullish outlook for multifamily we expect the rental market will take the lion's share of new household formation and outperform the for sale market on the near term. Back to eqr, Michael Manelis added this he said in many of these markets it's going to be when does that consumer sentiment turn positive again? We've had a great setup with the reduction of competitive supply being so much lower in many of these markets. It's going to take much, it's not going to take much of a catalyst from that sentiment change or any kind of catalyst in the job change in these markets to really fuel that inter period growth. And I agree with Michael that consumer sentiment is the real key. If consumers feel more confident, that'll likely correspond to a solid employment picture and then the demand and rent story look pretty favorable in that environment. So of course a lot depends the economy. No surprise there. But the one thing we know is this, there's going to be a lot less supply hitting the market in 2026 into 2027, likely 28 as well. So if the economy holds up, that suggests we should get at least some renewed rent growth in 2026. As leases turn concessions burn off, you don't burn off the entire concession. Maybe partial concession burn off is still going to lead to some effective rent growth and that should translate to better bottom line revenue growth by 2027. Or at least that's the consensus thesis anyway at this point. All right, that wraps up our apartment REITs recaps. Now let's jump to rental housing trivia. All right, today's trivia is sponsored by Authentic. If you've got a property that's underperforming and you can't figure out why, check their Check out their multifamily leasing and marketing audit. They'll dig into your pipeline leasing funnel and comps and and tell you exactly where things are breaking down. Plus strategies on how to fix it. Listeners of this podcast get 50% off. So head to authentic ff.com and click the banner to learn more and claim the offer. All right, so today's rental housing trivia question is who is the longest tenured CEO among the currently active multifamily REITs? Meaning currently active. Meaning the REITs that are still standing. Obviously we don't have as many as we used to, but among the REITs that still stand today, who is the longest tenured CEO still in the role? So we'll get to our answer later on, but I'm not going to give you multiple choices. If you know the REITs at all, you probably know this one already and Multiple choices probably won't help you anyway, so. But we'll revisit that answer here in a bit. But next in the news, Foreign.
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Few quick headlines touch on this week. Number one, cbre, they released their multifamily buyer I'm sorry, their multiple underwriting survey for Q3. And the headline here is multifamily buyer sentiment Improves. And I'll just read quickly from this article. It says core asset buyer sentiment improved in Q3, with 64% of survey respondents expressing a positive outlook versus 57% in Q2. Core buyers were substantially more positive than they were at the end of 2024. Value add buyer sentiment improved the most, jumping to 70% positive from 62% in Q2. Value add sellers remain largely neutral with both minimal positive and negative sentiment. Overall, buyer and seller sentiment improved most in sunbelt markets such as Atlanta, Miami and Nashville. All right, so there you go. Next headline comes from KPBS in San Diego. It says San Diego landlords could soon face restrictions on fees added to rent. All right, so this is a new proposed legislation. I don't typically talk a lot about proposed legislation at city level, but this is something that we're going to see likely or we already are seeing across a number of cities and likely see a lot more of this. And this, this particular legislation would not only require fee transparency, which just means, you know, making your amenity fees and other non rent charges, you know, very, very clearly visible in various ways, but it would also ban certain fees outright, including maintenance fees, pest control fees and valet trash fees. All right, so again, we're hearing more about this nationally. This is just a proposal in San Diego right now, but something that could gain traction elsewhere and a big topic that leading operators across the country are thinking about a lot. So keep an eye on that. And we did have an episode with Joanna Zabrinsky at Bhatt, I think it was last month or two about all in pricing. So if you're curious, dive in more of that topic and miss that episode, go find that episode. It was a good one. And then our last headline for this week comes from a news release from City Biz here. The headline is Federated Hermes to acquire a majority Interest in FCP Fund manager. All right, so Federated Hermes is a publicly traded investment manager. They're buying 80% stake in FCP, formerly known as Federal Capital Partners, which is an institutional investment manager based in Chevy Chase, Maryland, heavily focused on multi, multifamily. Also a lot of value add and affordable purchase price of $331 million. The news release says that upon completion of transaction, FCP and its 75 plus member team will continue to manage investment portfolios and other aspects of the business from its current locations. All right, so FCP Big Player in Multifamily looks like a strategic play by Federated Hermes to get some multifamily exposure. So congrats to all involved there. Let's get back to today's rental housing trivia question brought to us by Authentic. Again, check out authentic@authentic ff.com Today's question was who is the longest tenured CEO among currently active multifamily REITs? The answer is Rick Campo. He is the founding CEO of Camden Property Trust, which went public in 1993 and of course, he was the head of that company even prior to going public. And Rick's also a past guest of the Rent Roll and so you could find his episode as well. If you'd like to get to hear from Rick, he's always super interesting to talk to and that was a fun episode to have. And that's going to take us to today's interview, sponsored by funnel, the AI and CRM software trusted by four of the six major REITs and many more leading operators like BH and Cortland. To learn how Funnel can help your property centralize operations and automate everyday tasks, visit funnelle leasing.com by the way, speaking of apartment rates and our and the earnings calls, UDR actually had a shout out to Funnel and some of the things that they're doing around AI and Leasing anyway, so that's going to take us to today's guest. And our guest today is Handel Saint, just formerly of Morgan Stanley and today he's a managing director and senior REIT analyst at Mizuho Americas. We're gonna get Handel's take on the 3Q3 earnings calls. I'm gonna ask him about how investors think about REITs today versus other alternatives, his thoughts on where the sector is going. We're gonna see more take privates and a lot more. So here's my conversation with Heimdall Foreign. Welcome to the interview portion of today's podcast. I am honored to welcome in my friend Handel Saint, just who is with Mizuho. So Handel, first of all, thank you so much for being with us today. And before we get into all the stuff, you know, you and I have known each other. I don't want to date ourselves. We've known each other for quite a long time now. So give us some of your for those of you who don't know you or just see, maybe seen your name on earnings calls, asking great questions. Tell us some of your background and how you got into the, the world of track and the, the REITs. Absolutely.
- [36:44]
B
Well, thank you for having me. It's an honor to be here. Certainly appreciated the, the friendship, the camaraderie, the collaboration over the years. So I'm very happy to be here. Look, I'll tell you that getting into research wasn't exactly on my list when I was coming out of college years ago. You know, I didn't grow up in a family that was tied to finance. My father's a minister by training, my mother is a nurse's aide. So I was born in Hades. So this is all very new to me. And so I've been doing this job over 20 years now. But you know, I side doored my way into Wall Street. Right. I knew friends years ago who were working at ubs and UBS was hiring people in research. And so I interviewed, applied, was a research assistant for a year or two, then got promoted up to a research associate. I spent a couple years in investment banking, went back to school, got an MBA from NYU and got back into research. And I've been doing this job collectively. Yeah, it's going on 21, 22 years. And so you say it out loud and it makes me feel a little older. But look, the days are long, the years go by fast, but it's been a very rewarding journey. And so it's taken me to places I thought I'd never get to, been able to meet people I thought I'd never be able to meet. But sitting here today, the relationships I've made personally, professionally, through this business have been life changing, very rewarding. So it's been a real, it's been a real fun trip and certainly a lot more exciting than I could have ever imagined.
- [38:14]
A
Absolutely. And you've been on some, it's been a roller coaster, a few roller coaster rides these last 20 years and of course in the REIT sectors. So you mentioned the long days and I know you've had a bunch on these last couple of weeks. So before we dive into the, to the last round of earnings calls, just can you take us behind the scenes a little bit? What happens, the lead up behind these, lead up to these earnings calls and earnings releases, and in particular, I've always wondered, I'm sure some people think about this too, is like, how do these, how do the REITs even kind of divvy up, like who goes when and, and just Kind of take us a bit. Kind of the how all this works. Yep. Yep.
- [38:48]
B
Then to your last point, I wish that they would maybe space things out a little bit, because you looked at the calendar, and a day like last Thursday, you and I were joking before we started, you know, we had four apartments, two SFRs, one manufactured housing company. That's just within the world of residential, by the way.
- [39:04]
A
Right.
- [39:04]
B
So, you know, certainly there was a clustering around last Thursday, which. Not ideal. When you kind of sit here in my seat, you know, I think from a certain perspective, it's an intense 24 hours, and you could say, well, it's just, you know, get through that day, and then it's downhill from there. But, you know, I think that most of us would rather have a little bit of time in between, space things out so we can digest it. And so my understanding, a lot of these apartment REITs and residential REITs do communicate, do coordinate up front on which day they're going to report what time. So we can't say. That's a lack of communication on their part. So. Which leads me to believe was it intentional and their part. And, you know, I joke with the company, sue, maybe this is their way of paying us back for some of the, you know, for being a pain in their butt over the course of the year. But I also, the conspiracy theorist in me also wonders, you know, whether sometimes there's safety in numbers, safety in hiding, clustering. Right. Because I think, unsurprisingly, that, you know, we know the theme out there. It's been a tough year for residents, apartments especially. And so I think that perhaps if I had maybe less than exciting things to say, maybe I might want to go on a day when there's three or four others. And so that gives you a little.
- [40:16]
A
Bit of COVID by the way, back to the calls from. And at least that none of them made you, you know, have calls on Friday afternoon before Halloween. Because anybody with young kids would have been very upset about that, I'm sure. Absolutely.
- [40:27]
B
But I've had those, too, in the past. So we juggle. We have a team. We figure it out. But thankfully, that's over now.
- [40:37]
A
Absolutely. All right, so let's get into the meat and potatoes. Just big picture thematically, what stood out in this last round of these Q3 calls you just wrapped up? Jay?
- [40:51]
B
I'll tell you that it's not that we were really surprised with what we heard. We've been following the data, and it's been clear since May. There's something. There was something in the water. Certainly something that was preventing companies from being able to push rents as much as they normally do through a normal peak leasing season. We heard companies talk about some occupancy preservation strategies and leaning on retentions a bit. All things which clearly go into the mix, but certainly sounding more defensive from an operating perspective. And so fast forward a couple of months into September and seeing more data was clear that, you know, the demand wasn't quite as strong, the pricing power wasn't as. Wasn't really there as much as it used to be. Now, questions on, you know, how much more can the landlords push, given how aggressive they've been the last couple years? Supply, obviously, in certain regions, certain cities, has been a bit of an issue. But then also the macro, clearly the consumer is a bit more stretched. Confidence is a little lower. Job growth has been slowing down. So a lot of things that have been happening in the world around us which kind of leads you to, you know, a place where what we've heard the last couple weeks isn't a surprise that things are a little softer. Obviously, the numbers for this year have come in a little bit below where we expected. We've seen the apartment REITs for two consecutive quarters now cut their blended rate guides this year, their expectations for a full year rent growth. So again, not a big surprise if you've been following the data closely, but certainly not something that we would have thought coming into this year. And we've seen kind of a little bit of a shift in kind of the markets that we're a bit more concerned about. The last couple years we've been focused on supply. Supply, clearly you can see that it's visible. We've seen the numbers and we knew that it was primarily a Sunbelt issue. There were some coastal markets, which obviously pockets of supply to downtown Philadelphia, Seattle, a few others. But it's clearly been more of an issue in the Sun Belt. What we've heard the last couple weeks and what we're seeing in the macro makes me a bit more concerned about the demand into next year. Right. Obviously we have a sector here which is, you know, very dependent on household formations. And if you think about the composition of household formations, you've got some job growth, you've got, you know, immigration and certain other factors, demographics. And if you kind of go through all three of those, it's not necessarily tailwinds from where we've been relative over the last couple of years, job growth, obviously slowing immigration policy, depending on whose numbers you believe there's 2 million plus fewer immigrants in the country today and obviously kind of the demographic bulge we've gone through, seeing the kids go through college, get into the apartments, get jobs and now forming households and a lot of them going into homes, you know, has you thinking about the demand side of the picture as we head into next year. So, but just boiling what we've heard over the last few weeks in third quarter earnings, clearly there's a little bit of a softness in the numbers, clearly some concerns on what that might mean for next year in this kind of mixed macro. You also have a declining 10 year, which has caused mortgage rates to come in a bit. We were at high sixes a couple months ago. Today we're 6, 3, 6, 4. I don't think that we're going to see a dramatic reduction in the long end of the curve from here. Another way of saying I don't think the 30 year mortgage rate's going to come in dramatically. I think inflation is going to be proved pretty sticky. But I still feel that not the margin, obviously those factors collectively take a little bit away from the demand side. So I think that apartments today are in the okay place. But I think the bigger concern that I have is our numbers for next year are too high. And in a lot of cases I'm fairly high conviction that they are. So that's one of the factors I think that folks are needing and expecting to see. But we do have private market valuation support, which we'll get into in a moment. But I think for REIT investors the challenge is there are other sectors where there's been an improvement in fundamentals and so they have other options at their disposal in other sectors which I think just have a better setup. So net, net the sector's in a decent place barring a recession, but next year's numbers need to come down. I think that's keeping some people on the sidelines.
- [45:03]
A
Yeah, no, I think like just going back to some of the things you said, obviously it doesn't seem like there's any big surprises in the sense like the bottom didn't drop out, but certainly bigger picture to your point. I mean I was among those. I mean as you well know, I thought thinking we'd see more growth second half of this year than we did, at least moderately more. And that hasn't played out. So we'll see what happens next year. But let's. You alluded to this a little bit. Let's talk about fundamentals because there's the, the fundamentals on rents are a little bit bipolar right now and They've been that way for a couple of years where as you know, everyone's emphas renewal, rent growth, high retention, people paying really, I would say a normalized renewal rate of renewal rent growth number renewal trade out, number three, four or five percent depending on the market. But big but here there's little new lease rent growth, in some cases negative new lease trade out. And obviously that's not a sustainable pattern for very long. And so for REIT investors and for you, your peers, the investors you speak with, how big a deal is that and how is it impacting how they think about value?
- [46:06]
B
That's a great question. I think that there's over the long term, there is this sort of spread between what you can get on renewals versus new lease rates and if you're one of these Sunbelt markets where you're seeing renewals come under your door or however the corporates are communicating at, you know, plus 3 or 4% and you know, down the street there are new units that are coming up which offer either one to two months free rent. Or you know, you see also seeing in the market that new lease rates are negative in some cases, so negative is it minus 2, minus 3 versus renewals plus 3 plus 4. Start to ask yourself, well, how sustainable is that dynamic now? It's not as wide as I think it was a year ago. Number some of the markets where we saw 700 basis points of a gap. So that has narrowed a little bit. But it is raising some questions on if landlords can really push new lease rates as much, sorry, renewals rates as much if the new lease side of the picture is this week. And so I think for some folks, and I think what the landlords are betting on is that it's costly and it's painful to move. So you're willing to stay put and accept a slight uptick in your rent versus the cost, the hassle of the move, but it is a relationship we're watching. But I think the one interesting thing we heard on that front too this past quarter is that you're hearing a few anecdotes of concessions popping up in renewals, concessions popping up in certain markets this time of year. It happens, right? We're in a shoulder period, slower demand. And so landlords typically are locking the back door this time of year, trying to preserve occupancy. And so I think there's all this element of leaning on renewals. But you know, concessions start entering the market because there's less people coming in the front door. So that's not a surprise, but concessions on renewals is something that caused me to, you know, perk my ears a bit. And certainly something we're watching doesn't seem to be prevalent, but the mere fact that we're talking about it in certain markets this time of year is a little surprising. So again, it kind of speaks to some of the fears or concerns that people have on not only how the pricing is playing out this year, but what the implications could be to next year's rent rolls. And again, as we think about the street earnings estimates for next year, another reason why. Bit nervous that. Or not even nervous. I think there's a pretty fair conclusion on our part that next year's street estimates need to come down.
- [48:28]
A
Yeah, no, it's interesting because I think while there's rightfully a lot of focus on affordability, sometimes we forget that even if affordability is a non issue, you don't want to pay more to renew your lease than someone's paying to come in the front door. Right. It's just, I mean, regardless of what I could afford, I don't want to pay more than I have to for anything. Right. It's human nature. So I think that's gonna be interesting to see how it plays out. Let's talk about operational strategies. You know, but you've been doing this a long time. You know that the REITs always, they talk about their secret sauce, operational strategies, new technologies designed, whether it's to reduce OPEX or boost ancillary revenue. In your view. You know, sometimes I read these things, I'm wondering, like, how much do investors care about these things? Are they moving the needle and how investors are valuing them? And if so, what are the strategies or technologies at a high level that are standing out to you? Yep.
- [49:21]
B
No, that's a great question. And certainly I think the apartment REITs as a group have done a pretty good job the last 5 ish years plus of identifying kind of this opportunity. In some cases, like udr, they've been great at quantifying that opportunity, something that a lot of their peers have not yet been able to do. And look, I think UDR gets a lot of kudos and they're a bit more visible and vocal in their kind of technology platform rollout. But I remember something that the old CFO of Avalon Bay told me once upon a time. He said, look, a lot of these things are like, you know, what do you say? It's like, it's like taking. It's like, just because I didn't tell you that I took a shower this morning doesn't mean that I didn't take a shower this morning. And I think the point that he was making is that we're all doing this right, we're all kind of looking at these different strategies. We're all investing in the opportunity, we're all deploying it. Some have just been more visible, more vocal about it. But we've seen the initial phase that you've talked about, right? There's, you know, we've gone through that a reductions of the on site staff. You remember the days used to walk into apartment building, there'd be three or four leasing people, the on site staffing. And so they've gotten very good at, you know, cutting the number of on site staff, leveraging some of their assets within kind of the neighborhoods to create kind of this clustering these synergies and sharing kind of resources across different assets. We've seen them optimize pricing, we've seen them roll out smart home and other kind of green initiatives. You know, certainly that part of the, you know, the puzzle has been kind of addressed now. I feel like the next wave that we're getting more into is, you know, leveraging data and AI for, you know, prospects and bringing in tenants for leasing and removing some of the kind of automated repetitive tasks to, you know, kind of further cut into some cost savings for operating the platform. Self guided tours also looking to screen applicants to help lower kind of bad debt potentially and ways to keep residents happy, screening for things that, you know, the tenants are more interested in. So ways you can increase customer kind of satisfaction. So which obviously helps your retention, what helps your overall revenue and your cost. So I think there's lots that's been rolled out. The most popular thing people are talking about these days, you hear all the calls is WI fi, right? I mean everyone's rolling out wi fi programs and I get it right, there's opportunity to buy wholesale, sell retail. But I think all these apartment REITs are all addressing or leveraging technology in many similar ways. It's just some are maybe a step or two ahead and I point to UDR just because they've been just not only earlier on in discussing it, but just better at quantifying the impact of their initiatives.
- [52:06]
A
Yeah, us research nerds, we like quantifying things, so it's good to get some real data. Yeah, I like it. All right, so you've alluded to this a couple of times. Let's get to this 2026 outlooks. In your view, how aggressive or conservative are the management teams being in their guidance. And what are the key watch points in your mind that could influence, you know, further revisions up or down?
- [52:33]
B
Absolutely. So I think they're, you know, we're, you know, on every call, we've been trying to get some guideposts for next year and the companies are largely opting not to roll out any formal, but they're giving you color on how to think about certain things. Right. We know kind of how the, the earning picture, for instance.
- [52:51]
A
Yeah.
- [52:52]
B
Shaping up. Right. We know that so fars are going to be highest on that list. Retention and renewal rates obviously help them a bit more than their earnings going to be somewhere between 1/2 to 2%. The coastal apartment rates, just by virtue of how well a lot of those markets had done over the last year, are kind of next in that continuum. Their earnings are going to be somewhere between 70 to maybe 100 basis points. The Sunbelt guys, you know, just given how weak the Sunbelt markets had been, are going to be on the lower end, you know, probably between flat to plus 30, 40 basis points point. So that tailwind you have going into next year is going to be a bit more significant for the SFRs. But the second derivatives matter too. And so we're thinking about where the rate of change, how that's coming along. A number of the subal markets are getting less bad. You've talked about on some of your podcasts. And so supply is coming down. It's been remarkable how much we've been able to absorb. If you look, go back and look back at how much a lot of the job estimates have been revised downward. So I think that's certainly something that we've talked about, the absorption. But we haven't gone back to talk about how well things were absorbed with lower job growth numbers. But I think we've seen some markets, Atlanta, Orlando, a few that are showing some signs of stabilizing a bit. At least things are getting less bad at a lower rate of speed. Obviously certain markets have bigger challenges. Supply for Nashville and Austin, it's gonna take a little longer. Obviously the magnitude and when that supply is being delivered matters. But we're watching that rate of change because that matters into how next year's same store revenue picture folds or stacks up because investors are really focused on that second derivative in same store revenue. And so if you go back and historically look at how apartment REITs perform, there's a few things which have high correlation with stock performance and one of them is going to be that second derivative, same store revenue which it's tied to your rents. Are your rents improving or are they slowing? And what does that mean for your near term revenue growth and effectively your earnings? And so we're now at a period of time where the Sun Belt appears to be the only region where things could be a little bit better next year other than San Francisco. San Francisco's unique muscle market. We'll come back to that in a moment. But the Sun Belt set up for next year is still going to be on an absolute basis lower in terms of same sort of revenue versus coastals, but it should be better than this year and that matters. Coastal markets. You know, it's been certainly a challenging year coming into this year. We wouldn't have foreseen dc, which has been one of the strongest, if not the strongest market in the country of the last five years, certainly facing its challenges. Things held up fairly well the first six, seven months, but we've seen some cracks and certainly people out of a lot of concern about where D.C. is heading the next couple quarters. But add to that list of coastal markets, you're worried about la. I mean, that's become a bit of a cluster.
- [55:41]
A
It's always like the coasts are great, except la. Right? That's the common theme for like two years now.
- [55:47]
B
Yeah, yeah. But then now we have Boston. So you have Boston, you have dc, you have la. Things in Seattle are slowing a little bit. I think the headlines around Amazon job cuts spook people. But if you look more closely at some of the war notices, a good chunk of those job cuts are not actually occurring in Seattle. They're occurring in markets spread throughout the country. But I think folks are still concerned about what's happening in Seattle. So the list of coastal markets that are slowing is expanding. Sunbelt markets. Again, some of those markets, we know they're weak, but there are a few that are getting better. And then there's San Francisco, San Jose, Northern California, which is just to stand out. The strongest market in the country, Essex has 40% exposure there. So Essex may be the one coastal apartment REIT next year, which we think may have slightly better. Same store revenue maybe, but they also have 40% SoCal, which we were just talking about, which is a bit of a headwind. So I think all this means to us is that our apartment expectations next year coming down second derivative improvement for Sunbelt should help them. Coastal gets a bit more difficult to support here and sfrs, people don't speak about that as much, but they too have a bit of a slowing second derivative problem. You don't see it as dramatically because they have 75% retention. So the number of units that are changing 25% new is about half what you're seeing in apartment. So that roll through effect is slower. But if you look at same store revenue for those companies, it's also been slowing the last couple years.
- [57:13]
A
Yeah, that's all good points. That kind of gets me to the next question, which is how do REIT investors think about short term versus long term? Because one of the things I think has been really interesting and there's good reasons for it, but still interesting nonetheless, is that as you've alluded to, most of the strength this last couple of years has been on the coast other than LA and the Midwest, which REITs, the bigger REITs at least have very little presence in. But REITs across the board are much more focused on expansion through the Sun Belt and the Mountain states than they are the coastal markets and the Midwest for a variety of reasons. So how do you think about that in terms of the short term versus long term?
- [57:50]
B
No, it's a great question. I think that we certainly have our analysis, our expectations and you can argue that investors should have a good sense of how these market dynamics are playing out in the near term and also over the longer term. So it shouldn't be a surprise to folks that Sunbelt rent growth is pretty weak. Why? Because, well, we've seen a significant amount of supply. But sometimes what does surprise people is when I tell them and here's why I'm positive on the Sunbelt and start pointing that obviously a dramatic reduction in supply and if you have a decent amount of job growth, the numbers can get a little bit better and easier comps burning off concessions. There's things that can help you form or frame a more constructive outlook for the Sunbelt if you have a bit more time. Right. If you're playing for the next month or the next quarter, you wouldn't be heavy Sunbelt. Right. Certainly because the numbers aren't getting better yet. And I think that the expectation isn't that, it's, it's the sense that, all right, we're still plagued or burdened, maybe a better word, by this excess supply. So you're watching other factors which if you're a longer term investors, you say, all right, well hey, maybe this is starting to get a little bit better. Right? Consumer confidence might be at an all time low, maybe. Obviously we know the supply picture is dropping dramatically the next couple years and if you're making decisions over a 12, 18 month valuation, we haven't even talked about valuation yet. You're looking at some of these companies trading at, well north in the case of the Sunbelt department reads maybe mid six implied cap rates, basically private market values are 5ish. And you've got public companies trading mid six. That's clearly a sizable delta. And so I think for someone with a bit more patience you can say, well that to me is pretty dramatic. Especially if I believe that one supply is going to fall dramatically the next couple years, which we know it will. Mathematically we see the numbers two, how do I frame that? Right. What's the right way to think about the growth potential the next three, four years? That's a tough question because no one can say with certainty we know that again certain things are going to happen. But the apartment REITs, when they're asked this question, they frame it in a sense of all right, we certainly encourage about what we're seeing in terms of that supply picture falling. We think the next few years we should be able to deliver above average growth. And for a number of them they've even gone as far as say the setup for us feels kind of similar to what we saw post the gfc. Right. And so if you go back and measure some of the subsequent NOI growth out of the companies over that three year period from 2011 through 14 or even 15, you are comfortably in the mid upper single digits. Camden EQR have come out and said that publicly. So I think there's certainly a sense that, all right, if I'm buying stocks for the near term, you know, one, maybe I'm not buying apartments because the numbers aren't looking great, but if I was, maybe you're playing more of a ethics coming into the quarter because we know that San Francisco is really strong. We know that's a unique differentiator. But if I'm buying stocks over the 12, 18 month time period, where do I feel there's the biggest discount relative to either historical valuations or private market values? And then you know, how do I think about the growth potential? I think that number of these coastal markets again are decelerating while a number of these Sunbelt markets have troughed and are now starting to show a little bit of inflection. So if you're making a two year bet, hard to see the coastal markets, with the exception of San Francisco outperforming the Sun Belt in terms of market rate growth or noi, knock on wood.
- [61:26]
A
Yeah, that's well said. I want to come back to private sector values and nav In a moment. But first I want to ask you this. Within the apartment sector, there's a view that hey, no one's recession proof, but there's some recession resilience or durability given that there's always need for housing. Even during the great financial crisis, we saw a vacancy peak at about 8%. Relatively low rent cuts, low to mid single digits in most markets, even in the worst of times compared to other options like an apartment. And SFR bull would say this is more attractive. But I'm curious, like you see a bigger world of investors who look at a lot of other options. Do apartments and SFR get credit for that as being more attractive in a case of a weakening economy or not?
- [62:13]
B
You know, that's a great question because I think there are some viewpoints that would certainly support that line of thinking, that there is some defensiveness, right. Obviously shelter is a core need, right. If you think about obviously the, the supply picture, at least on the for sale side, there'd been an underproduction of homes over the last decade. But I think that you need some context around that because you know, coastal versus Sun Belt and then apartments versus sfr a little different. Look, I think that if you're worried about job today, job slowing or job cut, there's weakness in obviously the young adult college caged cohort. Then there's concerns about tech and AI and what that's doing to the certain markets and certain jobs obviously. And you know, kind of more San Francisco, Seattle, maybe more the coastal markets. But I think those two dynamics, and by the way, apartments tend to have more of a young adult, non family element to it. And so clearly job growth matters we as we start off this discussion. So if you're worried about jobs, apartments being short duration, clearly there's going to be more of a meaningful impact to apartment cash flows than if you assigned a seven or ten year industrial or retail lease. And so I. E. That short term, shorter term lease is sometimes a blessing and sometimes it's a curse. When market rents are going up. It's great to be having the ability to, to redo your pricing and benefit and capture that in the way up. But when the opposite's occurring, obviously you cycle down a little bit more quickly. And so when I think about apartments, you know, I think that again those dynamics, young adults having more coastal exposure, some of the industries that they're exposed to carry a bit more relative risk than parts of the Sunbelt which have less of those types of jobs. But also relative to Sunbelt, sorry, SFR which have more families, right? Dual income households, kids in schools. You got a wife like mine, she's got a lot of stuff stored in closets and in our garage. So I think there's a stickier tendency. And so that really helps your, your cash flow when you have less of that, that impact on, on demand because you're not turning over as much of your unit. So I think there's, you know, a fair, a fair statement to say that there is some defensiveness within resi, but I think it requires some context. And certainly I do worry that if you get to a period where there's more meaningful job growth, job cuts than we had expected that, you know, and then, by the way, that's the concern that you heard in a lot of the REIT executives voices over the last couple weeks, right. They were unwilling to give kind of longer term perspectives because, you know, I think the quote we kept hearing over and over again, it depends on the jobs. The macro is uncertain. I'll tell you how next year, if you tell me what the job growth picture for next year is, then I'll tell you what I think our numbers can do.
- [65:13]
A
Right.
- [65:13]
B
And you know, and, and, and, and fairly so. So I think that's the setup that we're dealing with right now. Part of why I think the stocks are going to be relatively range bound here because as cheap as they look, ask yourself what the catalyst for buying it, especially this time of year where demand is weak, there's not a lot of leases turning over. And if you're then concerned about the macro picture and next year's numbers, there's a sense of let's wait and see, maybe until the calendar year, maybe it's tack loss selling season, maybe it's wait until fourth quarter earnings in late January to get a better sense of how the macro develops and how these companies are then more willing to discuss their prospects for next year.
- [65:51]
A
Yeah, that's a well said and certainly uncertainty is real. It's not, you know, no one's, no one's hedging on that. And I tell people, look, if you need someone to blame, just blame the leading economic shop and credit agency in the U.S. moody's, who's put out a 48 chance of a recession, as if that helps anybody whatsoever. 48%, you know, it's very helpful.
- [66:12]
B
You know, it's tough when you're basing some of that on government job numbers. And we have no idea.
- [66:18]
A
No, look, those numbers, we're flying blind.
- [66:21]
B
Yeah, we're flying blind.
- [66:22]
A
All right, so let's get, let's get back to values for a moment as we, as a couple more things I want to ask you about. So you've alluded to this, but how do, how do you think about this gap between how investors are valuing apartment and SFR REITs versus NAV, net asset value and how the private sector is valuing assets? And obviously this is a big talking point among REIT execs who feel they're undervalued, especially in the Sun Belt. But, but how are people, how do your investors think about this?
- [66:51]
B
No, it's a, it's a great point and certainly I think there's some frustration because obviously you see a still fairly liquid private market where we're seeing assets trade plus or minus 5. Is it 5? 3 in certain cases, maybe 4, 7 in certain markets. But broadly, let's just say it's 5ish. And we're speaking apartments. Not for now. And you're seeing companies again. The coastal apartment REITs are trading close to 6 implied. The sun belts mid 6. And so clearly there's a big disconnect. And Companies trading at 10, 15, 20% plus discounts. NAV and apartments historically have traded much tighter to nav. There's always been a bit of that private market bid out there when apartments trade at significant discounts for too long. Well, the private industry is watching and we're clearly the tail. They're the dog. There's lots of capital that's been raised which would love to buy apartments. If you're thinking about deploying capital. Public market close to 6 yields, obviously you'd have to offer some form of premium, but private markets of five, so there's clearly a relative arbitrage. SFR space, you could argue is even wider. Now, I don't necessarily value SFRS at a 4 cap or sub 4, which you see in the MLS market, because what you're able to sell to the end user, you know, on an individual basis, is going to be lower on a cap rate than if you're selling a portfolio to a more savvy institutional buyer. Right. When I bought my house, forgive me, I didn't buy my house based on a cap rate analysis. Yeah, I bought the nicest house I could in the nicest neighborhood I could. And the one that my wife told me that we had to buy.
- [68:28]
A
Right.
- [68:29]
B
But if you think about portfolios, you have institutional portfolios that we haven't seen a lot here from the SFR space in a while. But those portfolio cap rates are in the low to Mid fives. So there's clearly a little bit of arbitrage. But even if you use that low to mid 5 implied cap rate, sorry, cap rate that you're seeing in a private market by SFRS, it's still wide of, you know, kind of the 6 plus implied cap rates we're seeing for the single family rental guy. So look, I hope this doesn't lead to more consolidation. I've covered this space long enough to remember when there's 30 public apartment REITs today, there's six large caps and a handful of smaller caps. So we've seen a massive amount of consolidation. So I'm hopefully not talking myself out of a job here. But clearly there's a disconnect between public and private and I think two things are likely to occur. Maybe the private market values, they feel sticky here and certainly cap rates coming down, sorry, interest rates coming down probably helps support that. But if you have to revise your nois down, that's maybe one way to close some of the gap. And then maybe seeing some larger scale portfolios, maybe not entire companies, but just more data points, reinforcing kind of that 5 cap helps to provide some support for the public company valuations too. But it's just a lot of uncertainty out there. I hope that we don't see any more big takeouts. But look, I think that there's companies who understand that their objective is to obviously deliver the best risk adjusted returns to investors. And so that's why you've heard more talk about stock buybacks here in the last couple weeks, right? You go out into the market with your higher cost of capital trading close to 6% plus cost of equity, plus your cost of debts come down, but it's still north of 5, maybe 5 and change. Do you use that to buy acquisitions assets at a 5 cap? I think investors would look at you sideways if you did. Unless you're recycling capital from an asset you sold. Or do you take capital and buy back your stock at a 6% plus yield? And we've seen some of that, we've seen Avalon Bay do that. Invitation just rolled out a new buyback plan. So that was certainly a very popular topic on the calls, unsurprisingly given where the valuations are, but certainly something I think we should see more of just given the opportunity on the table.
- [70:51]
A
And does that give investors confidence? And they say, hey, a number of these REITs are buying back their own stocks, they're doubling down on it. Is that, is that a, is that symbolic or does it, is it meaningful?
- [71:01]
B
It depends on how much you're doing. Right. I mean, sometimes, you know, if It's a cosmetic 5 or 10 million, that's to me, that doesn't do much. That shows that, okay, you have observed, you acknowledge the discount. But unless we're doing something in more size and, you know, substantive amounts, I think Avalon Bay did 150 million invitation announced, announce a $500 million buyback. We'll see how much they buy. But certainly, I think, you know, the magnitude matters, but I think the signaling is positive, certainly from an investor perspective. Because if you're going to sit here across the table for me and tell me how cheap the stock is and I should buy it, why aren't you buying it?
- [71:35]
A
Yeah, yeah, that's a good point. All right, so I'm going to close with. I want to ask one more question because you've talked about some of the take privates in the past. We're at 30 plus five REITs. We have six big, some people say seven big ones today, a bunch of smaller ones. Obviously, we all saw Alma Communities is winding itself down another small apartment rate. Last year we had Air Communities on multifamily side, Tricon, the SFR side. So you and I both like to have publicly traded apartment and SFR REITs, because there's more to talk about. But what do you think the odds are? Are we going to see another big take private anytime soon, you think? Given this gap in values that we see.
- [72:17]
B
I wouldn't be surprised if something happening at the smaller end. Right. We have a number of companies who have already explicitly stated that they're exploring strategic alternatives. So I think in some cases, obviously they're facing either cost of capital, you know, platform synergy in some cases, market issues, obviously, if you're heavy DC and heavy Sunbelt. So you may want to think about, you know, the next couple of years operating as a public company, going through those challenges or perhaps, you know, getting, getting a takeout offer and you may be just rolling through the next few years as a private entity, not having to report quarterly and, you know, have your stock get taken to the woodshed in some cases. So I feel like the setup is there and we should see, especially with debt costs coming in. So if you think about the wall of capital that's been raised, you know, depending on whose number you believe it's 400 billion plus, whatever. But I think that there's certainly an amount of that which is always favored residential, which is the favored asset class. And now you have an opportunity to Benefit from lower debt costs and so you can juice out higher levered returns and then you can make a multi year bit and multi year bet in some cases. Like you were saying, the Sunbelt numbers don't look great this year. They're probably going to look below average next year. But if you're thinking about 27, 28 is a great opportunity. And so maybe you're thinking about that as a private company and thinking, well, now might be a really good time to try to get in front of some of these companies or even just assets in that region because of that growth profile we see the next couple years. So feels like the setup's conducive, but you know, it takes two to tango. And you can certainly argue that there's a lot of value that's been created in a lot of these platforms. They're very sizable entities. Margins are really high, 70% plus. And so a lot of these platforms are built to win, built to last. So the opportunities there, I just don't know if there's as many of the clear candidates as we had in years past, at least on the larger cap side. Right. I mean, you could argue equity. Yes. They're all great companies, great track records. Mid America, cpt, very sizable. And I think all of them, I think all six, if I'm not mistaken, are in the s and P500. So my argument is that there certainly is an opportunity for, for takeouts. But you know, I certainly do think that there's also a lot of value these companies can create through development and through other corporate actions.
- [74:43]
A
Yeah, absolutely. And, and by the way, I think another thing going off these REITs is that the private sector, whether it's individual assets and valuations or potential take privates, is like the, the assets that these REITs own are what's in demand right now among private investors, which is newer, vintage, good quality assets and good locations. And that's, that's, that's, that's the most liquid part of the sector right now from a, you know, individual asset standpoint. Well, Handel, this has been great. I really, really appreciate. Let me pick your brain. And so thank you for all you do and tracking the REITs. And thanks for spending some time with us today.
- [75:16]
B
Appreciate you. Thank you. And we'll talk soon.
- [75:41]
A
And that's a wrap on episode number 58. Big thank you to Hendel for being our guest today. Thank you to jpi, to Madera, to Authentic, and of course to Funnel for sponsoring today's episode. And thank you to all of you for spending part of your week with us. We'll see you next time.