Residential REITs: Navigating High Homeownership Costs

Impact of High Homeownership Costs on Rental Demand

High homeownership costs, including elevated financing, insurance, and maintenance expenses, make rental housing an attractive option, driving demand. Favorable demographics and a higher propensity to rent versus buy further support this trend, with stable demand and strong occupancy expected to continue.

"The Company may increase or decrease these rates based on a variety of factors, including overall supply and demand for housing, concentration of new apartment deliveries within the same submarket which can cause periodic disruption due to greater rental concessions to increase leasing velocity, and rental affordability." --- (ESS, sec filing, 2024/Q1)

"We also see a little competition from owned housing as the high cost of homes, combined with elevated financing costs and rapidly rising insurance, real estate tax, and maintenance costs combine to make rental housing a very attractive option for many people. Social factors that we've discussed on" --- (EQR, earning call, 2024/Q1)

"The increase was primarily due to higher average rental rates, which we believe was primarily attributable to job growth, favorable demographics with a higher propensity to rent versus buy, continued demand for multifamily housing in our markets, and a manageable supply of new multifamily housing." --- (CPT, sec filing, 2024/Q1)

"As shown on the right-hand side of Slide 7, demand for [indiscernible] also continues to benefit from the differential in the cost of owning a home versus renting." --- (AVB, earning call, 2024/Q1)

"With new supply deliveries poised to begin tapering later this year, demand trends remaining stable and occupancy remaining strong, we remain optimistic that leasing conditions should recover quickly and begin improving in early 2025. While the transaction market remains slow, we are seeing more acquisition" --- (MAA, earning call, 2024/Q1)

Tenant Attraction and Retention Strategies

Residential REITs are leveraging market fundamentals, optimizing rent pricing with tools like YieldStar, and focusing on lease renewals and tenant improvements to attract and retain tenants amidst high homeownership costs.

"I'd say the other impetus is that in several of our markets, I think people are aware of the improving fundamentals and the very attractive fundamental setup as it relates to affordability, supply and some of the improving rent growth." --- (ESS, conference, 2024/06/04)

"So when we look at -- as we look at it today, we are encouraged that to the point where we are going to -- the tool and the algorithm that is YieldStar is going to say, you have the opportunity to increase rents across certain markets, and we will take advantage of that." --- (CPT, earning call, 2024/Q1)

"So, I think what you should expect for the next several months working our way probably even through the middle of the third quarter is that we will sequentially build new lease change up, and we will see that stability in kind of the renewal, achieved renewal increase performance." --- (EQR, earning call, 2024/Q1)

"However, with continued solid demand and the resulting steady absorption of the new supply pipeline, we continue to believe that the decline in new supply deliveries expected late this year and into 2025 will fuel a strong and quick rebound in rent performance." --- (MAA, sec filing, 2024/Q1)

"So, we have an active lease with a very high credit quality tenant. We're in the process of putting TI dollars into that." --- (EQR, earning call, 2024/Q1)

Financial Performance Amidst High Homeownership Costs

Residential REITs have demonstrated strong financial performance amidst high homeownership costs, with Camden Property Trust and Mid-America Apartment Communities reporting higher-than-expected core FFO and NOI, respectively. Equity Residential and Essex Property Trust highlight the importance of FFO metrics, while AvalonBay Communities benefited from favorable capital markets activity.

"Turning to our financial results. For the first quarter, we reported core FFO of $1.70 per share, $0.03 ahead of the midpoint of our prior quarterly guidance. Our first quarter outperformance was driven in" --- (CPT, earning call, 2024/Q1)

"While new lease rates are facing slightly more pressure at the moment with concessions on select units, up from four weeks to six weeks, we continue to achieve rents on average approximately 18% above our original expectations, driving higher than originally projected NOI and earnings and creating additional long-term shareholder value." --- (MAA, earning call, 2024/Q1)

"Overall, the fundamentals of our business remain healthy. Long-term, we expect elevated single family home ownership costs, positive household formation trends, manageable competitive new supply in our established coastal markets and the overall deficit in housing across the country to buffer the impact on our business from the risks of potential economic weakness." --- (EQR, sec filing, 2024/Q1)

"The Company considers FFO and Core FFO to be useful financial performance measurements of an equity REIT because, together with net income and cash flows, FFO and Core FFO provide investors with additional bases to evaluate operating performance and ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures and to pay dividends." --- (ESS, sec filing, 2024/Q1)

"Kevin O'Shea: Yes, John, this is Kevin. Really, the $0.02 from better-than-expected capital markets activity was primarily driven by a combination of favorable interest expense and interest income as well as slightly higher budgeted -- higher-than-budgeted capital interest expense." --- (AVB, earning call, 2024/Q1)

Geographic Trends in Rental Markets

Seattle and Northern California are outperforming market rent forecasts, while East Coast markets drive asking rent trends. Suburban portfolios are consistently outperforming urban ones. Companies are strategically buying and selling properties to enhance portfolio quality and growth, with market turnaround times influenced by supply projections.

"It's more limited. But having said that, what we're seeing right now is that Seattle and Northern California are trending slightly ahead of our original market rent forecast." --- (ESS, earning call, 2024/Q1)

"Sean Breslin: Yes. I mean as it relates to this trend at asking rents, that's primarily driven by the East Coast markets." --- (AVB, earning call, 2024/Q1)

"So there's just not a lot of deals going on. But there should be some interesting opportunities to buy and sell where we sell some of our properties, buy other properties just to move the textures around our -- on our portfolio to improve the quality and ultimately, the growth rate going forward, maybe market concentration." --- (CPT, earning call, 2024/Q1)

"So, the suburban portfolios are clearly outperforming the urban, and that's a trend we've seen for a while in those markets." --- (EQR, earning call, 2024/Q1)

"sort of what markets do you think we'll see that turnaround the fastest. So, based on your supply projections, where do you think we'll see that quicker turnaround?" --- (MAA, earning call, 2024/Q1)

Regulatory Impacts on Residential REITs

Regulatory reforms are crucial for improving public safety and encouraging employer relocation, indirectly benefiting residential REITs (EQR). Changes in state and franchise income taxes also impact financials (CPT). Regulatory risks have increased since 2017, notably with California's failed rent control ballot measure (EQR).

"Right now, our opinion is you need to have some regulatory reforms away from housing just to make public safety better in some of those places and both to sort of encourage employers to relocate or to stay located in those markets." --- (EQR, earning call, 2024/Q1)

"The decrease was primarily due to lower state and franchise income taxes, partially offset by an increase in taxable income due to higher third-party construction activities in a taxable REIT subsidiary." --- (CPT, sec filing, 2024/Q1)

"So regulatory risk in the apartment industry really started to go up in 2017 with the advent of a ballot measure in California that failed on rent control. So that was sort of the advent of" --- (EQR, conference, 2024/06/04)

"year? So regulatory risk in the apartment industry really started to go up in 2017 with the advent of a ballot measure in California that failed on rent control." --- (EQR, conference, 2024/06/04)

Operational Efficiencies and Cost Management

Residential REITs are focusing on managing operational efficiencies and costs. AvalonBay Communities and Camden Property Trust reported increases in property management expenses, while Equity Residential noted a decrease in general and administrative expenses due to lower payroll costs. Mid-America Apartment Communities emphasized EBITDA re as a key performance measure, highlighting operational efficiency.

"Total property management and other indirect operating expenses, net of corporate income for the three months ended March 31, 2023 as presented in the following tables includes $3,152,000 of shared services costs for this change." --- (AVB, sec filing, 2024/Q1)

"Other Expenses ($ in thousands) Three Months Ended March 31, Change 2024 2023 $ % Property management $ 9,394 $ 8,297 $ 1,097 13.2 % Fee and asset management 443 413 30 7.3 General and administrative 16,693 15,356 1,337 8.7 Interest 32,537 32,843 (306) (0.9) Depreciation and amortization 144,802 142,444 2,358 1.7 Expense on deferred compensation plans 5,819 5,912 (93) (1.6) Total other expenses $ 209,688 $ 205,265 $ 4,423 2.2 % Property management expense, which represents regional supervision and accounting costs related to property operations, increased approximately $1.1 million for the three months ended March 31, 2024 as compared to the same period in 2023." --- (CPT, sec filing, 2024/Q1)

"General and administrative expenses, which include corporate operating expenses, decreased during the quarter ended March 31, 2024 as compared to the prior year period, primarily due to decreases in payroll-related costs, partially offset by increases in workforce/contractors costs." --- (EQR, sec filing, 2024/Q1)

"As an owner and operator of real estate, management considers EBITDA re to be an important measure of performance from core operations because EBITDA re excludes various expense items that are not indicative of operating performance." --- (MAA, sec filing, 2024/Q1)

"NOI. We define NOI as total property revenue less direct property operating expenses (including property taxes), and excluding corporate-level income (including management, development and other fees), property management and other indirect operating expenses, net of corporate income, expensed transaction, development and other pursuit costs, net of recoveries, interest expense, net, loss on extinguishment of debt, net, general and administrative expense, income from unconsolidated investments, depreciation expense, income tax expense, casualty and impairment loss, gain on sale of communities, other real estate activity and net operating income from real estate assets sold or held for sale." --- (AVB, sec filing, 2024/Q1)

Technological Innovations in Property Management

Residential REITs are leveraging technological innovations to enhance property management. AvalonBay is utilizing data, AI, and automation for personalized resident experiences. Equity Residential is investing in solar power, and Mid-America Apartment Communities has implemented a bulk Internet program, showcasing diverse tech-driven strategies to improve property management.

"CEO Ben Schall attended the NYU Schack Institute of Real Estate's 28th Annual REIT Symposium, where he spoke about digitalization in the industry and how AVB is building new technologies that leverage data, AI and automation to create personalized experiences for our residents. https://t.co/jyfeemv0EC" --- (AVB, Twitter post, 2024/04/18)

"So in terms of our priorities forward, you know, 1st and foremost, I would say investing in our portfolio is a great to use your money. I mean, we have a lot of investments, whether it's solar power raised with" --- (EQR, conference, 2024/06/04)

"We have half of our property on a bulk Internet program now. We've been doing that for three years or four years, but there's opportunities for the other half with this even enhanced version of higher margin." --- (MAA, earning call, 2024/Q1)

Future Outlook and Strategic Planning

Residential REITs like CPT, MAA, and AVB are focusing on developing, redeveloping, and acquiring communities, while maintaining solid demand and occupancy. AVB plans significant investments and debt management, leveraging their balance sheet and strategic capabilities to generate shareholder value.

"Future Outlook Subject to market conditions, we intend to continue to seek opportunities to develop new communities and to redevelop, reposition, and acquire existing communities." --- (CPT, sec filing, 2024/Q1)

"As Tim will outline further, despite the high level of new supply, we continue to see solid demand and absorption, leading to improved current occupancy with future exposure better than this time last year." --- (MAA, earning call, 2024/Q1)

"It's not changed significantly from our initial outlook. And as you recall, what we identified then and it's still true today is that for 2024, we have $1.4 billion in uses, which consists of $1.1 billion of investment spend and then a $300 million debt maturity later this year in November, which has a 3.7% interest rate." --- (AVB, earning call, 2024/Q1)

"And we're confident that we will find opportunities to put our balance sheet and strategic capabilities to work to generate shareholder value." --- (AVB, earning call, 2024/Q1)