Top 10 Takeaways from Apartment REITs’ Q3 Earnings Calls
Earnings season has wrapped up for the nation’s apartment REITs. We parsed through the 3rd quarter 2021 earnings call transcripts for every publicly traded apartment REIT. From the largest players to the smallest, the overall storylines were very similar: Apartments are hot. But even in a hot market, there’s plenty of risks and opportunities to work through. Here’s a quick recap of the top 10 takeaways we gleaned from the latest reports.
REITs are serious about reducing on-site staffing
Multiple REITs boasted that they are containing labor shortages and payroll pressures by expediting a tech-enabled reduction in on-site staffing needs. There’s a huge focus on giving renters more flexibility with self-service functionality from touring to leasing to living. Operators are embracing technologies that give their residents 24/7 service – from virtual or self-guided tours to fully online leasing to resident portals. On-site team members are increasingly tasked with high-value, high-touch tasks … and everything else is pushed offsite or to cloud-based tech.
UDR’s Tom Toomey said in his earnings call: “The platform focuses on self-service, enhanced resident satisfaction and expanding our controllable operating margin.” UDR said it has reduced on-site staffing by 40% since 2018.
Renter incomes are soaring
There’s a serious detachment between what property managers are seeing on the ground versus what makes headlines. Multiple REITs reported huge income growth among incoming renters, which then translated to static rent-to-income ratios even with big rent growth of late. That’s good news for renter affordability and potential rent growth runway. What’s remarkable is the universal nature of these income growth trends – among essentially all REITs and in all markets and now for multiple quarters.
MAA’s Tim Argo said: “If we go back to the Q3 of ’19, two years ago, income for our residents has gone up about 17%. So while rents have increased quite a bit, our incomes have as well.”
There’s huge upside in renewal pricing in 2022
Renewal rents have generally lagged new lease rents, and loss-to-lease is an enormous topic for pretty much every REIT. But there’s an upside: There’s lots of meat on the bone for 2022 revenue growth. Given the lack of renter affordability issues and lack of alternative options plus rising inflationary costs, sizable renewal growth appears achievable in 2022. Some operators reported sending out double-digit renewal increases in recent months. Of course, those increases will be limited by regulatory headwinds in certain coastal markets.
So far, renters who signed at steep discounts last year in certain cities appear willing and able to pay higher rates upon renewal. That’s good news; however, some operators see right-sizing renewals as a two-year process to avoid ultra-high renewal offers.
It’s still a great time to build and buy apartments
Despite low cap rates and robust investor demand, REITs are not tapering back on portfolio expansion. Most REITs are still in expansion mode. A recurring theme is that the cost of capital is still very low, helping make new deals viable without taking on unnecessary risk. For REITs with development arms, they’re finding better yields on new construction. And rising rents are helping them offset rising construction costs that some executives pinned in the 10-15% range.
On the acquisition side, many REIT executives shared tales of coming in second or third on competitive bids. It’s a hot market – especially in the Sun Belt. There’s less REIT and institutional interest in acquiring in California or New York right now. (More on that later.)
Supply chain issues are real, but not debilitating
Everyone is talking about supply chain issues, but the challenges so far appear mostly manageable. Appliances and paint are the two big bottlenecks. Everything is running behind and everything is more expensive. That’s impacting unit turns, renovations and lease-ups the most. REITs reported some cost increases in the 10% to 20% range.
In one particularly colorful anecdote, Camden’s Ric Campo shared this: “In California, we are releasing up our Hillcrest project and also needing replacement refrigerators, we had to go out. And we bought a couple 100 refrigerators from Best Buy in a week. So we went to Best Buy after Best Buy after Best Buy loading up on a refrigerator. It’s not going to change anytime soon. And that pressure is going to be there for a long time.”
Coastal cities are rebounding, but regulatory issues are problematic
First, the good news: The coastal cities are back. Demand is rebounding, and it’s the good-type-of-demand with higher-income households and not just deal seekers. Property managers report that even where offices remain sparsely populated, people are returning for the lifestyle in places like New York City, San Francisco, Boston, Seattle, etc. It’s certainly a big win that coastal, urban apartment demand proved untethered to return-to-office policy. Vacancies are few, concessions are going away, and rents are nearing pre-COVID levels faster than expected.
The bad news? Regulatory issues are causing massive heartburn. Most REITs seemed rightfully uncertain about when local eviction bans and renewal rent caps would actually expire (rather than be re-extended) in certain cities. Additionally, rent control conversations are heating up. New York’s proposed “Good Cause Eviction” bill (which introduces new renewal rent caps among other things) is a particular concern that could not only hurt rental housing owners, but also backfire on renters with unintended consequences.
Diversification is the name of the game
Most apartment REITs have outsized exposure to coastal cities, and most seem focused on diversifying their portfolios a bit – although not exiting coastal cities altogether – given the issues mentioned above. Several REITs made a point to talk about cycling funds into Sun Belt markets. Lesser policy risk combined with robust demand from upper-income renter points to larger allocations toward Sun Belt markets going forward. In particular, hot markets for new investment include Dallas, Austin, Denver, Phoenix, Nashville, Charlotte, Raleigh, and South Florida.
There’s broad awareness now that the big Sun Belt markets have grown up and that the old school of thought around perceived headwinds (primarily supply pressures and move-outs to home purchase) is outdated and ungrounded in the right submarkets.
Lots of concern about rising property taxes
The one knock on the Sun Belt is the threat of rising property taxes due to high demand and rapid price appreciation. That’s particularly a concern in states that do not cap property tax increases from year to year. Most property owners are pushing back on appraised values, and finding some big wins in the process. But rising property taxes will be part of the equation going forward. REITs expanding into the Sun Belt noted that with newer assets, total expenses should still be manageable due to lower overall operating costs.
Smart home conversions are big
Smart home technology started in new developments, but retrofits are now a big part of renovation programs. Property owners identified multiple benefits, particularly for energy conservation and building/unit access. Renters so far have been willing to pay incrementally more for the added convenience, as well, as smart tech becomes a marketable amenity. MAA, the nation’s largest apartment owner with 100,490 units, reported that it’s nearing the 50% mark for units with smart home packages.
Inflation is not a major concern
Wall Street analysts asked just about everyone about the impact of inflation, but REIT executives mostly shrugged off possible concerns. Real estate has historically proven to be an investment hedge against inflation. And since housing costs are a big part of CPI, rent increases are likely to be part of an inflationary environment – allowing pyone about the impact of inflation, but REIT executives mostly shrugged off possible concerns. Real estate has historically proven to be an investment hedge against inflation. And since housing costs are a big part of CPI, rent increases are likely to be part of an inflationary environment – allowing property owners to pass down their rising costs.