While I have a new actionable investment idea in the hopper, it is not yet ready to send out (interested readers: keep your eyes out this week either in your Inbox or at www.privateeyecapital.com; if you haven't already, sign up for the FREE Actionable Investment Idea newsletter here - it's FREE!). Today I will highlight a couple of interesting tidbits in the wonderful world of apartment assets/apartment REITs from the past week:
First, on Friday 10/9, Andrew Rosivach, the former Goldman Sachs REIT sell-side analyst (covered REITs at GS from 2012-2019; Andrew is currently the Chief Credit Officer at Store Capital, STOR), released a bullish research report (and disclosed he is LONG EQR) on Equity Residential on Seeking Alpha (find here).
Andrew’s piece is noteworthy as
- This is Andrew’s first article on Seeking Alpha- Evidently he was so moved by the discount in EQR shares that he felt compelled not only buy shares but to write about it
- Andrew covered EQR for a long time and is knowledgeable about the company/apartment REIT space and
- Andrew’s recommendation/long position is in sharp contrast to current Goldman Sachs sell-side analyst Richard Skidmore who rates EQR a sell.
In his report, among other things, Andrew notes:
A) sell-side reports like those issued by Goldman Sachs, focus on short term share price outlook. Andrew highlights the investment opportunity for ‘patient longs’ who have a long term time horizon. Private Eye Capital takes a long term, fundamental view. While sell side analysts spend almost all of their time setting short term price targets, if sell side analysts actually knew where stocks/REITs would trade in the short term, proprietary trading would be a far more lucrative endeavor.
Apartment real estate is a long term investment - that's why private real estate funds and syndication deals tend to have a minimum 5 year commitment. I have no idea why the sell side thinks 6 month price targets are of any value. Short term price outlooks given by the sell side are ‘entertainment only’ IMO. Find my short tirade on sell side price targets here.
B) expectation that negative rental trends for apartments in megacities are a short term phenomenon
C) outlook for supply growth is muted - Andrew shows national numbers. I’d note that the outlook for supply growth is much lower in LA/ SF due to incredibly strict building codes and very high construction costs (discussed here)
D) Cheap valuation - Andrew looks at yields on EQR vs. corporate bonds
E) Cheap valuation relative to NAV - private market transactions indicate a large discount to NAV - cites September’s AIV JV transaction (find my note here). At the midpoint, I estimate EQR’s fair value at $80 (find here and here).
Second, Jonathan Litt, the real estate hedge fund manager who intimated he was short AvalonBay (find my report here) a few weeks ago, may have had a change of heart (or more importantly mind). In a 10/8 Tweet (find here) Litt highlighted:
A) Private market operators Blackstone (BX), KKR, and Starwood are on the hunt to buy apartments. Cap rates are sub 4.5%. This is consistent with the facts posted on my site and many conversations I’ve had with private market multifamily investors. I have argued that the PRIVATE MARKET is the real market (find here) and the one which should garner long term investor attention. Recall that only 6% of apartment assets are owned by publicly traded REIT - the other 94% is owned privately by private operators including BX. Given the valuation discrepancy, logic dictates that smart/nimble private investors such as BX could become involved in public apartment REITs which brings me to…
B) Blackstone has taken stakes in 3 apartment REITs (at 6/30/20 BX had stakes in AVB, EQR, AIV - find here https://www.holdingschannel.com/13f/blackstone-group-inc-top-holdings/ - I look forward to seeing how, if at all, this changed during 3Q - given that REIT prices were fairly weak while private market values held firm, I suspect BX may have increased its stake). To me, the one of the largest and most knowledgeable/best informed market participant buying these REITs validates the notion that ESS, EQR, AVB, CLPR are excessively discounted at today’s prices. It is worth noting that BX’s primary business is operating private equity funds and that purchasing public REITs is somewhat unusual, speaking to the rarity of the opportunity in apartment REITs.
As always, this is not investment advice, do your own work.
Eric Bokota is LONG ESS, EQR, AVB, CLPR
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