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Why Trump's 'Eviction Moratorium' is a Nothing Burger for the megacity apartment REITs

BIG Headline -->Minimal Impact

Eric J Bokota

As many of you have or will read, the Trump administration has used an executive order to ban evictions of some renters in certain circumstances through the remainder of 2020.  While this may cause apartment REIT shares to trade down in the near term, we expect the actual impact on the apartment REITs discussed on this blog (AVB/EQR/CLPR) to be minimal and could actually be positive for long term investors.  Let's explore:

First, yesterday (as expected) California extended its eviction moratorium until Feb 2021.  EQR and AVB both have significant (49 and 40% of net operating income, respectively) exposure to California.  Presumably, the market reacted to this news yesterday as the apartment REITs again lagged the broader market which was lead by tech shares.  And we view tech strength as being very positive for AVB and EQR.  

Similarly Seattle (a further 11% and 6% of rent for EQR and AVB, respectively) already had an eviction moratorium through the end of the year.  Ditto for Boston (10 and 12% for EQR and AVB, respectively). As for NYC, it has an eviction moratorium scheduled to end October 1 but most market participants seem to be expecting an extension.  Washington DC's eviction moratorium is also set to expire in October.  As an aside yesterday's WSJ had an interesting piece noting the resilience of apartment market values in the private market and highlighted a recent large property sale in Alexandria, VA (which neighbors DC).  We believe public market investors with a long term time horizon would be wise to take their cue from the private market.

Second and even more importantly, that the California/megacity REITs including AVB and EQR have been operating in an environment where evictions have been effectively banned since March but have still collected 97-98% of rent. Why is that? Because EQR and AVB target knowledge workers - virtually all of whom have been able to work from home during the pandemic, earn a paycheck and pay their rent.  This is unlikely to change.  I expect rent collections will remain very strong.  

Here is a slide from EQR which illustrates the ability of its tenants to pay rent:

Source: Equity Residential Investor Presentation

The profile of AVB's renters is not dissimilar and we do not anticipate any material uptick in non payment of rent.  

Why this could be a positive

As mentioned in our recent piece on AVB, there are some potential positives which come with eviction moratoriums as smaller landlords will be disproportionately impacted as:

1) they tend to have weaker underwriting standards (more exposure to tenants which will face issues paying their rent - LESS CASH IN

2) unlike the publicly traded apartment REITs, the private market operators use significantly more leverage and have higher debt service (monthly interest expense) obligations - MORE CASH OUT

3) as smaller landlords collect less rent from tenants but have to make interest/tax (CA property taxes are very stable and predicable due to Prop 13 - we will explore in a forthcoming article) payments, these landlords have less money available to fund repairs and improvements.  Who wants to live in a dump with a broken dishwasher? This makes their properties less desirable places to live for their well heeled, creditworthy tenants.  

4) The creditworthy tenants will be more likely to seek newer, better maintained apartments which increases demand for exactly the type of high quality apartments owned by AVB and EQR.  

OUR ENTHUSIASM and FAIR VALUE ESTIMATES remain unchanged for AVB/EQR/CLPR despite the 'SCARY' HEADLINEs YOU WILL PROBABLY see for the next couple of days.  We see this as opportunity.

Eric Bokota owns shares of AVB, EQR, and CLPR.  

Disclaimer: This isn't investment advice/ do your own work.  

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