Key Highlights: We have our heads down working towards a Best Idea presentation on Industrial/Logistics REITs to be held on Tuesday, 7/6 at 12:30pm ET, and the news/catalyst flow is somewhat slow for our covered stocks right now, so we are breaking down thoughts on recent REIT related news:
- Still no word on CDC eviction ban extension: As a reminder, the national CDC eviction moratorium is set to expire next Wednesday, 6/30. We are tilting towards a possible extension of the ban given that political rhetoric picked up in recent days on the Democratic side to extend further. As it relates to the residential REITs, and we have focused on AMH and INVH, the ban is serving to prolong a 150-200bp drag on SSRev growth y/y in the form of higher bad debt, which is an offset to gross revenues. Additionally a contra-A/R account builds up on the balance sheet in each period, albeit small relative to the asset base and cash collection rates remain consistently in the high-90% range. In a perfect world, given the level of demand for the product type and unbelievably tight supply, the REITs would love to be able to evict those non-paying tenants and re-tenant their assets at higher rates, which could probably be done in ~30 days or less. At some point this will reverse the bad debt expense impact, and create a similar sized tailwind on top of underlying market asking rent growth. We have assumed a normalization beginning Jan. 1, 2022 to be conservative, but it is possible that we could see a return to normal sooner contingent on when eviction moratoriums are lifted.
- Potential headline risk as share of renters increase?: While we remain extremely bullish on HPA, rent growth and the SFR sector in general, just reading the tea leaves it make sense to acknowledge the potential for headline risk around the sector, specifically in the form of political blowback. Investors will recall the sector has come under fire from politicians and the media in the past given its origins as a trade on foreclosed homes during the GFC. As home ownership affordability continues to slip away, more citizens choose to rent and rental rates increase, criticism around "the loss of the American Dream" and "Wall Street extracting rents from consumers" becomes more likely. There will likely be a day where a front-page NYT or WSJ article drops that is critical of the space, or potentially a Senate hearing held to discuss some form of regulation - if it happens in the near-term and the stocks are knocked down on the headlines, we would view that event as an exceptional buying opportunity. You can already see landlords playing some 3-D chess and getting ahead of this HERE with loyalty programs providing credits against future rent and/or building towards a down payment on a home.
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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