Last Thursday in a late-night 6-3 unsigned opinion (three liberal justices dissenting), SCOTUS sided with landlord groups and struck down the latest extension of the Biden CDC's federal eviction moratorium. Essentially SCOTUS determined that any further extension would require legislation from Congress, and that Congress had several months to write that legislation but failed to do so. Justice Kavanuagh had sided with the three liberal justices back in June in allowing the moratorium to continue, but wrote that he only did so because (1) it was known and set to expire July 31 and (2) Congress had time and was required to act in order to extend it. That obviously did not happen.
What does it mean? All of the residential REITs have been limited somewhat in their ability to "churn" their portfolios by evicting non-paying tenants and re-tenanting those units, which should be fairly straightforward particularly along the Sunbelt given near-record ending and average occupancy levels. Cash collections have been 150-200bps lower than would otherwise be realized, and recognized revenues have been lower by a similar amount due to above-average reserved bad debt which functions as a contra-revenue account. Our base case from the beginning was that these figures would begin to normalize beginning in FY22, but all else the same the process gets moved up and should begin well before year end. This is an added tailwind to rental revenue, NOI and Core FFO earnings growth in the near term. Best Idea Long AMH, for example, noted on the 2Q21 call that their internal assumption embedded in guidance was that bad debt would remain around ~250bp through year end (versus 100bps normally), which is now increasingly conservative and a source of upside heading into year end.
It is also important to note that local restrictions remain in place aside from the federal mandate. Several states have eviction moratoriums in place that are not effected by the SCOTUS ruling, namely California, Minnesota, New Jersey, New Mexico, New York, Washington and Washington, D.C. Scanning that list, the Sunbelt residential REITs are most insulated and free to manage their portfolio occupancy according to market conditions. We continue to like that AMH has essentially eliminated its California exposure to a de minimis amount, whereas peer INVH generates ~18% of revenue in California.
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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