03/08/22 06:13 AM EST

REITS DAILY BRIEF | 3.8.22 | (APARTMENT RENT TRACKER, AMH, INVH, TCN, ILPT)

Rob Simone, CFA

Takeaway: Anti-SFR shareholder proposal up North; ILPT to Short Bench w/ catalyst in rearview mirror

Hedgeye Cartoon of the Day: Stand w/ Ukraine

Ticker: AMH, INVH, TCN

Subsector: Single-Family Rentals

Headline: Negative effects of "financialization of housing in Canada"

Yesterday a client brought to our attention an SFR-related shareholder proposal included in the 2022 proxy materials for Royal Bank of Canada (RY). To our knowledge (and we could be wrong here) it is the first such proposal targeting the SFR industry specifically from an ESG and human rights perspective as it relates to financing and growth. We have argued from the beginning that the primary risk to SFR is from a political/headline perspective, and in our view this further supports that notion. We would also highlight that Invitation Homes (INVH) is specifically called out in the proposal, with AMH and TCN (despite being Canadian domiciled) not mentioned. Our intention here is not to opine on the proposal or put a stake in the ground, rather to highlight for clients another example of SFR's growth intersecting with public policy in a potentially negative way.
The proposal is one of two from the B.C. General Employees' Union.
Proposal #2 highlights a 2019 letter from the UN Special Rapporteur on the right to adequate housing as a basic human right, specifically addressing the business of INVH:

"... large-scale ownership has made it possible for SFR to become, for the first time, an asset class and has had deleterious effects on the enjoyment of the right to housing. SFRs with institutional owners are associated with undue rent increases making housing unaffordable for many existing tenants and reducing the availability of affordable housing stock."
The proposal highlights Core Development Group in Canada targeting over ~4,000 homes and an eventual IPO, as well as the fact that Core would need to rely on bank financing and potentially securitizations to finance its business, similar to the way INVH (and AMH and TCN) have grown and enhanced returns over time. The obvious implication is that RY should consider not participating in financing such businesses. Banks opting not to do business with SFRs would likely (1) shift SFRs to financing more via the "shadow banking system," and could (2) impact the long-term growth and return profile of the business. We think it is a long way off from that occurring, but directionally it appears certain groups are becoming more vocal and adversarial.
The shareholders requested that "RBC take steps to assess and mitigate the human rights and reputational risks involved in the financialization of housing."
The Board recommended a vote AGAINST the proposal.

So to be clear, SFR is and will continue to be increasingly in the crosshairs as home affordability declines and more of the housing stock is owned for rent by institutions.
As a reminder we still have an effective pair trade with American Homes 4 Rent (AMH) on the Best Idea Long list and Invitation Homes on the Best Idea Short list for idiosyncratic reasons.

Tickers: AVB, AIRC, AIV, APTS, BRG, CPT, CSR, IRT, EQR, ESS, MAA, NXRT, UDR, VRE

Subsectors: Apartments

Headline: Broad-based deceleration continues, but NYC & certain CA markets hanging in there

Data recently released by Apartmentlist.com continues to show a continued and very clear deceleration in the Y/Y RoC in February, with the following highlights:

Total / Wtd. Avg.: +16.1% y/y, or down -25bps on the RoC sequentially from January
Boston: -333bps
Jersey City: -205bps
Dallas: -170bps
Cambridge: -166bps
San Antonio: -156bps
Nashville: -152bps
Fort Worth: +168bps
New York City: +142bps
Seattle: +222bps
Oakland: +120bps
San Jose: +92bps
Anaheim: +83bps