Tuesday, August 08, 2006

Apartment REITs

So I believe I mentioned that the declining housing market was creating some investment ideas. That sounds familiar. Of course, the most obvious opportunity would be apartment REITs the likes of Camden Property Trust (CPT), Archstone-Smith Trust (ASN), AvalonBay Communities (AVB) and Essex Property Trust (ESS).

I currently live in a Camden property in Rockville, MD. I've been here about 1 year. Real nice. And fairly reasonably priced for me. My rent was $1440 per month until I received notice of a change earlier this year. (I don't mind paying for things important to me, and this place has most if not all of them.) On top of all of that, the leasing agent was painfully attractive, I mean "staring directly into the sun without shades" beautiful...but I digress.

Now, the notice I received informed me that the rent would be increasing by $342 per month. WTF?!?!?! Some basic math shows that to be a 23.75% increase. Who ever heard of this kind of shite? I had to leave on general principal. It wasn't that I couldn't afford the new rent, I just didn't feel like paying it. At least have the decency to put a gun to my face and tell me "your money or your life".

A few weeks later I'm reading my favorite publication, The Wall Street Journal Online, and they have an article about resurgent apartment REITs as the housing market starts slowing. It features the CEO of CPT talking about how they have been able to raise rents as much as 25% in certain markets due to new rent optimization software they implemented within the last year. Conceptually, this software is similar to the yield management software most airlines use. So based on all the data, the software told these people to increase my rent 20%+ Y/Y. Riiiiight. Had I known about this, I would have picked up some CPT sooner. (I wasn't following the shares because I was beginning to have "issues" with the new management here, and the painfully cute assistant manager moved on to God knows where.)

Aside: The WSJ is, in my estimation, the best daily publication on the planet. If you don't subscribe, you should if you're at all serious about your money. Only in the WSJ will the CEO expose his strategy for increasing rents. I love it.

Now, as I prepared to write this post, I decided to do a bit of followup on the apartment REITs, to see if the thesis I originally formulated over 6 months ago still held up. Unsurprisingly, it does not. Why would I want to buy into a REIT on the tail end of their earnings yield curve? 4%? I get 5% at HSBC's online bank. I mean, the numbers work for Ken Heebner, but I just can't see it right now.

Anyway, I will continue to rent for the time being. I was hoping that this would be my last apartment but it was not meant to be. I have no problem with being able to save over 25% of my take home pay however. If I have to do that for another year, I guess I'll just suffer through.

So now I pose the question to you, gentle reader - what's your investment thesis for a slowing housing market?

3 comments:

Nick said...

Sounds like you live just down the street from me! I currently rent in the Post apartments by the shopping center (the one with the Safeway and Krispy Kreme, right?). We've only been there nine months, so we haven't received a rent increase notice yet; but others around us have, and they're looking at the same jacked-up rate you're getting.

Fortunately we just put a contract on a house not far away, so our renting days will officially be over soon.

Anonymous said...

I will hoard my savings in cash and get prepared for bargin hunting in one or two years, when I believe the market will be down.

Khyron said...

Nick,

Yeah, that sounds about right. I mean, as I said, its not that I can't afford it, I just don't have to and won't stand for it.

It is even better that I am moving because the new place is 4 miles from my office and still in Montgomery County. Gasoline costs will go down *and* my car insurance may drop as well with the reduced commute.

Anonymous,

Cool. I'm stacking cash at a furious rate over the next year too. I may not have the 20% I'd like to have, but I'll have a lot more than I currently have.

I figure the FOMC starts cutting rates within the next 6-9 months. The PIMCO funds in my 401(k) have been lightened recently in my regular rebalancing. But now once those cuts take off, I expect they'll make some significant gains in the short - intermediate term. You know, the 1% decrease in rates increases bond returns 10% equation. Then I'll be looking at ending my renting days with a larger down payment, better personal credit quality, lower financing rates, and more reasonable prices in the housing market (and even if the last one doesn't come to pass, 3 out of 4 should be in good position).