Profits Soared For Publicly Traded Landlords In Q3, With Rental Income Outpacing Property Costs

A combination of persistent inflation and aggressive federal interest rate hikes has decimated residential property investing in the U.S. But the business of owning rental properties is still booming.

Seven of the nation's top publicly traded landlords reported year-over-year profit gains in the double digits in the third quarter, showing that both their business models and corporate ledgers have been insulated from the worst effects of the current financing environment. 

Nearly all public landlords have seen revenues grow much faster than operating expenses over the past 12 months.

Publicly traded landlords significantly slowed acquisitions and, in some cases, development activity in the third quarter to avoid rising costs, a review of quarterly reports found.

Most have low levels of corporate debt and years to go before the bulk of their debt matures, a result of having taken advantage of low interest rates to refinance in the preceding few years. And all have experienced the benefits of housing inflation, or arguably contributed to it, by raising rents faster than their costs are rising.

“We, like most every business, are feeling the impact of inflation across our expense structure,” UDR Chair and CEO Tom Toomey said on his company’s Q3 earnings call. “Thus far, we have been able to pass these costs on to our residents in relatively short order.”

Apartment Income REIT recorded virtually flat property expenses year-over-year, with expenses other than insurance, utilities and property taxes down 400 basis points over the same period. AIR President of Property Operations Keith Kimmel attributed the low costs to low turnover and high “resident quality” on AIR’s Q3 earnings call.

Equity Residential expenses grew 3.5% year-over-year, which it attributed to low property tax and payroll costs in its report.

While companies like Equity Residential, Essex Property Trust and UDR all reported growth in salaries, they have mitigated its bottom-line impact by increasing the use of proptech and other levers to decrease the number of employees required to carry out property management duties.

UDR had no on-site management personnel for 25 of its 175 active properties at the end of Q3, and expects to transition 10 more properties to virtual management in the next 12 months, UDR Senior Vice President of Operations Mike Lacy said on the company’s Q3 earnings call.

“Today, we have increased the number of apartment homes managed per associate by 60% versus pre-Covid levels,” Lacy said.

Spiking home values have sent property taxes skyward for property owners in Sun Belt states, but the effects have been felt most acutely in the single-family rental market.

American Homes 4 Rent experienced a 12.9% year-over-year increase in property expenses, which the company attributed to a combination of turnover costs, the effect of inflation on maintenance and repair prices, higher property taxes and a larger portfolio. AM4H’s tenants average higher turnover and lower household income than its multifamily counterparts. 

For Camden Property Trust, which focuses almost exclusively on the Sun Belt, property taxes rose by more than 25% year-over-year, but same-property expenses overall only rose 4%.

With major landlords experiencing such a banner year for net operating income, tax bills are expected to rise next year. But if Camden Chief Financial Officer Alex Jessett’s comments on the company’s earnings call are any indication, owners with the means will likely be fighting in court to minimize the effect of NOI growth on their tax bills.

“Obviously 2022 has been a fantastic growth year,” Jessett said on the call. “But [assessors] are also supposed to look at real values and clearly real values have come down. And so I think we're going to have a lot of protests and probably a lot of lawsuits working through this process in 2023.”

Across the board, publicly owned landlords have either slowed or stopped acquisition activity due to the high cost of capital, opting instead to put revenues into paying down debt, buying back shares or distributing dividends to shareholders. 

“I am very bullish on our opportunities when we look to 2023 for buying,” AIR co-Chief Investment Officer John McGrath said on the earnings call. “Some of the distress in the market will provide opportunities for us, such as [the fact that] levered buyers are on the sidelines because they are worried about negative leverage and other dynamics like that.”

Though rent growth slowed back down to single digits nationwide in the third quarter amid dropping demand, multifamily landlords such as Mid-Atlantic Apartment Communities, UDR, Camden Property Trust and AIR all managed to grow rents by double digits over that period, and all did so while occupancy ticked downward. 

“Focusing on rate growth and accepting a higher rate of turnover and slightly lower occupancy reflects our strategy to strengthen our rent roll,” Lacy said in a statement released with UDR’s Q3 report.

Prioritizing maximal rent growth, even at the cost of higher vacancy rates, has come under criticism as the cost of housing has skyrocketed since late 2020. The practice has been associated with widespread usage of software algorithms to achieve higher revenues on a per-property basis. The most popular such software, RealPage’s Yieldstar, has become the subject of a class-action lawsuit alleging anticompetitive practices.

Even with MAA achieving a 14.5% increase in rents year-over-year, the company’s tenants averaged a 22% rent-to-income ratio in Q3 for the second consecutive year, MAA Chair and CEO Eric Bolton said on his company’s quarterly earnings call. MAA, Essex Property Trust, AIR, Equity Residential and UDR were among landlords that pointed to the relative affluence of their tenants as reason for confidence that inflation will continue to help such companies more than hurt.

“Turnover was a little higher in some of our secondary markets that have some [Class-]B assets, but we're also replacing those with residents [whose] rent-to-income ratio has not changed,” Tim Argo, MAA executive vice president and chief strategy and analysis officer, said on the call. “So I think to the extent we are seeing it here and there, we're able to quickly replace it with residents that have strong affordability.”