Following a mid-December 2020 spin-off of the majority of its stabilized assets into AIRC, AIV is an orphaned REIT stock comprised of a combination of stabilized multifamily assets, mezzanine debt and a sizeable development pipeline. Despite a nearly $1B market cap and trading over $15M per day, it is a single-digit stock with no dividend, no sellside coverage and a management team that has essentially gone dark other than its earnings release and 10-K release several weeks ago. Coincidentally, the founder and long-time CEO made his largest open market purchase in the company’s 10 year history of being public a couple weeks ago, at a price just 8% below where the shares are currently trading. I believe this is a highly asymmetric situation with 70% return in my base case and a chance to make 150%+ over the course of a year, and with fairly limited downside.
Despite being a development company, the bulk of the current value are actually in the stabilized multifamily portfolio. This is comprised of 24 multifamily assets spread across the country. The assets are mostly A- and B+ assets with 65% suburban / 35% urban mix by book value. The portfolio was acquired mostly in the late 1990’s and early 2000’s, and has an undepreciated book value of $1,071M, and it produced $87M of NOI in 2020. I reviewed each of the properties and evaluated their quality and occupancy levels and was pleasantly impressed. The current acquisition market for multifamily assets is very strong, with cap rates at record lows and tight inventory. In addition public multifamily REITs are trading in the mid 4% cap rate range. Applying a 5% cap rate to 2020 NOI for the AIV portfolio, which is depressed due the pandemic, implies $1.7B of value for the multifamily portfolio alone, which is below the current enterprise value of $1.6B.
In addition to this multifamily portfolio, we also get:
A $307 mezzanine loan yielding 10% to a lower income multifamily development project in San Francisco
A development pipeline of 4 assets currently leased from AIRC, and where AIV will be paid by AIRC for nearly all of the value creation upon completion
Several other JVs and other assets detailed in the table below
On the liability side, there is $457M of non-recourse property level debt and a $534M note to AIRC. There is also a $131M deferred tax liability associated with the 1001 Brickell purchase.
As you can see in the table below, my NAV ranges from $7.70 in the downside case, where I apply a 6% cap rate to the multifamily assets (125 to 150bps wide of where this portfolio would likely transact in the private market) and give essentially no credit for the development pipeline. In this downside case I assume a 25% trading discount to NAV and still get $5.75 per AIV share, which is only 8% below the current share price. In my base and upside cases, I achieve $11.99 and $17.43 per share of value, which is 92% and 179% above the current share price.
I think this situation has remained off of the radar of most investors, as all of the sellside dropped AIV coverage and switched to AIRC. In addition, the company won’t speak with investors directly, and has only published a 10-K and earnings report.
The founder and Chairman Terry Considine made his largest purchase ever open market purchase in AIV stock several weeks ago, acquiring ~$3M shares in the $5.80 range. The company hasn’t yet released its incentive plan, but I believe they are largely aligned with shareholders to create value.
As the company begins to report more results and proves out its development pipeline, I expect the large gap between NAV and share price to narrow significantly.
A word on multifamily macro:
While single family housing strength garners much of the attention in the market, multifamily demand remained resilient through the pandemic, outside of major coastal gateway cities (New York and San Francisco, and to a lesser extent Boston and Seattle). Suburban and sunbelt / mountain west rents remained very strong. Coastal rents bottomed at the end of last year. I don’t have a strong view on the macro from here, but the public markets believe in the recovery, with coastal multifamily REITs EQR and AVB having rallied to within 15% of their pre-pandemic highs, and trading in the 4% to 4.5% implied cap rate range. MAA with greater sunbelt / suburban exposure continues to make new highs. While I am generally constructive on multifamily trends, hedging this risk is simple.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.