Catalyst Watch – Costa Hawkins
California Proposition 10, the Local Rent Control Initiative, is on the ballot in California as an initiated state statute on November 6th.
What exactly is Costa Hawkins? It is a state law that sets some requirements for the cities in California with rent control. There are 3 main provisions:
• It protects a landlord’s right to raise the rent to market rate on a unit once a tenant moves out.
• It prevents cities from establishing rent control—or capping rent—on units constructed after February 1995.
• It exempts single-family homes and condos from rent control restrictions.
Per a September 3rd Stifel note, there are over 3.8mm units in the State of California. The major metropolitan areas in California have roughly ½ of multifamily units:
In addition, Stifel goes on to mention that there are seven multifamily REITs that own roughly 145,800 units. This equates to 3.8% of the 3.83mm units in the state and roughly 8% of the 1.83mm units in the eight major metro areas (See Below).
While keeping an eye on this list of stocks ahead of the Costa Hawkins vote, here is some recent analyst commentary on a couple names:
Essex Property Trust (ESS) – On August 30th, JPMorgan analyst Michael Mueller was out with a note saying that he thinks the stock has been weighed down in recent months by fears over Costa-Hawkins being repealed. In their view, the consensus seems to be placing a lot of weight on the notion that this will pass and Costa-Hawkins will be repealed. If it doesn’t pass, however, we think the stock can make a decent move higher.
Equity Residential (EQR) – On August 14th, SunTrust Robinson analyst Michael Lewis downgraded the stock to Hold from Buy and kept his $66 price target. The analyst cites the company’s below-average projected same-store growth, reduced development pipeline, high exposure to the potential Costa Hawkins repeal, and few positive catalysts in the near term. Lewis also notes that after a strong year-to-date performance, the REIT is trading at the highest FY18 FFO multiple in his group.