REIT returns outperformed the S&P 500 under moderate/high inflation scenarios, while slightly underperforming general equities during low inflation...
Hurricane Ian: Managing Exposure Through Unprecedented Climate Events
This discussion provides a reasonable degree of solace that there will not be a lasting financial impact on our constituent companies from Hurricane Ian.
Hurricane Ian Leaves Florida In Disarray
Karen Clark & Company (KCC, 0.0%), a catastrophe risk management firm based in Boston estimates that the privately insured loss from Hurricane Ian will be close to $63 billion, with a majority of those losses coming from wind, storm surge, and inland flooding from across the affected areas. The storm began as a tropical depression in the central Caribbean Sea approximately five days before making landfall in southwest Florida just after 3PM on September 28th with winds of 150 mph. Hurricane Ian made a second landfall on the afternoon of September 30th near Caines, South Carolina as a Category 1 hurricane with winds of 85 mph. KCC estimates that Ian will be the largest hurricane loss in Florida history, in nominal dollars, with total economic damage in excess of $100 billion including uninsured properties, damage to infrastructure and other cleanup/recovery costs. At the time of this writing, the death toll from the storm stood at just over 104 people in Florida and that number is unfortunately expected to rise as recovery efforts continue across the most impacted areas of the state.
Florida Represents A Significant Property Market
Florida is a large and important property market for all sub-sectors of the REIT universe with meaningful representation on the part of many constituents within the HAUS portfolio. Of the Top 10 holdings in HAUS (71% of Total), only two names, Equity Residential Properties (EQR, 9.53%) and Essex Property Trust (ESS, 7.33%) have essentially no exposure to the Florida markets and our largest single position, AvalonBay Communities (AVB, 9.72%) has less than 2% of net operating income (NOI) coming from south east Florida. Rounding out exposure for our “coastal” apartment names, UDR Inc. (UDR, 5.76%) generates 10% of total portfolio net operating income (NOI) from two Florida markets, Tampa and Orlando.
Sunbelt Apartment Names Weathered the Storm
As expected, the sunbelt apartment names have sizeable Florida exposure, and in most cases that exposure is limited to three high growth metros within the state: Tampa, Orlando and Jacksonville. While we take pains not to downplay the significance of Hurricane Ian, it should be noted that while all three of these markets experienced damage and disruption, they were fortunate to not have been in the direct path of the storm and thus fared relatively well. Mid-America Apartments (MAA, 9.08%) reported Florida exposure at 16.7% of total NOI as of 2Q22 and this exposure was roughly two-thirds Tampa/Orlando, and one-third Jacksonville. The company has yet to put out a statement updating investors on what the longer-term impact will be from the storm, but our expectation is that the damage was relatively limited with only a short-term disruption to operations. Camden Property Trust (CPT, 4.88%) has Florida exposure that is limited to Orlando and Tampa, with each market representing just over 6% of the total operating portfolio, for total Florida exposure of 12.3%. CPT has disclosed that their Florida properties have undergone “minor damage” and we look forward to additional information when the company reports 3Q22 earnings around the end of October.
Single-Family Rental Companies
Looking at the two single-family rental (SFR) companies within our Top 10 holdings, we note that American Homes 4Rent (AMH, 8.08%) is substantially less exposed to Florida than Invitation Homes (INVH, 5.20%). Based on 2Q22 supplemental earnings data, AMH generated just over 12% of same-store NOI from their three Florida markets; Jacksonville, Tampa and Orlando and this market exposure translates to 12.8% of total homes owned. AMH disclosed earlier this week that the Florida portfolio experienced “limited damage” from the hurricane. INVH owns approximately 25,300 homes in Florida representing 31.4% of firm revenue per 2Q22 data. On a same-store NOI basis, 30% comes from the Florida market, with the largest segment being south Florida at 12% of NOI, followed by Tampa at 10% and Orlando at 7%. Jacksonville rounds out the exposure at roughly 2% of same-store NOI. INVH has yet to provide an update on their portfolio.
Manufactured Housing Sector
We round out the discussion with the manufactured housing sector, which has historically had heavy exposure to Florida due to the attractiveness of its climate and water amenities, two characteristics which work against us during hurricane season. Both Sun Communities (SUI, 6.49%) and Equity Lifestyle Properties (ELS, 5.02%) have substantial Florida exposure. SUI owned 129 Florida properties per their 2Q22 financial disclosure with a total of 41,000 manufactured housing and recreational vehicle (RV) sites in the state. This represents 31% of total U.S. sites (excludes the United Kingdom). Per the marina business, Florida houses 20 properties with 5,100 boat slips, and this represents 11% of total boat slips owned by the company. SUI provided disclosure over the past few days stating that three RV properties in the Fort Myers area (where Ian made landfall) suffered “significant flooding and wind damage” from the hurricane. They also disclosed that one marina suffered damage to a seawall and docks. The disclosure goes on to state that other property damage appears “limited to trees, roofs and fences”. Florida is ELS’s largest market with 63,800 manufactured housing and RV sites across the state. The market represents 38% of total sites and 44% of revenue. While we note that a handful of ELS properties appear to be located in close proximity to where Ian made landfall, the company filed a press release reporting “limited impact from the storm”. We look forward to getting a more detailed update on the company’s 3Q22 earnings call.
A Reasonable Degree Of Solace
In aggregating the Florida exposure of our Top 10 holdings, we arrive at a number just shy of 10% of the portfolio. We would preface as referenced above, that Florida is a large state and much of the REIT exposure in our portfolio is centered around three major metros, Tampa, Orlando and Jacksonville, all of which were less severely impacted by the storm than communities centered around Lee County, in the southwest quadrant of the state. This discussion provides a reasonable degree of solace that there will not be a lasting financial impact on our constituent companies from the tragic weather event which played out over the course of several days in late September. From a broader perspective however, we are reminded of the importance of diversification at the portfolio level, and for the need on the part of our constituents to be more diligent than ever  as it relates to data and analytics on catastrophe preparedness and planning as “unprecedented” weather events become more frequent.
Karen Clark &Company – Hurricane Ian – KCC Flash Estimate: 09/30/2022
CBS News – Hurricane Ian Death Toll Surpasses 100; 10/04/2022
Financial Disclosure: AvalonBay Communities, Equity Residential, Mid-America Apartments, UDR, Inc., Essex Properties, Camden Property Trust, Invitation Homes, American Homes 4Rent, Sun Communities, Equity Lifestyle Properties
Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please call (800) 693- 8288 or visit our website at www.armadaetfs.com. Read the prospectus or summary prospectus carefully before investing.
Investments involve risk. Principal loss is possible
Distributed by Foreside Fund Services, LLC.