Carlyle Avoids Mowing Lawns in Housing Rebound: MortgagesHui-yong Yu
Carlyle Group LP, the second-largest private equity firm by assets, has spent about $2.5 billion betting on the U.S. housing recovery since late 2008. Only $10 million has been for single-family homes.
The firm is buying and building apartment properties after investing in about 50 multifamily projects over the past two years, said Robert Stuckey, Carlyle’s head of U.S. real-estate investing. Washington-based Carlyle also is wagering on mortgage bonds that it started to acquire in October 2008 when prices tumbled during the credit crisis.
While other buyout firms also are capitalizing on distressed home-loan securities, Carlyle’s focus on apartments, an established industry for institutional investors, separates it from rivals including Blackstone Group LP, the largest private-equity firm, and Colony Capital that are rushing to purchase foreclosed single-family homes to rent, planning to manage thousands of properties that increase in value as the residential real-estate market recovers.
“Our posture is there are better ways to play the housing recovery” than buying single-family houses, said Stuckey. With the bond investments, “our approach enabled us to buy at about 30 percent of replacement cost, marketable securities, and we don’t have to mow the lawn.”
Carlyle has used about half of its current $2.34 billion Carlyle Realty Partners VI fund for multifamily after first investing in the sector in 2000. The firm has deployed capital from Seattle to Dallas to New York after demand for rental housing soared when millions of people lost homes to foreclosure and lenders tightened standards for residential mortgages.
In January, Carlyle acquired a parcel in Las Vegas to develop a 255-unit complex of rental townhomes called Elysian Southern Highlands. It also bought a newly renovated 45-unit apartment building and adjacent land parcels in Chicago’s West Loop where it plans to develop more than 100 additional units.
“Carlyle saw the opportunity in the multifamily space earlier than some other opportunity funds,” said David Hodes, co-founder of Hodes Weill & Associates, a real estate advisory firm, in New York. “At the time they were gearing up, there wasn’t a lot of capital for multifamily development but there was a lot of demand for finished product.”
Apartment construction in the U.S. has been rebounding from a 50-year low in 2009 as developers race to meet rental demand. The two-county region including Seattle is seeing the most apartment construction in 25 years, while development is surging in the Washington area, Miami and Boston.
“Apartments are one of the only property types where development can make sense right now based on the level of rent growth you are getting,” said Ray Huang, a multifamily analyst at Green Street Advisors Inc. in Newport Beach, California. “We are still positive on the multifamily space.”
Demand is so strong that some new projects are pre-leasing large numbers of units before construction is complete, said Stuckey, who has run U.S. property investing for Carlyle for more than 14 years. “It feels unusual” to sign leases before the project is done, he said.
The Southwestern, located in a medical district of Dallas, leased more than 20 percent of its 359 units before the building was complete. Eleven North in the Gulch neighborhood of Nashville, Tennessee, pre-leased 60 percent of its 300 units and was sold in November for a profit of 2.6 times Carlyle’s invested capital.
“We’ve had instances where people are clamoring to get in,” Stuckey said. “It’s indicative of where we are in the cycle.”
The recovery in the single-family home market, by contrast, is just beginning, he said.
Given the size of the housing market and the amount of distress, Carlyle isn’t ignoring it. The firm made a limited investment, spending $10 million of equity to buy houses in the Atlanta area, Stuckey said. Carlyle’s investments have been made through Sylvan Road Capital LLC, an Atlanta-based company started last year by Oliver Chang, former head of U.S housing strategy at Morgan Stanley.
“It’s a big investment concept and that’s why we’re taking it seriously,” Stuckey said. “We’ve got a toe in the water.”
That’s dwarfed by Blackstone’s $3 billion investment, which has bought it more than 17,000 homes across the country. Colony, a Santa Monica, California-based firm headed by Thomas Barrack, has bought more than 8,000 homes, and American Homes 4 Rent, led by B. Wayne Hughes, has about 10,000 properties and said this week it plans to sell shares to the public.
“It’s hard to find a private-equity firm on the planet that doesn’t have a strategy in this space,” Gary Beasley, chief executive officer at Waypoint Homes, said in January at the American Securitization Forum’s annual conference in Las Vegas.
Single-family homes to rent is a relatively new strategy for institutional investors, suggesting that returns ought to be higher than for multifamily because of the greater risk, said Green Street’s Huang.
The kind of apartments sought by institutional investors, usually properties with 50 units or more, are priced to deliver internal rates of return, a measure of investment yield used by private equity firms, of almost 7 percent, according to Huang.
Return expectations for single-family rentals ought to be more like 7.5 percent to 8 percent to compensate for greater risk, he said.
A central part of the investment premise in single-family rentals -- buying low -- has been eroded by the rally in home prices during the past eight months in markets such as Phoenix, Las Vegas, parts of California and south Florida, Huang said.
Single-family rentals also are likely to require more capital and labor to maintain than multifamily rentals, Huang said. “Everyone has their own roof and each home has different infrastructure,” he said. And the software for setting rents to maximize revenue isn’t as advanced as for apartments, Huang said.
Still, the multifamily sector isn’t without its challenges, including a rush to build, according to Hodes.
“The challenge is if every proposed new building gets in the ground at the same time, there are going to be too many apartments arriving at once,” he said. “Long term, there’s no issue the U.S. can absorb a lot of new apartments. Multifamily development is not a contrarian strategy anymore.”
That’s also being echoed in the mortgage bond market, where Stuckey and his team made money for Carlyle clients by buying mortgage securities on the cheap from October 2008 to April 2009, paying about 39 cents on the dollar for home loan bonds without government backing, he said. In all, since 2008, the firm invested about $1.5 billion in such bonds.
As the housing recovery gained momentum, non-agency debt returned more than 20 percent annually in three of the past four years. The debt is now yielding 4 percent to 6 percent, according to Barclays Plc.
While Carlyle has returned some money to investors, it retains “substantial” positions that continue to benefit from the housing rebound, Stuckey said.
The rebound has showed signs of strengthening. The median home price in January rose 12 percent from a year earlier, the biggest gain since 2005, according to the National Association of Realtors. Home sales increased to a 4.92 million annual rate, 43 percent above a record low two years ago.
Carlyle raised about $150 million last year for a fund to invest in the debt, according to people familiar with the firm who asked not to be named because the information is private. The firm, which has $170 billion under management, has sought to diversify into real estate, credit and other areas to reduce its reliance on traditional leveraged buyouts. The company fell 0.8 percent to $31.43 at 2:54 p.m. in New York trading, trimming its gain in the past year to 43 percent.
Besides apartments and RMBS, Carlyle also is investing in senior-living facilities, from those that cater to independent living and assisted living to residences that provide care for Alzheimer’s patients.
“As the population ages, demand for senior living is growing faster than for any other” type of housing, Stuckey said. “There’s a void in the market” as construction hasn’t kept up with demand from the aging population, he said.