American Homes 4 Rent Tests Housing REIT Market With IPOJohn Gittelsohn
American Homes 4 Rent is readying the biggest initial public offering by a company leasing single-family homes at a time when investors are cooling on the fledgling industry.
The real estate investment trust, founded by self-storage billionaire B. Wayne Hughes, plans to raise as much as $794 million in its sale of 44.1 million shares scheduled for later today. With a price range set at $16 to $18 a share, the IPO is poised to be far smaller than the $1.25 billion amount estimated in an initial propectus by the Agoura Hills, California-based company in June.
The company, with almost 18,000 properties, is the second-largest in the U.S. homes-for-rent market, after Blackstone Group LP. While American Homes 4 Rent has the benefit of strong leadership under Hughes and a diverse portfolio, it’s uncertain whether single-family owners can make money over the long term on par with other types of landlords, said Dave Bragg, an analyst at Green Street Advisors Inc. The two other REITs that have gone public -- Silver Bay Realty Trust Corp. and American Residential Properties Inc. -- are trading below their offering price.
“We recommend buying at the low end of the range,” Bragg, based in Newport Beach, California, said of the American Homes 4 Rent IPO. “Over the long term, we identify a high-quality problem resulting from home price appreciation, which would bring initial yields down to very low historical levels.”
American Homes 4 Rent and competitors such as New York-based Blackstone, which has invested more than $5 billion in about 30,000 houses, are betting they can build an institutional real estate class from U.S. single-family rental homes, which are mostly owned by mom and pop businesses.
REITs, hedge funds and private-equity funds have raised more than $17 billion and bought more than 100,000 properties since 2011, taking advantage of prices that are still 24 percent below their 2006 peak amid rising demand from renters who can’t buy or don’t want to own. The U.S. homeownership rate is at 65 percent, an 18-year low, the Census Bureau reported yesterday.
Shares of other public single-family rental REITs have fallen as the companies have failed to show a profit, in part because they are acquiring houses faster than they can fill them with tenants. Silver Bay, based in Minnetonka, Minnesota, began trading in December at $18.50 a share and closed yesterday at $16.10. American Residential Properties of Scottsdale, Arizona, went public in May at $21 and has fallen to $16.99.
“The headline occupancy numbers for this space, roughly 50 percent, is not yet enough to give evidence that this business model works,” Jade Rahmani, an analyst with Keefe Bruyette & Woods Inc. who rates Silver Bay outperform, said in a telephone interview from New York. “Hopefully these management teams can walk and chew gum at the same time -- can build out operations at the same time they are acquiring.”
Colony American Homes Inc., a single-family rental company founded by Thomas Barrack Jr. with about 14,000 houses in five states, withdrew an IPO in June as prospects of rising interest rates slammed shares of REITs. The Scottsdale, Arizona-based company hasn’t ruled out going public, according to Owen Blicksilver, a spokesman for Barrack with Blicksilver Public Relations Inc.
“We will continue to evaluate when a return to the public markets might be advisable,” Blicksilver said in an e-mail.
Waypoint Homes Realty Trust Inc., a single-family home renter based in Oakland, California, filed updated plans on July 19 to go public with a portfolio of 690 homes. Ellington Housing Inc., an Old Greenwich, Connecticut-based REIT, said July 2 it is seeking to raise as much as $100 million in an IPO.
It will get harder for rental investors to make a profit because the flow of low-cost foreclosures is shrinking and purchase prices are rising faster than rents, according to John Burns, chief executive officer of Irvine, California-based John Burns Real Estate Consulting LLC.
Home prices in 20 U.S. cities climbed 12.2 percent in the year through May, the most in seven years, according to the S&P/Case-Shiller index released yesterday.
“The bargains are gone,” Burns said in a telephone interview. “The great buying opportunity of the decade has mostly passed.”
While higher prices may limit buying by the landlords, they may also work in their favor by spurring more Americans to rent as costs for mortgages also increase. An index of pending sales of existing homes fell 0.4 percent in June from May, as higher interest rates and limited inventory slowed transactions, the National Association of Realtors said July 29. Rates on 30-year mortgages averaged 4.31 percent last week, up from a near-record low of 3.35 percent in May, and hit a two-year high of 4.51 percent earlier this month, according to Freddie Mac.
The number of U.S. homes occupied by renters increased 863,000 from a year earlier, compared with a 117,000 drop for owner-occupied residences, the Census Bureau said yesterday. Owners have lost more than 7 million homes to foreclosure or sold them for a loss since 2007, according to RealtyTrac.
Rental vacancy rates fell to 8.2 percent, the lowest since the first quarter of 2001, according to the Census report.
The “report is most bullish for single-family rental REITs and apartment REITs, because vacancies are at multiyear lows,” Jay McCanless, a Nashville, Tennessee-based homebuilder analyst at Sterne Agee & Leach Inc., wrote in a note yesterday.
It’s still uncertain whether single-family rental landlord capitalization rates can rival those of apartment REITs, because expected lower rates of tenant turnover may be offset by higher costs of operating scattered-site rentals, according to Green Street’s Bragg. The cap rate is a measure of investment yield calculated by dividing the property’s net operating income by purchase price, so it falls as costs and values rise.
Rent increases for REIT-run apartments peaked at 5.6 percent in the third quarter of last year and funds from operations, a measure of landlords’ ability to generate cash, rose an average 17.8 percent for the fiscal year, according to Bloomberg Industries analyst Jeffrey Langbaum. Apartment FFO increases are expected to moderate this year to 5.4 percent as rents rise more slowly, according to Langbaum.
Gross rental yields on single-family homes have compressed by about 100 basis points, or 1 percentage point, to an average 9.7 percent over the past year, according to Green Street’s analysis. The average American Homes 4 Rent property costs $173,327, including renovations, according to its filing. Annual rents average $16,284 a year for a 9.7 percent yield.
“If history is a guide, SFR cap rates could settle below those of any other REIT sector, because home prices are typically inflated by emotions and government subsidies,” Bragg wrote in a July 24 note.
Hughes, 79, has a proven track record building companies as founder of Public Storage, which should make American Homes 4 Rent attractive to investors, according to Bragg. The Glendale, California-based self-storage operator is the third-largest U.S. REIT by market value and has more than 2,200 facilities.
American Homes 4 Rent is an internally managed REIT, unlike Silver Bay or Colony, Bragg said. The Hughes family will control 23 percent of the company’s total value, which means they may undertake a more cautious acquisition strategy than leaders at externally managed companies that get paid by total assets rather than profits, he said.
Hughes’s company owns properties in 41 markets in 21 states, led by Indianapolis, Dallas-Fort Worth in Texas and Chicago. Other investors have flocked to Phoenix and Atlanta, where foreclosures have been more abundant and home prices have been more volatile.
As of June 30, 48 percent of American Homes 4 Rent’s 17,949 homes were leased, according to a regulatory filing.
American Residential Properties, with 86 percent of its 2,531 homes rented, had a first-quarter loss of $4.02 million and $5.25 million in revenue. Silver Bay, which leased 53 percent of its 4,594 homes as of March 31, reported a loss of $6.4 million and revenue of $7.68 million for the first quarter.
“We need to be very disciplined on the investment side,” Silver Bay CEO David Miller said during a June 13 interview. “We’d like to grow but it has to be smart growth.”
Peter Nelson, American Homes 4 Rent’s chief financial officer, didn’t respond to a phone message seeking comment.
Compared with smaller investors, large single-family rental operators can increase margins from economies of scale, such as borrowing at lower costs and purchasing paint or home appliances at bulk discounts, according to Green Street’s Bragg. American Homes 4 Rent also should be able to demand higher rents than small operators by developing a reputation for service and higher-quality properties, he said.
“The brand is important because the single-family rental industry has historically been very fragmented,” Bragg said. “To associate a superior level of service with that brand, which I’m confident that they will, provides a lot of value to a renter.”