Home-Rentals Wall Street Made Say Grow or Go: Real EstateHeather Perlberg and John Gittelsohn
Alexander Philips joined the rush to buy foreclosed U.S. homes four years ago, spending $40 million on houses in California and Nevada to operate as rentals. Now his firm, Twinrock Partners LLC, is getting ready to sell.
“We didn’t want to be the last one standing when the music stopped,” Philips, 38, said in a telephone interview. “We view this as a trade, not as a business.”
The U.S. home-rental industry, transformed over the past two years by Wall Street-backed companies that were built on the rubble of the housing crash, is poised to be reshaped again as landlords like Philips get out. Corporate owners with limited capital or deadlines to repay investors are now selling houses in bulk, or one by one, after a 26 percent surge in prices from a March 2012 low. For bigger firms, swallowing smaller competitors is among the best opportunities for growth as they shift their focus to managing scattered properties.
“That consolidation phase will be bigger than the original buy phase,” Tom Barrack, whose Colony American Homes is the third-largest single-family landlord, said during an interview today at Bloomberg’s Los Angeles bureau. “Now we’ll sweep up everybody over the next two years who got stuck, who says I have home price appreciation, which they do. They bought right, but now they are stuck.”
American Homes 4 Rent, the second-biggest company in the industry, this month bought Beazer Pre-Owned Rental Homes Inc., gaining more than 1,300 houses. Barrack’s Colony American has made four bulk purchases this year.
Starwood Waypoint Residential Trust was formed after Waypoint Homes was sold to an affiliate of Barry Sternlicht’s Starwood Capital Group LLC, which has about $36 billion of assets under management. Waypoint Homes, founded in 2009, was one of the first large-scale single-family rental operators.
“You’re starting to move into that consolidation phase,” David Singelyn, chief executive officer of Agoura Hills, California-based American Homes 4 Rent, said in a telephone interview. “There’ll be more and more transactions by us and others as time goes on.”
Private-equity firms, hedge funds and real estate investment trusts have amassed about 200,000 homes since the housing crash, largely through foreclosure auctions and purchases of individual properties. The biggest buyers have slowed such acquisitions as home prices climbed, focusing on efficiently managing properties, retaining tenants, and minimizing costs.
Blackstone Group LP -- whose Invitation Homes LP division is the largest single-family landlord, with about 45,000 houses -- has decreased spending on home purchases to about $15 million to $25 million a week, down from last year’s peak of $150 million, according to a person familiar with the strategy, who asked not to be named because the information is private. Denise Dunckel, an Invitation Homes spokeswoman, declined to comment.
The largest landlords have better access to financing than their smaller counterparts, raising money by selling stock, borrowing from banks and selling debt at lower rates through bonds backed by rental properties.
Since November, Wall Street has issued $3 billion of securities backed by houses owned by Blackstone, Colony and American Homes 4 Rent, giving the landlords cash for less than 2 percent above the London Interbank Offered Rate. The debt provides leverage to increase returns on investment and buy more properties.
Silver Bay Realty Trust Corp., the first single-family landlord to go public, said yesterday it’s planning an offering of securitized loans.
Securitization was a “huge watershed event for the industry, and validation,” said Justin Chang, CEO of Barrack’s Colony American Homes, which has about 17,000 homes. “At the beginning, there were lots of questions about whether this is an industry or a trade. I haven’t had anybody ask me that in a long time. It’s clearly a viable business. We’re proving that; Blackstone and American Homes 4 Rent are proving that.”
While the single-family rental market is huge, with almost 14 million rental houses in the U.S., the institutional component eventually will comprise a handful of dominant firms, similar to other niche real estate sectors like public storage, according to Jade Rahmani, an analyst at Keefe Bruyette & Woods Inc. in New York.
“The bigger you are, the more efficient it becomes,” Rahmani said in a telephone interview.
The industry is being bolstered by increased demand for rentals after more than 5 million homes were lost to foreclosure and as tight lending standards limit buying. The U.S. homeownership rate, which reached a record 69.2 percent a decade ago, dropped to a 19-year low of 64.8 percent in the first quarter, according to the Census Bureau.
“We’ve got this extraordinary demand for the product,” said Gary Beasley, co-CEO of Oakland, California-based Starwood Waypoint. “Homes that have been on the market for 90 days and over are 95 percent leased.”
Rising home prices and the costs of managing scattered rental properties are causing some smaller landlords to look for an exit, according to Singelyn. American Homes 4 Rent bought Beazer for about $263 million in debt and stock, its largest bulk acquisition so far. Beazer, which started in 2012 with $100 million in backing from investors led by buyout firm KKR & CO., was too small to compete, Singelyn said.
“They wanted to stay in the business,” he said. “They just didn’t think they had the scale to compete effectively.”
The larger companies have found different ways to use their scale to reduce costs and increase efficiencies, buying paint, flooring and appliances wholesale from national suppliers, for example. American Homes 4 Rent routes all rental queries and tenant questions from its markets in 22 states to a center in Las Vegas that fields about 60,000 calls a month, Singelyn said.
The biggest potential savings may come from reducing turnover. Each time a tenant leaves, it costs the equivalent of four- or five-months’ rent, including vacancy time, leasing fees and expenses to cover new paint, flooring or carpeting, said Laurie Hawkes, president of American Residential Properties Inc., a Scottsdale-based REIT with about 7,000 houses.
Single-family dwellers are often less mobile than apartment renters, because they have children who want to stay in the same schools, according to Hawkes, who said some tenants are renewing leases for the fifth year.
Executives of the biggest single-family companies compare their business models and metrics to the apartment industry, which in the 1990s was transformed by firms creating corporate structures and then financed with institutional capital.
Apartment REITs report about 50 percent turnover annually, according to data compiled by Bloomberg. Turnover was about 25 percent at Colony American Homes, according to Chang. It’s about the same at Blackstone, according to a report by Morningstar Credit Ratings LLC. American Homes 4 Rent and American Residential Properties had 28 percent turnover rates in their most recent quarters.
Bigger may not always be better for single-family rental operators. Institutional funds that have internalized property management have to be able to maintain thousands of properties that were initially serviced by local and regional groups, said J.D. Asbell, a landlord with about 175 houses in Kansas and Missouri who also renovates and sells homes to Wall Street-backed firms.
“This is a hard business to run,” said Asbell, who has been renting homes since 1993. “The management is always going to be an issue for the big funds. That’s the key to this long term, keeping the houses occupied and getting out bad tenants that aren’t paying.”
While big landlords are making bulk purchases, they also are getting choosier about the homes they buy from other operators, according to Jack Bevier, partner at Dominion Group, which purchases and renovates homes to rent in Atlanta and Baltimore.
Dominion last month sold 127 of its Atlanta homes to Rochester, New York-based Broadstone Real Estate LLC for $10 million, and 50 more houses are currently under contract.
“All of their boxes have gotten smaller and they are pickier about new acquisitions than they had been in 2012, when there was a feeding frenzy,” Bevier said.
Some early entrants are selling to individuals rather than doing bulk deals to repay investors, especially in West Coast markets that saw rapid price appreciation.
Gregor Watson, whose Dwell Finance now owns about 5,000 rentals, has sold about 200 of the first houses he bought, mostly in the San Francisco Bay area, where prices have climbed more than 60 percent since 2009, when he began buying in the post-bubble trough. Almost all of the buyers were owner occupants, who pay a higher price than institutional landlords, since they don’t have expenses such as property management, leasing fees or vacancies, according to Watson.
The negotiation process is also easier with individual buyers, said Jonathan Shechtman, portfolio manager for residential strategies at Axonic Capital LLC, a $2.1 billion investment firm based in New York.
“We would much rather sell to John and Jane Doe looking at granite counter tops and stainless-steel appliances than institutional money looking at price based on the capitalization rates of the home,” he said.
Larger firms also are diversifying strategies as the homebuying spree fades. Progress Residential, which has more than 10,000 homes in 12 states, is shifting purchases to parts of the country where home values have seen fewer gains, and acquiring newly-constructed houses along with nonperforming loans, known as NPLs, according to President Curt Schade.
“Our first choice is always to modify loans and keep the homeowner in place,” Schade said. “Our primary focus isn’t to use the NPLs to gather real estate.”
American Homes 4 Rent, Starwood Waypoint, Altisource Residential Corp. and Axonic are also buying nonperforming loans to expand their holdings of rental properties.
Instead of increasing his wager on single-family rental housing, Philips of Twinrock started buying apartments six months ago. His Newport Beach, California-based firm has spent $50 million on 1,300 units in markets such as Tulsa, Oklahoma, that offer higher returns than coastal cities like New York or San Francisco.
“Multifamily is time-tested, more of a wealth generation investment product,” he said. “It’s easier to manage.”
Twinrock’s target for liquidating its single-family rental funds is next year through 2017, so they’re not in a rush to sell, Philips said. He began to repay investors last year, after refinancing the portfolio with a bank loan in May 2013, before interest rates jumped.
“Our timing was pretty excellent,” Philips said. “Sometimes, it’s better to be lucky than good.”