"Arguably when you get scale, you can hire your own plumbers and electricians, and maybe help costs go a little lower that way," says Richard Green, director of the USC Lusk Center for Real Estate. "But it's still a mystery to me how they can manage the properties efficiently enough and get the right yields."
Or as Auction.com's Rick Sharga puts it: "It's hard enough to manage a 30-unit building, but it's incrementally more difficult to manage properties that are scattered all over the place."
Given the management challenges, another way to earn a decent return would be to boost rents, but home prices are rising faster than rents at the moment, making that avenue questionable.
Critical mass in limited markets is key to achieving greater economies of scale and American Residential Properties (ARPI +0.7%) - which owns 7K homes in 12 states - owns 1K+ homes in core markets like Phoenix, Houston, Dallas, and Atlanta, and plans to have 500 homes by year-end in five other markets.
American Homes 4 Rent (AMH +0.1%) started with 49 markets, but has whittled that down to about 30, and Starwood Waypoint (SWAY -0.3%) aims for at least 1K homes in markets where it does business.
The companies are also investing in technology to aid in things like determining how much to pay for a home to managing maintenance. Starwood has a system tracking 400K neighborhoods to figure out fair prices, and a revenue management system based on traffic and rent prices allowing it to optimize rents.
Likely IPO candidates: Blackstone's Invitation Homes, with about 43K homes, and Colony Financial's (CLNY +2.7%) Colony American Homes with more than 8K rentals. Reven Housing (RVEN) - with 177 homes mostly in Houston - has filed with the SEC to raise up to $29M and uplist from the pink sheets.
An interesting study from Kroll finds single-family rental properties whose rent payments were bundled into securitizations in Blackstone's initial deal rent for just 94% of market rate. Blackstone's issuance was followed by one by American Homes 4 Rent (AWH -0.3%) as well as another from Blackstone.
“It may be a function of the size of the properties or the age of the properties,” says Kroll's Michelle Patterson. Or perhaps the issuer was in such a hurry to get the homes filled and the debt deal done that properties were rented for less than they otherwise would have been. A person familiar with Invitation Homes (Blackstone) says rental rates are expected to converge with market rates over time.
The first securitization received strong demand from investors, but they asked for beerier yields the next time around.
Zillow's April Real Estate Market report has national home values slipping 0.1% in April to $170,200, the first month-over-month decline since about the end of 2011. On a year-over-year basis, home values gained 5.3%. The company's current forecast calls for values to rise 2.2% in the year ending April 2015, about a third of 2013's appreciation.
Values fell in April even as inventory continues to tighten, with the number of homes listed for sale on Zillow slipping 0.4% annually last month, the 4th consecutive month of decline. Conditions are most "acute" at the lower end of the market which has become the sandbox of institutional players like Silver Bay (SBY -0.1%), American Homes 4 Rent (AMH +0.3%), American Residential Properties (ARPI +0.4%), and Starwood Waypoint (SWAY +0.5%).
Purchased 689 single-family homes in Q1 for $109M, boosting portfolio size by 11% to 6,792 homes ... "and we still see a robust supply of high-quality homes." About 81% of homes were leased as of the end of Q1. Of homes owned six months or longer, 89% are leased, up from 86% at end of 2013.
Core FFO of $2.2M or $0.07 per share vs. break-even in Q4, and up from $800K or $0.04 one year ago.
In April, another 232 homes were purchased for about $36M, and another 197 homes were put under agreement for a total of about $32M.
At the peak last summer, Blackstone's (BX) Invitation Homes unit was buying about $125M of homes per week, but - with good deals harder to find - has slowed the pace to $30M-$40M, and global real estate chief Jonathan Gray suggests it could drop further. “It’s not going to get larger," he says. "There’s less and less distressed housing ... We have slowed down [buying] significantly in a number of markets as a result of prices going up."
Gray expects real estate will do just fine without Blackstone's giant-sized purchases. "We are an increasingly smaller and smaller part of the story now that the recovery has plenty of momentum on its own."
The pure-play single-family rental stocks' performance continues to disappoint, with the two public the longest - Silver Bay (SBY +0.3%), and American Residential Properties (ARPI -0.9%) - both near their lows since issuance. Others: American Homes 4 Rent (AMH -0.6%), Starwood Waypoint (SWAY -1.8%).
Colony American Homes is selling $513.6M worth of paper backed by rental payment on 3,399 single-family properties in 20 metro areas in 7 states. It would be the 2nd such deal following Blackstone's landmark offering late last year (American Residential Properties has hired Deutsche to put together what would be deal #3).
A $299M tranche of the deal has received a AAA rating from Moody's, Kroll, and Morningstar. S&P has said these rental-backed bonds don't yet meet the criteria necessary for a top rating.
Underperforming in the single-family housing sector today is American Residential Properties (ARPI -2%) after a cut to Underperform at BAML.
Like others in the business, the company is looking for reasonably priced sources of fresh capital and - amid its Q4 results last week - disclosed it's tapped Deutsche Bank to lead a $300M securitization deal for its rental income. Deutsche, of course, led the first such securitization - one from Blackstone late last year.
633 homes purchased for $104M during quarter, 15% more than Q3, and bringing number of homes higher by 12%. Leased properties up 11% to 458; occupancy rate of 75% on total portfolio unchanged from Q3, 86% on properties owned six months or longer, down from 92% in Q3.
Increased renewal rents by 3.4%. Broke even on core FFO.
Funded $18M in short-term private loans; owned $42M of these now, with average interest rate of 11.8%.
Economies of scale? Purchases in Q4 are all over: 291 in Texas, 103 in Tennessee, 88 in North Carolina, 59 in Illinois, 31 in Georgia, 23 in Indiana, and on down the line until 2 each in South Carolina and Nevada.
In the first two months of 2014, company has purchased another 308 homes for about $46M and put under contract another 340 homes for about $53M.
After giving a AAA rating to a portion of the first bonds backed by home rental payments to come to market late last year, Moody's is requesting comments on its proposed methodology. Moody's decision on the first deal was based on the liquidation value of the homes under a "heavily-stressed scenario."
Competitor S&P, as well as Fitch say the paper doesn't yet meet the criteria for them to assign top ratings. In Moody's request for comment, it says when grading the deals it's focused on two sources of cash flow: Rental income and proceeds from the sale of the underlying properties.
American Homes 4 Rent (AMH +0.3%) is prepping a rental bond of its own, and others in the sector like Silver Bay Realty (SBY +1.4%), American Residential Properties (ARPI -1.9%), and Starwood Waypoint (SWAY +1.2%) no doubt have their own plans. Last year's pioneer Blackstone (BX +0.1%) is surely eyeing up a 2nd offering as well.
American Residential Properties Inc is a real estate investment trust. The Company acquires, restores, leases and manages single-family homes as well-maintained investment properties to generate attractive risk-adjusted returns over the long-term.