Smart Wall Street Money Builds Homes Only To Rent Them Out (#GotBitcoin?)
Companies that once gobbled up foreclosed suburban homes are now acquiring new ones for the rental market. Smart Wall Street Money Builds Homes Only To Rent Them Out
Millennials aren’t the only ones having a hard time finding houses to buy. So is Wall Street.
A shortage of houses in the entry-level price range where first-time buyers and big rental-home companies both shop is prompting some institutional landlords to start building new ones themselves.
These companies are racing to meet demand for rental homes from a wave of young families too saddled with student debt to buy, as well as from investors wagering that the suburban renter class that swelled after last decade’s housing crash is here to stay.
Acquiring newly constructed homes represents a sharp turn for institutional landlords such as American Homes 4 Rent and Tricon American Homes. Those companies and others like them emerged as bargain hunters at the depths of the housing crisis, when they gobbled up foreclosed homes by the thousands for far less than it would cost to build new ones.
The idea then was to accumulate enough homes in specific cities to make maintenance efficient and rent them to families who wanted to maintain suburban lifestyles and keep their children in good schools, but who couldn’t buy because of beaten-down credit and meager savings.
Surging property values since the recession have made bargains on houses harder to find. Yet those higher home prices have also improved the outlook for the rental business by making homeownership more difficult for millions of millennials.
Agoura Hills, Calif.-based American Homes 4 Rent has been building houses throughout the Southeast to add to its pool of more than 52,000 rental homes across the country. Chief Executive David Singelyn told a recent gathering of rental investors that in some places the company can build houses for about the same price that it costs to buy existing ones.
By building houses, American Homes avoids sales commissions and renovation costs. It can outfit homes with its preferred fixtures and finishes at the onset, and charge higher rents than it can fetch for its older homes, Mr. Singelyn said.
“You’re also going to have a brand new asset that has much lower maintenance costs over probably the first 10 years,” he said.
Tricon American Homes, a unit of Toronto-based Tricon Capital Group Inc., started adding new homes to its stable last year and has hundreds more in the works. The company, which has about 17,000 U.S. rental homes, made a deal in the summer with a Texas pension fund and a Singaporean sovereign-wealth fund to go on a three-year, $2 billion homebuying binge. The group says it intends to acquire as many as 12,000 single-family properties.
Tricon has purchased new houses and lots from builders and agreed to take big chunks of subdivisions up front to help developers get projects off the ground. Kevin Baldridge, Tricon’s president, said the company recently agreed to buy an entire 135-home phase of a subdivision outside of Houston he likened to a “horizontal apartment community,” and is weighing whether to start building homes itself.
The build-to-rent strategy is more about adding rental income than finding homes that will rise in value, said Terry Chen, Tricon’s acquisitions chief. “What we’re really after is the durable cash flow,” he said.
Not all big rental investors like the idea of building rental homes.
At the same industry gathering last month in Scottsdale, Ariz., where Messrs. Singelyn and Baldridge touted their build-to-rent strategies, Invitation Homes Inc. co-founder Dallas Tanner said he would listen to pitches from builders but didn’t want the Dallas-based company—the country’s largest single-family landlord with more than 82,000 houses—to take on development risk or push too far from city centers to try to make the numbers work on new construction. “It’s just not what we’re focused on,” Mr. Tanner said.
Some smaller investors said they have recently been getting their hands on brand-new homes at significant discounts without having to lift a hammer. They said they do it by approaching home builders during the waning days of fiscal periods, when executives are eager to jettison inventory to hit quarterly sales targets.
Bruce McNeilage, whose Nashville, Tenn.-based Kinloch Partners LLC flips packages of occupied rental homes in the Southeast to larger investors, has augmented his own construction projects with homes he acquires from builders on the cheap. By paying cash, he said, he is able to close deals in a day or so, as opposed to the months it might take someone who has to secure a mortgage. That approach has enabled him to squeeze discounts of up to 15% from builders in recent weeks, he added.
He said he pays full price so public records don’t show a decline in neighborhood sales prices and reaps the discount after closing through rebates from the builder. He also agrees not to use yards signs to advertise rentals, to avoid raising hackles among the neighbors.
Mike Kalis, who used to work for a big home builder but now runs Marketplace Homes, a Livonia, Mich.-based seller and manager of rental houses, said investors have to approach developers delicately. When home prices crashed a decade ago speculators walked away from deals in droves, leaving builders holding unsold homes—many of which were scooped up on the cheap during the recession by early rental investors.
“You kind of have to do it very quietly where they don’t know that you’ve picked off 30 homes that you’re going to convert into rental,” Mr. Kalis said.
Blackstone Starts Selling Out of Home-Rental Empire
Private-equity firm late Tuesday sold more than $1 billion of shares of Invitation Homes.
Blackstone Group LP is cashing in on its bet on the suburban rental class.
The private-equity firm late Tuesday sold more than $1 billion of shares of Invitation Homes Inc., the giant single-family home landlord it launched following the financial crisis in a wager that many Americans would be willing to rent the suburban lifestyle they could no longer afford to own.
The share offering is Blackstone’s second since March and comes as Invitation’s shares are trading at a record, reflecting rising rents and strong demand for the 80,000-odd homes it owns in 17 markets around the country. Blackstone, which invested in Invitation from private-equity funds that are approaching deadlines to return cash to investors, now owns about 27% of Invitation’s shares, down from about 34% before the latest sale.
Invitation shares traded down slightly on Wednesday to $25.27, just below the $25.30 that Blackstone received in the offering. The stock is up more than 26% since debuting in a February 2017 initial public offering.
Those gains have come this year as Invitation and its main rival, American Homes 4 Rent , up 21% in 2019, have reported rising rents and occupancy rates along with reduced expenses. Concerns about whether the companies would be able to profitably manage tens of thousands of far-flung properties resulted in tepid responses to their shares until recently.
Investors have come around on the nascent rental-home sector as the companies have become more efficient operators and the national homeownership rate weakened amid an otherwise strong economy. Both companies target homes with at least three bedrooms in good school districts in hopes of attracting families who will stay in homes longer and pay more than apartment renters.
Invitation’s first-quarter results, which showed an uptick in tenants renewing leases, showed that its “renters may prove far stickier than once assumed,” Raymond James analyst Buck Horne said in a note to clients this month.
Blackstone joined several other financiers in gobbling up deeply discounted homes during the foreclosure crisis. The firm teamed with a group of real-estate investors in Phoenix and bought its first houses around the Arizona capital in April 2012. From there it spent roughly $10 billion, much of it borrowed, buying houses in hot job markets around the country. In 2017, Invitation merged with a rival rental-home operator formed by real-estate tycoons Barry Sternlicht and Tom Barrack.
So far Blackstone has reaped roughly $2 billion from its two share sales this year. It also has received a $682.5 million payout from Invitation before the company was public and about $197 million in dividends paid out on the firm’s shares since the IPO.
Blackstone Moves Out Of Rental-Home Wager With A Big Gain
firm sells the last of its stake in invitation homes, the company it created after the housing crisis to scoop up foreclosed properties and rent them out.
blackstone group inc. has closed the door on its giant rental-home gambit.
the investment firm late wednesday sold the last of its stake in invitation homes inc., invh -1.51% the company it created after the housing crisis to scoop up tens of thousands of foreclosed single-family properties from the courthouse steps, spruce them up and rent them out.
blackstone began whittling its position in march through a series of bulky stock offerings. the last of which, on wednesday, was for nearly 11% of invitation’s shares and brought back about $1.7 billion. including dividends paid before and since invitation’s 2017 initial public offering, blackstone reaped about $7 billion in all, according to securities filings. that’s better than twice what the firm invested.
blackstone’s wager was that last decade’s historic collapse in home prices and advances in cloud computing and mobile technology would enable it to buy enough suburban houses to achieve economies of scale and then to efficiently manage tens of thousands of far-flung rental properties thereafter. to do so would be to tame the final frontier in real estate for institutional investors and gain a toehold in the largest asset class in the world: the u.s. single-family home.
“the hardest part wasn’t buying the homes, it was building the business,” blackstone president jonathan gray, who headed the firm’s real-estate business when it launched invitation, said in an interview. “we created a company from scratch. it was created on a yellow pad. it was an idea. now it’s a real business.”
as the number of foreclosed homes swelled and home prices hit bottom eight years ago, blackstone and other big real-estate investors pounced. blackstone, hotelier barry sternlicht and donald trump confidante tom barrack sent buyers to auctions with duffel bags of cashiers checks and instructions to buy anything that was cheaper than it cost to build new, not too old, big enough for a family and in a good school district.
blackstone formed invitation with a group of phoenix investors who were buying trailer parks before the crash. they were led by dallas tanner, invitation’s 39-year-old chief executive, who at the time was fresh out of graduate school.
starting with a three-bedroom stucco house on the outskirts of phoenix that it bought at auction for $100,700, invitation went on a $10-billion homebuying spree. its buyers streamed into foreclosure auctions across the sunbelt spending at a clip of more than $100 million a week. in about 18 months, it had bought 30,000 homes one by one and spent another $2 billion or so fixing them up.
when the flood of foreclosures subsided, the companies hit the open market looking for houses. they employ sophisticated house-hunting algorithms and increasingly build homes expressly to rent. invitation eventually absorbed the rental empires of messrs. sternlicht and barrack.
invitation’s shares received a tepid response at the onset. lately, though, they have soared as the company has reported record occupancy and rents. its shares are up 50% this year despite blackstone liquidating its majority stake. rival american homes 4 rent, which owns about 53,000 homes to invitation’s 82,000, is up 34% this year.
the two companies compete at the high end of the rental market. their typical tenants aren’t quite 40, have a child or two and a household income of about $100,000. the landlords have capitalized on both the willingness of relatively high earners to rent the suburban lifestyle they can no longer afford, and disinterest in homeownership from younger americans who lack confidence in their employment and the housing market.
though homeownership has bounced back from the 50-year lows reached in 2016, it remains well below last decade’s rates.
mr. tanner said that blackstone’s “belief in the validity of our business model and their investments set us on a path to meet an underserved need in the housing market…we look ahead knowing we are well positioned to continue to help families live in great neighborhoods without the cost of homeownership.”
Wall Street Bets Virus Meltdown Gives Landlords A Chance To Grow
Largest home-leasing companies have strong occupancy, rent collection and expect demand for suburban houses to rise.
Wall Street’s wager on high-earning suburban renters is paying off, and it is raising its stakes.
Investors are flocking to America’s mega landlords, drawn by signs the companies that emerged from last decade’s foreclosure crisis owning huge pools of rental houses are weathering the economic shutdown far better than feared. Many also expect that the coronavirus pandemic will make suburban single-family homes both more desirable and more difficult to buy for even the relatively well-heeled.
Share prices of the largest home-rental companies, such as Invitation Homes Inc. and American Homes 4 Rent, have outpaced the broader stock market since they and the S&P 500 bottomed in late March. Invitation is up 57% since then and American Homes has gained 36%, compared with the S&P 500’s 31% climb.
Invitation, the country’s biggest single-family rental company, last week reported record occupancy of its roughly 80,000 houses and better-than-normal on-time rent payments in May—despite the pandemic leaving millions of Americans unemployed.
American Homes 4 Rent, the second largest with about 53,000 houses, said it isn’t much below its own pre-pandemic levels of rent collection or occupancy. The company said a $225 million venture to build rental houses that it struck with J.P. Morgan Asset Management in February was enlarged in recent weeks to $650 million.
Redwood Trust Inc. executives said that the bundler of real-estate debt was preparing to offer investors a fresh pool of loans to single-family landlords, even after the value of its mortgage-related assets collapsed.
Amherst Residential, which manages about 20,000 houses for big investors such as hedge funds and pensions, called off its planned acquisition of 15,000-home rival Front Yard Residential Corp. over the difficulties of integrating the two companies during the pandemic, including back-office functions in locked-down India. Amherst paid Front Yard a $25 million breakup fee, loaned it $20 million and bought $55 million of its shares at the above-market acquisition price.
Amherst still wants to add houses. President Drew Flahive said in an interview that the firm is negotiating separate house-hunting pacts with two large insurance companies.
“The amount of interest we’ve gotten in the last two or three weeks in terms of setting up private-market investments has really accelerated,” Mr. Flahive said. “We’re likely to see a really pronounced capital flow into single-family real estate.”
Investors weren’t so sure about rental houses at the onset of the pandemic. Bonds backed by rent payments traded down from face value. Shares of Invitation and American Homes plunged on worries about how many people would pay their rent. But the stocks have bounced back. Rent collections and tenant retention have proven far better than commercial property, such as office towers and shopping centers, and even apartments, which tend to have smaller household sizes and incomes than rental houses.
“Investors will be able to breathe a deep sigh of relief,” Raymond James analysts wrote in a note to clients. “Residential rent collection results…have been far more resilient than initially feared, proving to be a steady ship in a sea of turmoil.”
Invitation executives attributed the company’s record occupancy and strong rent collection to two main factors: the dual-income households earning about $110,000 that are its typical tenants and a shift to promoting occupancy of its houses with discounts instead of pushing up rents.
The company bought $28 million of houses in April but said it would pause purchasing once it completes another $19 million worth that it has under way. Meanwhile, it is hoarding cash, including $152 million of security deposits, in case tenants run into problems paying rent in the coming months.
“We will be able to pivot quickly to resume buying when the time is right,” said Ernie Freedman, Invitation’s finance chief.
Both Invitation and American Homes said there has been an uptick in leasing activity in recent weeks. That is partly thanks to their earlier investment in self-showing technology, such as electronic deadbolt locks, that was intended to eliminate the cost of staffing showings for so many scattered properties.
After a slow second half of March, April showings for American Homes rose 5% over the previous year and the company recorded some 9,500 showings during the last weekend of April and the first weekend of May. That is about six per available property, said operating chief Bryan Smith.
Rental executives say some recent move-ins chose to rent instead of buy given the economic uncertainty. Others have leased houses to get out of apartment buildings, given the contamination risks associated with close living.
“You have this squeeze from both sides,” said Amherst’s Mr. Flahive.
The executives say it is unclear whether historically low borrowing costs will prompt a surge of homebuying, or aspiring homeowners will be stymied by more restrictive mortgage lending. Either way, there may not be enough new suburban homes to meet demand, given the slowdown in construction.
“We’re still going to have the fundamental lack of supply to meet normal household formation,” said Invitation’s 39-year-old Chief Executive Dallas Tanner, who is the same age as the company’s typical tenant. “There are 65 million people between the ages of 20 to 35 coming our way.”
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