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.”
Race For Space Pushing Up Suburban Rents
America’s mega landlords have thrived since Covid-19 set off a scramble for suburban homes.
Big companies that own single-family homes are raising rents at the fastest rate since they emerged from last decade’s foreclosure crisis, capitalizing on a rush for suburban housing.
Though millions of Americans are still struggling to pay rent and at risk of eviction, the bet on six-figure-earning suburbanites by companies such as Invitation Homes Inc. and American Homes 4 Rent has so far been pandemic proof.
Occupancy of the hundreds of thousands of houses collectively owned by these companies is at record highs. Timely payments are in line with historical rates. Tenants are accepting rent increases instead of moving out. New renters hunting for home offices and outdoor space are paying up to move in.
A Covid-19 vaccine might make moving to the suburbs less urgent for some, but rental executives and investors expect favorable demographic and housing-market dynamics to outlast the pandemic.
“The demand we see today is totally insatiable, and it’s growing,” said David Singelyn, chief executive of American Homes 4 Rent, which owns more than 53,000 houses in 22 states and collects an average monthly rent of $1,686.
Asking rents for available properties owned by big home-rental firms jumped 7.5% in October, according to real-estate analytics firm Green Street. It was the fifth straight month of year-over-year increases and the biggest since the firm began tracking in 2014, when financiers were still gobbling up foreclosures.
Mom-and-pop operators and individual investors who own most of the country’s 16 million rental houses are also raising rents. But not as aggressively as America’s mega landlords, who use computer programs to match rents with demand and have their own investors to please.
September single-family rents climbed an average of 3.8% from a year earlier across 63 markets regardless of the owner, according to John Burns Real Estate Consulting. No market declined.
Increases in excess of 5% came in corporate-landlord strongholds Atlanta and Phoenix, but also in Middle America, around Memphis, Minneapolis and Kansas City, as well as in the West Coast’s less-expensive inland markets, like Sacramento, Calif. and Portland, Ore.
“Landlords are able to raise rents right now at a rate that is high in normal times,” said Rick Palacios Jr., John Burns’s head of research. “It’s ridiculously high when you put it in a backdrop of a recession”
The situation speaks to the uneven economic recovery. Multitudes of Americans remain unemployed and without the means to make up for missed rent payments once eviction moratoriums are lifted. Meanwhile, work-from-home professionals have kept earning and are looking for more living space.
American Homes 4 Rent and larger rival Invitation Homes are up 60% and 71%, respectively, since shares bottomed on March 23. The S&P 500 has climbed 59% since the market nadir. Shares of Toronto’s Tricon Residential Inc., which owns about 22,000 U.S. houses, have nearly doubled.
Progress by Pfizer Inc. and partner BioNTech SE toward a Covid-19 vaccine on Monday lifted shares of beleaguered apartment owners, whose tenants tend to be lower earners and most affected by the stalled service economy. Shares of single-family landlords and home builders declined on hopes that the pandemic will be brought under control with shots instead of lockdowns, weakening the suburbs’ pull.
Wall Street is betting on rental homes long term, though. Wealth managers, private-equity firms and other big investors have pumped billions of dollars into home-rental operations this year so that they can add houses.
These investors anticipate a wave of high-earning but debt-saddled millennials forming families and alighting to the suburbs in search of good schools and granite countertops.
Many are millennials drawing good salaries but carrying so much student debt that buying a home is difficult even with historically low mortgage rates.
The inventory of for-sale homes relative to the number of U.S. households is at its lowest level in decades, which has pushed prices to records in many markets. Builders have ramped up construction, but they aren’t adding much at the low-end. Just 10% of new homes sell for less than $200,000, down from nearly 45% a decade ago, according to John Burns.
American Homes 4 Rent executives say many new tenants are arriving from expensive coastal cities. The number of Californians applying to lease the company’s houses in Arizona, Nevada and Texas have been roughly twice what they were in 2019, operations chief Bryan Smith told investors last week on a call to discuss the company’s third-quarter earnings. Migration to Florida from New York and New Jersey has been similarly strong.
The Agoura Hills, Calif. company said that new lease rates for the summer quarter rose 5.9% and that October was up 7% from a year earlier. For a few months the company renewed expiring leases without increases, but by August it had resumed asking tenants to pay more at renewal. American Homes 4 Rent expects fourth-quarter renewals will rise 4%.
Invitation Homes, which owns more than 79,000 houses and collects an average monthly rent of $1,881, raised new lease rates 5.5% during the third quarter. Renewals rose 3.3%. Executives say they have been more aggressive since September, when the quarter ended, but are mindful of risking move outs.
“We’re not going to push too hard into the winter here when we don’t have a vaccine and we know that there may be some moments where there’s going to be some uncertainty,” said Charles Young, the Dallas company’s operation chief. “We’re just trying to find that right balance.”
Rental Home Construction Climbs As Purchase Prices Surge
Investors are betting Americans will keep flocking to spacious suburban living even if they can’t afford to buy.
There haven’t been so many single-family homes under construction in the U.S. since 2007, yet many of these new houses won’t be for sale.
Investors are building tens of thousands of houses expressly to rent in a bet that Americans will keep flocking to spacious suburban living even if they can’t afford to buy homes.
The Covid-19 pandemic sparked a race for space among Americans, and home prices have surged to records. The gains have outpaced wage growth, straining affordability despite historically low borrowing costs.
Homeownership is unaffordable for average wage earners in 55% of U.S. counties, up from 43% a year earlier, according to Attom Data Solutions, a real-estate analytics firm. Meanwhile, single-family landlords have reported record occupancy and fast-rising rents since the pandemic began.
Individuals, family offices, pension funds and Wall Street’s boldfaced names are shoveling billions of dollars into build-to-rent projects. Home builders are embracing the business of selling houses wholesale to landlords, and even teaming up with them to build neighborhoods that blur the line between houses and apartment complexes.
“Every institutional investor is considering this space,” said Trevor Koskovich, who heads investment sales at the property-deal adviser NorthMarq and recently represented the seller of five gated rental communities around Phoenix. They fetched $235.5 million from a Chicago investment firm.
The 943 one- and two-bedroom houses have their own street addresses, include slivers of outside space and share swimming pools. Their developer, Christopher Todd Communities, has teamed up with the builder Taylor Morrison Home Corp. to replicate these rental villages across the Sunbelt.
“Our confidence in this opportunity has only increased over the last year,” said Sheryl Palmer, Taylor Morrison’s chief executive. Darin Rowe, who runs the home builder’s rental business, expects the portion of new U.S. homes that are sold straight to investors to exceed 5% over the next few years, up from the historical average of 1% or so.
From clustered cottages to cul-de-sac McMansions, more than 50,000 houses were built specifically to serve as rentals during the 12 months ended Sept. 30, according to John Burns Real Estate Consulting. That tally—well above the 31,000 average over the past four decades—is likely low since it misses one-offs in which end use isn’t specified by building permits as well as houses in typical subdivisions that are sold to investors, said Rick Palacios Jr., the consulting firm’s head of research.
Executives at LGI Homes Inc., for instance, have said that bulk sales to landlords would account for as much as 10% of the builder’s 2020 home sales, or as many as 900 houses.
The build-to-rent boom was sparked a couple of years ago, when the megalandlords that emerged from the housing crisis were looking for ways to grow after they soaked up the flood of cheap foreclosures.
Big companies including American Homes 4 Rent and Tricon Residential Inc. took to buying houses on the open market. But there is competition from regular house hunters for a limited number of desirable properties at the lower end of the market.
“The banks and lenders stopped providing financing to the lower middle class and so home builders stopped building entry-level homes,” said Thibault Adrien, whose Lafayette Real Estate began buying foreclosed homes a decade ago. “The last way to increase our exposure was to build our own.”
It was counterintuitive for businesses built on deeply discounted properties to start paying more than replacement cost to add houses, said Mr. Adrien. But after testing the strategy outside Tampa, Fla., Lafayette went all in.
Building made it possible for investors to outfit houses with their preferred fixtures and finishes at the onset. Plus, landlords found that renters were willing to pay premiums to move into brand-new houses.
“Imagine if consumers could only lease old cars, not new cars,” said Mr. Palacios. “That’s how single-family rentals have been.”
Lafayette teamed up with the private-equity firm Carlyle Group Inc. and has about 1,200 houses recently completed or under way.
American Homes 4 Rent, which owns about 53,000 houses, formed a $625 million venture with J.P. Morgan Asset Management to add to what was already the most prolific output of new rentals. American Homes 4 Rent has built 2,500 houses in more than 60 neighborhoods and has dozens more subdivisions in development.
Its Celery Cove subdivision outside Orlando, Fla. is representative, with 37 three- and four-bedroom houses that lease monthly from the $1,700s.
Tricon has a similar, $450 million partnership to build rentals with the Arizona State Retirement System. The Toronto firm said it is considering raising another fund, which could have $1 billion of spending power, to buy homes from builders.
Those homes are generally indistinguishable from owner-occupied properties and can be bought and sold one by one. Many investors are opting for projects that are closer to apartment complexes.
Investors and lenders said hybrid projects, such as Christopher Todd’s, can be financed more favorably than the same number of scattered homes while having advantages over apartments, such as being able to lease units as they are ready rather than waiting for an entire building’s completion. Developers can also adjust plans if demand falls short.
“That really mitigates some of the risk,” said Ivan Kaufman, chief executive of Arbor Realty Trust Inc., which has originated about $1 billion of loans to build-to-rent projects over the past two years.
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