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, is preparing to sell.
“We didn’t want to be the last one standing when the music stopped,” said Philips. “We view this as a trade, not as a business.”
The 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.
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“That consolidation phase will be bigger than the original buy phase,” said Tom Barrack, whose Colony American Homes is the third-largest single-family landlord. “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, in June bought Beazer Pre-Owned Rental Homes, 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, 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,” said David Singelyn, chief executive of Agoura Hills, Calif.-based American Homes 4 Rent. “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, whose Invitation Homes division is the largest single-family landlord, with about 45,000 houses, has lowered 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.
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, the first single-family landlord to go public, said it plans 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 in New York.
“The bigger you are, the more efficient it becomes,” said Rahmani.
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, Calif.-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, 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, a Scottsdale, Ariz.-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.
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 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, 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.