Single-family rentals stay sexy to investors

Source: Wall Street Journal

The push is on to turn single-family rental homes into an asset class that can be bought and sold on Wall Street. Last week, the Journal reported that publicly traded home-builder Beazer Homes had teamed up with buyout firm KKR & Co. to launch a real-estate investment trust to manage its small portfolio of single-family homes as rentals. Beazer’s REIT is still private, for the moment, but has plans for an IPO to take the company public in the coming years. Others are jumping in as well. Los Angeles-based Colony Capital, led by distressed debt investor Tom Barrack, has also formed a single-family rental REIT, based in Phoenix, with plans to ramp up acquisitions and expand to new markets in the coming months. Since dozens of prominent investors have signaled that they plan to make big bets on the single-family rentals, it’s useful to look at how these ventures are structured. “From the very beginning, we’ve thought of this as eventually becoming a public company,” says Justin Chang, a principal with Colony and acting CEO of Colony American Homes, the private-equity firm’s new rental REIT. “This is a big opportunity, the beginning of an asset class.” In its early stages, Colony’s effort, which started buying up distressed single-family homes about four months ago, looks fairly similar to the strategy pursued by Beazer and other single-family rental investors. Colony says it has raised about $750 million so far, mainly from institutional investors, and has bought about 600 homes s in Arizona, Nevada, California and Colorado. The company expects that by the end of June, it will have bought more than 1,000 distressed homes, and it plans to expand by the end of the summer to Texas, Georgia and Florida. An IPO could happen in the next 12 to 24 months. The stats are similar, too. Colony is underwriting their purchases of distressed homes for rental at cap rates of about 7-9%. What that means is each house Colony American Homes buys is expected to produce an annual rental income equal to about 7% of the house’s purchase price. That is slightly higher than the 5-6% range of yields that most apartment operators in strong apartment markets are making today. Assuming that rents and home values will both increase about 3-5% per year going forward, and as Colony is able to put some leverage on the homes it buys, the company figures that it can give returns of 15% or higher to its investors. These are similar to the types of projections from other single-family rental investor groups, including Beazer. Colony could differentiate itself in two areas. First, the thorn in the side of single-family rental investors has been the issue of management. Apartments work as an asset class because they are comparatively easy to manage: they share amenities and don’t require the kind of individual attention from plumbers or other fix-it workers that homes do. In the past, investors have typically had to employ a third-party property manager to handle their homes. Colony is trying to solve this problem by bringing management in-house. Earlier this year, the company acquired Vineyard Services, a Phoenix-based property manager, renamed it, and made it the official manager for all of CAM’s homes. Paul Fuhrman, another principal at Colony, estimates this will add a few percentage points (between 1% and 2.5%) to the yields they are able to offer investors. Still, even with what they hope is a relatively efficient management structure, Colony is planning to spend about 50% of rent revenues on expenses for each house. Typical apartment operators only spend about 35% of rent rolls on expenses. The other main difference for Colony is that the company has access to thousands of single-family properties that might work as rentals through its deals with the federal government. Colony has bought distressed loans valued at more than $4 billion in seven separate transactions with the Federal Deposit Insurance Corp. over the last few years. Hundreds of these loans have been distressed single-family home loans, which Colony now owns in partnership with the FDIC. Mr. Fuhrman said putting those homes into the new REIT could be an option.

URL to original article: http://www.builderonline.com/builder-pulse/single-family-rentals-stay-sexy-to-investors.aspx?cid=BP:051712:JUMP

For further information on Fresno Real Estate check: http://www.londonproperties.com