The 2007 to 2009 recession helped usher in a new institutional real estate asset class. Do single family real estate investment trusts (REITs) have legs?
A New Old Market
Investor-owned single family homes aren't new. However, because of the complexities of managing large numbers of single family homes, large investors generally shied away from it. The housing-led recession changed things.
Suddenly, institutional buyers could come in and buy large quantities of cheaply priced homes. Moreover, the homes were often available in regional clusters, affording economies of scale. Add in technological advances, such as using the Internet to manage leasing and repairs, and what was once too difficult suddenly became viable.
The Big Guy
Blackstone (BX) has quickly built itself into the 800 pound gorilla in the space. It owns more than 30,000 homes across the country. That's a huge portfolio relative to the other players in the space. However, it helps expose some of the limitations of institutional ownership. For example, if a water heater breaks, Blackstone has to repair it. That repair only benefits one tenant out of 30,000.
In fact, every repair requires parts and labor that benefit only one property. While the company can purchase water heaters in bulk, saving some money, the labor costs wind up being multiplied by every single repair. And while 100 properties in reasonably close proximity to each other is a benefit, it still doesn't compare to a single building housing a hundred residents. Two simple repairs could require an hour of drive time.
These issues are amplified by the number of homes Blackstone owns, but the company's overall diversity actually makes it one of the safer ways to play the institutionalization of the single family market. The limited partnership's business is tied tightly to Wall Street, which might scare off some investors, but the top line has headed higher for the past four years.
Distributions vary based on performance, so there is some volatility on that front. Still, with a yield of around 5.8% based on the latest quarterly dividend, it would be a good option for investors looking for single family home exposure without putting all of their eggs in one basket.
A Real Market
The thing about the single family home market is that more than just Blackstone sees opportunity. For example, Wayne Hughes, the founder of giant Public Storage, has purchased around 10,000 homes too. If the man who basically created the storage rental market sees opportunity, investors should seriously consider taking a closer look.
Two Good Options
Silver Bay Realty Trust (SBY) and American Residential Properties (ARPI) are the two most direct plays on owning single family homes. Both real estate investment trusts are relatively new, so there isn't much history to look at, but the entire industry is new so that isn't a stigma.
American Residential Properties is the younger of the duo by a month or two. The REIT owns more than 2,500 homes in Arizona, California, Florida, Georgia, Illinois, Indiana, Nevada, North Carolina, South Carolina, and Texas. One factor that sets it apart is that, at the end of the first quarter, the company's portfolio was 86% leased.
So it has a relatively stable business today but also has a little room to grow the rent roll. In addition, it provides management services for another 600 properties owned by others, a relatively reliable sideline. The company hasn't announced a dividend yet, but investors shouldn't expect much on the income front right now. This is really a growth play.
Silver Bay has a portfolio of around 3,400 homes across Arizona, California, Florida, Georgia, Nevada, North Carolina, Ohio, and Texas. That said, about half of those properties were vacant at the start of the year. That makes the REIT more risky, but also provides a great deal of internal growth potential. Indeed, all management needs to do is rent out the half of the portfolio that's empty and it can improve results by 50%.
The foreclosed homes it owns often need a lot of repairs, so that's no slam dunk. But, it does suggest more of a growth opportunity than American Residential offers. Silver Bay recently initiated its dividend at a mere penny a share. That's little more than a token and investors shouldn't be expecting much more in the near term.
It's About the Market
Investors interested in this space should consider an investment as “getting in on the ground floor” of a new market. There are lots of risk, and the big returns could be a few years away. That said, for more aggressive investors, Blackstone, Silver Bay, and American Residential all offer access to a market that simply didn't exist before. That's not only exciting, but based on the investors entering the space, a big potential opportunity.