Issuers of single-family rental securities defend business models, assert long-term strategies

Issuers of single-family rental securities defended their business models, despite the limited success of their IPOs, at the Keefe, Bruyette & Woods Mortgage Finance Conference in Midtown Manhattan this week.

Issuers of single-family rental securities defended their business models, despite the limited success of their IPOs, at the Keefe, Bruyette & Woods Mortgage Finance Conference in Midtown Manhattan this week.

It was as soon as the single-family securitization asset class was born in late 2013 that the industry-at-large began to question the long-term viability of the sector. But the companies say the next stage in the sector’s development is stabilizing their portfolios for long-term management.

Laing
Laing

“This is a business, not a trade,” said Diana Laing, CFO of American Homes 4 Rent (AMH). “Our primary focus is stabilizing as much of the portfolio as possible.”

As acquisitions slow down, speakers said they aim to stabilize portfolios by improving efficiency with more centralized business models — call centers, leasing offices — and new technologies. They argued that plenty of opportunity for growth and profitability still exists.

AMH has amassed about 38,000 homes since the recession, going public in July of 2013 and issuing $2bn in SFR securities in 2014 and early 2015. The company’s pace of acquisitions has fallen to just 1,000 or so homes per quarter. Each home purchased goes through a three- to six-month renovation before leasing, and the firm plans to boost occupancy to 95% by June.

“As time goes on our asset management strategy will be to always prune and optimize the size and/or efficiency [of the portfolio],” Laing said. “We have slowed down the acquisition machine… we are very focused on markets where we can buy 25 properties, improve NOI and not even have to add a person.”

But, she added: “At any given moment there are one million homes in the foreclosure process we would [still] look at for buying.”

Brien
Brien

However, several of the IPOs for SFR firms have been disappointing, while others have had limited success. American Homes 4 Rent expected to raise $1.25bn through its IPO, but it generated $887m.

“Our total equity cap after the IPO was in excess of $3.5bn, so that was not a disappointment,” Laing said.

Meanwhile, Doug Brien, CEO of Starwood Waypoint Residential Trust (SWAY), a public real estate investment trust, admitted at the conference that “our stock price is not exactly where we’d like it to be.”

But the fundamentals of the business remain healthy, Brien argued, noting that technological infrastructure is key to managing his business going forward, using systems that integrate information for every single home.

“It was the foreclosure crisis that was the catalyst for economic opportunity… but also cloud and mobile computing that made it viable,” he said. “It gave people using iPads in the field everything they needed to make decisions and manage assets.”

The turnover rate on SFR homes, roughly half that of the multifamily sector, speaks to the long-term viability of the business — one of the reasons SWAY is developing “multi-year leases to encourage longer stays.” And having enough geographic concentration is also crucial to managing homes over the long term, he added.

Colony Capital (CLNY) executives — president/CEO Richard Saltzman and executive director/CFO Darren Tangen — also expressed optimism in the long-term profitability of the business, hinting that the firm wants to go forward with postponed plans to go public “sooner than later.”

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Saltzman

“This a business we still like. It’s worked the way we wanted by taking advantage of distress in the residential real estate sector… we bought at very attractive prices and are still buying, at a slower place… we are stabilizing at 90%-plus [occupancy]… we are really starting to raise rents and there is a lot of growth opportunity,” they said.

They added: “Eventually we would like to get public… we are still private but looking at all sorts of options.”

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