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Is Single-Family Rental Market Poised for Consolidation?

Rapidly Appreciating Home Prices, Search for Profits Has Players Ready To Pounce on Roll-Ups
August 21, 2013
It’s safe to assume that when renowned real estate dealmaker Barry Sternlicht says “hang on to your chairs” that some excitement is afoot. And that is just what Sternlicht said about the single-family rental market in his company’s earnings conference call this month.

Sternlicht was talking about the potential for consolidation within the nascent industry as institutional entrants in the arena vie for scale - and thus profits.

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Already, that growth among the publicly held entrants in the field is beginning to show some tapering as housing prices rise and profits have yet to materialize.

One of the smaller players in the market, Sternlicht’s Starwood Property Trust (NYSE: STWD), with 3,150 homes at the end of the second quarter, still is a factor in the market. The number of homes in the REIT’s portfolio doubled in the second quarter and it still considers itself in the ramp-up stage. Starwood has built its portfolio largely by acquiring nonperforming loans and then converting the loans to REO rentals.

When asked by a stock analyst whether the company would consider combining its portfolio with another company in order to accelerate the size and scale of the operation, Sternlicht answered, “possibly.”

But then he added: “I mean, you could also see us be a consolidator, we'd do the opposite.”

Starwood has purchased its portfolio with all cash and carries no debt on its properties. As such, Sternlicht said: “I think you're going to like [what] we're going to do there, so hang on to your chairs.”

Right now, there are three public U.S. REITs focused on single-family rentals and a handful of others in the formation stage registered for future public offerings.

Two of three other current public REITs in the market matched Starwood’s acquisition pace in the second quarter. American Homes 4 Rent acquired about 1,500 homes, giving it 19,825 properties. American Residential Properties acquired about 1,560 homes, giving it 4,089.

However, the third such REIT -- and the first one to go public -- Silver Bay Realty Trust, has put the brakes on expansion.

“We plan to decrease in the pace of acquisitions towards the end of the quarter and continuing to beginning of the third quarter with the objective of absorbing our inventory,” David Miller, president and CEO of Silver Bay, told investors on his earnings conference call. “This has the added benefit of allowing us to avoid new inventory coming online in the low season of November to January.”

Silver Bay owns approximately 5,600 homes but acquired only about 30 new properties in the second quarter.

“During the quarter, we focused our acquisition activity in markets for the opportunities that was most compelling,” Miller said. “Our top markets for acquisitions were Phoenix, Atlanta and Columbus, OH, which collectively comprised approximately 53% of total acquisitions.”

While it is currently focused on stabilization of its existing portfolio, Miller also noted in his call that the opportunities for acquisition have decreased as market prices have appreciated more rapidly and sooner that had been expected. He noted California and Las Vegas markets specifically.

“Despite the rising of rates, we believe the housing market will continue to strengthen and our business is positioned to perform well under a variety of rate scenarios,” Miller said. “The impact of rising rates on housing is complicated as evidenced by previous cycles. Rising rates are likely to affect sales volumes and affordability, although housing affordability still remains quite strong in historical contexts. While higher rates could moderate the pace of [house price appreciation] in the near term, this may have a positive impact on our leasing operations as the relative cost of renting becomes more attractive.”

“Our investment thesis is predicated on buying assets below replacement costs in geographies that will benefit from strong demographic and economic growth,” he added. “These factors will ultimately be the primary drivers of housing price and rents appreciation.”

Stephen Schmitz, chairman and CEO of American Residential Properties, said his company continues to see “excellent acquisition opportunities.”

“Our pace of acquisitions is ahead of our expectations and we continue to enter new markets and diversify our portfolio,” Schmitz said. “The vast majority of our purchases during the second quarter were individual property purchases. With individual acquisition opportunities plentiful in our identified core markets, it becomes simply a matter of determining which properties present the best investment opportunities.”

“While it’s well known that more institutions have entered the buy-to-rent market, we continue to see no shortage of attractive investment opportunities,” he added. “The inventory of properties available at favorable prices far exceeds the amount of capital supporting the institutional players in the buy-to-rent market and the overall economics of our business remain highly attractive.”

And while American Residential prefers one-off deals, Schmitz added that he is beginning to see portfolios from smaller aggregators coming on to the market for sale.

“We still see portfolios out there and as comes primarily from smaller aggregators, they either haven’t achieved critical mass from a management standpoint or realize that they don’t really have the ability to raise capital,” he said.

So as some aggregators begin to focus on stabilization and markets get too pricey for new opportunities, as Sternlicht says, “hang on to your chairs.”

Sternlicht said he expects there to end up being four or five large national public REITs in the sector when the industry gains its footing.

“They'll take their place alongside the multi-REITs, and I think they'll be competitive from a dividend strategy and a growth perspective,” he said. “Although there may be periods of time when they're just earning the dividend and they're not appreciating, which isn't any different than commercial real estate. There are times when there's no rental growth. In fact, some markets have seen negative rental growth; real effective rents, and cap rates will pop around. So I think it can be an interesting business.”

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