When someone once said, “Time waits for nobody,” they might have been talking about real estate investing.
So if you were the nation’s second largest REO-to-Rental investor and the largest single family rental real estate investment trust, would you choose this week to go public on the New York Stock Exchange?
When conditions start to deteriorate, sometimes it’s a question of sticking to the plan rather than risking worse conditions in the future. That’s what the nation’s largest single family rental real estate investment trust faced this week.
According to the latest Campbell/Inside Mortgage Finance HousingPulse survey, small investor participation in the housing market is on the decline. In June, the investor share of home purchase transactions fell to 19.7 percent, HousingPulse results show. That was down from a 23.1 percent share found as recently as February and the lowest level recorded since September of 2012.
Nor are small investors the only ones tightening their belts. Earlier this week, RealtyTrac reported that despite their bigger pockets, the huge hedge funds and REITs are slowing down on their purchases just like smaller investors. Institutional investor purchases (investors that purchased at least 10 properties in the last 12 months) accounted for 9 percent of all US residential sales in June, up from 8 percent of all sales in May but down from 10 percent of all sales in June 2012. States with the highest percentage of institutional investor sales included Georgia (23 percent), Nevada (16 percent), Arizona (15 percent), Oklahoma (13 percent), North Carolina (12 percent), and Florida (12 percent).
So American Homes-4-Rent, the Agoura Hills, CA real estate investment trust founded by self-storage billionaire B. Wayne Hughes, bravely went ahead with its IPO, damn the torpedoes. The company, with almost 18,000 properties, is the second-largest investor in the U.S. homes-for-rent market, after Blackstone Group LP.
It raised $705.9 million Wednesday, or 44.1 million shares for $16 each, according to data compiled by Bloomberg, after offering them for $16 to $18 a share. In addition to the shares already privately held, the sale will value American Homes at $3.7 billion. Hughes is buying an additional $50 million of shares in a concurrent private placement, and early investor Alaska Permanent Fund Corporation is purchasing an additional $25 million.
That sounds like a lot of coin to buy rental properties, but the truth is that the total was light years short of what was initially expected. By the time the closing bell sounded, American Homes 4 Rent raised almost 44 percent less than the $1.25 billion amount estimated in an initial prospectus by the company in June.
Shares of other public single-family rental REITs have fallen as the companies have failed to show a profit, in part because they are acquiring houses faster than they can fill them with tenants. Silver Bay, based in Minnetonka, Minnesota, began trading in December at $18.50 a share and closed yesterday at $16.09. American Residential Properties of Scottsdale, Arizona, went public in May at $21 and has fallen to $17.54. Both are trading below their offering price.
According to paperwork filed with the SEC for the IPO, American Homes had just 55 percent of its properties leased as of June 30. A considerable number of others were not rent-ready, and as a result cash flows are unlikely to stabilize until 2015 and beyond as the company continues buying homes.
American Homes reported a net loss of $7.5m on total revenue of $6.6m in the three months ended March 31. Investors seem to be valuing the company either on the basis of price-to-book value or by discounting cash flows on future rental income and home price appreciation.
The American Homes deal and the whole REO-to-Rental model has left a lot of Wall Street types scratching their heads. “The headline occupancy numbers for this space, roughly 50 percent, is not yet enough to give evidence that this business model works,” said Jade Rahmani, an analyst with Keefe Bruyette & Woods Inc. “Hopefully these management teams can walk and chew gum at the same time — can build out operations at the same time they are acquiring.”
Said Dave Bragg, an analyst at Green Street Advisors Inc. based in Newport Beach, California, said of the American Homes 4 Rent IPO, “Over the long term, we identify a high-quality problem resulting from home price appreciation, which would bring initial yields down to very low historical levels.”
You see, on Wall Street, it’s not a good thing to buy high and hope you can sell higher.
One thing is for sure. If it’s tough being a little dog in this real estate economy, it’s not much easier being a big guy.