Tracking the Big Dogs: American Homes-4-Rent Goes Public


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.

Photo: .imelda

About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.


  1. Great info Steve!
    I was wondering how the IPO went based on their estimates.

    Real estate is one area where the little guy has an advantage on the big guy. The big guy doesn’t have the manpower to find local deals, get the best agents, get the best contractors and get properties rented quickly. The big guys are too concerned with buying and forgot about the other parts of the process. Plus their buying criteria appears to leave a lot to be desired.

    • Thanks, Mark.

      Rule number one in business: The simpler it appears, the more complicated it really is.

      Sometimes I think some investment banker ran around Wall Street two years ago with a PowerPoint that said: “Here’s a simple way to make 8 percent on your money. Lots of little guys are doing it. Just think how much more could be made with the billions that institutional investors cant invest in mortgage backed securities.”

  2. Steve – very good article indeed!

    I am not stupid, but I don’t understand why people are buying into the hype. Basic principals – value is a function of Cash Flow…what am I missing?

    Among the Wall Street traders there is a saying that goes something like this “Don’t be the market”. That was what happened to Jamie Diamon’s “London Whale”.

    15,000 properties – tlak about being the market…

  3. “Hopefully these management teams can walk and chew gum at the same time — can build out operations at the same time they are acquiring.”

    Obviously, with a 45% vacancy rate, they can’t. I’ve been reading for months about the number of these homes just sitting empty, waiting for reno and/or leasing. And because these institutional investors don’t know the markets they’re investing in and don’t have teams assembled, they are hiring the worse of the worse in terms of contractors and/or property managers.

    It seems shareholders are betting on appreciation, which has not been proven yet to be sustainable in this current market (but don’t tell that to the bandwagon). I think a lot of investors are going to have a rude awakening coming.

  4. I’ve done some work with these folks in the Cincinnati market and have seen their models… They’re not really buying many REO here – it’s actually mostly retail sales from owner occupants at 6-7% cap rates. In several neighborhoods, every comp that I pull is an AH4R purchase. I see them making the exact same mistakes so many new investors make, but on a MUCH larger scale,

  5. Mehran Kamari on

    “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.”

    That’s the first thing I learned NOT to do when I joined BP 🙂

  6. Thanks for the update Steve. I have been mystified for quite some time wondering how are they going to make this a profitable venture other than speculating on massive appreciation and cashing out. To me it is like playing a slot machine and hoping to hit a jack pot until you go broke with your start up funds and more until you run out. I thought they would be buying bulk inventory from the banks at under 50 cents on the dollar for the bulk purchases but it appears they are overpaying from not just buying the bulk stuff. I hate to predict bad things because a lot of people will lose out when this doesn’t work out except for the insiders. This will be very interesting to see how it unfolds but could be another bubble brewing down the road.
    Thanks for the data

  7. I always enjoy Steve’s articles. I really agree with what Mark Ferguson said. The little guy does have an advantage especially on the service side. I am just starting to increase my rental holdings and have only 3 units to myself and some with partners. My goal is to keep tenants happy and keep them long term. I am not afraid to bend over backwards, to a degree, to keep a tenant happy. The big guys cant do that.

  8. Great article and discussion. My current operation is to buy FORECLOSURES, rehab them, have a professional manager place a tenant, them sell them to investors (hedge funds are buying most of them). When the hedge funds unload at way less than they paid – I will buy them , freshen-up the rehab and sell to smaller investors (keeping many myself). I guess I am more of a recycler than an investor.

    Every time I think the “stupid money” is gone, here it comes again.

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