The Single Family Rental “SFR-Rent” business has long been a “mom and pop” asset class, however, due to the deep discounts following the U.S real estate crash, yields on rental properties spiked and some homes traded for less than replacement cost. This captivated institutional investors and the business model began to ferment in 2010 and began gaining significant steam in 2012. In Las Vegas, large investor purchases peaked in 2013. Most institutional investors have either kept their holdings or their entire operations were acquired by other firms.
Some important consolidation has happened in a relatively short period of time. American Homes 4 Rent acquired Beazer Pre-Owned in 2014. Starwood ultimately joined with Waypoint Homes and subsequently Starwood Waypoint Residential Trust merged with Colony American Homes. The current ticker symbol is “SFR.” In March of 2016, American Homes 4 Rent and American Residential Properties completed their merger. American Homes 4 Rent is the largest publically traded SFR-Rent company. So some of the big consolidation has already occurred in the sector, a sign of a maturing business. It’s harder to grow by purchasing properties since a lot of markets have rebounded strongly, compressing cap rates. Now industry leaders have to work on streamlining management and marketing.
The SFR-Rent business is hard to scale do to the distributed nature of the assets, however, there are human capital, process, and software gains and potentially better access to debt markets with increases in firms size. We believe that the remainder of acquisitions will be in the form of the dwindling non-performing loan opportunities and that some institutions will purchase smaller portfolios assembled by private individuals.
A natural question to ask is; is the SFR-Rent sector becoming more like multifamily REITs? In a general sense, no. Demographically, the single family renter is distinct from the multifamily renter. Typically, single family renters are at least two-person households or greater. In our property management portfolio, single family renters remain in the home longer than in attached product.
Additionally, the single-family REITs tend to trade significantly different from each other. Note the trends in the two exhibits below. While there appears to be a relatively strong positive correlation between each stock and its peers in the sector (although recently there have been some trend departures), there is little correlation between the SFR stocks and Multifamily stocks. In some cases, this is even a negative correlation.
Part of the reason for the distinctions between what should be somewhat related sectors is probably the difference in rent growth. At some point, SFR rent growth may begin to mirror Multifamily growth. Secondly, SFR-Rent firms may still be realizing economies of scale while the older Multifamily sector has already obtained these benefits and it has long been baked into the stock prices. Finally, Multifamily has been a hot sector while real estate emerged from the doldrums of the recession. Banks actively pursued the sector for lending opportunities and after a long period of little to no construction in some major metro areas, occupancies were strong, inviting new construction. Some experienced owners like Sam Zell of Equity Residential and Barry Sternlicht have somewhat opposing views as Equity Residential has been an occasional seller recently while Sternlicht and Starwood Capital have been purchasing some of Equity Residential’s Apartments. Simultaneously, some analysts have backed lowered their expectations of rent growth in the sector after strong increases. Locally, we still like the sector but believe it is limited on the upper-end. Similarly, rent growth in the single-family sector was strong last year and appears to be tempering somewhat.
Overall, we see the SFR-Rent sector as entering a mature phase, however, there should still be acquisitions, however this is likely to be from larger public operators swallowing up privately assembled portfolios. Technology continues to play a big part, as well as contract negotiations with repair and service providers. The sector remains interesting because some of the locations the public portfolios are concentrated in likely have some room to run in terms of prices, bolstering NAV. Additionally, market turmoil, particularly from Europe, is likely to keep bond yields low and hence, drive some interest in more bond-like sectors.S & P Dow Jones Indices and MSCI Inc are moving REITs from the financials sector into one of its own called Real Estate Sector. This may increase interest in the sector at least a little bit.