The Blackstone Group L.P. (BX), Silver Bay Realty Trust Corp (SBY)- Single-Family REIT IPOs: Too Early for Wall Street?

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"…single-family homes are cheap now, too. If I had a way of buying a couple hundred thousand single-family homes, and had a way of managing them -- the management is an enormous problem because they are one by one -- they are not like apartment houses. I would load up on them …" -- Warren Buffett, from a Feb. 27, 2012 interview on CNBC

During the past year much has been written about single-family homes being viewed as a new asset class for institutional investors. Warren Buffett’s often quoted February 2012 interview on CNBC appears to have been taken to heart by Wall Street. Now, for the first time, recently formed regional and national entities are competing to be your new neighbor. A few of them are trying to compete for your investment dollars as well.

The Blackstone Group L.P. (NYSE:BX)

Is there a "first mover" advantage?

REIT investors have traditionally been in search of a dependable risk adjusted yield. As an asset class, REITs have recently fallen out of favor with Wall Street investors. REIT stock prices have been trending lower as long-term interest rates have risen in anticipation of the inevitable winding down of the Federal Reserve QE program. It should then come as no surprise that the anticipated June 2013 IPO of single-family REIT Colony American Homes was cancelled due to market conditions. However, there could be another reason behind this IPO delay. According to an SEC filing in May 2013, just more than 50% of the 9,931 homes purchased by Colony Capital LLC for an aggregate dollar amount of $1.4 billion are vacant.

In a recent Bloomberg News article, Aaron Edelheit, chief executive officer of The American Home, an Atlanta-based single-family rental operator with 2,500 homes was interviewed. "If you’re building a vehicle that’s going to be publicly traded, you’re going to have to show cash flow," Edelheit said. "Wall Street is going to care about cash flow."

The first single-family rental REIT to go public was Silver Bay Realty Trust Corp (NYSE:SBY) raising $100 million in December 2012. Altisource Residential Corp (NYSE:RESI), a $100 million spin-off from Altisource Residential Corp (NYSE:RESI) Portfolio Solutions also began trading as a REIT at the end of Dec 2012. (RESI is initially focused on purchasing portfolios of poorly performing single-family mortgages, not the homes). American Residential Properties Inc (NYSE:ARPI) raised $287 million with a timely IPO in May 2013.

All three of these single-family REITs reported losses for the quarter ending March 31.

This is not a surprise if you look at the SEC filings which reveal that a significant percentage of homes these companies own, or plan to acquire, are vacant. Industry giant Invitation Homes, private equity firm The Blackstone Group L.P. (NYSE:BX) single-family rental homes division, budgets 10% of its property acquisition cost for renovation. It is uncertain how long it will take to lease this large number of homes. As publicly traded REITs compete to grow, it will be challenging to generate funds from operations, or FFO, to pay an attractive dividend to shareholders.

Can investors expect hefty increases in rental rates?

In a recent Forbes article, Trulia chief economist Jed Kolko points out that, "rents for single-family homes in the markets where investors have been buying and renting out homes -- including Las Vegas, Phoenix, Atlanta, Los Angeles, and Orange County have fallen or flatten year-over-year."

There are elephants in the room:

It was reported on June 4, 2013 that American Homes 4 Rent, AMH, is seeking $1.25 billion in an IPO led by Public Storage founder B. Wayne Hughes to buy and renovate homes. As of April 30, 2013 American Homes 4 Rent owned 14,210 single-family homes valued at $2.5 billion. It is interesting to note that the contributed over $400 million to Malibu, CA based AMH. "Nobody’s ever done this on a scale before," Michael Burns, CEO of the Alaska Permanent Fund, which had $41.5 billion under management at the end of the first quarter, said in a telephone interview from Juneau, Alaska. "These people’s background is in public storage, which is about as close as we could find." The emphasis is mine, as I did not find this logic to be comforting.

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