It isn’t exactly rare for companies to go public before raking in the dough. Dot-coms do it all the time, listing on major exchanges with only a modest revenue stream in place. But it isn’t normal in the REIT space.
Or is it?
Just 8 months ago Silver Bay Realty Trust Corp (NYSE:SBY) launched as a revenue-light, asset-heavy pure-play on single family homes. Now, American Homes 4 Rent (NYSE:AMH) is looking to capitalize on the hunger for exposure to single family properties with its own IPO.
What’s the deal with all these startups?
REITs are decidedly in the “boring” part of the financial spectrum, buying properties to lease to tenants for a predictable revenue stream. Typically, a REIT is seasoned for years as a private entity before it goes public with years and years of history to back up its offering.
Today, the thirst for IPOs is anything but typical, which allows atypical IPOs to happen even in the most conservative of sectors.
American Homes 4 Rent (NYSE:AMH) listed with an astonishingly low occupancy rate, negative income, and thousands of acquisitions in the pipeline. As of June 30, the company had 17,949 homes in its portfolio, of which only 9,882 were leased. Not to mention another 1,152 properties were in the escrow pipeline at the same time.
American Homes 4 Rent (NYSE:AMH) isn’t the only company actively buying properties while working through a backlog of paid-for homes. Silver Bay Realty Trust Corp (NYSE:SBY), which had its IPO in December 2012, currently owns more than 5,000 homes across the United States. As of the first quarter, only 2,413 homes were leased. We will know much more about its portfolio when it reports earnings next week.
A tough market
Investors are rightfully turning their nose up to single-family REITs until their financials can back their valuations. Silver Bay Realty Trust Corp (NYSE:SBY) has shed 12% of its market value since its 2012 IPO. It plans to repurchase as many as 2.5 million shares to buoy its market valuation.
American Homes 4 Rent will likely find the same difficulty as investors digest its portfolio. The company has more homes in the pipeline than it has leased. It’s currently unprofitable, and one-time renovation and acquisition costs are difficult to separate from the portfolio returns when it matures. That makes valuing the REIT extraordinarily difficult – future cash flows can be especially difficult to project.
What is known, though, is that American Homes 4 Rent (NYSE:AMH) has a substantially better business model and cost structure than Silver Bay Realty Trust Corp (NYSE:SBY), which may lead it to better post-IPO performance.
The mechanics of REITs
Established REITs typically employ an in-house management team to acquire and maintain properties. Since an established REIT will do far more managing than acquisitions, the model requires very few employees.
New REITs, especially those that deal in single-family homes, need a substantially larger workforce to buy, renovate, and lease each new property, so they typically rely on a third-party to do the dirty work. American Homes 4 Rent (NYSE:AMH) and Silver Bay Realty Trust Corp (NYSE:SBY) have a third-party to acquire and renovate new purchases. For this service, the REITs pay the cost plus 5%. This is standard.
However, when it comes to the administration, most REITs keep it close to home. American Homes 4 Rent will eventually internalize all of its management functions by December 2014, which should minimize operational costs and expenses.
Silver Bay operates differently, retaining some connection to Two Harbors, which spun off the company in December. Its relationship will cost shareholders 0.375% of the average daily market cap per quarter, or 1.5% per year in administration fees and expenses.