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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The Blackstone Group L.P. (NYSE:BX)’s Invitation Homes is the largest institutional owner of single-family homes to rent. They own a staggering 29,000 homes clustered in 13 of the 300 housing markets throughout the U.S. Even more daunting is the fact that 25,000 of these homes have been purchased in the last 12 months according to a June 9, 2013 Blackstone Blog post. This post appeared on the The Blackstone Group L.P. (NYSE:BX) website in response to the Sunday New York Times editorial Meet the New Landlord. Blackstone makes a compelling argument that given the sheer size of the U.S. housing market, they own a very small percentage of the homes.

However, in the cities, towns, and neighborhoods where Invitation Homes has placed a pin in the map, it would be silly to believe they do not impact the local market.

There appears to be a “fast mover” advantage:

Jonathan Gray, The Blackstone Group L.P. (NYSE:BX)’s global head of real estate, said recently in a June 10thinterview, “that it’s getting harder to acquire properties for a profit as competition intensifies.” Blackstone has already deployed $5 billion dollars of capital to invest in 29,000 homes — with 24,000 of these homes having been purchased in 2012. This indicates the rate of growth for Invitation Homes has already slowed dramatically halfway through 2013. Gray said, “For our type of capital, my guess is we are in the later stages of this.”

Back in Nov 2012, Jonathan Gray was interviewed by Jason Kelly in a Bloomberg News video. I encourage any investor thinking about buying single-family REIT shares to listen to Mr. Gray discussing The Blackstone Group L.P. (NYSE:BX)’s strategy. They are building Invitation Homes into a branded national platform, fueled by their unparalleled access to billions of dollars of private equity capital. This buys Invitation Homes the luxury of time to stabilize the income stream from their rental home portfolio. The Blackstone Group L.P. (NYSE:BX) can then spin off all or part of Invitation Homes as an exit strategy for their private equity partners. Buyers would be more likely to pay a premium over book value for a transparent company that has predictable funds from operations.

A home may be a castle, but where is the moat?

Single-family REITs that are raising and deploying capital are also competing with savvy local investors and traditional homebuyers. Home ownership is the ultimate mom and pop business. These new single-family REITS are competing with literally millions of David’s, a few Goliaths and one Leviathan. Most of the low hanging fruit appears to have already been picked. The idea of buying used homes below replacement cost in the hopes of repairing them and renting them out for a profit sounds appealing at first glance. The devil is in the details. Invitation Homes may have begun to build a moat in 2012 by nimbly creating a business large enough to be scalable. If so, this would allow for future growth by “bolting on” additional portfolios accretive to earnings.

What would Mr. Buffett do?

I suggest investors pay close attention to the SEC filings for the quarter ending June 30th for Silver Bay Realty Trust Corp (NYSE:SBY), American Residential Properties Inc (NYSE:ARPI), and Altisource Residential Corp (NYSE:RESI) — specifically how each company plans on balancing growth versus earnings moving forward. Time is of the essence. Will one of these early single-family REITs stand out from the pack? I would wait until then to pull the trigger. I believe Berkshire Hathaway could become interested in purchasing part or all of International Homes — but only after it proves to be a scalable and profitable business. Why gamble when you can invest?

The article Single-Family REIT IPOs: Too Early for Wall Street? originally appeared on is written by Bill Stoller.

Bill Stoller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Bill is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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