The Blackstone Group L.P. (BX), UMH Properties, Inc (UMH): How to Play Single-Family Homes with REITs

Have you heard the news?  Single-family homes are the new investment of the day. Big players like private-equity king The Blackstone Group L.P. (NYSE:BX) are acquiring single family homes for rental income and appreciation. The Blackstone Group L.P. (NYSE:BX) is on a $100 million a week buying spree, having purchased $3.5 billion worth of American homes in just the past year.

For investors, the opportunities in single-family homes are huge. Spreads between borrowing costs (currently at record lows) and rental rates have never been so large, nor has housing been so cheap.

How to play single-family homes

Investors who want exposure to the purest of real estate plays in single family developments have two solid choices:

UMH Properties, Inc (NYSE:UMH)

UMH Properties, Inc (NYSE:UMH) is a small-time REIT, but it boasts big profits. This real estate investment trust is engaged in the financing and rental of manufactured homes, as well as the ground on which they sit. According to the company’s latest 10-K, it owns some 10,644 different rental sites on a total of 2,366 acres. The business is wildly profitable, with vacancies coming in at a relatively low rate of 20% across all its properties.

What makes this REIT so attractive is its pure-play position. UMH Properties, Inc (NYSE:UMH) is involved only in manufactured homes and land leases, with zero exposure to commercial or retail properties. Most impressively, the company generates a tremendous amount of revenue from each land lease in its developments – $391 on average.

UMH Properties, Inc (NYSE:UMH)’s 7% dividend yield looks more than secure. Dividend growth, which has a profound impact on REIT valuations, appears strong. UMH Properties, Inc (NYSE:UMH) increased is portfolio as measured in units by 11% in 2011 and 20% in 2012. What cash UMH Properties, Inc (NYSE:UMH) cannot put to work it invests in other REITs to avoid cash drag. The company has an $18.3 million preferred stock portfolio, as well as $39 million in equity securities of other REITs.

Silver Bay Realty Trust

This recent spin-off from Two Harbors Investment Corp (NYSE:TWO) is a true pure-play on single family homes. Silver Bay Realty Trust owns more than 3,400 single-family homes as of the latest annual report, and intends to use the proceeds of its recent IPO to acquire more homes in its established markets.

Silver Bay has excellent exposure to the most hard-hit real estate markets that have rebounded nicely since the end of the credit crunch. Some 29.4% of its units are internally managed in Phoenix, Arizona, while another 17.8% are located in Atlanta, Georgia, and are also internally managed. The company also has a substantial presence in Tampa, Florida (24%), North California (7.5%), Las Vegas, Nevada (6.3%), and Southern California (4.4%), where its units are managed by a third-party.

This REIT is in its earliest days–over 75% of its holdings were acquired in the last 12 months. From the latest filing, you can see a detailed breakdown of Silver Bay’s holdings, acquisition price, and rental rates:

Two factors make Silver Bay an interesting play. First, it does not carry any debt on its balance sheet. Rather, the company is entirely equity financed, though it does intend to use debt for leverage in line with other REITs. The 10-K states that the REIT believes it can handle leverage in the vicinity of 30-50% of its total capital structure.

Secondly, investors may soon get a lower entry point. Two Harbors will distribute its current 50% stake in Silver Bay to its shareholders in April. Given that Silver Bay trades fewer than 500,000 shares per day, selling pressure when shares are divested could give patient investors a great entry point. Two Harbors owns 23,917,642 shares of the common stock, which will soon be unleashed to shareholders and likely sold at market. Those who wait for the distribution could get a better entry point on this up-start single-family REIT.

As Silver Bay improves its overall vacancy rate by listing acquired but not yet renovated units for lease, it should drive higher cash flows from operations, which will result in a robust dividend yield. Of course, this REIT’s exposure to key markets will also give it plenty of room for capital appreciation as higher rents and faster home sales boost the company’s underlying asset values.

Single-family homes are undoubtedly the best way to get access to an improving real estate market with an asset-backed, inflation-resistant investment. With so many markets offering homes at less than their cost of replacement, timely investments in single-family REITs could prove to be a boon for entrepreneurial investors.

The article How to Play Single-Family Homes with REITs originally appeared on and is written by Jordan Wathen.

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