As Housing Markets Advance, What Is Next for Single-Family Residential REITs?

This article is republished with permission from REITCafe.

Several years into a growth economy, most housing markets are moving forward. The four publicly traded real estate investment trusts (REITs) that were formed to acquire and rent distressed single-family homes are currently reporting short-term successes, with improved earnings and property values. However, each of the single-family residential REITs reported a net loss for the first quarter of the year.

The increased value of the underlying homes has improved the REITs’ net asset values. The median price of a single-family home grew 11.5 percent in 2013, 5.7 percent in 2014, and 7.4 percent between the first quarters of 2014 and 2015, according to the National Association of Realtors.

Though not positive, REIT earnings have certainly improved. With renovations completed, more homes are being leased, which has increased rental revenue. Widespread rent growth also has contributed to increased earnings. The leased portfolio of American Homes 4 Rent (AMH) grew from 18,997 homes in the first quarter of 2014 to 29,717 homes in the first quarter of 2015. The larger portfolio led to 70 percent growth in total revenue during that time frame. Similarly, the stabilized portfolio of Starwood Waypoint Residential Trust (SWAY) included 10,970 homes in first-quarter 2015—more than double the 5,142 homes it owned a year earlier. Starwood Waypoint’s first-quarter 2015 total revenues were almost three times greater than in first-quarter 2014.

Three of the four publicly traded single-family residential REITs now pay dividends. American Homes 4 Rent recently announced a quarterly dividend to be paid in June. Its dividend yield is 1.19 percent. Starwood Waypoint declared a quarterly dividend representing a 2.16 percent yield to be paid in July. Silver Bay Realty (SBY) paid a dividend representing a 2.50 percent yield in April. American Residential Properties (ARPI) is the only publicly traded REIT that is not yet paying a dividend.

During the first quarter, the two largest single-family residential REITs—American Homes 4 Rent and Starwood Waypoint Residential Trust—beat consensus funds from operations (FFO) estimates. Nevertheless, these REITs still struggle to achieve positive earnings.

While good for net asset values, the pool of low-cost foreclosures shrinks when home values rise, making it more difficult to purchase houses that meet the REITs’ required investment returns. Along the same lines, when single-family residential REITs sell a property, it can be difficult to reinvest the proceeds for similar yields.

Raising capital for expansion is an ever-present challenge that has prompted single-family residential securitizations. Blackstone’s Invitation Homes division became the first to complete a securitization backed by single-family rental properties in 2013. Since then, REITs like American Homes 4 Rent and Starwood Waypoint have adopted this strategy. While some of the new bonds have received AAA rates, based mostly on low loan-to-value (LTV) ratios, the bonds are not without risk because there are no longer-term credit performance data.

Going forward, some consolidation in the sector should be expected. Larger REITs or non-REIT homeowners may acquire small existing REITs, especially those with limited capital for expansion. As new REITs are formed this year, we could see the single-family sector expand. Invitation Homes, the largest owner of single-family homes, and its owner, Blackstone, are reportedly considering an initial public offering (IPO). Colony Financial is another large single-family homeowner that could become a REIT.

Ultimately, the jury is still out on single-family residential REITs. While significant progress has been made since last year, the nature of the sector makes continued investment more difficult.

* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.

** - 10 yr. Treasury Yield as of 5/22/2015.