With all of the investment alternatives available in real estate do we really need another alternative for institutional investors?
Is it time for a new flavor? Maybe something revolutionary like the ‘Rocky Road’ was to ice cream. Historical note: Rocky Road ice cream (chocolate, nuts and marshmallows) was developed after the Great Depression and, according to Joseph Edy, “gave folks something to smile about.” It began 80 years of ice cream innovation.
Jonathan Gray at Blackstone Group thinks he has a new flavor and it’s called "single-family housing" and he is making a huge bet on it becoming investment grade. He is also quick to point out that Blackstone, and others, are fixing problems for communities, providing affordable housing and putting people to work. Ok, I am smiling. So let’s take a closer look.
Estimates of the size of Blackstone’s single family fund have blossomed in the last three months. Reports grew from $1.5 billion and 10,000 homes closed in January to now over $3.5 billion and 20,000 homes closed. Just recently it was announced that Deutsche Bank would triple the size of a syndicated loan to Blackstone $2.1 billion which will be used to acquire more homes with a target of 60 percent LTV ratio. So this is going to be big. The debt partners include such stalwarts as Credit Suisse, Goldman Sachs, Bank of America and JPMorgan Chase.
Under the premise of ‘loan to own’ my question is do you really want to own 20,000 homes? Owning and managing 20,000 multi-family units is one thing but 20,000 single family dwellings is something that has never been done before. So I got curious about the concept and began to dig deeper.
Blackstone has created an operating partner called ‘Invitation Homes’ which will acquire and manage this new beast and after looking at their website for rental homes in Atlanta I decided to evaluate some of the recent acquisitions made for this fund.
I compiled sales information on 87 homes acquired for about $10M million by Invitation since last August in three counties around Atlanta. The homes averaged just under 2,000 sq. ft. and were acquired for about $117,000 apiece.
Since some of the homes were still being warehoused or renovated I used Zillow, an internet based comparable and valuation service, to determine how they were doing. Zillow uses some dynamic data crunching to come up with what it calls “Zestimates” for current value and approximate rental value. The good news is that it seems that there is some buying power in this strategy as the current ‘Zestimated’ value of these homes is almost $12 million with a combined annual rental value of $1.2 million. Also in terms of cost to replacement they are buying them on average below $60 per sq. ft.
Of course on average Blackstone estimates another 10 percent spent on capital and at least 60 days of downtime. In order to evaluate peak-to-trough pricing, I narrowed down 62 homes which had previous sales reported between 2000 and 2007 and evaluated the difference in pricing (i.e. the discount) to which Invitation acquired the homes against the highest recorded sale during that period. (Not that I believe we will return to 2006 pricing anytime soon, but it is a measure that seems significant.)
In fact many of the counties where I obtained the sales information have even classified sales during these years as “not typical of market conditions” for tax assessment purposes. Be that as it may, all of us home owners can dream can’t we? On average they were able to acquire these homes at a 41 percent discount to previously recorded high prices. Not bad. But good deals seem to be all the more difficult to come by as the housing recovery continues to build steam.
If you ran an investment analysis of all of these homes and assumed downtime etc. you would probably do fairly well. But that is not the optimum end goal for Blackstone. They want to take this investment public and that is where they hope to generate the highest and best returns for their investors.
With the potential for rising mortgage interest rates and increased scrutiny and down payment requirements for home buyers, rental housing is poised to grow significantly. On the flip side, home values will certainly be impacted when borrowing rates go up.
It will be very interesting to see if Blackstone and others can turn single family into a new favorite flavor. But it is clear that this is new territory and undoubtedly it may be a rocky road.