Correction: Silver Bay Realty Trust was left out of the list of publicly-traded single-family rental REITs.
In a move that has been expected for some time, private equity firm the Blackstone Group has filed for an IPO for Invitation Homes, its single-family home rentals company, Reuters reports. The Dallas-based company owns approximately 50,000 homes in 14 markets, including Seattle, Los Angeles, Inland Empire, South Florida and Atlanta, and is expected to be valued at about $7.5 billion, according to published reports. The firm has been among the first to break into the residential mortgage-backed securities (RMBS) market back in 2013.
Invitation Homes has slowed down its acquisition activity over the past year, in part because of difficulty in finding sizeable portfolios for sale in its preferred markets. At the same time, REIT investors have been expressing more interest in the single-family rental sector because of the attractive operating fundamentals, according to a November 20 note from analysts with Irvine, Calif.-based research firm Green Street Advisors.
“Blackstone likely believes that the elements of a successful REIT IPO—consistent rent-derived cash flow, appealing growth strategy and good management—are in place,” says Steven Marks, managing director and head of U.S. REITs with ratings agency Fitch.
Currently, there are three publicly-traded REITs in the single-family rentals space—American Homes 4 Rent, Colony Starwood Homes and Silver Bay Realty Trust—the lowest number in any property sector outside of manufactured homes. Year-to-date, these REITs delivered a total return of 26.63 percent—compared to a return of 6.57 percent for all equity REITs, according to data from the National Associate of Real Estate Investment Trusts (NAREIT). Total returns in 2015, on the other hand, equaled 1.77 percent.
Meanwhile, single-family home prices continue to go up. In October, the median price for all single-family homes registered a 17.0 percent increase compared to October 2015, at $269,300, according to HomeUnion, an online real estate investment management firm. Median home prices have been rising for the past 55 months, the firm reports. The median price of single-family homes bought for investment purposes specifically rose by 17.1 percent year-over-year, to $238,000, and the average investment cap rate compressed by 90 basis points, to 5.2 percent.
In a recent report, researchers with real estate investment management specialist Amherst Capital Management estimated that U.S. single-family homes remain undervalued by about 5.0 percent. As a result, single-family rentals currently have the potential to produce unlevered returns of approximately 7.4 percent and leveraged returns of approximately 13.0 percent over a 10-year period.
In addition, “Historical volatility of single-family portfolio values [is] lower than most other residential/commercial rea estate asset classes. SFR REIT option pricing also points to lower implied asset volatility,” the report noted.
Recently, however, performance in the single-family rentals sector has cooled down slightly. In October, the vacancy rate at single-family rentals included in single-borrower securitizations rose by 20 basis points over the month prior, to 5.2 percent, according to Morningstar Credit Ratings. Over the same period, average contractual rents for properties included in securitization rose 4.4 percent, Morningstar reports. Metros experiencing the highest increases included Sacramento, Calif. (9.7 percent), Los Angeles (6.5 percent) and Atlanta (4.7 percent).
Year-to-date in 2016, there have been only two IPOs in the REIT space, raising a total of $1.48 billion, according to NAREIT. These included MGM Growth Properties, an MGM Resorts spin-off, and Global Medical REIT.