by Lawrence Meyers | August 23, 2013 11:37 am
If you had capital a few years ago, and you knew anything about buying foreclosed homes, you experienced a once-in-a-generation opportunity to create wealth.
Houses were purchased, renovated and flipped like mad. Many others were purchased, renovated and rented. Sales for batches of homes were conducted on courthouse steps. Banks couldn’t get rid of others fast enough.
Alas, not many people had that opportunity, but plenty of opportunity still exists because both single-family homes as well as B- and C-grade apartment complexes can be bought for good prices.
Of course, if you don’t have the money for that, three stocks have come along that allow the average investor to get in on the single-family purchase game.
But are they good plays?
First, you have to look at the overall status of the distressed property market. The Mortgage Bankers Association put March 2013 non-performing single-family mortgage loans at 10.3% of all loans, accounting for about 4.2 million homes.
Single-family rentals make up about 34% of the market. However, foreclosure activity is well below what it was in 2009, so buying the right home at the right price is very much a regional affair. Still, it suggests a viable business model because the homes currently in inventory are worth more than what they were purchased for. And homes rented for the right price will yield a nice return on investment over time.
Now, a look at the individual plays:
American Homes 4 Rent (AMH[1]) just had its IPO a few weeks ago, raising more than $700 million. The REIT has some 20,000 homes in its portfolio, giving it total real estate value of about $3.3 billion. That alone is pretty amazing, and gives investors plenty of diversification, as these properties are found in more than 21 states. And the properties have a high occupancy level: 97% of properties that have been rent-ready for more than 90 days have been leased.
The company, a real estate investment trust, has a strong management team led by the founder of Public Storage (PSA[2]). Earnings came out on Wednesday and revealed a $10 million operating loss, but I think we need to wait and see what the P&L looks like after the properties have stabilized to get a feeling regarding the company’s profitability. I do see, however, large advisory fees listed, and that always concerns me.
American Residential Properties (ARPI[3]) is a REIT that owns about 4,100 homes, of which 1,558 were purchased just this past quarter for $191 million. Occupancy rate is 88% on properties owned for at least six months.
The company also funded $19 million in short-term mortgage loans, with ownership now at $36 million, yielding 12.2%. Under this method, the company loans money to another speculator and takes a first lien on the house. The financing is generally in place for only four months while the speculator renovates the house and tries to flip it. Theoretically, if he or she cannot flip it, the company seizes the property and either tries to sell it or rent it out.
The problem with ARPI is that it is so new that it has no YOY comparisons to make. Core funds from operations, which is used to determine dividends, was a tiny $2.2 million. I say wait and see with this one.
Silver Bay Realty Trust Corp (SBY[4]) — a spinoff of Two Harbors (TWO[5]) — owns about 5,600 single-family homes, of which 65% were leased at the end of June. Occupancy for six-month periods is 87%, but like ARPI, Silver Bay doesn’t have YOY comparison available yet.
The REIT still is in the process of ramping up, and while it has announced a mere penny-per-share dividend, it also bears watching. The stock is down to $16, off its $18.50 IPO price, suggesting investors are skeptical.
The upshot is that these are all developing stories. The key will be which company can get the right homes at the right price and get them rented quickly. I like ARPI a bit more because it is also diversified into short-term secured mortgage paper.
As of this writing, Lawrence Meyers[6] did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc.[7], which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books[8] and blogs about public policy, journalistic integrity, popular culture, and world affairs[9]. Contact him at pdlcapital66@gmail.com[10] and follow his tweets @ichabodscranium.
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