We’ve talked about REITs before, but there is a new emerging REIT: the single-family REIT.
Let’s first review how a REIT works. A REIT is defined by Investopedia as: “A security that sells like a stock on the major exchanges and invests in real estate either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.”
An Equity REIT invests and owns properties. These properties are typically office buildings, shopping centers, large (100 doors+) apartment buildings, you get the idea. You would not usually put single family homes in this category, but that’s changing.
Since the collapse of the real estate market there has been an over abundance of distressed homes. Some large-scale investment firms have had an opportunity to buy these distressed properties in bulk. Typically this has been done through private funds, these funds start with high buy ins ($50,000+). These funds would then rehab and sell the properties, much like an individual flipper does.
The REIT market has taken this model and adapted it to the Equity REIT model. REIT’s are now being made available that offer a way for investors to get into institutional scale investments of single-family homes that are being converted to rental properties.
The players in this “emerging asset class” are equity groups such as Blackstone (BX), Och-Ziff Capital management (OZM), Oaktree Capital (OAK) as well as public REIT’s including Colony Financial (CLNY), Silver Bay Realty Trust (SBY) and Altisource Residential (RESI).
Sliver Bay was formed in June 2012 and went public December 2012. Since June the company has been acquiring 300-400 properties a month, which equals $40-$50 million. Since the IPO, Silver Bay portfolio has grown to 8,090 homes valued at $981 million.
These investors get the opportunity to buy REO’s in bulk. They buy what is called a “tape” of properties. “Tapes” are usually 100+ REO properties; there is a balance of great, standard and scary properties. A tape is purchased at a “bulk” discount. These institutional investors have the systems in place to get the properties fixed up and on the rental market quickly. They are seeing yields of 5% to 7%, this is also taking into consideration that they are using cheap money because of very low interest rates. With the use of leverage and price appreciation, returns are projected to be as high as 20%.
This model is being well accepted by some of the big lenders such as Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC).
It’s not surprising that the majority of the properties are being purchased in some of the hardest hit markets. If we just look at the geographic break down of Silver Bay – 31% Phoenix, Orlando and Tampa combined is 27% and Atlanta 17% there is most certainly a pattern.
The chart below (taken from Sliver Bay Realty Trust prospectus), shows appreciation in the markets that Sliver Bay has chosen to buy many of its assets.
Many in the REIT world aren’t sure that this is a sustainable model. I personally like it because I see many ways the assets can be of value to the REIT. As rentals, they are at the high end of the rental market. Renters who choose a home to rent tend to be better tenants with more staying power. As balance sheet assets, there is some data that shows they are appreciating at a good rate. I also see where the asset could have the flexibility to adapt to the market if there are more buyers than renters. Perhaps the REIT could sell the homes on contract and continue to produce income for the REIT.
Although there is risk with this new kind of REIT I certainly see the upside potential as worth the risk. Just my personal opinion.