Unstructured Finance

Home gold rush is over

September 24, 2013

The pressure keeps building on small players in the buy-to-rent trade to cash out and flip the foreclosed homes they snapped up to the biggest investors in the space.

The news that Oaktree Capital Management and Carrington Mortgage Services are putting the 500 homes they’ve acquired and leased out up for bid may well be an indication of more to come. With increases in rents leveling off, the economics of buying single-family homes to rent them out becomes more dicey–especially given the 20% or greater surge in home prices in the markets favored by investors .

People familiar with Oaktree and Carrington say the two firms expect to make a sizeable profit on their portfolio because the homes are leased and producing decent cashflows. These people note the ability of a larger player to buy a portfolio of leased homes is attractive given the difficulty some of these firms have struggled to bring the homes they have acquired on line.

Earlier this year, Reuters wrote about the trouble with the new math for investors betting on foreclosed homes as an asset class and predicted that the pressure to flip could grow in the coming months. And there’s no reason to believe that’s not the case especially as shares of several firms that converted their single-family rental portfolios into REITs have proven to be lackluster performers.

Shares of American Homes 4 Rent, which has 18,00 homes, are up a modest 4 percent after pricing at $16 in an August initial public offering. But shares of Silver Bay Realty  Trust and American Residential Properties, far smaller firms, are trading below their IPO prices. And Colony American Homes Inc, which planned an IPO of up to $1.25 billion but postponed the offering in July, has yet to set a date for coming back to the market.

Blackstone Group, the big kahuna with 32,000 homes, still has not moved to file for an IPO. The firm, which says it has  long term commitment to the asset class, is working with Deutsche Bank on a deal to securitize some of the cash flow coming from the rents on the homes and sell those notes to bond investors.

But that securitization deal has been in the works for awhile and there’s no indication when it may come to the market.

One market participant told me that for many firms who went into the buy to rent trade thinking it would be an easy trade to buy homes and rent them and hold them for a while, “this REO fund thing is not turning out the way people planned.”

So with the various attempts at monetizing the trade either not doing well or taking long to come to fruition, the temptation for smaller firms to sell to larger rivals mounts. The gold rush that began nearly two years ago is coming to an end.

 

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