Single-family home real estate investment trusts are an entirely new industry niche. They offer an easy way to enter the single-family home rental market without having to do any of the legwork. That's great!
But REITs are income vehicles, and the players here are still in growth mode, offering investors little to no income. Should you get in early, or wait to see what these REITs will pay?
Building a better house trap
The CEO of Silver Bay Realty Trust (NYSE: SBY ) recently told a conference that "2014 will be the time that we've got a good, solid lease portfolio and we will be focused on increasing our cash flow and distributing that to shareholders." Right now the REIT, which owns around 5,600 single-family homes, pays a paltry quarterly dividend of a penny a share and is focusing its efforts on buying and fixing properties.
Shareholders have had a trying wait, too, since Silver Bay peaked at around $20 a share after the IPO but now sits at around $16. And it's not an outlier. American Residential Properties (UNKNOWN: ARPI.DL ) has fallen from around $21 a share to $17 and still doesn't have a dividend policy in place. The company owns about 4,100 homes and is following the same play list: build portfolio, then dividends.
The companies, however, are trying to capitalize on a housing market dislocation that is slowly starting to correct. So time is of the essence as they try to build scale. That's why the founder of Public Storage, the giant self-storage REIT, founded American Homes 4 Rent (NYSE: AMH ) .
He saw an opportunity in the self-storage space and created an industry-leading company. Now he's seeing an opportunity in single-family homes, and he's trying to repeat his earlier success. American Homes is huge, owning around 20,000 homes, but -- you may have guessed it -- pays no dividend.
In fact, American Homes isn't shy about what it wants to do. "We have not adopted and do not expect to adopt a policy of making future acquisitions only if they are accretive to existing yields and distributable cash." In plain English, the company is looking to benefit from the capital appreciation of under-priced assets -- shareholder dividends aren't paramount.
To get paid or not?
The highest-yielding single-family home REIT right now is actually Altisource Residential (NYSE: RESI ) , with a niche-leading, though hardly impressive, 1.7% or so dividend yield. The only problem with Altisource is that it's the most aggressive of this quartet. While the other three are focused on buying homes, Altisource is building its portfolio by foreclosing on underwater mortgages.
At mid-year, the company noted that it was "on our way to achieve[ing] our first year goal of acquiring loans that will eventually result in 5,000 rental properties." Properties right now? It doesn't say because, well, there just aren't that many. At the end of June, the company listed just $54,000 worth of rental properties, $3.7 million of real estate owned, and $160 million of mortgage debt. Right now, the company looks more like a mortgage REIT than a property owner.
No easy answer
Clearly, investors who want to get in on the single-family home opportunity should be watching these REITs. If income is your goal, however, this industry simply hasn't matured enough. A housing market recovery should increase the values of their underlying portfolios and, thus, the value of their shares.
However, you aren't likely to get a dividend in your pocket until the companies move out of growth mode. It's a new and exciting space, but income investors should wait for more dividend clarity.
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