How Many Houses Are Empty?

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Silver Bay Realty (NYSE: SBY  ) and American Homes 4 Rent (NYSE: AMH  ) are two of the prominent names in the emerging single family home real estate investment trust (REIT) space. Having owned some of their properties for a year or so, they are starting to see just how many renters move at the end of a lease -- the answer will have big implications for ongoing results.

Silver Bay, American Homes, and American Residential Properties (UNKNOWN: ARPI.DL  ) have been focusing on growing their portfolios while the U.S. housing market remains depressed. However, along the way, they've built sizable home portfolios. American Homes is by far the largest of the three, with nearly 22,000 single family homes. Silver Bay has about 6,600 homes, and American Residential 5,400 or so.

A new sector, the trio are starting to come up on their first lease expirations. This is the time when renters either renew and stay in their homes or leave to go find another place to live. That decision can have a big impact on results.

For example, American Residential notes that "in terms of day[s] on market for leasing, we're currently ranging approximately 42 days on market on average..." and that "residents typically move in within two weeks..." after a lease is executed. That's over a month and a half with no rent coming in on a property. American Homes says that it can get a home leased in 30 days, or about one month.

That means American Residential and American Homes 4 Rent are on the hook for utility bills and don't earn any income to offset things like taxes. And, to make matters worse, some of the homes these companies own are in communities with association fees -- another expense that must be paid -- and those can be hundreds of dollars. Then there is the cost of preparing a home for a new tenant, such as cleaning and repairs.

Silver Bay noted in its third-quarter conference call that lease expirations in the third quarter were "a relatively small subset of our portfolio and may not be representative of our renewal and turnover experience." However, they start to give a sense of what to expect over the longer term. Of the 675 lease expirations, "163 properties turned over, implying a 24% turnover rate."

However, the company is "estimating the turnover rate for [the] single-family sector to come in around 33%." That's in line with results reported by American Homes 4 Rent, which saw a retention rate of 73%, which means about 27% of its residents left. Like Silver Bay, however, American Homes' "tenant retentions statistics are based on a relatively small sample."

Although the cost of maintaining a vacant home and preparing it for the next tenant are notable issues, so too is the cost of the renting process. American Residential Properties has to pay human beings to show homes to prospective tenants, do background checks, and fill out paperwork. The higher the turnover, and the longer it takes to release a home, the more employees have to be paid.

And turnover will have an impact on occupancy statistics. Although Silver Bay, American Homes, and American Residential are all still working through their recent purchases, once their portfolios are stabilized, occupancy won't be an issue that investors can "overlook" because of a focus on portfolio growth. Silver Bay's goal is to have an occupancy rate "well north of 90%." There's no question the others are seeking similar results. However, the higher the turnover, the harder that will be to achieve.

A watchful eye
It's exciting to watch this REIT niche as it matures. However, that process needs to be closely monitored since so many questions remain unanswered. Until portfolio growth starts to slow down, leasing activity will likely overshadow metrics like occupancy. Monitor turnover trends for a clue as to where things are heading at Silver Bay, American Homes 4 Rent, and American Residential when their growth starts to slow.

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  • Report this Comment On November 23, 2013, at 5:54 PM, CBDer wrote:

    The concept of single family homes as a portfolio is in no way, shape or form a new idea. The issue was and will likely continue to be that SFH are much more expensive to operate, as the article mentions, but also to maintain. One house = one roof whereas multifamily may be 2,4, 12 or 100 = one roof. And that is just the roof as an example. Anyone that has owned one knows that a house takes constant maintenance, probably at least 1% of it's value. Don't forget to add asthetic expenses and yard/lawn care. Renters typically don't do this to the level that will prevent a costlier payout between tenants. There are ways to maximize SFH rentals, but that could mean slim margins until re-sold after appreciation over time or being in the repair business, lawn business plumbing business etc etc etc. to cut costs. Simply put, there was a reason rental dwellings were/are multiples and complexes...efficiency.

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