With foreclosures slowing and home prices rising, the single-family REIT sector – once operating in overdrive – may be running out of fuel.
Sector pioneer Blackstone Group has backed away from purchasing new properties, and Colony Financial nixed its spinoff plans for its single-family unit last year amid falling interest in housing stocks. Relatively new company Starwood Waypoint Residential Trust (NYSE: SWAY), however, is drilling down, determined to make the single-family rental business a lucrative enterprise.
Emphasis shifts from buying to maintaining
A recent commentary on the single-family REIT sector by JPMorgan Chase analyst Michael Hudgins was rather dour, as he noted the dearth of newly foreclosed properties on tap lately – the bread and butter of the industry. Though he noted that many of these new players have done well, the next chapter entails the maintenance of the acquired properties, and whether or not a profit can be made in this untested arena.
This is an excellent point. The decrease in available "bargain" homes is the reason behind Blackstone's pullback, although the company hasn't stopped buying properties. In fact, Blackstone's Invitation Homes arm may join Colony Financial's Colony American Homes as a new, stand-alone company around this time next year.
How to do it: Starwood rolls up its sleeves
Obviously, both Blackstone and Colony see value in spinning off another two competitors into the single-family rental industry. The big question is: how do they plan to maintain that value?
Starwood Waypoint is on the cutting edge of this issue, full of vim and vigor when it comes to placing itself on the winning side of the single-family rental market. In an interview with REIT.com earlier this year, co-CEO Gary Beasley was very bullish on the sector, predicting that investors will wind up owning between 5% and 10% of single-family rentals, which he believes will evolve in a similar manner as the multi-family sector.
Beasley also expects that only the largest companies will survive, which means consolidation in the market – and Starwood appears to be making itself as attractive as possible.
At the NAREIT conference recently, Starwood gave an inside glimpse of how it runs its business. The company's Targeted Home Selection Process consists of a proprietary method whereby factors such as income levels, school systems, and crime statistics help create a "livability" analysis – all based on a database of 400,000 neighborhoods.
Once it determines the best targets for acquisition, Starwood then invests about $15,000 renovating each home, compared to the $25,000 Blackstone spends. Once the units are ready, Starwood manages to sign 75% of its tenants to 2-year leases, while offering a sort of "rewards" program – where renters collect loyalty points toward things like cruises and free rent.
Starwood is still small, with approximately 7,200 homes compared to Blackstone's 45,000, and Colony's 16,000 properties. Time will tell if the model has staying power, and who the biggest players will be. Meantime, it is obvious that Starwood Waypoint is positioning itself to profit, whichever way the wind blows.