in today's National Post. GLTA
You want to bet on the U.S. housing marketing turning around, but you’re not ready to buy a retirement property. There’s a new vehicle developing for just that type of investment.
The next wave of real estate investment trusts south of the border is likely to be made of distressed properties bought by private-equity investors so cheaply that they can be rented out and still produce good returns despite the high management costs. This asset class does not exist now among REITs, which, in terms of rental properties, has been restricted to apartment buildings.
Since last spring, Toronto-based Tricon Capital Group has accumulated a portfolio of about 700 houses for about US$80-million in various U.S. locations. Blackstone Group LP has spent about US$300-million to buy more than 2,000 foreclosed homes. Beazer Homes USA has created Beazer Pre-Owned Rental Homes Inc., backed by private-equity firm Kohlberg Kravis Roberts & Co.
David Berman, chief executive of Tricon Capital, says unlike vacation properties, there is nothing romantic about his investments — it’s all about the numbers.
“There’s no emotional attachment,” says Mr. Berman with a laugh. “We are buying workforce housing where real people need to live. There are people who owned their houses before and are now forced to rent.”
His company has been purchasing properties one or two at a time in places like California, Arizona and Florida. “Sometimes we are buying on the steps of the courthouse,” said Mr. Berman.
The math works because his company has been buying out of foreclosure for as low as 40¢ on the dollar compared to where home prices were at the peak of the U.S. housing market in 2006. That’s probably about 10 percentage points better than he would get through normal channels like the Multiple Listing Service, says Mr. Berman.
“The reason we can do it is we are paying cash and we [deliver it] in 24 hours,” said Mr. Berman, adding Tricon is funding the acquisitions from the company’s balance sheet. “You can get financing but it takes time. An investor with cash is the preferred purchaser and can get it at a better price.”
Tricon looks at the investment for income — it has a going in yield of 8% — and capital returns. Both are possible because the collapse of real estate prices has left plenty of margin for error.
“If you are looking to buy a property or vacation home, there is probably no better time to do it,” says Mr. Berman. “The dollar is high and the housing values are low.”
He thinks the upside in property values could easily be 50%. He gives the example of a home now selling on the MLS for $125,000 in Sacramento. It might have fetched $250,000 at the peak of the housing but today that home can be bought for $100,000.
That same house, Mr. Berman says, can be rented out $1,100 to $1,300 a month. Even if management costs eat up a third of that income, you would still be left with an 8% return.
“It’s more expensive to operate than an apartment building on a per unit basis,” says Mr. Berman, adding you have to have that management to make it work. He says houses have to be a “screaming buy” to make it work.
With many saying the bottom has finally been reached in U.S. housing, large private equity investors have been pouring in. Many will likely spin the property holdings into a separate publicly traded REITs, something Tricon says it too would consider.
“Our bet is over time, vacant homes will fill up and markets will begin to recover,” Jonathan Gray, senior managing director and global head of real estate with Blackstone Group LP, was quoted as saying at a conference this summer. “Our exit will be to sell the individual homes to the renters themselves, or there could be a very large market for public housing REITs.”
Filings in the U.S. have already begun with Silver Bay Realty Trust Corp. announcing plans to create a REIT last month. Scottsdale, Ariz.-based American Residential Properties Inc., which acquires and manages single-family homes is another that may soon trade publicly.
Gary Berman, the president of Tricon and David Berman’s son, said his company is now a top 10 player in the U.S, for single-family homes — a significant investment for the company which has traditionally owned U.S. land.
“We expect by the end of the year to own 1,000 homes and we just started in April. We hope to have 2,500 homes under management later this year,” says Mr. Berman, noting the homes being purchased are held in a REIT within Tricon.
That will make it easier to turn what is a private REIT into a separate public entity or sell it en masse to a major pension fund investor.
Jimmy Shan, an analyst with Toronto-based Griffiths McBurney Securities, said single family homes could be the next wave of REIT formation. “That is the debate right now, whether this is a new institutional asset class,” said Mr. Shan, who follows Tricon. “The question is: ‘How much scale can get you get?’”
Mr. Shan says the operational intensity of managing individual homes makes it difficult but it is also challenging to accumulate the portfolios. “You can buy an apartment building and get 100 units, here you have to buy a home every time. I think originally U.S. guys looked at it and said ‘it’s a great concept but how do you build it and make it a $1-billion portfolio’.”
Summit Industrial REIT did it one building at a time, creating a portfolio from scratch and later selling it for $3.3-billion to Dutch investment giant ING Group in 2006.
“The upside is you do the onesies and twozies and you build a big portfolio that becomes attractive to somebody else,” said Mr. Shan. “The point is it will take time to build up a big portfolio.”
Mr. Shan currently has a buy on Tricon and target price of $6.75. He recently visited some of the company’s San Francisco holdings and came away convinced their strategy can work, adding their holdings could climb in value by 13% over five years.
He says while the vacation home properties may catch the attention of consumers, the real deals may be away from the beaches and golf courses.
“There are two markets, the distressed markets and non-distressed markets. In the non-distressed markets, and I’d put vacation homes in there to a degree, prices are not as compelling as what these guys are buying,” said Mr. Shan.