Investors had a completely different plan. Take advantage of the foreclosure crisis and buy as much bargain-basement single-family homes, rent them out and sell them off when it's favorable. But looks like this emerging class of real estate is taking a different route as big players are consolidating which could make remaining stocks left standing potentially more attractive, Diana Olick of CNBC reports.
Just last week, a merger, the third of such deal in the asset class for this year, took place between American Residential Properties based in Arizona and American Homes 4 Rent based in California. The rental companies own 8,938 and 38, 377 rental homes respectively. This joint venture covers 22 states and is expected to yield $5.5 billion of market capitalization as per closing prices on December 2.
"In our view, this is a very positive outcome for both AMH and ARPI shareholders, with substantial upside opportunities for earnings accretion over time," say analysts at Raymond James, American Homes 4 Rent's acting financial adviser. "The sector's recent consolidation should only improve visibility, liquidity, and valuations among the remaining large players."
But Wall Street was not as optimistic with the merger as AMH's shares fell nearly 5% at the close last Thursday which also happens to be the day of the announcement.
Laurie Hawkes, who co-founded American Residential Properties along with CEO Stephen Schmitz three years ago, admit the difficult decision that had to be made for the merge. Until the merger closes, the two remain in the company.
According to Hawkes, challenges in the third-quarter earnings can be attributed to a change in focus; where the "company became less of a buyer and more of a manager of the rental homes", as stated in the article. Despite the rough housing market, she sees potential in the fast growing sector, but also sees capital as the major roadblock.
"The stock market expects us to accomplish in three years what it took the multifamily sector 25 years to do. The ability to raise capital to grow is the critical element for the single-family rental sector, but issuing dilutive equity or increasing leverage were not attractive options for ARPI," Hawkes said. "Absent access to growth capital, we concluded consolidation made sense in order to enhance scale, increase operating efficiencies, share best practices and create additional value for our investors. We are rearranging the chairs in the room to optimize performance."
Rental investors bet on the continuous decline of home ownership rates with lending rules tighter than ever, increasing home prices, and generational shift in attitudes. But Wall Street remains unimpressed.
"The opportunity to buy additional homes at attractive prices is strong, the market demand for rentals is robust and the value of the homes is appreciating, but the stock market has not given credence to the underlying value of the real estate or the sustainability of the cash flows - hence the discount in the trading levels of all of the publicly traded SFR stocks," Hawkes said, referring to single-family rentals.
For Hawkes, demand for rentals is only to go higher with affordable prices and ease of new class of rentals further pulling home ownership rates down, but warns of the need for improvement in professional management.