Sometimes it pays to wait.
Wall Street landlords bought thousands of homes and sold stock to the public before they'd even filled many of the properties with renters. Now those companies are struggling to persuade investors they can operate efficient businesses.
Shares of the four publicly traded U.S. home-rental firms are below their 2012 to 2013 initial offering prices and have fallen as much as 5% in the past month. The companies are learning to operate at the same time they're trying to please investors, unlike landlords backed by Blackstone Group, Colony Capital Inc. and Goldman Sachs Group Inc. alumnus Don Mullen, which haven't turned to equity markets for capital.
“Companies should be built privately,” said John Bartling, chief executive officer of Blackstone's Invitation Homes, the largest U.S. owner of single-family properties. “Unless you can communicate it and forecast it well, you're going to struggle with investors as they try to determine how to forecast your earnings.”
Blackstone, with almost 50,000 houses, has indicated it's in no rush to take Invitation Homes public as a real estate investment trust. Jonathan Gray, head of real estate at the New York-based firm, said in April that “at some point in the next 12 or 24 months, we'll have a business that can come public.” Mr. Bartling declined to comment on any IPO plans.
(More: Guggenheim adds real estate to its smart beta lineup)
For those already public — American Homes 4 Rent, American Residential Properties Inc., Silver Bay Realty Trust Corp. and Starwood Waypoint Residential Trust — shares are trading below the value of the underlying assets, according to Haendel St. Juste, a Morgan Stanley analyst. Some earnings reports this month disappointed investors as expenses remained unpredictable, prompting renewed questions about the prospect of managing thousands of scattered properties.
UNDER MICROSCOPE
“In hindsight, the timing of their going public could be viewed as a mistake,” said Jade Rahmani, an analyst with Keefe Bruyette & Woods Inc. “They had to grow under a microscope and have generated less income so far than investors expected. They should basically be looked at as startups.”
American Homes 4 Rent, the largest single-family rental company after Blackstone, with about 37,500 homes, fell the most ever on Aug. 7 after reporting second-quarter earnings. The Agoura Hills, Calif.-based landlord showed higher-than-expected costs when properties got new tenants.
The stock dropped 11% in the past year to $15.68, below the IPO price of $16 in July 2013.
“The Achilles heel of the thing is they have not been able to consistently show control over unit expenses, particularly around high turnover periods,” said Reed Cassady, a senior research analyst at Legg Mason Inc.'s ClearBridge Investments, which owned 4.4 million shares as of June 30. “They've demonstrated that the model works outside of that one issue.”
American Homes 4 Rent is working on ways to manage costs of repairs and maintenance, Chief Operating Officer John Corrigan said on an Aug. 7 conference call with investors.
“There is some low-hanging fruit, but many initiatives will take longer to execute,” he said.
These firms are reaching limits of their ability to raise capital because they can't issue more stock without hurting current shareholders, said Dave Bragg, a residential REIT analyst at Green Street Advisors in Newport Beach, Calif.
“American Homes 4 Rent doesn't have any sort of cost-of-capital advantage that would allow them to go out and issue stock and buy assets and grow the portfolio,” Mr. Bragg said.
APARTMENT REITs
Apartment REITs, which have a long history, are more attractive to investors — and have performed better this year — because they have more consistent costs than scattered rental houses, said Anthony Paolone, a JPMorgan Chase & Co. analyst.
Single-family landlords are “competing against the regular apartment space, which is performing incredibly well,” he said. “It's still a niche that's finding its way in the public markets.”
Shares of American Residential Properties are trading at 15% below their May 2013 IPO price and are down about 3.8% in the last 12 months. The performance has drawn criticism from activist investor Jonathan Litt, co-founder of Land & Buildings Investment Management.
(More: VEREIT, formerly American Realty Capital Properties, plans to cut holdings by $2.2 billion)
Mr. Litt, whose firm held 1.5% of the Scottsdale, Ariz.-based landlord's shares as of June 30, advised CEO Stephen Schmitz to raise the stock price by the end of 2015 by repurchasing stock with proceeds from sales of some of its roughly 9,000 houses.
“If that doesn't work, I'm hopeful he'd be open to selling the company,” Mr. Litt said in an interview.
Mr. Schmitz responded to Mr. Litt's urgings for asset sales and buybacks on an Aug. 6 conference call.
“As we get towards the end of the year, obviously we've got to take a hard look,” he said. “And it's not something we've ruled out by any stretch.”
Mr. Schmitz and American Homes 4 Rent CEO David Singelyn didn't reply to requests seeking comment.
RELATIVE PERFORMANCE
Starwood Waypoint Residential Trust, which owns about 12,500 homes and is backed by Starwood Capital Group's Barry Sternlicht, is down 5.8% in the past 12 months. The firm is being unfairly judged by the performance of its peers, according to CEO Doug Brien.
“Even though we have raised our guidance range and delivered on the expectations we have set, we are seemingly lumped in with others that do not have the operating history nor the performance we have produced,” Mr. Brien said in an e-mail.
The Oakland, Calif.-based company is the only one of the REITs to rise in the past month, with a 1.6% increase.
Silver Bay, which is also trading below its December 2012 IPO price of $18.50, is using sales of homes in Southern California and Atlanta to pay debt and repurchase shares. Anh Huynh, a spokeswoman for the Plymouth, Minn.-based landlord, declined to comment.
Invitation Homes is selling homes that don't fit its strategy, including about 1,300 in Atlanta. The company is continuing to buy properties and hone operations without the same investor scrutiny that's plaguing its public peers.
“We are still investing actively through the private equity markets, but always have an eye on the public markets,” Mr. Bartling said.
