The strength of the single-family rental housing business was clearly on display over the last month as Invitation Homes raised billions in the capital markets, both through its initial public offering and a billion dollar loan deal with Fannie Mae.
“These two deals together certainly signal that the single-family rental space is here to stay for the foreseeable future,” says Daren Blomquist, vice president with data firm RealtyTrac.
Invitation Homes is an affiliate of Blackstone, the private equity giant. Its deals in January provide even more institutional validation for the business of operating single-family houses as rental properties. Until a few years ago, this segment of the market was almost exclusively operated by mom-and-pop investors with small portfolios. More recently, big institutional owners like Invitation Homes have been scaling back their purchases of new properties in the space.
Fannie Mae loan
Invitation Homes received a 10-year loan for $1 billion from Fannie Mae and Wells Fargo. The loan will be used to refinance earlier bond offerings from Invitation Homes to get a lower interest rate that will improve the performance of the firm’s existing investments. “They are trading their debt for better debt,” says Dennis Cisterna, chief revenue officer with Investability Real Estate Inc.
All of this new capital could potentially change the REIT’s buying habits. “That activity has slowed down very dramatically in the past year,” says Blomquist. “Blackstone and other continue to buy homes very sparingly.”
Investors in single-family homes scaled back their purchases as prices for single-family houses rose. For Invitation Homes, those purchases were always restricted to newer homes in a few markets like California’s Inland Empire, Nevada, Arizona, Florida, Georgia and Illinois, according to Realty Trac’s analysis of 23,000 houses owned by the REIT.
The money raised in the IPO is helpful in itself. But lower interest debt could widen the circle of deals that make sense for Invitation Homes.
“This could potentially change the calculus of what they are looking to purchase,” says Blomquist. “If their cost of capital is lower they could operate on tighter margins on the yield side.”
That means the REIT could afford to buy homes that have higher prices compared to their income. Invitation Homes could also take a chance on buying homes that earn less in operating income relative to their purchase prices, venturing into lower rent housing.
The same strategy could be available for other investors if Fannie Mae offers this kind of loan to the rest of the single-family rental housing sector. “The other big guys can potentially go this route. I don’t think anyone in the industry is looking at this as a one-and-done for Fannie Mae,” says Cisterna. “I’m sure they have their meetings scheduled with Fannie Mae already.”
Currently, the lowest interest rate that a single-family rental owner can find in many markets is about 5.5 percent—compared to the 3.5 percent rate more common for permanent agency financing. “People could get a little more aggressive with their acquisitions,” says Cisterna.
The IPO
Invitation Homes’ January IPO reportedly raised $1.54 billion. The company joins other single-family rental housing REITs Colony Starwood Homes and American Homes 4 Rent.
The only surprise to come out of the IPO was its size. Some industry insiders expected Invitation Homes to sell more stock to raise money, perhaps $9.5 billion to $10 billion. However, the company’s ability to raise capital by refinancing debt probably reduced its need to sell off equity that may have more room to rise in value.
“Who doesn’t like good debt rather than selling off shares?” says Cisterna.
