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Front Yard puts itself on the market, but public REITs likely aren't interested

In settling a challenge from an activist investor, Front Yard Residential Corp. became the second small-cap single-family rental real estate investment trust to announce it was exploring strategic alternatives in 2019. Front Yard's portfolio may not be a close fit for the larger public REITs in the sector, industry experts said, but there are a number of private equity firms targeting single-family rental homes who could potentially show interest.

Front Yard agreed to launch its process, with Deutsche Bank Securities Inc. as its adviser, as part of an agreement with investor Snow Park Capital Partners LP. In March, Reven Housing REIT Inc. began a strategic review of its own, in what its CEO described as an effort to find an institutional capital partner.

Front Yard, with its roughly $587.3 million market capitalization prior to its settlement with Snow Park, is much larger than Reven, which had a market capitalization of roughly $44.7 million on May 20. Both companies, though, are dwarfed by the largest public REITs that own rental houses — Invitation Homes Inc. and American Homes 4 Rent — with market capitalizations of $13.19 billion and $7.14 billion, respectively.

While either of the industry leaders could theoretically buy either of the smaller REITs, "I'd have to say, looking at the portfolio, that there's zero chance Invitation wants it," Robert W. Baird analyst Drew Babin said in an interview.

Among the complicating factors, Babin said, is the fact that Invitation has been seeking to reduce its debt ratios after its acquisition of Starwood Waypoint Homes, and acquiring Front Yard would mean taking on more leverage. More broadly, the company, which owns more than 80,000 properties and has Blackstone Group LP as a major investor, has been focused on pruning its portfolio to focus on its most attractive markets, Babin added.

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While American Homes 4 Rent's portfolio may be a closer geographical fit with Front Yard's, Front Yard's properties on average are still smaller and older, with lower rents, than those owned by either of the public REIT leaders.

"It seems to be a different, more workforce price point," Babin said, noting that Front Yard's average monthly rent in its top market, Atlanta, is $1,123, compared to $1,573 for American Homes in the same area.

Moreover, he added, American Homes 4 Rent has been focused in recent months on building its own rental properties. Asked in an earnings conference call whether the build-to-rent program made American Homes less likely to pursue a portfolio like Front Yard's, CEO David Singelyn said the company's main considerations in acquisitions are portfolio and tenant quality.

A more logical fit, Babin suggested, might be a private equity buyer, which would likely be more comfortable taking on added leverage and could handle the spending on repairs that an older portfolio would likely involve, without having to answer to investors on quarterly earnings conference calls.

Potential private equity investors in single-family rental include a value-add fund run by Heitman LLC; a residential-oriented fund from Man Group PLC; and dedicated single-family rental funds from Pretium Partners LLC, Amherst Holdings LLC and Cerberus Capital Management LP.

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Front Yard executives could not be reached for comment, but Reven Housing REIT CEO Chad Carpenter has argued that lower-priced single-family rental properties, with higher yields relative to purchase price, are a solid investment.

"I think the point is, single-family homes is a great asset class to invest in," he said in an interview this week. "I don't think that's the issue that Front Yard has and we have."

Carpenter argued that Front Yard trades at a discount to net asset value because of investor concerns about corporate governance, including its relationship with its external manager, whereas Reven trades at a discount because it has not been able to grow large enough to complete an underwritten public offering to raise capital.

Despite the differences in size and age between Reven's and Front Yard's properties and those of the public REIT leaders, there is in fact a potential fit between the companies, Carpenter said.

"The single-family homes are residential units that lease, right?" he said. "There's different price points and different sizes, but in theory, they're all residential units that rent to somebody, so they all fit. Everybody fits."

Carpenter declined to discuss Reven's strategic review, but, asked whether a combination between Reven and Front Yard made sense, replied: "We would obviously love to grow Reven. If they were to sell, we'd probably like to buy them, but we don't have the capital to buy them, so we're not a bidder for them, unfortunately."

"If I had the money, I would look at it, for sure," he added. "If I can buy assets at a discount to NAV, that's a good trade, if the yields are right and it fits our yield strategy."

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