? Even if the U.S. is relatively late in its economic expansion, the real estate sector still has a few years of growth left, the executive said.
? With consolidations and government-sponsored enterprises providing financing to single-family rental companies, the sector has proven it is a "real business" as opposed to "a trade," the executive said.
? Small and midsize single-family rental companies are showing more interest in secondary and tertiary markets that have not been picked over by real estate investment trusts, with cities such as Pittsburgh; Cincinnati; Kansas City, Mo.; and Birmingham, Ala., attracting attention, the executive added.
|Gary Beasley, CEO and co-founder |
Gary Beasley is the CEO and co-Founder of Roofstock. Previously, he was the co-CEO of Starwood Waypoint Residential Trust, which he led through its spinoff. The company later merged with Colony American Homes and merged again with Invitation Homes Inc. Beasley spoke with S&P Global Market Intelligence at the 2017 IMN Single-Family Rental Investment Forum West in Phoenix.
The following is an edited transcript of the conversation.
S&P Global Market Intelligence: Roofstock's marketplace has been operating for about a year and a half. How has the overall housing market evolved during that period, and how has the single-family rental sector changed?
Gary Beasley: I would say the housing market has continued to improve. And nationally now in most markets we're back to peak levels. So we covered all the ground that we lost during that downturn. And some markets are at all-time highs, with places like Austin, Dallas. Places like Nashville and the Bay Area have risen to new levels. There's still some places like Florida that have been slower in the recovery, but on average we’re back to where we were.
In terms of the single-family market, it has evolved tremendously in the last year and a half since we've been active at Roofstock. I think we've seen continued consolidation among the biggest players. So I was very early at Waypoint Homes, we built that platform out, we took it public with Starwood Capital in 2014. I left to start Roofstock in May of 2015. But later that year, Colony and Starwood merged together to form Colony Starwood.
More recently that legacy company merged into Invitation Homes so it's now part of a 82,000 home conglomerate. Just as context, at Waypoint we were the first owner-operator to get to 1,000 homes and that was January of 2012. And by the second-quarter of 2012, Invitation was buying a 1,000 homes a week. The bottom of the housing market was at the beginning of 2012. From that first-quarter on, home prices have been going up steadily.
During the first day of investment forum, you talked about a possible housing correction. Would you like to elaborate on your comments?
Boy, if I knew there was a coming correction in any market, I would not be doing what I do today, in fairness. We're nine years into an expansion, so there's often this rule of thumb, 10-year cycles.
Real estate has only recovered since 2012. From a real estate, housing standpoint we're really only five years into that recovery. Often times, you won't see housing directly correlated with the stock market. Even if we're fairly late in our economic expansion, there may still be a little more room to run on the real estate side, because we had this once-in-a-generation drop, where it dropped over 30% nationally.
How would you characterize investor appetite for single-family rental homes? How has the industry shifted over time?
What I'm finding is that it's a very attractive new asset class if you will, for a number of reasons. A lot of people understand housing and are comfortable with a hard asset and may not be as comfortable with just a financial product, like a stock or bond. They're a little more esoteric. They understand it's a house, it produces cash flow, there's a title to it, it's tax efficient because you can depreciate the asset, you can deduct many expenses, it's very efficient to leverage, so you can get good price-debt density as an investor, it's uncorrelated to the equity market.
As equities have continued to run, we're seeing more and more people taking money out of the stock market and putting it into hard assets. And housing is one that is attractive because if you look at real estate asset classes as verticals, housing is probably the most fairly priced of all of them. The others are all kind of trading at record low cap rates.
Single-family rental REITs have become major players in the sector, amassing nationwide portfolios. What does Roofstock offer investors that REITs do not?
There's advantages and disadvantages to both REITs and directly investing in housing. The advantage of REITs is you have perfect liquidity and you have broad diversification. The advantages of investing directly in housing is it's not an equity so there's no direct correlation with the stock market, like you do with REITs. You can use a lot more leverage, REITs tend to get penalized with 30% or 40% leverage. You can lever up to 80% with these homes and really improve your return on equity, hence the distributions that you can get from a privately held portfolio tend to be higher. If you look at the REIT dividends today, they're in the 3% or less range. You can get twice that or more on a privately owned portfolio.
You can also pick your markets, so for example if you believe in Nashville or Boulder, you can make concentrated bets by buying properties in those areas that could potentially run ahead of the market. When you buy a REIT, by definition, you're buying a very broad basket of exposure.
What was your big takeaway from the conference?
I think if I was to take a step back, and look back at the tone or tenor of the conference, right now, it's that the single-family rental industry has proven it's a real business and not just a trade. Every year up until now, people have asked the question: "Are you sure it's just not a trade?"
With the Invitation Homes IPO and the consolidation and the quarters a lot of these public companies have been reporting, people now believe it's a viable asset class much like multifamily. So that question's been answered. I think it's only 2% institutionalized. There's a lot of talk about where does that go. Does that go to 5%? Does that go to 10%? It probably gets somewhere in that range, which means there's a lot of room to go on the consolidation side.
Another theme that I'm seeing is there's a lot more interest in secondary and tertiary markets that have not been picked over by the REITs, places like Pittsburgh, Cincinnati, Kansas City, Birmingham, interesting markets with lower price points with good yields, and I think the opportunity to perhaps get disproportionate returns relative to some of the other primary markets. And also Freddie Mac is showing interest, they got $1.3 billion approved to do financing in the sector.