Real Deals

Real Deals: Rental home buyer likely to keep investing in Triangle after IPO

dbracken@newsobserver.comAugust 7, 2013 

Last week, American Homes 4 Rent, the large investor that has been gobbling up single-family homes in the Triangle and turning them into rentals, raised $705.9 million in an initial public offering of stock.

Depending on whom you listen to, the IPO was a notable milestone for a fledging industry or the latest example of how the housing market has once again become a playground for financial engineers.

One thing is certain. If American Homes 4 Rent continues to acquire homes in the Triangle at its current pace, its success or failure will be closely watched in communities where it has been buying properties.

The company is now the second-largest owner of homes in the buy-to-rent industry behind the private-equity firm Blackstone. As of June 30, the company owned 17,969 homes in 21 states and had 1,152 more in escrow.

In the Triangle, American Homes 4 Rent is quickly becoming a major player in an industry that has historically been dominated by smaller, mom-and-pop operations.

Since December it has acquired more than 640 homes in Durham, Johnston and Wake counties, according to property records. The vast majority of those – more than 500 – are scattered about Wake County.

While that investment is considerable, it doesn’t put the Triangle in the company’s top 10 markets, according to its regulatory filings. Charlotte, where American Homes 4 Rent has invested $133.5 million acquiring 766 homes as of June 30, was the company’s 10th largest in terms of units owned.

But expect more investment in the Triangle, as this region is an ideal fit for the company’s criteria: places with above median household incomes, good schools and a desirable quality of life.

Model unproven

Given that the buy-to-rent industry rose out of the ashes of the housing bust, the question going forward is whether American Homes 4 Rent and other companies in the sector can build profitable businesses as housing market conditions change. American Homes 4 Rent plans to use the proceeds from its IPO to rapidly expand its operations “even if the rental and housing markets are not as favorable as they have been in recent months.”

At the moment, the company’s business model remains unproven.

American Homes 4 Rent reported a net loss of $7.7 million in the first quarter on revenues of just $6.6 million. The company had leased just 9,882 of its homes as of June 30, an occupancy rate under 50 percent.

The improving housing market will make it more costly for American Homes 4 Rent to acquire properties. In addition to dealing with rising home prices, the company will also likely have fewer opportunities to scoop up distressed properties. In its regulatory filings, the company reported that between July 1 and July 9 it acquired 512 homes, with about 38 percent of those being acquired in foreclosure auctions.

In the Triangle, the bulk of the company’s inventory has not been foreclosures. It has even purchased a sizable number of new homes from builders.

Investor interest cools

Much will depend on the ability of American Homes 4 Rent to act as an efficient and responsive landlord on such a vast scale. There are some hints that the company may be up to the task. The occupancy rate for the homes that American Homes 4 Rent has owned for longer than 90 days was 97 percent, as of June 30, according to regulatory filings.

And while the company’s acquisition costs will rise as the housing market improves, it may also benefit as homeownership becomes more expensive. In particular, rising interest rates may keep more families in rentals.

Still, there are strong signs that the initial enthusiasm among investors for the rent-to-buy model has cooled. Two other similar companies that went public before American Homes 4 Rent are trading below their offering prices, and American Homes 4 Rent’s IPO was far smaller than the $1.25 billion it hoped to raise when it filed in June.

The company’s shares, which began trading last week at $16, closed Wednesday at $15.65.

Bracken: 919-829-4548

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