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Rivals’ Woes Complicate Plans for Invitation Homes IPO

The biggest landlord for U.S. single-family homes can’t ignore the lackluster performance of several publicly traded competitors.

Invitation Homes is the biggest and, by some measures, the strongest of the new breed of landlords that have amassed tens of thousands of single-family homes in the U.S. But the company’s hopes for an initial public offering could be hampered by the struggles of its smaller peers.

Analysts expect Dallas-based Invitation, a unit of investment and advisory giant Blackstone Group, to go public in the next year or two. “My best prediction is that it’s a 2016 event,” says Dave Bragg, managing director, residential and self-storage, at Green Street Advisors in Newport Beach, California. “But it’s not a foregone conclusion that they will pursue an IPO.”

For Bragg the wild card is the performance of American Homes 4 Rent. Invitation’s largest competitor and closest proxy, the Agoura Hills, California–based real estate investment trust went public in August 2013 at $16 a share. Its stock price barely budged, closing at $16.26 on September 18.

“Unfortunately for Invitation Homes, a challenge is the fact that American Homes 4 Rent trades at a big discount to the value of its assets,” Bragg says. “Investors will naturally want to pay a similar discount for Invitation Homes.” That could complicate New York–based Blackstone’s decision about whether to take Invitation public or perhaps even sell its holdings.

Invitation chief executive John Bartling declines to comment on his company’s IPO plans. In general, though, he says, this new business model has proven viable. “Private equity markets and the fixed-income markets are having a very positive experience around the single-family residential industry,” Bartling explains. “For the most part, the companies that chose to go public early are having to mature through the public markets.”

Wall Street–backed single-family landlords emerged in the aftermath of the Great Recession. They began snapping up houses in 2012 and ramped up acquisitions in 2013. Invitation owns 47,000 houses, according to Green Street Advisors, whereas American Homes 4 Rent has 35,000. The No. 3 player, privately held Colony American Homes, owns 19,000 properties.

Three other publicly traded REITs — Starwood Waypoint Residential Trust, Silver Bay Realty Trust Corp. and American Residential Properties — hold smaller portfolios of houses. Shares in those landlords have languished too, and along with American Homes 4 Rent they reported losses for 2013, 2014 and the first half of this year. This week Colony American and Starwood Waypoint announced a merger that is expected to close in the first quarter of 2016. The combined company would own 30,000 homes.

Bartling, a veteran of the apartment industry whose résumé includes stints as CEO of multifamily landlords Walden Residential Properties and Lexford Residential Trust, notes that the growing sophistication of his former business has raised tenants’ standards as they graduate from rental apartments to rental houses. “They’re used to a better fit and finish,” he says. “They’re used to a better quality of service.”

Invitation aims to meet those expectations by renovating the properties it buys before putting them on the rental market. The company focuses on three-bedroom houses that appeal to families.

Invitation won’t divulge details about revenue and profit, but it has begun to reveal some metrics as it packages properties as mortgage-backed securities. Its vacancy rate is 3.5 percent, according to New York–based Moody’s Investors Service, compared with vacancies of 5 to 8 percent for other single-family landlords.

“The demand for single-family residential is very strong,” Bartling says. “It affirms the business model: People do want to live in single-family homes, and they don’t mind renting.”

Many observers say that single-family landlords offer a way to play the decline in the U.S. home ownership rate. Only 63.4 percent of Americans owned their homes in the second quarter of 2015, the lowest level since 1967, according to the U.S. Census. “The broader macro environment for single-family rental is strong,” says Mark Zandi, West Chester, Pennsylvania–based chief economist at Moody’s Analytics.

Although lower home ownership rates are good news for a landlord, Bartling doesn’t see Invitation and its rivals as a replacement for home ownership. Rental houses help consumers to shift from apartment living to home ownership, he says: “We want to provide opportunities for people to move into ownership when they’re ready.”

Low vacancy rates prove that single-family landlords offer a product consumers want. The next step is to turn a profit. American Homes 4 Rent posted a loss of $33 million on revenue of $399 million in 2014. One major obstacle: Maintenance and turnover costs topped $46 million last year, eating up 12 percent of revenue, as the landlord struggled to manage repair expenses.

The sinking share prices of the four public landlords reflect doubts about single-family landlords. “I’ve always been a little skeptical of the whole business model,” says Alex Barron, founder and senior research analyst at the Housing Research Center in El Paso, Texas. Barron thinks many of the companies got started too late. “The housing crash was hopefully a once-in-a-lifetime opportunity,” he says. “The time to be buying was 2008 or 2009.”

But Green Street's Bragg thinks patience could pay off for Invitation. “My sense is that they’re doing well in their effort to build an operating platform,” he says. “They’re taking a very different approach than the four publicly traded single-family rental companies.”

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