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CalPERS feels the heat as single-family rentals face more scrutiny

Activist calls Ares' investment in single-family firm Front Yard Residential a 'clear headline risk' and urges pension to address eviction policy.

CalPERS: the Sacramento-based pension urged to confront Ares over single-family rental investment.

The California Public Employees’ Retirement System is taking a closer look at its relationship with Ares Management after a single-family rental company backed by the firm came under fire for its evictions practices.

During the CalPERS Board of Administration meeting on Monday, an advocacy group called the Private Equity Stakeholder Project used the public commentary period to level harsh accusations at Front Yard Residential, a single-family rental company acquired by Ares and New York-based investment firm Pretium Partners earlier this year.

Alyssa Giachino, a representative from PESP, said Front Yard had flouted federal guidelines restricting evictions during the pandemic by filing notices against more than 500 tenants. She also said the Georgia-based company had moved to evict residents in Black neighborhoods at a rate disproportionate to their white counterparts. Specifically, she cited the majority-Black counties of Clayton and DeKalb in metro Atlanta, where the group says Front Yard filed eviction documents against 16 percent and 18 percent of tenants, respectively.

“The company’s evictions filings, particularly its disproportionate filings against Black renters…are clearly a headline risk,” Giachino said. “Ares Management’s failure to address or even respond to questions about its company eviction practices represents a significant management failure on Ares’ part, one that CalPERS should be concerned about given its recent investment of $1.3 billion.”

CalPERS is not an investor in Front Yard, nor does it list Ares as one of its external real estate managers, with its 2019-20 annual report showing no exposure to the firm’s real estate funds. It did, however, make commitments to a pair of 2020-vintage private equity vehicles: $1.08 billion to Ares Capital Europe V and $147 million to Ares Private Opportunities, according to PERE affiliate publication Private Equity International. The pension did not respond to a request for comment.

In a statement to PERE, Ares said it had no board seats or control over Front Yard, with Pretium acting as the sponsor. Also, Ares understands Front Yard to be following the moratorium criteria outlined by the Centers for Disease Control and Prevention, meaning it would not evict a tenant with a valid hardship declaration. The statement also noted that an eviction filing is the first legal step to address non-payment of rent, and often does not result in the removal of the tenant.

“Based on data provided to us from Front Yard, only a fraction of Front Yard’s eviction filings have resulted in actual evictions,” the company said. “Based on data provided to us from Front Yard, actual evictions from acquisition of Front Yard through end of May represented less than 0.2 percent of homes.”

The statement added that the accusation that Front Yard has targeted Black residents for eviction is “without merit,” as the company does not keep track of the racial backgrounds of its tenants.

Still, Giachino implored the investor to leverage its relationship with Ares to address the evictions practices at Front Yard. “Given the scope of CalPERS’ relationship with Ares, we believe CalPERS should ask Ares Management why its home rental firm is evicting renters in majority-Black counties at five to six times the rate of tenants of majority-white counties,” she said. “In addition, please ask Ares to meet with renters to discuss what steps it will take to address concerns that Front Yard-Haven Brook tenants have raised.” Haven Brook is Front Yard’s property management arm.

Theresa Taylor, chair of the CalPERS investment committee, asked that the pension’s private equity team follow up with Ares about the accusations. Chief investment officer Dan Bienvenue said he had already broached the topic with Ares – reports about Front Yard’s evictions were previously carried by NPR, CBS News, Bloomberg and Reuters – but would do so again following the meeting.

SFR craze

Last fall, Ares and Pretium partnered to take Front Yard private at a price of roughly $2.4 billion. Ares tapped its real estate and alternative credit platforms for the acquisition, which closed in January. By adding the listed firm’s nearly 15,000 single-family rental properties, Pretium grew its exposure to the sector to 55,000 homes.

The transaction was part of a flurry of large-scale, institutional investments into the strategy. JP Morgan Asset Management launched a $625 million joint venture with listed specialist American Homes 4 Rent. Nuveen Real Estate pledged $400 million to a single-family rental platform called Sparrow. Brookfield acquired a 10,000-home platform called Conrex Property Management and launched a $300 million sector-specific fund. Even Blackstone, one of the original institutional managers to enter the rental home market in the wake of the global financial crisis, bought back in via a strategic investment in Toronto-based Tricon Residential, one of the more active firms in the space.

Among the more ambitious entrants to the space is Boston-based Rockpoint Group. It rolled out a $375 million joint venture with Blackstone’s single-family rental spin-off, Invitation Homes, then followed that up with another $250 million partnership with Atlanta-based specialist Resicap. Rockpoint envisions managing a platform of $2.5 billion-worth of rental homes, the firm told PERE last fall.

Under the microscope

Institutional capital’s advance into this market has not gone unnoticed by regulators. In March, the Consumer Financial Protection Bureau and Federal Trade Commission issued a joint statement that they would monitor and investigate eviction practices by private equity groups and multi-state landlords to make sure they were complying with federal, state and local eviction moratoria.

PESP’s Giachino first flagged Front Yard’s uptick in evictions during CalPERS’ board meeting in April. At the time, she said the company had filed 350 eviction notices, including 270 in Georgia’s Clayton and DeKalb counties. At this week’s meeting, she said evictions filings in those two counties had surpassed 390.

Front Yard disputed PSEP’s claims in a statement to PERE: “Front Yard is in full compliance with all applicable laws and regulations and has not evicted any resident with a valid CDC declaration in place. Front Yard seeks to work with its residents to avoid evictions, and does not collect racial composition data. Claims of targeting residents of certain demographics are false.”

Since last September, PESP has tallied 70,000 eviction filings by corporate landlords in several key Sunbelt states: Arizona, Texas, Florida, Nevada, Georgia and Tennessee. More than half of those have come since the beginning of this year, though the monthly totals have declined from 7,945 in March to 6,550 in April and 6,026 in May.

Evictions are just one of the headline risks that have cropped up around the single-family rental strategy amid its proliferation. Concerns about private equity shops inflating home prices and elbowing out first-time homebuyers have featured prominently in newspapers ranging from the New York Post to the Wall Street Journal.

Rental properties make up a small portion of the US single-family home market and those owned by institutions are fewer still. Of the 7.6 million houses that traded hands last year, 0.14 percent were bought by large companies, according to the National Rental Home Council, which advocates for the industry. But as the sector grows, so too does the scrutiny applied to it.