Friday Letter Northern exposure

While single-family rental properties have attracted an increasing amount of interest from private equity firms and investors alike, Alaska’s intended foray into the strategy is particularly intriguing on a number of levels. 

The Alaska Permanent Fund’s announcement of its plans to invest $400 million in a single-family homes strategy caught the attention of many in the private equity real estate industry this week. Some PERE sources expressed surprise that the $40 billion oil endowment was committing so much of its capital to a strategy that is still largely untested.

Indeed, by putting $400 million – one percent of its total asset value – into investments in single-family rental properties, isn’t Alaska risking too much exposure to one strategy?

Not that PERE has anything against investing in single-family rentals. Indeed, the market offers two benefits that many institutional investors find highly attractive: current income – through stable rents – and yield. Single-family properties currently generate cap rates of more than 8 percent, providing much higher returns than most investments, and those rates have remained stable since late 2010, according to an April research report from data provider CoreLogic.

Until recently, attracting institutional investors into the single-family home rental market was a challenge, largely because of the regional nature of the markets and the difficulty in bundling the properties.

The US government, however, helped to remove some of those barriers last August, when the Federal Housing Finance Agency issued a request for information (RFI) to solicit ideas on the disposition of single-family real estate-owned (REO) properties held by Fannie Mae, Freddie Mac and the Federal Housing Administration. After receiving more than 4,000 responses to the RFI, the agency announced in February the first pilot sale involving nearly 2,500 Fannie Mae REO assets – 70 percent of which were single-family. Bids for the transaction are due next month.

Despite these factors, major commitments from investors still are rare. Even the California Public Employees’ Retirement System (CalPERS) – the largest US pension fund, with $235 billion in assets – currently only has indirect exposure to the strategy through its investments with private equity firm GI Partners.

In January, GI Partners announced that it had committed up to $400 million to the strategy through a separate account with Waypoint Real Estate Group, a California-based private equity real estate firm that invests exclusively in foreclosed homes to rent. The investment was made on behalf of the $1.9 billion GI Partners Fund III, to which CalPERS has contributed $500 million, but single-family rentals are by no means the sole focus of the fund.

Therefore, it is all the more remarkable that the state nicknamed The Last Frontier – and said to be a relatively conservative investor – would be a pioneer in the single-family rental space, as one of the first US pensions or endowments to commit a substantial amount of capital. For the record, Alaska does not plan to purchase or directly own any single-family rental homes, but instead it will invest through another California-based firm, American Homes 4 Rent, to purchase portfolios of vacant homes in the contiguous US.

The choice of American Homes 4 Rent, moreover, is a curious one, since many players in the single-family rental market told PERE they had never heard of the firm prior to Alaska’s announcement. Why would the state opt to invest with an apparently little-known entity when it could instead partner with established fund managers such as Colony Capital, which has been acquiring single-family rental properties on behalf of its latest debt fund, or operators like Waypoint?

Aside from the fact that American Homes 4 Rent currently owns 1,000 single-family homes, Alaska revealed nothing more about the firm in its announcement, and it did not respond to repeated requests for additional information. The company was similarly unresponsive, and its website also was scant on detail.

Upon further investigation into the matter, however, PERE has learned that the firm is owned by Wayne Hughes, the founder of Public Storage, the largest self-storage REIT. Hughes ranked #232 in Forbes’ list of the world’s billionaires in 2010 and had a net worth of $3.9 billion at the time. He is said to have been self-funding American Homes 4 Rent’s acquisitions up until now.

Hughes, meanwhile, is no stranger to the Alaska Permanent Fund, which currently owns $13.8 million worth of Public Storage stock, according to its website. Sources suggest that the relationship between Hughes and Alaska dates even further back, to the days before Public Storage became public in 1984.

So, will Hughes – and by extension Alaska – find similar success in single-family rentals? It may be too soon to tell, but the strategy looks promising, and the private equity real estate industry certainly will be watching with interest.