Oh, how quickly they grow up. In the past few months, two private equity real estate firms that have become high-profile players in the single-family rental market are moving to take their ventures public.
Last month, Colony American Homes, the single-family rental platform of Colony Capital, registered for an initial public offering with the US Securities and Exchange Commission. The filing occurred less than two months after the platform completed raising approximately $2.2 billion in private capital commitments. Meanwhile, Waypoint Homes Realty Trust, another firm that has raised private capital to invest in buy-to-rent homes, registered for its own IPO in early April.
Colony American and Waypoint’s stock market debuts will follow those of Silver Bay Realty Trust, which became the first dedicated single-family rental business to launch an IPO in December, and American Residential Properties, which began trading on the New York Stock Exchange last month.
Firms that are going public are doing so for two reasons. Some wish to create liquidity as an exit or option to exit, as in the case of Silver Bay, a company formed through the combination of single-family rental portfolios owned by Provident Real Estate Investors and Two Harbors Investment Corp-oration. Others, however, see it as a new means of fundraising.
“We do not view this as an exit – just a mechanism to access more permanent capital to continue growing the company,” said Waypoint co-founder Colin Wiel on his firm’s proposed IPO. That permanent capital usually is raised at a lower cost, since the return expectations of public equity investors typically aren’t as high as those of private investors. Public firms consequently have more flexibility in terms of the properties they can buy.
The recent filings have raised questions over why some firms are launching IPOs so early. Colony American, for example, was established just last year, although it had amassed 9,931 single-family homes as of April 30, one of the largest such portfolios in the US. Other buy-to-rent companies haven’t yet stabilized the majority of their properties and still have overall low occupancies for their portfolios. In many cases, they still are building their operational platforms and haven’t yet established a stream of mature net operating income.
Dave Bragg, managing director at Green Street Advisors, a real estate research and consulting firm, disagreed. “It’s early innings in the industry as a whole, but I wouldn’t say it’s too early to have a few public companies,” he said. “It allows the public markets access to an opportunity set they wouldn’t otherwise have.”
One of the drivers of the recent IPO activity, after all, is the interest from the public markets. With the stocks of both Silver Bay and American Residential currently trading
below their IPO price, “I wouldn’t characterize the interest as strong,” said Bragg. “Still, there is interest and awareness of single-family rentals as a way to play the housing recovery directly.”
Indeed, the rebound in the housing market is another impetus for going public now. According to the S&P/Case-Shiller Home Price Indices, average home prices rose 9.3 percent in February in the 20 cities covered – the highest annual growth rate in nearly seven years.
While going public at an early stage has its advantages, it also can be a risky move. If the company fails to perform to investors’ expectations, it could see the value of its shares drop and become the target of a takeover or have to shut down altogether. “If you fail, the public markets are very quick to turn on you,” said one industry player. “It could put you in a worse situation than if you had stayed private and locked up private capital.”
Another question is how much demand there is in the market to support this new type of publicly-traded REIT. One test is whether public investors will be able to differentiate between Colony and Waypoint, which have somewhat divergent backgrounds and strategies. Unlike Colony, a newer but more aggressive investor, Waypoint has been acquiring buy-to-rent homes since 2008 and has grown its business organically. The firm also tends to purchase slightly older homes than Colony and other recent entrants such as The Blackstone Group.
Some firms already have decided against going public or selling their assets to REITs. “While the yields for single-family rental have compressed, we believe we are in the early stages of a sustained housing recovery,” said Tom Shapiro, president of GTIS Partners, which buys single-family rental homes as part of its US residential investment strategy. “The consumer will be the best exit in the future.”
Others are taking a wait-and-see approach. “It’s very early on in the development of this industry,” said Oliver Chang, managing director at Sylvan Road Capital. “There’s a lot to be proven: whether you can manage these properties, whether you can perform relative to multifamily REITs and whether you can do it for the long term.”
In the short term, firms that take the IPO route stand to benefit from access to cheaper capital. Still, it’s too early to predict how the single-family rental strategy will fare with more public exposure. After all, the industry still has a lot of growing and maturing to do.