Single-family rentals see a ‘second wind’ of fundraising activity

Firms like Cerberus Capital Management and Amherst are focusing on the sector as investor interest picks up on the back of Invitation Homes’ IPO success.

Private fundraising activity for single-family rentals is on the rise again as strong public market performance has helped the once-fledgling sector become more widely accepted as a property type, according to multiple industry experts.

“Single-family rentals, in the past year or two – 2017, 2018 – I’d characterize it as a second wind in private market fundraising,” Green Street Advisors analyst John Pawlowski told PERE.

Cerberus Capital Management and Amherst Holdings are two of the latest firms seeking to raise capital for single-family rental focused funds. Cerberus is reportedly seeking $500 million to expand its single-family rental portfolio from 11,000 homes to more than 40,000. Meanwhile, Amherst held an initial close on its fund last week, according to an SEC filing, and is understood to have raised $600 million. PERE also understands that the firm intends to acquire existing single-family rental portfolios in the market rather than buy and aggregate assets on its own.

The two firms join Pretium Partners, which raised $1 billion in July, and Man Group, which launched a fund earlier this year as part of a surge in single-family rental focused fundraising activity during the past year.

The total capital raised this year for funds participating in the single-family rental strategy is poised to exceed the previous peak in 2013. The strategy garnered $1.45 billion as of August 2018, compared to the $1.45 billion raised in all of 2013, according to PERE data. In addition, the funds are larger in size on average – the $1.45 billion raised so far in 2018 is attributed to the close of just two funds, as opposed to the close of five funds reported in 2013.

Pawlowski has observed an acceleration in fundraising in the last two years, mostly from existing players, and said many of the new funds have had no difficulty attracting capital. He cited Tricon’s $750 million joint venture announced in July with GIC Private and the Teacher Retirement System of Texas – two large institutional investors – as an example that fundraising efforts may be gaining steam.

Roofstock chief executive Gary Beasley, who previously acted as co-chief executive of Starwood Waypoint Residential Trust and now runs a marketplace for buying and selling single-family rental homes, attributes the uptick in single-family rental fundraising to the successful initial public offering of Blackstone’s single-family rental REIT Invitation Homes in January 2017. Since raising $1.5 billion in one of the largest REIT IPOs in history, Invitation Homes’ share price has appreciated approximately 13 percent. Beasley noted that Invitation Homes and other big players in the space helped legitimize the property type, and the emergence of publicly traded single-family rental REITs gave investors a way to track performance.

After an initial burst of interest around 2013, fundraising activity quieted down as REIT share prices for public single-family rental companies were in a slump, according to Pawlowski. Single-family rental REITs underperformed the apartment REIT index – thought to be the closest comparable sector – by approximately 4,500 basis points from the middle of 2013 until the end of 2015.

Since then, single-family rental REITs have recovered and outperformed apartment REITs by around 5,500 bps, Pawlowski noted. The space has stabilized and players including American Homes 4 Rent and Invitation Homes have continued to see quarterly performance improve. In the last six months, shares of American Homes 4 Rent rose more than 20 percent and Invitation Homes gained almost 8 percent. Both REITs also beat analyst revenue expectations for the last two quarters.

“There doesn’t seem to be a shortage of capital for this space right now,” Pawlowski said.

As single-family rentals have become more widely accepted as a property type, the potential investor base for the strategy has likewise expanded. In fact, some investors are beginning to view single-family rentals as more of a long-term core strategy, rather than an opportunistic bet, Pawlowski added.

Though home prices have appreciated slightly, the property type still produces strong yields, which will encourage some investors to commit capital, particularly as returns for other property types decline, Beasley said.

Based on conversations he has had with firms, Beasley expects new entrants to hit the fundraising trail in the next six to 12 months. Though competition should ramp up, firms that have an established operating platform and a scalable business should not have trouble attracting institutional capital, he said.

Fundraising in 2018 may also be driven by firms that are looking ahead to the next downturn and want to have capital in place to deploy quickly if opportunities arise, according to Daren Blomquist, senior vice president of data provider ATTOM. However, unlike Beasley and Pawlowski, he believes this may be a tough time to raise a single-family rental fund because many investors may not be so forward-thinking.