American Homes 4 Rent, the largest publicly traded investor in single-family rental homes, has acquired a pool of properties from a subsidiary of Michael Vranos' Ellington Management Group, in what could be a sign of further consolidation in the industry.
The company agreed to pay $126 million for some 900 homes scattered across six states, Arizona, Colorado, Georgia, North Carolina, Tennessee and Texas, it said on Wednesday. The pricing amounts to around $140,000 paid per property.
American Homes and other public landlords, including, Silver Bay Realty Trust and American Residential Properties, have recently been constrained from making many large purchases of rental homes, partly due to the weak performance of their stocks, according to research published by J.P. Morgan in December.
Rental companies are also coping with the climbing cost of financing acquisitions via the securitization market. Investors have expressed the loudest concerns over liquidity and spread stability in the deals, and how refinancing of loans backing the securitizations might play out. Benchmark pricing spreads on rental-backed securities have widened by 25 basis points since August, recent Bank of America data show.
That's not to say that acquisitions of rental portfolios aren't getting done. American Homes said last month it is ratcheting up its property purchases from $300 million to $500 million per quarter.
Other large rental landlords like Blackstone Group's Invitation Homes are also expected to buy or offer bids for more portfolios from mid and smaller-sized companies, which are cashing out as home values rise high enough to make their investment on once-distressed and foreclosed properties worth their while. That could lead to market-wide consolidation, with smaller aggregators rolling up into the largest landlords, said FBR Capital Markets & Co's Steve Stelmach, an analyst with the firm.
That kind of roll-up strategy is preferable to building portfolios through acquisitions made on courthouse steps, and pricing conditions appear to getting more favorable to potential sellers. American Homes will pay a 26% premium to Ellington's costs, according to Fred Small, analyst at Compass Point Research & Trading.
Ellington explored the possibility of turning its rental unit public in July 2013, but it has not executed on those plans. According to a July 2013 filing for Ellington Housing, the firm owned 707 properties at the time, with contracts for another 55 homes pending.
Jonathan Gray, Blackstone' global head of real estate, recently said that Blackstone may soon explore options to buy other publicly traded rental REITs. Blackstone CEO Steve Schwarzman repeated that possibility in a December interview with CNBC, describing real estate as a "terrific" investment for the firm and counting the ways they could exit the rental business down the road. "You can create a REIT, you can take it public, you can sell individual houses, you can sell them all together, you can sell them in geographic pieces. There are a lot of ways to realize on that," he said.
Despite the rising cost of securitization financing, researchers at Morgan Stanley expect to see issuance of around $46 billion of rental-backed securities in 2015, up from approximately $30 billion in 2014.
