The REO-to-rent sector has attracted capital and interest from several meaningful REITS, according to a recent Keefe, Bruyette & Woods report.
Colony Financial and Two Harbors are examples of two mortgage REITs that have actively invested in this sector so far. To date, these companies have invested approximately 15% and 5% of their respective equity in the sector. This equates to roughly $300 million of capital but over $700 million including investments by affiliates, according to the KBW report.
Since the beginning of the year, Colony Financial has been investing in a joint venture created to acquire single-family homes for rent. The venture is managed by an affiliate of Colony Capital called Colony American Homes. To date, Colony American has acquired roughly 3,500 homes in Arizona, California, Texas, Nevada, Colorado and Georgia. Of these 3,500 homes, Colony American has acquired 2,100 and is in escrow on 1,400 homes.
Two Harbors, a mortgage REIT that has historically invested in agency and non-agency MBS, started buying REO-to-rental assets in early 2012. As of Aug. 31, Two Harbors had invested about $150 million in single-family residential properties on about 1,370 homes, the KBW report said. The company has been acquiring properties in Arizona, California, Florida, Georgia and Nevada, and recently expanded to North Carolina.
KBW said it expected other REITS to enter the space over time.
In May 2012, Beazer Homes, a single-family homebuilder, announced the formation of a private REIT called Beazer Pre-Owned Rental Homes with private equity firm Kohlberg Kravis Roberts. The REIT said it planned to raise $85 million in capital, including $20 million from Beazer that consisted of its 200 single-family homes in Phoenix and Las Vegas, and $65 million from outside investors. In 2011, Beazer formed a REO-to-rental program in Phoenix with an initial investment of $20 million, which the company contributed to the REIT, the KBW report said. BZH and KKR have said they plan to take the REIT public once it reached $150 million of capital.
Blackstone Group has reportedly spent more than $250 million in 2012 buying REO-to-rental properties, according to Bloomberg. It also plans to form a public REIT or sell the assets to another company or tenants. "Currently, Blackstone is the largest investor aiming to enter the rental market, as it is in the process of raising $13 billion for what will be the largest private equity real estate fund ever created," the KBW report said.
American Residential Properties is another REIT investing in REO-to-rental properties in the Phoenix area. In early 2010, the company launched the ARP Phoenix Fund I, raising $225 million to support their acquisition activity in the space. President Laurie Hawkes expects that the REIT will go public next year, according to the KBW report.
KBW added that another potential REIT that will enter the space is the commercial mortgage REIT called Starwood Property Trust. "The company has mentioned the REO market as an area of potential interest but has not announced anything definitive," the report said.
The American Securitization Forum (ASF) hosted a sunset seminar on REO-to-rent on Oct. 10 where panelists discussed the different strategies investors can apply to scale the asset class. The REIT model is a more permanent and longer-term investment stratgey that could work well with securitization, said Dash Robinson, a managing director at Wells Fargo who spoke at the ASF event.