A pioneer in the U.S. home-rental boom that grew out of the housing bust is becoming a takeover target.
American Residential Properties Inc. built up a portfolio of about 9,000 houses worth $1.3 billion over seven years. Now, the Scottsdale, Ariz.-based landlord is running out of options to raise money for more purchases. The company, with a market value of $600 million, may find its best bet is to sell out to one of the bigger firms in the market, such as Blackstone Group's Invitation Homes or American Homes 4 Rent.
"The way to maximize shareholder value would be to sell themselves," David Segall, an analyst at Green Street Advisors Inc. in Newport Beach, Calif., said in a phone interview. "They have no source of new capital, so either they just sit there with their small portfolio or they have to face the music at some point and make the decision of trying to sell themselves."
Owners of single-family rentals are consolidating and buying in bulk as the pool of low-cost foreclosures shrinks and U.S. home prices rebound. American Residential may attract suitors because its shares are trading below their initial public offering price and amount to less than the value of the company’s real estate, Segall said.
American Residential Chief Executive Officer Stephen Schmitz said during an April 21 interview in Miami Beach that while the company hasn't put itself up for sale, "we do everything to maximize shareholder value."
Invitation Homes CEO John Bartling, whose company owns about 47,000 homes, declined to comment on whether it would consider buying American Residential. David Singelyn, CEO of American Homes 4 Rent, the largest publicly traded single-family landlord, with more than 36,000 homes, also declined.
Investors who purchased at least 10 homes a year have spent about $68 billion on 528,000 single-family houses since 2011, according to Morgan Stanley analyst Haendel St. Juste, making a corporate business out of a space dominated by mom-and-pops. American Residential is among four U.S. landlords that have gone public as real estate investment trusts since 2012. Eight companies have issued $9.8 billion in debt backed by mortgages on almost 70,000 homes.
Earlier this year, Tricon Capital Group Inc. agreed to pay $150 million for almost 1,400 rentals, while Silver Bay Realty Trust Corp. bought a portfolio of more than 2,400 homes.
Demand for rentals continues to rise. Owners of more than 9 million homes lost property through foreclosure or distressed sales from 2006 through 2014, according to the National Association of Realtors. The U.S. homeownership rate fell to 63.7% in the first quarter, down from a 2004 peak of 69.2% and the lowest since 1993, the Census Bureau reported April 28.
American Residential has slowed home purchases even as rivals continue to expand, because it doesn't want to take on too much leverage and "we're not going to go out and issue equity at these prices," Schmitz said during a March 12 conference call. For now, the company is mostly focused on improving cash flow and the efficiency of its current portfolio, he said.
The company's net asset value, calculated from estimates of stabilized net operating income and capitalization rates, is $23 a share, St. Juste of Morgan Stanley said in a March note. American Residential, which went public at $21 a share in May 2013, never closed above that level and ended Tuesday at $18.52 in New York. The company reports first-quarter earnings on Wednesday after the close of the market.
Pressure to boost the stock may come from Jonathan Litt, founder of activist real estate hedge fund Land & Buildings Investment Management. The company bought 300,000 American Residential shares last year. Litt, who has pushed this year for changes at MGM Resorts International and Macerich Co., said during American Residential’s last quarterly conference call that it was trading "at a 30-some-odd percent discount" to its net asset value.
"To me, the next step would be to sell some assets and buy back stock," he said.
Litt declined a request May 1 for any further comment, according to his spokesman Dan Zacchei.
Green Street's Segall said American Residential’s portfolio may not be a good fit for either Invitation Homes or American Homes 4 Rent, because they have preferred higher-priced properties than most of the smaller firm’s homes.
Even so, mergers among single-family rental companies are likely to follow the pattern of apartment real estate investment trusts, the most similar asset class in the industry, according to Jeffrey Langbaum, a Bloomberg Intelligence analyst. The sales of Colonial Properties Trust to Mid-America Apartment Communities Inc., BRE Properties Inc. to Essex Property Trust Inc. and Associated Estates Realty Corp. to Brookfield Asset Management Inc. are examples of big apartment players consuming smaller competitors.
"The smaller companies that are struggling to grow and are underperforming could be takeout candidates," Langbaum said.
