The single-family rental (SFR) sub-sector of the rental housing market is the latest in a long series of property types which have transitioned from local/mom and pop ownership to institutional management and ownership. Though this transition has be ongoing for the past 15 years, the sector is vast, with institutions currently owning only about 600,000 SFR units or 3% of the 17 million single-family rental homes in the U.S. (and SFR makes up less than 20% of the total single family housing market) [i]
While transaction activity in the SFR sector has slowed materially thus far in 2023 from the sizeable volumes achieved in 2021-22 when interest rates were low, and financing was readily available, resident demand for this product remains high and pandemic-era trends are likely to persist. Couples and families continue to place a premium on space as full and part-time remote work percentages are likely to remain high. Highly amenitized and well-managed SFR is also gaining popularity as an alternative to home ownership whether by choice or by necessity, and residents are staying in this product longer than typical apartment dwellers.
According to Yardi Matrix, as of mid-year 2023, the average SFR rent in the U.S. was up 27.9% since January 2020 and 39.8% since Matrix began tracking the sector in January 2018. Rent growth has normalized in 2023 with Yardi pegging year-to-date growth at approximately 1.5%. Occupancy levels on a national level peaked at around 97.5% in early 2021 and settled at a still healthy 95.8% at the end of July.
The listed REIT space is fortunate to have two dominant competitors that date back to the dark days of the global financial crisis when the U.S. housing market was undergoing its worst contraction in history. Both American Homes 4 Rent (AMH) and Invitation Homes (INVH) have been publicly listed for approximately ten years, are pioneers in the institutionalization of the SFR industry and have growth exponentially via one-off purchases of homes on the multiple listing services (MLS), through portfolio level acquisition, and more recently from on-balance sheet and joint venture development programs.
American Homes 4 Rent (AMH)
A recent AMH presentation highlights the strong revenue growth experienced in the first half of 2023 with stable occupancy and rental rates driving revenue of approximately 6.5% for the year. For 2Q23, new lease rates increased 9.4% and renewal rates increased 7.0%. Operating expenses tend to be more volatile for SFRs in general compared to traditional apartments and AMH reported an increase of 9.9% for 2Q23 and this was driven by a 27% increase in property insurance and a 14% increase in property taxes. For the full year, the company is guiding to operating expense growth of 9.75%.
AMH points out that historically low home inventories have led to supply constraints. Existing home inventories have normalized at 50% below the long-term average partially due to homeowners locked into low-rate mortgages and their reluctance to sell when current mortgage rates are prohibitively high. Current inventories of “for sale” homes stand at approximately 1.0 million per month which is also materially below historic levels. Single family home permits are forecast to be approximately 800,000 per annum for the next four years, a below average number which will perpetuate the housing shortage.[ii] With existing homes being offered for sale at prices that are still considered quite high by historic standards, the rent versus own proposition becomes more attractive and AMH states that the cost to rent is 26% less expensive than owning a comparable home in their markets.
One of AMH’s big differentiators is its in-house development capability with 2,200-2,400 deliveries expected in 2023. At the end of 2Q23, the company announced a new $625 million joint venture with JP Morgan which complements a prior joint venture arrangement with JP Morgan and one with Heitman Real Estate. The early entry into the development business looks very astute today given that the acquisitions market has slowed precipitously, leaving development as a primary driver of external growth.
AMH’s balance sheet ended 2Q23 in a strong position. During the quarter, the company received a credit rating upgrade from Moody’s to Baa2 and they had $200 million available cash on the balance sheet. The total debt load of $4.4 billion had a weighted average term to maturity of 11.9 years and an interest rate of 4.0% with no debt maturities until the fourth quarter of 2024. Other debt statistics include a total debt/market capitalization ratio of 23% and net debt/EDITDA of 5.3x.
Invitation Homes (INVH)
INVH reported 2Q23 operating results that were largely in line with expectations and the company modestly raised its full year earnings projections. Operating trends were stable in June with blended lease rate growth of 7% composed of 7.4% on new leases and 6.9% on renewals. Average occupancy for the period was 97.6% and bad debt as a percentage of gross revenue improved to 1.5%. INVH generates just over 15% of operating income from California where a large percentage of non-paying residents are now being forced by courts to vacate housing units, a positive for landlords. Operating expense growth should moderate in the second half of 2023 as year over year comparisons improve and overall inflationary pressures are beginning to wane.
Subsequent to the quarter end, the company announced the acquisition of a portfolio of approximately 1,900 homes for a purchase price of $650 million from an affiliate Starwood Capital. Management believes that they are buying this portfolio at a substantial discount to “replacement cost” and have estimated a first-year yield on cost in the mid-5% range. The acquisition portfolio also has a 90% overlap with existing INVH markets and thus should provide operating synergies as well as imbedded rent growth. The company is expected to own 100% of the portfolio themselves, implying that leverage levels will initially move higher than where metrics ended the quarter. INVH has a disciplined fiscal profile with 99% of its debt either fixed or swapped to fixed at the end of Q2. They also have no debt maturities prior to 2026 and a 2Q net debt/EBITDA ratio of 5.3x.
The SFR sub-sector of the broader FTSE/NAREIT Equity REIT Index has been one of the top performing categories thus far in 2023 achieving a total return of 19.8% year-to-date through August 11, 2023.[iii] Investor confidence in the group has risen over the course of the year for several reasons including the resiliency of single-family home values and the affordability proposition now offered by renting over owning in many of the markets where SFR owners are active. From a near-term perspective, it has not gone unnoticed that the supply/demand dynamics for SFR should outpace traditional apartments as the apartment industry works to absorb a cyclically high level of supply over the next 6-12 months which will put pressure on rent growth and occupancy levels. SFR revenue growth averaged over 6.0% in 2Q23 and on the back of only modest diminution in occupancy, high resident retention and very strong blended lease rate growth. The biggest concern regarding the SFR group at the start of the year was expense management, which can tend to be erratic in even the best of times, let alone an operating environment as difficult and unpredictable as is playing out today. This said, the group was able to demonstrate modest improvements in maintaining operating expenses during 1H23 and the outlook for 2H23 improved, leading to higher expectations for full year results.
Both AMH and INVH started alerting investors in the Spring of 2022 that the transactions market for SFRs had gotten extremely frothy and warned that acquisition activity would likely be curtailed. Deal volume did slow steadily over the subsequent quarters and external growth became more reliant on alternatives including in-house development and development joint ventures such as programs national and regional builders.
With institutional interest in single-family rental housing still in its infancy, the industry will likely continue to grow and become even more efficient over time while the secular and demographic factors driving supply and demand should sustain values at ever higher levels.
[i] Yardi Matrix: Despite Temporary Stall, Institutional SFR Growth A Good Long-Term Bet (August 2023)
[ii] American Homes 4 Rent: Investor Highlights (June 2023)
[iii] FTSE Nareit U.S. Real Estate Index Series Daily Returns