Managing 18000 rental homes not so much fun, it turns out

B

billyjoerob

http://fortune.com/2015/09/25/housing-wall-street-investment/

Earlier this week, two of the bigger residential real estate investment funds, Sternlicht’s Starwood Waypoint Residential Trust and Barrack’s Colony American Homes, announced they were merging, in part because neither of them were big enough to make it on their own. The terms of the deal should give other housing market investors pause. The merger values Colony at $1.5 billion, or about 50% of what it paid for its 18,000 homes and other assets, minus debt.
 
I think a lot of the homes were bought blind and with the idea that they would be flipped to the public in an IPO. That's not going to happen, and managing all of those houses is a nightmare. There is a reason why managing residential rentals is for semi-wealthy retirees who have time on their hands. And there is no way to sell 18000 homes without driving down the price. So they are in a spot of bother.

Here is a report from Zillow:

Of the largest 35 metro markets covered by Zillow, Baltimore, Md., Washington, D.C., and Philadelphia, Penn. all had more than 40% of homes lose value year-over-year in August. In Baltimore, 48% of homes decreased in value. On the other hand, Denver, Colo. Dallas-Fort Worth, Texas, San Francisco and San Jose, Calif., Seattle, Wash. and Portland, Ore. all had less than 10% of homes lose value over the past year. “Denver, which continues to be the hottest large real estate market in the county, had a scant 1.5% of homes lose value over the past year,” Gudell says.

Real estate is not a sure thing.
 
SWAY's mcap values their portfolio at $75K per home. I can't imagine that the ASP is not 2x that number (SWAY paid an average of $180K per). The combined company is probably zero-downside.
 
destriero said:
SWAY's mcap values their portfolio at $75K per home. I can't imagine that the ASP is not 2x that number (SWAY paid an average of $180K per). The combined company is probably zero-downside.
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Not so sure about that. Total investment in properties is $2.2B. Total rent revenues last quarter was $46M, annualize that it's $184M. So they're not even getting 10% yield on the properties before expenses and depreciation. FFO yield on the real estate is about 2.5%. It's hard to compete with local real estate investors that know the neighborhoods and have zero overhead and expenses.

They're stuck. Huge transaction costs to get in, then huge expenses to manage the property, and no buyers. Stocks are usually valued on cash flow, not on book value. They got stuck in a low-return asset and can't get out.
 
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