Wall Street's Single-Family Home Grab, Phoenix — Part 6

After a flurry of investment, the nation's largest single-family rental operators have slowed their acquisitions amid darkening economic clouds.

But the major players are projecting confidence that their business model will prove sturdy enough.

"I think our business is really well-positioned as a recessionary hedge, quite frankly," Invitation Homes CEO Dallas Tanner said during a July 28 call with investors.

Times have changed for single-family rental companies. When Invitation Homes, Progress Residential and other operators moved aggressively into the Phoenix market, interest rates were low, home inventory was scarce and prices were soaring. All of those indicators have reversed or moderated this year, leaving major real estate investment trusts facing new challenges to their business model.

Analysts have said single-family residential investment trusts remain in a strong position and should be able to ride out the shifting winds of the real estate market.

"They might not be too concerned because most of them are holding the homes and renting them out — they're not flippers," said Thom Malone, an economist with CoreLogic who has studied single-family home rentals.

"It's not a bad position to be in, because real estate is a hedge against inflation," Malone said. "If you're an investor, you can just keep raising the rents to protect yourself from inflation."

After the Great Recession, the housing market was jolted by the emergence of institutional single-family home landlords that snapped up tens of thousands of properties across the nation, focused on the Sun Belt. Phoenix saw the second-most institutional activity in the nation, behind only Atlanta, according to CoreLogic.

As of the end of June 2022, one large rental operator, Invitation Homes, owned 83,093 homes across the nation, including 12,686 in Atlanta, 8,885 in Phoenix and more than 8,000 each in South Florida and Tampa, according to filings with the U.S. Securities and Exchange Commission. (Law360, using Maricopa County records, found that Invitation owns about 2,700 single-family detached rental homes in Phoenix proper.)


But the companies are not immune to larger economic trends.

Progress Residential, one of the largest single-family rental landlords, recently put a notice on its listings in several markets: Applicants could get $1,000 off their first month's rent. For landlords accustomed to seeing high occupancies and strong rent growth, rent concessions come as a telltale sign of softening.

High interest rates and other market forces are battering real estate investment trusts, including those that focus on single-family rentals. Invitation's stock has fallen 27.73% for the year to date, Tricon was down 44.18% during that time, and American Homes 4 Rent fell 27.09%, all markedly worse than the broader S&P 500 decline of 22.96%, as of closing on Wednesday.


Acquisitions have slowed, peaking in February, according to Malone's research. Purchases by investors reached 28% of all single-family home purchases, the largest share since 2011. But rising borrowing costs and higher home prices have dented the buying spree.

Dallas-based Invitation Homes reduced its guidance for acquisitions in its second-quarter SEC filings.

"We don't love where our cost of capital is today," Tanner, the CEO, told Wall Street analysts in July.

Institutional investors may wait for lower rates, CoreLogic's Malone wrote in an August report.

"Investors are likely more sensitive to the recent interest rate increases than homeowners," he said. "For homeowners, the decision to buy is often a lifestyle choice, but investors may be considering single-family homes as an alternative to other potential assets."

Phoenix home prices have jumped 61% during the past three years, reaching a median of $430,000 in August, according to Redfin. Phoenix homes, which not long ago had a low barrier to entry for investors, gradually became a costlier asset to acquire.

"The home prices got way too high, and [companies] knew they wouldn't be able to charge rents sufficient to warrant the investment," said Mark Stapp, who is the Fred E. Taylor professor of real estate at Arizona State University's W. P. Carey School of Business.

Tanner is an alumnus of the graduate real estate program and serves on the business school's board of advisers, Stapp noted.

Invitation performed well during the 2007-09 financial crisis, Tanner told investors in July.

"While you get a little bit more muted on your rent growth — it's just more of like a [consumer price index] type of number — our occupancy stayed really steady through the Great Recession in that kind of 96% to 96.5% range."

More homes are also on the market. Inventory in the Phoenix area recently has soared, with 21,832 homes available, up 88.8% in August compared to a year earlier, according to Arizona Regional Multiple Listing Service.

Institutional purchases may not reach the high watermark of early this year for the foreseeable future, said CoreLogic's Malone.

"Given that prices are going down, purchases are going down, construction is going down, it's hard to see those surging," he said. "It's possible that we could be in a new normal where they won't surge up again, but they may flatten out."

Single-family rental investors have focused on markets with low home prices and property taxes, coupled with strong population and economic growth. Largely, that has meant the Sun Belt.

The largest shares of investor purchases during the second quarter, Malone found, came in these metropolitan statistical areas: Atlanta-Sandy Spring-Roswell, Georgia; Phoenix-Mesa-Scottsdale, Arizona; Las Vegas-Henderson-Paradise, Nevada; Memphis, Tennessee; and San Jose-Sunnyvale-Santa Clara, California.

Expensive and high-tax metro areas attracted less attention from the single-family rental REITs.

Single-family rental companies would not make executives available for interviews. In email responses to questions and in public statements, however, the companies said they provide necessary single-family rental stock.

"We're proud to provide much-needed access to housing in communities with strong demand among people who choose or need to rent single-family homes, such as the case in Phoenix," FirstKey Homes spokesman Michael Torres said in an email.

FirstKey, based in Marietta, Georgia, owned 299 homes in Phoenix as of August, according to Law360's analysis.

In a statement, Tricon Residential, based in Toronto, said, "For a generation, America failed to build quality, affordable, accessible housing. And at a time when many across the nation are struggling, many families are choosing to rent, and we try to be part of the solution for each and every individual family."

High mortgage rates have introduced other market dynamics for single-family rental companies. Rates are at almost 20-year highs, hovering near 7% in national surveys. That makes it more difficult for REITs to sell homes, which they sometimes do, but it also creates rental customers who can't afford to buy a home.

"It's probably never been more affordable to rent versus own a home, given how high mortgage rates have moved," Tricon President and CEO Gary Berman said during an Aug. 10 earnings call.

Berman said Tricon had prospered during COVID-19 and in localized economic downturns in certain markets.

"Our business fared extremely well during the pandemic, another proof point for the expected resilience of our business model," he said.

The REITs that focus on single-family rentals rely on a steady stream of monthly rent revenue. Occupancy rates hover around 98% for some operators, providing massive revenues. That in turn can be bundled into securities and resold.

"The beauty of the business model is the value isn't just the house price. The value is the capitalized value of the revenue stream," Stapp said.

One example shows how the financing works. Progress Residential in September issued securities that were collateralized by a $426.8 million loan secured by mortgages on 1,434 single-family homes across the nation. The loan was originated by Goldman Sachs.

It was the 36th securitization for Progress, totaling $20.5 billion, according to ratings agency KBRA.

Securitization in the single-family rental sector began in 2013, KBRA noted. Since then, the agency has rated dozens of such transactions, with none of the underlying loans going delinquent. KBRA has upgraded the ratings of 143 asset classes, and issued no downgrades.

"This performance of the sector was initially in the backdrop of strong economic growth with increasing rents and home prices," KBRA stated in a presale report. "However, the asset class is now being subjected to economic and geopolitical disruptions. Additionally, rising interest rates may put downward pressure on home prices, and inflation may put pressure on operating margins."

If home prices, rents or operating margins decline meaningfully, the sector "could come under a stress that it has not previously endured," KBRA stated.

Fitch in May gave Invitation Homes a "BBB" credit rating, near the lower end of investment-grade ratings but indicating the company is expected to meet its debt obligations.

"Fitch expects an aging millennial wave to continue to drive demand for single-family rentals, particularly in [Invitation's] markets, and rising rates and costs may dampen homebuying activity," the ratings agency said.

The companies sometimes sell homes to rebalance their portfolios and to take advantage of market trends, but they're not primarily buying homes to resell them, analysts said. Malone found that only 17.3% of investor purchases nationally in December 2021 had been resold six months later.

In Phoenix, Invitation Homes and other institutional players helped resurrect the real estate market after the Great Recession, Stapp said.

"It was very positive in that it cleaned out the defaulted mortgages and homes they were attached to, and that's why Phoenix recovered," he said.

Stapp defended the REITs' business model. Single-family rentals provide relatively affordable housing for people who can't afford to buy and aid mobility by offering rentals to people moving to Phoenix, he said.

"It's a viable business model," Stapp said. "There are benefits that also go along with a number of issues."

For Phoenix to continue to grow, more housing is needed, Stapp said.

New residents "have to live someplace," he said. "The institutional owners of these homes provide one of these outlets."

--Additional reporting by Emma Whitford. Editing by Orlando Lorenzo. Graphics by Jason Mallory and Ben Jay.

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