Two REITS Getting Buy on Single-Families Rehabs

 | Aug 28, 2013 | 12:00 PM EDT  | Comments
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I have been pretty open with my thoughts about the residential real estate markets. The bounce in prices has been sparked by heavy institutional buying of single family homes by REITs and hedge funds as rental property. Large funds like Blackstone and other private equity funds have been large buyers of property and several REITs have debuted this year. It is estimated that $18 billion was raised to buy single family properties and investors flocked to take advantage of the real estate collapse. So far they have been disappointed.

It seems that the managers and investors alike misjudged the time it would take to get the homes fixed up and rented. They were rebuying these houses in bulk usually from banks and mortgages companies and they were considered distressed properties. Many had been vacant for an extended period of time and were far from move-in condition. The anticipated flood of rental income and dividends has yet to emerge and investors have been dumping the housing REITs at a pretty rapid clip of late. Many of them are close to being a bargain for long term investors.

Silver Bay Realty Trust (SBY) was a widely anticipated IPO when they came public in December at $18.50 a share. They were the first single family REIT to debut and investors flocked to the deal quickly pushing the prices up past $22. They have just as quickly become disillusioned and the stock now trades down at less than $16 a share. The company owns more than 5,500 homes in some of the hardest hit regions of the United States including Atlanta, Phoenix, and Tampa, Fla. About 65% of them are currently leased and management is still looking to buy new homes as they say they can still find many homes around the country that sell below replacement value.

The stock is currently trading at 90% of tangible book value and roughly 83% of the estimated net asset value Silver Bay management released at the end of the quarter. That is pretty cheap given that many single family homes in the country still sell well below their values just a few years ago and would have to rise by 50% or more to match peak valuation. It may take many years to get to that level but rental incomes should add nicely to the total return of the stock. We have seen insider buying in the past month and management has announced a stock buyback so the folks running the company seem to think the stock is too cheap at current levels.

Colony Financial (CLNY) offers investors a higher yielding way to play the single family housing recovery. Colony invests in secondary loans, high yield loan originations and single family homes. The three businesses are each about one third of the company giving them a fairly balanced approach to the real estate markets. The company was formed in 2009 and had its IPO the same year so all of their loans and properties have been made or acquired since the bottom of the crisis in real estate and credit.

Loan acquisitions have been primarily distressed loans . They have completed acquisition of 19 U.S. small balance loan portfolios totaling  roughly 7,900 loans with an average price of 53% of book value. Since inception, Colony has acquired eight FDIC portfolios worth of $5.3 billion at a purchase price of 47% of face value. As the markets have stabilized so have many of the loans in the portfolio and recovery rates should be higher than the discounted purchase price if foreclosure becomes necessary.

The loan originations are first mortgage and mezzanine loans on a wide variety of commercial real estate properties. Recent transactions include New York office buildings, athletic clubs in California and a national portfolio of mezzanine loans secured by hotels. The portfolio currently generates an 11% yield and has very low loan to value ratios.

Colony has invested $550 million in Colony American Homes to buy, renovate and rent single family homes across the United States. In a recent presentation management told investors, "Single-family homes for rent is arguably the largest macro distressed real estate opportunity emanating from the financial crisis." The venture currently owns more than 9,000 homes it intends to rent. Colony currently trades at just 90% of tangible book value and thanks to the diversified portfolio of assets is yielding 7%.

Single family homes represent a great opportunity for long term investors. I have not started buying these REITs yet but they are the top of my wish list and I expect to own them before too much more time passes. They should be on your radar screen if you are a long term value investor.

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