Single-Family Rental REITs: Renting The American Dream (2024)

REIT Rankings: Single-Family Rentals

This is an abridged version of the full report and rankings published on Hoya Capital Income Builder Marketplace on April 2nd.

Single-Family Rental REITs ("SFR REITs") are one of the notable success stories of the Modern REIT Era, becoming a "core" institutional asset class and quieting the critics that questioned their ability to operate efficiently. One of the best-performing property sectors this year, Single-Family Rental REITs have rebounded as the previously-sluggish U.S. housing sector has shown signs of life amid a moderation in mortgage rates. In the Hoya Capital Single-Family Rental Index, we track the three major SFR REITs: Invitation Homes (INVH), American Homes (AMH), and Tricon Residential (TCN). We also track two recent entrants: NexPoint Diversified (NXDT) - which owns minority interests in Vinebrook and NexPoint Home Trust - along with Bluerock Homes (BHM) - a spin-off resulting from Blackstone's acquisition of former apartment REIT Bluerock Residential in 2021.

Single-Family Rental REITs concentrate heavily on the Sunbelt markets that have experienced the strongest economic growth during the post-GFC and post-pandemic recoveries. Invitation Homes is the largest publicly-traded owner of SFRs in the country with roughly 83k units with a significant presence on the West Coast and in Florida. American Homes owns nearly 60k units and focuses primarily on the Sunbelt and Midwest regions. Tricon Residential - which is dual listed in the U.S. and Canada - manages more than 33k homes, including its joint ventures with economic ownership in roughly 21k homes concentrated primarily in the U.S. Sunbelt markets. SFR REITs comprise roughly a third of NexPoint Diversified's portfolio through a 10.8% stake in Vinebrook's 22k homes and a 28.3% in NexPoint Homes Trust's 2k homes. Bluerock Homes owns 2k homes in the U.S. South.

Other major institutional investors involved in the SFR sector include private equity firms Pretium Partners, which owns/operates more than 80,000 homes through its Progress Residential platform; Cerberus Capital, which owns more than 34,000 homes through FirstKey Homes; Amherst Group, which owns/operates more than 34,000 homes through Main Street Renewal; and the aforementioned NexPoint Advisors, which manages nearly 25,000 homes through Vinebrook Homes and NexPoint Homes Trust. NexPoint also manages apartment REIT NexPoint Residential (NXRT) and mortgage REIT NexPoint Real Estate Finance (NREF). Several traditional Wall Street "heavyweights" are active in the space as well, including Blackstone (BX), which owns 17,000 homes through Home Partners of America.

The average single-family rent is $1,500 per month, but REIT portfolios skew towards the higher end of the quality spectrum with an average rent of around $2,000/month in 3-4 bedroom homes that are typically around 1,800 square feet. These five SFR REITs own a combined 165,000 SFR units with an average vintage of 20-25 years. Importantly, their tenant credit profile is generally better than the national averages for renter households with average annual income ranging from 85k-130k - well above the average renter household at 36k - and an average income-to-rent ratio of around 5x. INVH's resident credit profile is especially sturdy with an average annual income of new residents of nearly $135,000, with an income to rent ratio of 5.2x as of 4Q22. The average SFR head-of-household is 35-45 years old, an age cohort that will see the strongest growth of any 10-year segment over the next decade.

Single-Family Rental Fundamentals

The dire predictions of a "hard landing" in rental markets have been rebuffed in recent months by steadying rental rates and strong occupancy trends seen across the major rent indexes and in earnings results from the SFR REITs themselves. Data from Zillow earlier this month showed that national rent growth in February posted its strongest month-over-month gain in six months, while the Apartment List National Rent Report last week showed that rents increased 0.5% in March - the second straight monthly increase and a slight acceleration over last month’s pace. CoreLogic's latest report showed that year-over-year single-family rent growth cooled to 5.7% in January - down from a high of 13.9% in April 2022 - but rent growth and gains in all four of its price tiers were still higher in January than before the pandemic, led by the lowest-price quadrant which was up 8.5% from last year.

Easing mortgage rate pressures have also helped to ease concerns of further housing market deterioration on the ownership side, as the 30-year fixed-rate mortgage averaged 6.32% last week, down 76 basis points below the highs last November of 7.08%. Over the past month, all three Home Sales reports - New, Existing, and Pending - all exceeded estimates and showed sequential increases in February. Our newly-developed Own vs. Rent Index highlights the significant shifts in housing economics over the past several years. Lower mortgage rates made homebuying historically "cheap" early in the pandemic, but the pendulum swung forcefully in the opposite direction by mid-2022 as the combination of surging mortgage rates and higher home values made homebuying historically expensive relative to renting. Renting remains more "affordable" on the Own vs. Rent scale, but the differential in like-for-like monthly payments has moderated to $600 after peaking at $1,000 last year.

Despite the slowdown in housing markets - and home construction activity - over the last year, total household formation remained on a positive trajectory, consistent with the historical correlation between household formations and employment levels. Nearly two million new U.S. households were formed in 2022 - up from around 600k in 2022 - as tailwinds from the maturing millennial generation were amended by a surprising rebound in immigration and birth rates. The Census Bureau reported that net international migration added more than a million people to the U.S. population in 2022 - the largest single-year increase since 2010 - while the CDC reported that U.S. birth rate increased for the first time since 2014 - challenging two core tenants of housing skeptics' prognoses and representing sources of population growth that many economists had largely “written-off” in recent years.

Even with these secular tailwinds, profitability managing single-family homes isn't easy. The recent struggles at Tricon Residential (TCN) - which pushed the leverage limits to fuel its rapid growth over the past few years - reveal the even-more-acute stress faced by recent upstart private-market entrants that are learning the hard way that SFRs are a capital-intensive and logistically-challenging business that requires considerable scale and access to long-term fixed-rate capital to operate profitability through business cycles. The two flagship SFR REITs - Invitation Homes and American Homes are likely content to "play it safe" for now - a privilege earned through disciplined balance sheet management - but tighter financing conditions will be a catalyst to drive further market share gains to larger institutions that have access to cheaper and deeper capital, consistent with our view that the "institutionalization" of the SFR sector remains in the early-innings.

Single-Family Rental REIT Earnings Recap

Single-Family Rental REITs have been one of the top-performing REIT sectors this year after reporting solid earnings results and providing a mid-quarter update showing encouraging rental rate trajectories in early 2023. SFR REITs reported average blended rent spreads of 8.2% in the fourth quarter and 7.4% through early Q1. We expect the "stickiness" of single-family rent growth to be a theme over the next year because - unlike multifamily markets which are poised to face supply headwinds from a recent surge in new development - homebuilders have responded to the surge in rates by pulling back from an already historically supply-constrained single-family market. SFR occupancy rates remain within 100 basis points of historic highs at roughly 97%.

As noted, the "embedded" rent growth potential for SFR REITs should not be discounted, given the still-wide spread between rent growth on new and renewal leases - which we believe has built-up a longer runway for sustained rent growth that will be unlocked over the coming quarters. Invitation Homes estimated that its current leases are 4% below market rate in its February update while American Homes commented that its comparable "loss to lease" spread is in the "5-6% range" Tricon estimated its embedded spread was 15% at the end of the fourth quarter. This "embedded" rent growth should be enough to drive mid-single-digit earnings growth this year.

Invitation Homes has been the upside standout of late despite its heavy presence in California, where rental operators continue to see depressed rent collection rates due to the ongoing pandemic-era eviction moratorium. INVH reported FFO growth of 10.2% for full-year 2022 - 80 basis points above its prior outlook - and forecast FFO growth of 4.3% for full-year 2023. American Homes posted similarly strong results, noting that its full-year FFO rose 13.2% in 2022 - matching its prior guidance - and sees FFO growth of 4.5% for 2023. Results from Tricon were mixed as impressive property-level fundamentals were offset by expectations of a substantial FFO decline due to higher financing costs on its variable rate debt. TCN reported that its full-year FFO increased by 33% in 2022 - consistent with its prior outlook - but provided guidance that calls for a reversal of all of that gain for full-year 2023.

The expense-side can't be ignored, however, as many of the same questions that were raised before the pandemic have been reignited regarding rising same-store expense growth and higher capital expenditure levels per housing unit. Driven primarily by higher property taxes, same-store expenses increased nearly 7% in 2022. American Homes noted that its property taxes increased by nearly 10% in 2022 while Invitation Homes noted that its tax bill increased by 18% in 2022. Same-store expenses are expected to increase by another 8% in 2023 with both AMH and INVH expecting a high-single digit increase in property tax expenses, a roughly 20% increase in property insurance expenses, and a roughly 10% increase in property management expenses. INVH commented that "we do think those will subside as you get later into 2023 and 2024, but we're still in an inflationary environment."

Even with the margin setback, however, SFR REITs have exhibited notable improvement in operating efficiencies over the past three years both at the property-level and at the corporate-level. Aided by turnover rates which remain well below historical averages, NOI margins set record-highs for full-year 2021 at 66% and improved to 67% in full-year 2022, levels that are essentially on par with many of their multifamily peers. Invitation Homes has exhibited particularly impressive improvement in corporate-level efficiencies with its overhead costs as a percent of revenues declining from around 11% in 2016 to below 6% in 2022, underscoring the margin benefits of achieving sufficient market-level scale.

SFR REITs Pump Breaks on External Growth

These three REITs utilize varied acquisition strategies to fuel this external growth. Invitation Homes utilizes the most conventional (and lowest risk) strategy of the three SFR REITs, leaning heavily on traditional acquisition channels supplemented by partnerships with outside homebuilders to buy built-to-rent homes. American Homes, meanwhile, has led the charge on the "built-to-rent" strategy, investing heavily in its internal homebuilding capabilities. Tricon has leaned heavily on Joint Venture partnerships to fuel its growth, effectively leveraging its property management capabilities to achieve market scale more rapidly than would otherwise be achievable with full ownership.

SFR REITs will lean more heavily on "organic" growth this year, having scaled back their recently aggressive pace of external growth over the past six months. After adding more than $2B in net acquisitions from mid-2021 through mid-2022, SFR REITs have been quiet over the past two quarters and were, in fact, net sellers in the fourth quarter. The outlook for 2023 reflects expectations of a reduced pace of acquisitions: After acquiring 2,502 homes in 2022, Invitation Homes expects to acquire approximately 1,000 homes in 2023 - a 60% decline in acquisition volume. American Homes added nearly 3,000 homes to its portfolio in 2022 (including internal development), and expects to add 2,300 in 2023. Tricon was the most aggressive consolidator during the pandemic, adding over 7,000 homes to its portfolio in 2022, but expects to add between 2,000-4,000 homes in 2023.

Despite the recent successes, critics continue to question the long-term sustainability of the institutional stabilized ownership model pioneered by SFR REITs, particularly if home price appreciation consistently outpaces rent growth. This can create a problematic situation for SFR REITs: Future acquisitions can become less accretive as REITs are forced to pay higher prices for the same cash flow. Meanwhile, property taxes and other expense items are generally tied to rising home values. INVH continued to make acquisitions at cap rates in the low-to-mid 5% range, while it has historically sold properties with incredibly low cap rates between 1% and 3%.

Rapid home price appreciation and stiff competition in the "traditional" acquisition channel have forced SFR REITs to get creative with external growth plans. "If you can't buy it, build it" has been the recent mantra as SFR REITs have effectively become strategic homebuilders through internal development and partnerships with existing builders. INVH announced a partnership with PulteGroup (PHM) last July to buy 7,500 new built-to-rent homes while Lennar (LEN) partnered with Allianz to build $4B worth of SFR homes and Toll Brothers (TOL) partnered with Equity Residential (EQR) to build $2B rental units. American Homes - which has quickly become one of the largest homebuilders in the country - built over 2,000 homes in 2021 and 2023 through its internal pipeline which now accounts for half of AMH's acquisitions with the remaining 50% split between its National Builders Program (buying new homes from homebuilders) and traditional acquisitions.

A major factor fueling the rise of large institutional operators is the significant efficiencies gained in recent years through emerging property technology offerings ("PropTech") that have enabled SFR REITs to operate with Net Operating Income ("NOI") margins that are on par with apartment REITs. These REITs have tapped into the emerging "iBuying" industry to source acquisitions through relationships and direct investments into companies like Opendoor Technologies (OPEN) and Offerpad (OPAD) and leverage data from CoreLogic, CoStar Group (CSGP), Black Knight (BKI), and Redfin (RDFN) to source accretive acquisition opportunities.

Deeper Dive: Broader SFR Industry Trends

Taking a step back, Single-family Rental REITs were born from the last economic crisis when a cascade of foreclosures enabled a new class of institutional rental operators to emerge by buying distressed properties en masse. Even with forecasts for national home price declines of 5-10% over the next year, widespread distress in the U.S. housing market is highly unlikely given the underlying supply constraints resulting from a decade of underbuilding, and, ironically, due to the more substantial presence of well-capitalized institutional investors. The share of single-family homes that are rented has nearly doubled since the early 2000s and now comprises nearly a quarter of the single-family market, but the vast majority of the SFR market is still managed by "mom and pop" investors that own between 1-9 units.

Scale is a key competitive advantage for these large institutional SFR owners, and relative to apartment buildings where each property can have several hundred units, geographical fragmentation makes it more difficult to acquire a substantial number of units to achieve scale. Density within markets is especially critical for SFR REITs for achieving efficiencies in leasing, acquisition, and maintenance. We estimate that 500-1,000 units per market are needed to achieve minimum scale, but that 2,000 units or more are needed to reach a "critical mass" whereby the REIT can localize operations within that market and achieve cost efficiencies on par with apartment REITs.

Initially, in a phase we call SFR 1.0, the SFR REIT business model depended on the bulk acquisition of distressed properties, and REITs used foreclosures as a primary source of new home acquisition. In SFR 2.0, the business model evolved into a stabilized ownership model, focused on achieving efficiencies and growing via one-off acquisitions. In SFR 3.0, we see SFR REITs mirroring the model of the larger apartment REITs with internal development teams capable of supplementing the acquisition-fueled external growth channels, and also foresee REITs making a push into third-party property management, similar to how self-storage REITs have leveraged their scale and operational expertise to develop a sizable high-margin ancillary revenue stream.

Single-Family Rental REIT Performance

Following their worst year of performance on record in 2022, Single-Family Rental REITs have rebounded over the past two quarters as the previously-sluggish U.S. housing sector has shown signs of life amid a moderation in mortgage rates. The Hoya Capital Single-Family Rental REIT Index - a market-cap weighted index of these SFR REITs - is higher by roughly 5% in 2023, outpacing the 1% gain from the Vanguard Real Estate ETF (VNQ).

One of the newer REIT sectors, single-family rental REITs have produced excellent total returns relative to other REIT sectors in their relatively short history. From 2015 through the end of 2022, the SFR sector produced compound annualized total returns of 11% per year compared to the 5.6% annual returns from the broad-based Equity REIT Index. American Homes and Invitation Homes each declined about 30% in 2022, but both have posted similar mid-single-digit gains thus far in 2023. Tricon slumped more than 45% last year due to its more-highly-levered balance sheet, but has stabilized in 2023. The recent small-cap entrants - NexPoint Diversified and Bluerock Homes - have lagged this year with declines of 7%.

Single-Family Rental REIT Dividend Yields

Single Family Rental REITs are quintessential "Growth REITs" with relatively low dividend yields but with a high potential for dividend growth. Based on dividend yield, SFR REITs rank near the bottom of the REIT universe, paying an average yield of 3.2% compared to the REIT sector average of 4.0%. SFR REITs pay out just half of their available cash flow, however, and dividend growth has averaged more than 15% per year over the last five years, powered by the combination of robust external growth and strong rent growth.

Dividend growth has been especially strong over the past three years during the "pandemic era" as all three REITs have significantly raised their dividends over the past several quarters. After raising its dividend by another 18% earlier this year, Invitation Homes now pays a dividend yield of 3.33%. American Homes pays a dividend yield of 2.79% after hiking its payout by 20% earlier this year. Tricon pays a dividend yield of 3.00%, but has not raised its dividend since 2021. NexPoint Diversified declared its first quarterly dividend last October after paying monthly distributions as a CEF, implying a forward dividend yield of 5.77%. Bluerock Homes has not yet indicated its dividend rate.

Takeaways: Secular Fundamental Tailwinds

We remain bullish on the SFR sector based on the secular tailwinds of limited single-family supply, demographic-driven demand, and the additional "wildcard" of improved technological efficiency that has allowed SFR REITs to operate at scale to achieve similar margins as multifamily operators. While multifamily markets face supply headwinds over the next year, single-family builders have pulled back from an already historically supply-constrained single-family market, fundamentals that support sustained inflation-beating rent growth. Despite the housing cooldown, household formations have actually accelerated over the past year, lifted by historic levels of inbound immigration and an uptick in birth rates - challenging two core tenants of housing skeptics' prognoses. These REITs are content to play it safe for now - a privilege earned through disciplined balance sheet management - but tighter financing conditions will be a catalyst to drive market share gains to larger institutions that have access to cheaper and deeper capital, consistent with our view that the "institutionalization" of SFRs remain in the early-innings.

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