Excess Capacity in A Supply Constrained Market
Before getting started, I have a confession. I hate companies like Invitation Homes. During the financial crisis and the period that followed, investment funds like Blackstone Group and others went about buying up foreclosed and short-sell homes on the cheap. That is proving to be a very smart move.
The reason why I hate these characters is that they kept the real estate markets in some places like California from totally collapsing. With their huge army bidders at property auctions and large open checkbooks, they gobbled up all the best values. Where once that was a glut of homes, there is now a shortage. This spells only one thing: raising prices.
Blackstone and others had the cash to execute the largest institutional acquisition of residential real estate ever. The 2008 financial crisis and the years immediately after meant that individuals seeking to purchase homes using most any form of mortgage financing were out of luck. Banks were pretty much out of the business of lending.
Having Cash When Others Are Going Broke
So the hatred for Invitation Homes is born out of pure jealousy. Witnessing the residential real estate history of the past decade and being powerless to get into the game will do this even to a kind and generous soul like myself. Though many had the clarity to see what was happening, only a few were able to capitalize on it. Invitation Homes was one of them.
In December, Blackstone filed a Preliminary Prospectus for an IPO if Invitation Homes. Here are some of the choice details.
Invitation owns over 50,000 homes in 14 choice areas where population is growing and housing demand is rising. This includes Seattle, Los Angeles (including the Inland Empire), South Florida and Atlanta.
Invitations strategy is playing out brilliantly. Unlike much of the industry that has been building apartment complexes for nearly a decade, Invitation has concentrating on housings. Granted, there was far greater demand for trendy new rental housing especially among the booming millennial population during the early years, things are changing. Many of those couples are now having families pushing the limits of apartment living. These folks are screaming for homes with green space. This is where Invitation Homes has an interesting future.
REIT’s Offer High Yields
Invitation Homes is organized as a self managed real estate REIT. This means the company must dole out at least 90% of its income to shareholders to avoid paying Federal Income Taxes. This arrangement suits a lot of investors seeking above average yielding income. Is this a good option for you? The answer depends on your investment objectives but here are some thoughts.
Real Estate REIT’s lately have been under stock market price pressure. In fact during 2016 there were only two IPO’s in the REIT sector raising only about $1.5 billion.
There may be several reasons. The first is that many are apartment REITs like Equity REAL Estate owned by legendary developer Sam Zell are beginning to see the shift of millennials from apartment dwellers to home buyers. This has been happening for almost a year now. The second and obvious factor is interest rate levels in general.
When the Federal Funds rate was near zero over the past couple of years, investors were attracted to and rewarded by Real Estate REIT’s yielding 5%-8% and in some cases even more. Today, with interest rate increases likely the market is adjusting.
Looking For A Bargain
As investors, we will hope these factors will have an affect on the pricing of the Invitation Homes IPO. In other words, it’s time for the average citizen to get a break. I may hate companies like Invitation Homes, but for the right price on the IPO, I’m willing to bury the hachet. As a real estate REIT, Invitation Homes looks to be rather uniquely position relative to others in the field. They have excess capacity in a supply-constrained market: nice.
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