Haendel St. Juste is a Managing Director and senior US Real Estate Investment Trusts (REITs) analyst for Mizuho Americas. In this Q&A he discusses what led Mizuho to initiate coverage of single-family rental REITs, the impact of the Trump administration and why this sector offers such a compelling growth story.
What compelled Mizuho to initiate coverage of single-family rental REITs?
It’s a relatively new sector, and one with a potentially impressive near-term growth story. This sector, on average, can do over two times the overall REIT sector earnings growth this year and next, and that’s fueled by a number of things. The industry is not only taking advantage of opportunities on both the revenue and expense side to drive greater internal cost efficiencies, but it’s also very fragmented. Public institutions still own less than 2% of the single family rental stock available in the US, compared to approximately 10% on average across the rest of the REIT space. When you think about the portfolios and what public companies own versus the market opportunity you see, there’s meaningful opportunity to continue to expand externally.
What are some specific drivers of growth in this sector?
There are a number of tailwinds for single-family rental REITs, including high demand and potentially rising interest rates that could stretch affordability and force more people into rentership. We’re also still dealing with a negative psychology towards home ownership in this country stemming from the housing crash. It’s very difficult to secure a mortgage these days with the more rigorous bank underwriting standards, and homeowner demographics have changed; kids graduate with a lot more student debt and don’t have the down payments to buy homes. They’re also getting married later in life. You put all these factors together and you see that rentership likely has more tailwind near-term than ownership does. This sector also offers comparable margins to apartments, maybe higher. The average person stays three to four years in a rental home and two years in an apartment. Home rentals have much lower turnover, leading to fewer turnover costs and less downtime, which contributes to higher margins as well.
How has the housing climate contributed to growth in this sector?
This sector is born out of the housing crash. Single family rentals have been around for decades. Largely mom and pops for the most part, driven by people getting together to buy homes. Now you have institutions jumping in in a big way, assembling portfolios of thirty to fifty thousand homes. That hadn’t been the case until five or six years ago. Why? First, two things needed to happen. One, home values had to correct or decline enough to a level where the initial yield was interesting enough to investors; post-housing crash, there was the once-in-a-generation opportunity to purchase houses for forty, fifty, sixty cents on the dollar. The second thing that needed to happen was that technology had to evolve to the point where big, public institutions could operate these homes efficiently. Consider the operations of an apartment building – now think about individual homes rented to individual people on different blocks in different cities, scattered across the country. It’s overwhelming and complicated and served as a huge barrier to entry. With the evolution of technology, we now have the capability of real-time workflow processing, making the operation of single-family rental REITs dramatically more efficient.
Do you expect the new administration to have any effect on single family rental REITs?
Housing policy risk is one of the key things people are worried about for this industry. Trump has talked about wanting to get GDP growth back above 8%, and housing is a key lever that could get it there. Maybe there’s risk that Trump orders some type of action, for example, that lowers the down payment requirement; with the stroke of a pen it goes from 20% to 10%. There may be legislation that eases the regulatory burden on banks, a burden which has held back lending. We’re not aware of anything near-term but it’s certainly a real risk that can swing the pendulum slightly against these stocks because anything that makes it easier for people to buy homes is, at the very least perceptually, a likely negative for the space.
Single Family Rental REITs outperformed multi-family REITs and the RMZ for the first time last year. Do you expect this momentum to be sustained as we progress through 2017?
Near-term the sector has an opportunity to continue to outperform, not only due to growth but also the improved sentiment that we’re hearing from investors. Consider other sectors and go through a process of elimination. Apartments are going through peak supply this year, with healthcare there’s policy risk and retail is facing weak sales and closing stores. Then you get to this sector – stocks aren’t expensive, it’s seeing great growth, there’s a fundamental or secular story, and if rates go up, it’s actually a good thing for demand in this space. You approach it from a number of angles and realize that, through a process of elimination, and through merits of its own, this sector stacks up very well compared to almost every other sector out there. Certainly on a relative basis, this sector should hold up better than most of the other REIT verticals over the next few months at least.