distressed-real-estateYou haven’t missed out on buying foreclosed homes.

If you’ve ever been at a party, and spoken to some guy who buys distressed real estate, have you ever felt like you missed out on a great opportunity?  I’m sorry to say that, as far as distressed real estate goes, you pretty much missed out unless you are a big fund with lots of capital and expertise.

Distressed real estate has been the big investment since the housing crash.  We all wish we had scooped up tons of distressed real estate and made gazillions of dollars.  The good news is there are now stocks that at least allow you to participate in the process.

At this point, some 9-10% of all single family home mortgages are in some phase of delinquency, which translates to something like four million homes.  Massive bulk purchases of property are no longer the norm, however, so buyers have to assess distressed real estate very carefully to make sure they can earn a good return.

Many homes are still being purchased, renovated, and flipped.  However, the primary driver in the distressed residential real estate market are rentals.  The buyer purchases the home, renovates it, and then rents it.  A good return is in the 8-10% range annually.  This is the space the new public companies are operating in, and a lot of them are bundling these mortgages and selling them off as bonds.

American Homes 4 Rent (NYSE:AMH)

American Homes 4 Rent (NYSE:AMH) just had its IPO a few weeks ago, raising more than $700 million. The REIT has a massive footprint of over 25,000 single-family homes in its portfolio, stretching across 25 states, of which 20,000 are now leased.  The REIT has a $4.2 billion market cap, and management owns a billion dollars worth of equity.

AMH buys at 20-30% below replacement cost, which provides downside protection, and targets middle class areas, aiming for tenants with kids.  That creates ties to property, because people move into good school districts and stay there for a long time.

The company has a strong management team led by the founder of Public Storage (NYSE:PSA).  It recently bundled together some $481 million and securitized them at a 75% LTV paying a blended rate of LIBOR + 1.54%.   70% of the holdings ar rated A+ or better, with about 20% rated BBB or BB+.

American Residential Properties (NASDAQ:ARPI)

American Residential Properties (NASDAQ:ARPI) is a REIT that owns about 7000 homes in 13 states.  Management is very experienced, coming from many different areas of real estate.  Company capitalization came from several sources, raising $287 million in equity via IPO, $500 million in credit, $115 million in convertible notes, and is now pursuing a a$300 million securitization transaction.

Occupancy is at 81%, with 72% resident retention in the past quarter, on top of a 2.7% average rent increase.   The company also makes investments with other housing speculators.  It loaned about $19 million in short-term mortgage loans to these speculators, and the value is now at $36 million. The financing is generally in place for only four months while the speculator renovates the house and tries to flip it. Theoretically, if he or she cannot flip it, the company seizes the property and either tries to sell it or rent it out.

ARPI seems to have further to go before impressing me. Q1 Core FFO only came in a $2.2 million. I want to see higher occupancy rates before committing, and I’d like to see what kind of dividend it pays.

Silver Bay Realty Trust (NYSE:SBY)

Silver Bay Realty Trust (NYSE:SBY) is actually a spinoff of Two Harbors (NYSE: TWO), which is an agency REIT.  Silver Bay owns about 5,740 single-family homes in 8 states, having invested almost $800 million to acquire them, primarily in Phoenix and Atlanta.  The company believes pricing in its markets are at or below levels more than a decade ago, even despite the housing recovery.

It has 92% occupancy, with 6.6% quarterly turnover in its rentals.  It still has capital available to purchase more homes, with about $350 million available on it s credit facility.  As homes have gotten rented, FFO has moved into the black, generating $2.1 million in Q1.

At this point, all three of these REITs are still ramping up.  Houses are still being renovated and rented.  I want to see what happens once occupancy stabilizes and cash flow becomes regular.  I think, if you were to purchase one stock, I would choose AMH.  It is the largest, it is well-capitalized, and seems further along than the others.

Lawrence Meyers does not own shares in any security mentioned.

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Published by Wyatt Investment Research at