New Single Family for Rent Grows Up: Real Deals / Real Numbers
What We ll Cover Industry evolution from foreclosed homes to building new for rent; Starwood Waypoint s deals Building new for rent in communities as a business model for a new builder/developer; BB Living s deals The diversification of a California Builder; MBK Homes
Single Family Rental: What s in it for Builders + Developers? George Casey for Rich Rodriguez, formerly of Starwood / Waypoint
Growth Opportunity for SFR is Tremendous U.S. Residential Rental Market (1) (millions) 2.0 13.3 15.3 SFR 2-9 units 10+ units 12.9 Other The existing SFR market is larger than the 10+ unit multifamily sector Of the 15.3 million SFR homes in the U.S., only 1.3% (about 200,000 homes) are owned by institutional investors like SWAY As U.S. housing market stabilizes, renters still dominate household Owner Household Growth (Q1 2015 = 0.4 MM) Renter Household Growth (Q1 2015 = 1.4 MM) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: John Burns Real Estate Consulting (May 2015). 4
The Start In 2009 A former NFL player (and some friends) realized that they could buy foreclosed houses: At 50% of previous MP (high) Obtain a ready & qualified resident Provide a low risk 7.5% ROI
Starwood Capital Add the Starwood Portfolio 15k Houses under MGT Securitization Spin Off (SWAY NYSE) Market Recovering Need to scale
Enter: Built to Rent Builders Needing Volume + 100% Qualified Ready Bulk Buyer = New homes below market cost Warranty coverage for 2 years Increased consumer demand for new rental product
Scenarios for B2R Unsold specs Unsold to-be-built (TBB) lots Finish out a Community Start a Community Defined pod as part of a Master Plan
Scenarios for B2R Unsold specs Unsold to-be-built (TBB) lots Finish out a Community Start a Community Defined pod as part of a Master Plan
The Math?
Gross Income Property Management, Vacancy, Unpaid Rent Turn Costs, R&M, Leasing Return On Investment = Net Operating Income Total Cost Basis Acquisitions Price Construction Cost Development Period Costs Construction Management Leasing Accounting
The very first Waypoint B2R: Amburn Oaks (Grand View Builders / Texas City) Contract: Financials: Vacancy: Notes: 10 completed homes with a one year limited warranty from the builder (from close). Avg price: $129k Pro-forma at 6.8% ROI but performed at a 5.25 ROI Pro-forma at 100% leased and 33% annual turnover performance = turnover near 50% Any benefit in a builder warranty was given up early in needed improvements. Builder was not focused on warranty and Waypoint bore the cost. There was no long-term relationship built.
The very first Waypoint B2R: Amburn Oaks (Grand View Builders / Texas City) Positives: Negatives: We learned a lot. Stove piping from acquisition led to as-is buy. Misses: Gutters, patios, door bell, garage door opener, etc.; approximately $5K extra capex costs Builder not reliable on warranty with little recourse on contract.
A Step Up: Ryland
Hunters Ridge (Pod Strategy) 135 single-family detached plus 32 multi-unit (5 + 3 pack) buildings Spec collaboration from the start Delivered on schedule, allowing for pre-marketing (out clause) 2 year fit + finish warranty
Hunters Ridge (Pod Strategy) Performance Builder delivered on time Avg Rent $1550/month AVG ROI 6.7% 100% Leased PRE-CLOSE!!! Lesson Partnership on specs was key Waypoint finished items outside of Ryland catalog Daily interaction drove problem solving
Maronda 51 Scattered Lot Homes in Three Submarkets Spring Hill (North Tampa) 10 Homes South Gulf Cove 20 Homes North Port 21 Homes Opportunity for 40 More in North Port Strong expressed interest in this submarket Pre-Leased first two for $59 above market at 6.5% yield With cost Increases, future anticipated yield of 5.75% 11% discount to market acquisition price
Bulk Buy Legend Homes (Occupied + TBB) 165 homes (7 communities) at $147,0000/home - $24.25M (15 TBB) uroi of 5.7%, a 10.3% cash on cash yield, and a 16.9% 5-year levered IRR Portfolio was approximately 96% leased Approximately $760,000 of additional revenue Llittle to no development period risk or expense 1.96 equity multiple
What works when combining a B2R and MPC What are the Synergies? Jump start, quick completion, fill in Transparency in cost structure cost plus vs. retail discount Meets unmet demand; lower end of the price point smaller product Drives traffic both ways Potential move-up from renter to owner
We had problems when Lack of partnership Needs to be treated as one of several deals One-offs are risky Not involved in the beginning (design) Specifications are key REIT and builder often have different approaches and verbiage Misaligned values You re only as good as the partner Warranty process + response are key Different views of customer satisfaction short vs. long term
SFR and MPC Realities Master-planned communities benefit from build-to-rent rental product (Hunter Ridge example) Buy-in from master developer and other community homebuilders is essential (CCR & HOA details) There is strong demand once builders understand the model B2R adds product diversity It is already happening (rentals) in your communities its just not organized nor are you benefiting from it
Build to Rent: A New Approach to Rental Housing and Implications for Master-Planned Communities Build-to-rent pioneers. Build-to-rent leaders.
Progression of the Business Model 2011: Buy foreclosures at a discount to replacement cost and generate rental revenue 2012: Enter unbeatable competition, buying above replacement cost We needed a new strategy.
Enter: Build to Rent Distressed Land Prices + No Homebuilder Competition = Finished Lots Below Replacement Cost Low Labor and Materials Costs Increased Consumer Demand For New Rental Product
We sourced our first project, Higley Park, Purchased 185 finished lots in Gilbert, Arizona for $34,650/lot Constructed detached, cluster-style houses Declarant status over 608-unit subdivision High rental rates relative to distressed land prices Both rental and for-sale scenarios penciled; the market could dictate our strategy DOWNSIDE PROTECTION
and proved the model s viability Higley Park: Investment Summary 2015 NOI $2,254,557 Land Basis $5,232,150 Construction Basis $16,852,692 Total Basis (150 Units) $22,084,842 Yield on Cost 10.2% Average Basis Per Home $147,232 Average FMV Per Home $235,000 If Liquidated Today Net Proceeds (After Renovation and Sales Costs) $33,135,000 Levered Equity Multiple 3.3x Higley Park Actual Income and Expenses (2015) Revenue Gross % of Revenue Total Income $2,961,493 100.0% Expenses Management $153,550 5.2% Repairs and Maintenance $70,904 2.4% Turn Costs $21,394 0.7% HOA Fees $11,097 0.4% Property Taxes $299,169 10.1% Insurance $86,693 2.9% Other $64,129 2.2% Total Expenses $706,936 23.9% Net Operating Income $2,254,557 76.1% If we sold Higley Park today, we d earn a 3.3x levered multiple in under 5 years.
And the deal would still work at today s basis Higley Park: Rental Basis 2015 NOI $2,254,557 Land Basis ($60,000/lot) $7,500,000 Construction Basis ($52/sf) $20,560,284 Total Basis (150 Units) $28,060,284 Yield on Cost 8.0%
So why sell? We re happy retaining our homes as a single-family rental community Lower Expenses Lower Turnover Exit Optionality Tax Favorability
Our renter base is desirable and reliable Median Household Income: $74,000 Approx. 60% of tenants have a college degree Average residents per home: 3.2 Approx. 70% of units occupied by parent(s) and children
We were nervous about expanding our model to master-planned communities High HOA Fees Potential rental restrictions NIMBYism Hostile declarants AND hostile homeowners
Game Changers: Vistancia and Verrado In partnership with Rialto Capital, we acquired finished lots in two best-selling, master-planned communities. Vistancia Peoria, AZ Sub-declarant status Access to master HOA s amenity package Verrado Buckeye, AZ Master developer DMB allowed us to create our own sub-association Friendly relationship enabled smooth design review and community buy-in
Differentiated Product Targets an Underserved Consumer Generally smaller square footage Compact lots Attached homes More affordable Least Expensive Quick-Delivery Homes in Verrado, By Homebuilder Homebuilder Size Asking Price William Ryan Homes 2,151 $277,291 Maracay Homes 3,274 $336,240 Lennar 1,798 $254,490 Meritage Homes 2,612 $330,995 CalAtlantic 1,542 $289,147 Shea Homes 2,137 $285,560 David Weekley Homes 2,746 $489,384 AV Homes 1,959 $286,459 BB Living 1,927 $200,000
We ve discovered Build to Rent has natural synergies with MPCs Architecturally consistent and similarly scaled Meets unmet demand Accords with demographic reality Drives traffic Adds smaller product, which is otherwise difficult to pencil out
Innovating this product type has come with plenty of challenges Limited universe of debt and equity partners Homeowners unwarranted preconceived notions can make for a hostile environment HOA/community governance issues
We ve learned some key lessons Master-planned communities benefit from build-to-rent rental product Buy-in from master developer, homebuilders, HOAs and residents is essential, and requires community outreach There is strong institutional demand Product diversity in a given community is essential; we want to complement, rather than supplement, existing inventory We can turn dirt; the model is not limited to distressed land or finished lots
Diversifying a Single- Family Building Business Sunti Kumjim, AVP, Forward Planning + Community Development
Who We Are?
Sea House
Artesia Square
Aragon
WHY Diversify?
GDP Annual Growth Rate
The Real Cycle
Our Model to Date For Sale Find the Land Underwriting Buy the Land Develop the Land Build the Project Sell the Residences For Rent Find the Land Underwriting Buy the Land Develop the Land Build the Project Lease the Residences Sell the Stabilized Asset
So How Did Crawling Perform?
MetroLink Apartments, Riverside CA
MetroLink Apartments, Riverside CA
Operations Project Management Purchasing/Trade Base Construction/Product Diversification Finance/Accounting
Financial Hurdles
Financial Hurdles
Company Culture/Heritage
Company Culture/Heritage
Company Culture/Heritage
Who Are We Now?
What do unleveraged returns on assets look like? For Sale Builders Return on Assets-Public Builders EBIDTA/Assets 2015 2014 delta NVR NVR 25.0% 20.3% 4.7% DHI DR Horton 11.5% 9.2% 2.3% LEN Lennar 9.9% 9.1% 0.8% MTH Meritage 9.3% 10.6% -1.3% TOL Toll Brothers 7.7% 8.0% -0.3% TMHC Taylor Morrison 7.5% 8.1% -0.6% PHM Pulte 7.1% 7.8% -0.7% MDC Richmond American 6.5% 6.9% -0.4% CAA CalAtlantic 6.5% 12.3% -5.8% KBH KB 5.8% 4.5% 1.3% BZH Beazer 5.2% 6.2% -1.0% Residential REITS Return on Assets-Public Residential Focused REITS EBIDTA/Assets 2015 2014 delta ELS Equity Lifestyle Properties 18.2% 17.5% 0.7% AIV Apartment Investment & Mgt 12.7% 14.1% -1.4% CPT Camden Property 10.1% 10.5% -0.4% AVB Avalon Bay 8.1% 8.2% -0.1% ESS Essex Property Trust 7.6% 4.4% 3.1% AMH American Homes 4 Rent 5.2% 3.7% 1.5% CLNY Colony 4.2% 2.4% 1.8% Average 9.4% 8.7% 0.7% Average 9.3% 9.4% -0.1% Average Without NVR 7.7% 8.3% -0.6%