The Faltering American Dream Will Benefit This Trio

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Home ownership has fallen to 65% from its 2004 peak of 69.2% according to Bloomberg, suggesting that the American dream of owning a home is slipping away. That may or may not be true, but people still need to live somewhere and those seeking a house will increasingly turn to single family home real estate investment trusts (REITs) like Silver Bay Realty Trust (NYSE: SBY), American Residential Properties (NYSE: ARPI), and Altisource Residential (NYSE: RESI).

Although the dream of home ownership has indeed taken a hit, there are larger changes going on, too. For example, jobs are less secure than they used to be. Owning a home when the next job you have could be several states away is a big risk and commitment. In addition, large student loan debts are keeping those just starting their lives from marrying and having kids. Without a family and kids, why bother with the expense (and work) of a home?

It is too simple to suggest that the American dream is fading. It could be that the American dream is simply changing in subtle, but important ways. So, while people may not want to own a home for various reasons, they may still want to live in one. That's where the institutionalization of the single-family home market comes in.

A glass half full

Silver Bay Realty Trust owns nearly 6,000 homes in Arizona, California, Florida, Georgia, Nevada, North Carolina, Ohio, and Texas. The big risk, and at the same time big opportunity is low occupancy. The REIT started the year with a 50% occupancy rate. That's abysmal, but it takes time to fix up homes and rent them out. In the second quarter, the company managed to drop the vacancy rate to about 35% leading to a top line improvement of nearly 40%. Thus it also presents an opportunity since the company can improve its performance just by renting out the rest of its portfolio.

Silver Bay pays a token dividend of $0.01 a share quarterly. Oddly, the less-than year old company recently announced a share buyback program. It would seem that a new entrant in an emerging industry would make better use of its cash either buying new properties or fixing its homes more aggressively. That said, it purchased nearly 1,000 homes in the second quarter, but warned that it expected the portfolio's growth to slow now that it has deployed its IPO proceeds. 

Still, it is a good option for those seeking focused exposure with built in growth potential. That said, watch the company's odd capital allocation choice on the buy back. 

Nearly at capacity?

American Residential Properties is a bit smaller, owning over 4,000 homes in the same states as Silver Bay plus Illinois, Indiana, and South Carolina. It added more than 1,500 homes to its total in the second quarter.

The difference between the two is that American's portfolio has a better occupancy rate. At the end of the first quarter over 85% of its homes were leased. That said, the new purchases in the second quarter dropped that number by over five percentage points.

The March occupancy number was in-line with manufactured housing REITs like Sun Communities. This could indicate that 85% to 90% is about as good as it will get on the occupancy front, which limits upside potential from internal efforts. But it also indicate that American Residential has a solid core portfolio, reducing risk materially. Either way, the company's portfolio is generating more rent, percentage wise, than is Silver Bay's.

The company still hasn't announced a dividend yet, but it's likely to be small right now. More conservative types, however, might prefer American Residential's more stable portfolio. And American services another 600 or so properties owned by others, a business it could easily expand if its own portfolio growth slows.

Buying up bad bebt

Altisource Residential is the riskiest of the trio. The company's game plan is to buy up distressed mortgages and foreclose on the homes. While this could lead to paying pennies on the dollar for homes, foreclosure is a long and complicated process. Moreover, once Altisource takes possession of homes they are likely to need extensive repairs. This is a good option for aggressive investors since it is basically a capital appreciation play; The homes are likely to be worth a lot more after they are renovated than what Altisource paid to acquire and fix them.

Right now, however, Altisource looks more like a mortgage REIT than a property REIT. At the end of the second quarter the company owned just under $4 million worth of real estate and about $164 million of mortgage debt. More distressing, of the $4 million in real estate, only $54,000 was listed as “rental residential properties.” 

If the economy and home market improve it might even find that its strategy doesn't work as well since people could start paying their mortgages again or the homes could get sold out of the mortgage pool. While neither would hurt the company, both would slow the Altisource's portfolio growth and potentially require a revamp of its approach.

At the end of the day, it could take a long time for Altrisource to build its portfolio and the foreclosure route may not be a lasting business approach.  

Not dead yet

People like to live in their “own place.” Increasingly that's including renting a home instead of taking on the risk and expense of the “American Dream.” Silver Bay, American Residential, and Altisource are at the forefront of this new REIT space. There's also recently public American Homes 4 Rent, but it has virtually no public track record to look at. None are appropriate for conservative investors, but more aggressive types should take a look at the varying opportunities, approaches, and risks each presents.


Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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