American Residential Properties: Real Estate Investment Companies That Buy and Keep (and Rent) Their Residential Inventories - Is This Strategy Saving the Housing Industry?
In this week's Economist, the efforts of Arizona based American Residential Properties, Inc. ("ARP") are spotlighted as a mover and shaker in the American housing industry. What is ARP doing? The investment company has been steadily buying up residential properties, usually as short sales, and then renting them out - ARP is not reselling the homes, they are investing in them and acting as landlords.
Who is American Residential Properties?
Around three weeks ago (on July 12, 2012), American Residential Properties, Inc. issued a news release that it had completed a private offering of its common stock at $20.00 per share, for a total offering of approximately $224 million.
In that press release, ARP described itself as a "... recently organized, fully integrated and internally managed corporation formed primarily to acquire and manage single-family homes as investment properties for rental and to capitalize on other investment opportunities related to the single-family housing sector. ARP is organized and conducts its operations so as to qualify as a real estate investment trust for federal income tax purposes."
Its CEO, Stephen G. Schmitz, provided the following quote:
"We are pleased to be the first in our sector to raise significant institutional capital on a direct basis from a diverse shareholder base. The fact that the deal was oversubscribed is indicative of the value our shareholders place on our experienced management team. Over the past three- and- a- half years, we have built the systems, the processes, and procedures necessary to acquire and manage single-family homes on a high volume basis in multiple markets. Coupled with our low cost debt facility, we have close to $500MM of buying power. As rental demand continues to increase across the country, our mission is to provide affordable housing for our residents while, at the same time, earn a high risk-adjusted return for our shareholders."
What is ARP Doing that Is So Great for the American Housing Market?
In the past few years, this company has taken its cash and gone shopping in hard hit markets like Arizona (Phoenix), Nevada (Las Vegas) and California (anywhere) for residential properties that looked to be bargains. ARP buys homes that may need a bit of clean up or updating, but not much, and then rents out the properties to families who meet their tenant qualifications.
In doing so, ARP has contributed to the change that is being seen around the country: there are less homes in the sales market now than in past years and as a result, things like new construction of single family homes are being to happen again: things that haven't been seen in awhile.
On its website, ARP describes itself as a pioneer in "REO to Rental" investment that began its strategy in the Phoenix area and now focuses upon markets throughout the Southern United States. ARP buys, renovates, rents, and manages its properties - and from its current publications, it's expected that ARP will happily continue with its vertical integration in what it considers to be a growing cottage industry.
Is This The Next Big Thing in the Real Estate Investment Marketplace? Maybe.
Right now, most REITs deal with industrial concerns or mortgages or things like apartment complexes or office buildings. It is a new twist on things for a group of investors to buy up single family dwellings for the purpose of renting them out.
However, ARP isn't alone in thinking this is a great idea: SmartMoney quotes Warren Buffett as thinking this is a good thing to do, given the bargain prices on these distressed homes in many national markets.
So, is this what happens to that infamous shadow inventory created by the Foreclosure Mess? Perhaps so, at least for a part of it. For both big REITS like ARP as well as smaller investors, the plan to grab some single family dwellings at bargain prices and thereafter wear the landlord hat may be a very good and profitable idea indeed.