The Invitation Homes Model For Real Estate
During the year 2008, America was reeling from a real estate crisis. This crisis was so severe that it had thrown the entire financial system in disarray. It had also caused the real estate prices to plummet. The prices were at a record low. The price of the average house in America was 40% below the peak rate which was quoted in 2007, i.e., just before the crisis.
The situation had caught the attention of many financial bigwigs. Warren Buffet had stated that he was willing to make a $50 billion investment in the residential real estate. However, it did not materialize. This did not stop another investment corporation with deep pockets from joining the fray.
Blackstone Group is a private equity giant. They are capable of raising and deploying billions of dollars if they see a suitable opportunity. That is exactly what they did when they formed Invitation Homes LLC. The sole purpose of creating this corporation was to acquire real estate at below market levels and then rent them out. In essence, Blackstone LLC was becoming a landlord and a very large and powerful one.
In this article, we will analyze the invitation homes story and how it transformed the rental market in America.
The Invitation Homes Story
Blackstone funded Invitation group is a vertically integrated company. This means that even though the company is in the leasing business, the company has significant capabilities in acquiring, repairing, maintaining and managing residential properties.
Invitation Homes has acquired more than 50,000 homes in America. Most of the acquisitions have been made in states like Florida and California where there is a high level of industrial and commercial activity. The company had made a total investment of $10 billion. However, Blackstone itself has only invested $2 billion with the rest being raised from banks and other financial corporations.
In 2017, Invitation Homes listed their shares on the stock exchange. 27% stake was sold for $1.55 billion. As a result, 100% stake was valued at close to $6 billion. Blackstone had therefore created shareholder value to the tune of $4 billion within four years.
Lets understand the mechanics of the business model which allowed Invitation Homes to achieve this remarkable feat.
- Stagflation: Invitation Homes did not try to time the real estate market. Instead, they patiently waited to ensure that the market was at its bottom. The real estate market was not picking up even though the entire economy was. This is where Invitation Homes saw an opportunity. While most individuals were too afraid to invest in a housing unit, the rental trends were strong. This was likely to continue into the future. This is the reason why Invitation Homes made the big decision of acquiring billions of dollars worth of real estate.
- Replacement Cost: Invitation Homes also made it a point to buy real estate way below the replacement cost. They could afford to do so since they were buying large chunks of real estate. Often, Invitation Homes would end up buying hundreds of homes in the same neighborhood. Also, the company has bid for several dilapidated houses. They would then repair the houses and create value. Blackstone has spent more than $1.5 billion of the total $10 billion on real estate improvements. They wanted to create homes than tenants would love to live in.
- Leverage: Real estate investments have a lot of leverage. By definition, real estate is a secure asset. This means that if Blackstone put 25% down for a home, they could mortgage the house and obtain the other 75%. This has obviously magnified their returns on equity. This high leverage was also favorable because banks were struggling to lend during that period. As a result, they were willing to make loans with special interest rates to prime borrowers like Invitation Homes.
- Benefits to Developers: A lot of developers were stuck with a lot of home inventory. In the absence of sales in the retail market, these developers were looking at bankruptcy. In such a situation, Invitation Homes came in as a blessing. Even though the acquisition was done way below the market price, the developers were still given much-needed cash which they then used to get out of debt. Invitation Homes created value for all the parties involved in the transaction.
- Economies of Scale: One of the biggest advantages of the Invitation Homes model is the economies of scale that it brings along. Invitation Homes has in-house people who do a lot of the repair and maintenance work. As a result, they can get it done a lot cheaper than the market. Hence, if Invitation Homes spends about $25000 on repairs, they generate value of about $50,000.
- Lower Turnover Rate: Also Invitation Homes built its portfolio in urban areas which have high employment generating capability. As a result, their homes are occupied for over 96% of the time. This also helps in creating value.
To sum it up, Invitation Homes LLC used an innovative business model to benefit even when the real estate market was failing. Similar models need to be used in countries like China, India, Canada and United Kingdom which are also facing a housing crisis.
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