Alternative Business Models: Single Family Rentals - BB Residential RealFoundations - Housing ...
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MEET OUR PANELISTS
Alternative Business Models: Single Family Rentals
Matt Blank Dylan Rhea Betsy Scott
BB Residential RealFoundations the Alliance
Single-Family Rental Snapshot
Insights into the SFR and SFR/BFR Product Spaces
April 2020
The information contained in this presentation is confidential and is not to be disclosed to third parties.
Contents are Copyright (c) 2000-2020 Real Foundation, Inc. and all rights are reserved. (“Confidential”).
RealFoundations at a Glance
Core Values Services Engagement
→ We Work Hard Management Consulting → Collaborative Work Methods
→ Proven Models and Frameworks
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→ Methodology-Driven Execution
→ We Do What We Say
Energy Solutions
400+ employees 2,250+ projects + services delivered
→ 20th Year Since Founding → System Implementations of Leading
→ 400+ Full Time Client- 450+ clients Industry Software Solutions Such As Yardi,
Service Professionals Globally JDE, MRI, Argus, and DXC Homebuilder
→ Developers
→ 9 Global Offices → Strategy and Operating Platform
→ Residential
→ Consultants Average 9+ years Diagnostics
→ Owners/Operators
in the Real Estate Industry → Outsourced Business Processes
→ Service Providers Including Lease Administration
→ Executive Management
Team with 25+ years → Institutional Investors and Property Accounting
Working Together → Corporate Occupiers
H o u s i n g In n o v a ti o n Al l i a n c e | Si n g l e - F a m i l y R e n ta l Sn a p s h o t | Ap r i l 2 0 2 0 4
Discussion Agenda • Single-Family Rentals: Trends and Drivers • Single-Family for Rent (SFR): Existing Product Portfolios • Single-Family for Rent/Built for Rent (SFR/BFR): New Product Portfolios • Applying Rental Metrics to SFR • Outlook for SFR H o u s i n g In n o v a ti o n Al l i a n c e | Si n g l e - F a m i l y R e n ta l Sn a p s h o t | Ap r i l 2 0 2 0 5
Single-Family Rentals: Trends + Drivers
Broad Trends: Expansion of the Single-Family Sector1
→ Extended periods of declining homeownership since the 2008 downturn
→ Ongoing challenges in meeting requirements for a traditional home purchase
→ Other key factors are driving demand for Single-Family Rentals
→ The single-family housing sector has expanded to include rentals as both SFR and SFR/BFR
→ Homebuilders are shifting a portion of production to this market; other partnerships are evolving
SFR in Context of the Total US Housing Picture2
1 Sources: Metrostudy National Outlook –
8/29/19 and 2/24/20
2 Source: RCLCO; Census Data.
Forbes 1/16/2020
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Single-Family Rentals: SFR and SFR/BFR
Single-Family For Rent (SFR): Existing Portfolios
→ Acquisition and management of existing housing product through both institutional and smaller-scale investment vehicles
→ Owners and investors are comparing and contrasting characteristics against the the multifamily vertical
→ There is a lack of single family-focused management software platforms for large SFR portfolios
→ SFR is an evolving space with multiple varying operating models in use
→ Financial markets and analysts are still working to embrace and understand the SFR space for REITs
→ Significant public relations risks exist, especially for the large-scale players
→ “Capital pouring into the growing single-family rental (SFR) housing market is bumping up against a
tough competitor—the consumer. Heightened competition amid a tight supply of housing inventory in
many markets is pushing investors to shift strategies to focus on new development.”*
Single-Family for Rent/Build to Rent (SFR/BFR): New Product Portfolios
→ Many traditional single-family homebuilders are transitioning a portion of their business plans to SFR/BFR product
→ “Multifamily-ization” of Single-Family communities is driving changes in amenity planning and product design
→ Various planning strategies are being utilized with regards to increasing exposure to SFR/BFR product
→ Various partnership and building strategies are being utilized
→ Numerous challenges exist for the the SFR/BFR model
* Source: National Real Estate Investor – 1/22/2019
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Applying Rental Metrics to SFR
Defining Leading Practices Portfolio Definitions Leasing Definitions
• NRHC engaged Green Street to determine how key • Occupied vs Unoccupied • Downtime
disclosure metrics should be defined • Leased vs Unleased • Occupancy + Leasing
• NRHC surveyed its members on how they define • Core Portfolio • Average Occupancy
key terms as the starting point • Stabilized vs Unstabilized • Tenant Retention
• Focused on portfolio holdings, leasing stats, • Same-Property Portfolio • Rent Averages
operating/income measures, and asset values • Renewal Spread
• Green Street overlaid best disclosure practices from
other property sectors, then developed a report
Income Definitions Asset Value Definitions
summarizing best practices
• Net Operating Income • Cost Basis
• Same-Property NOI Growth • Yield
• Funds From Operations (FFO) • Measure of Value
• Cap Ex
Additional Terms + Considerations Definitions
• Availability • Home Price Appreciation
• New Lease Rental Renewal • Purchase to Move-In
• Total Physical Cost to Maintain • Turnover Cost
• Leasing Costs • Rent-Ready Property
• Vacancy to Move-In • Turn 1 and Turn 2
H o u s i n g In n o v a ti o n Al l i a n c e | Si n g l e - F a m i l y R e n ta l Sn a p s h o t | Ap r i l 2 0 2 0 8
Outlook for Single-Family Rentals
Regarding both SFR and SFR/BFR:
→ Both SFR and SFR/BFR will be permanent new fixtures in the housing market,
despite recent events
→ Institutional and smaller-scale ownership of SFR continues to evolve in
order to lower barriers to entry
→ SFR-focused technology platforms will continue to evolve in order to more
effectively service the industry
→ Decreasing availability of existing quality homes for large-scale SFR operations
will continue to drive new development
→ Homebuilders are continuing to explore how SFR/BFR can effectively
expand revenue opportunities and potentially hedge risk
→ Partnerships and joint venture structures to control construction,
property management, and capital will continue to evolve
→ Continued shifts in household structures will continue to affect demand
→ Shifting priorities and perception of value in ownership will continue to drive expansion
→ Focus on delivering a community/lifestyle experience will drive demand and improve lease durations
→ Product design will continue to evolve as SFR/BFR rental base expands
→ Off-site and modular construction will continue to expand availability of rental product
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Contacts
DALLAS CHENNAI MELBOURNE
Dylan Rhea 13737 Noel Road RF Managed Services 203-205 Blackburn Road
Enterprise Managing Consultant Suite 900 India Pvt. Ltd. Mount Waverley VIC 3149
Dallas, TX 75240 9th Floor, Shyamala Towers +61 3 9847 6844
Dylan.Rhea@realfoundations.net +1 214 292 7000 No. 136, Arcot Road,
+1 949 258 4040 Saligramam SINGAPORE
NEW YORK Chennai 600093
1 Sophia Rd. #05-03
Tamil Nadu, India
286 Madison Avenue Peace Centre
21st Floor Singapore (228149)
New York, NY 10017 HONG KONG +65 6550 9776
+1 212 750 9550 19th Floor, Two
International Finance SYDNEY
ORANGE Center
Level 17, The Ark
8 Finance Street
COUNTY Coca Cola Place
Central, Hong Kong
40 Mount Street
18565 Jamboree Road +852 2810 5200
North Sydney NSW 2060
Suite 540
+61 2 8415 9821
Irvine, CA 92612 LONDON
+1 949 258 4000 www.realfoundations.net
The Clove Building
4 Maguire Street
London SE1 2NQ
+44 (0)20 7740 3260
H o u s i n g In n o v a ti o n Al l i a n c e | Si n g l e - F a m i l y R e n ta l Sn a p s h o t | Ap r i l 2 0 2 0 10
BB Living Residential
April 2020
4900 North Scottsdale Road, Suite 4900 Seven Penn Plaza, Suite 1400
Scottsdale, AZ 85251 New York, NY 10001Macroeconomic Drivers of Build to Rent Single-Family Rental (SFR)
§ 1.2M net new households were formed in the last 12 months and over 50% of them were renters. ~60% of new households
1 going forward are projected to rent
Demographic § A majority of this household growth is expected to be driven by a key B2R age group, between ~25-45 years old, which has
and shown an increased propensity to rent SFRs over the past 10 years
Socioeconomic- § That same age group has seen the sharpest acceleration in their income growth over the last 4 years compared to during the
Driven Demand recession, at an increase of 390-410 bps
§ Additional households at a prime age for family creation with growing incomes will likely drive demand for higher square footage
rental product resembling traditional SF living
2 § Single family housing starts are still 13% below the historical average (market undersupplied at more affordable price points)
§ Completion of entry-level homes are even more depressed as the percentage of new homes with fewer than 1,800 square feet
Entry-Level or below $200K has dropped off in recent years reducing options for the more affordable-minded buyer
Supply § Quality of SFR rental stock is suffering from this lack of new supply as 86% of SFRs are 19+ years old
§ This has led to the recent growth of the "Build to Rent" industry, though it still remains a miniscule part of the overall home
building output
3 § In many markets it is more affordable to rent than own today, with greatest hurdle coming from upfront costs
Relative Value § Despite recent declines in mortgage rates, the upfront costs associated with homeownership remain a significant hurdle for
most potential home buyers; +/- 80% of Americans have less than $10,000 in savings
to Consumers
§ Lending standards may also be hindering would-be home buyers as originations for lower credit scores are still below pre-GFC
averages
The combination of limited affordable entry-level supply and the growth of younger households is
driving higher demand for our product
Source(s): John Burns Real Estate Consulting Page 131 Demographic and Socioeconomic-Driven Demand
Net Household Growth
YoY Change, Millions
Renter household formation has strengthened in the past ~6 months
after relative stagnation over the last couple years
Source(s): JBREC US Analysis and Forecast, October 11, 2019. US Census Bureau
Page 141 Demographic and Socioeconomic-Driven Demand
Projected Net Change in Households by Decade Born
2016-2025, Millions
14.0
“I skate to where the puck is going to be,
not where it has been.” – Wayne Gretzky
5.9
4.3
1.6
-0.1
-1.4
-3.1
-3.8
-4.9
Pre 1930s Savers 1940 1950s 1960s 1970 1980s 1990s 2000s and
1930s Achievers Innovators Equalers Balancers Sharers Connectors Later
Source: “Big Shifts Ahead: Demographic Clarify for Business” by John Burns and Chris Porter (2016) and John Burns Real Estate Consulting - Figure 7.3
The vast majority of new households going forward are projected
to be millennial-led, a target age for our communities
Page 151 Demographic and Socioeconomic-Driven Demand
Share of SFR and MF Renters and Owners By Age
Our target demographic is growing in size and showing an increasing
propensity to rent, SFR in particular
Source(s): John Burns Real Estate Consulting as of Oct-19 Page 161 Demographic and Socioeconomic-Driven Demand
Median Household Income Change by Age of Householder
CAGRs
Long Term: 2000-2018 Recession: 2008-2014 Recovery: 2014-2018
6.0%
5.0% 4.9%
5.0%
4.5%
4.2%
4.0%
3.3%
310bps 390bps 240bps
3.0% 290bps
410bps 2.4%
2.3% 2.2% 2.3%
2.1%
2.0%
1.6%
1.1% 1.0%
0.9% 0.9%
1.0%
0.0%
15+ 25-34 35-44 45-54 55-64
Our target demographic has experienced the greatest income growth
acceleration during the recovery, more than 2x the long term average growth
Source(s): US Census Historical Income Tables: Households Table H-10 Age of Householder: All Races by Median and
Mean Income: 1967 to 2018 (accessed October 2019) Page 172 Entry-Level Supply New Home Sales by Price
Percentage of total sales, rolling 12-month average
Percentage of new homes sold for less than $200K continues to plummet,
likely causing an increase in homes sold for $200-300K
Source(s): U.S. Census Bureau; John Burns Real Estate Consulting, LLC (Data: Jun-19, Pub: Aug-19)
Page 182 Entry-Level Supply
SFR Stock by Age Builder-Completed New B2Rs
Percent of total stock Trailing 12 Month Total
Single Family Apartments
35% 50
Over 64% of SFRs
are ~40+ years old
45
30% 29%
28%
40
26%
25% 35
23%
21%
30
20%
17% 25
15%
15% 14% 14% 20
11%
15
10%
10
5% 5
0
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2Q19
0%
Pre-1940 1940-1959 1960-1979 1980-1999 2000 or later
Over 60% of the SFR stock is 40+ years old.
Lack of quality product is likely driving increase in new supply
Page 19
Source(s): Harvard University Joint Center for Housing Studies tabulations of US Census Bureau 2016 ACS 1-Year Estimates,
John Burns Real Estate Consulting, US Census Bureau New Residential Construction (October 2019)2 Relative Value to Consumers
SFR Occupants; Barriers to Buying a Home
64% of single-family renters cited high down payment and closing costs as a
barrier to obtaining a mortgage. 51% had unqualifying credit scores
Source(s): Terner Center for Housing Innovation; John Burns Real Estate Consulting, LLC (Data: Apr-18, Pub: Aug-19) Page 203 Relative Value to Consumers
Savings Mortgage Originations by Credit Score
% of Americans Surveyed
$ Billions
< $1,000 $1,000-4,999 $5,000-9,999 > $10,000
20%
7%
58%
15%
~80% don’t have requisite
savings to be buyers
Despite lower mortgage interest rates, 80% of households do not have the
requisite savings nor financial qualifications to purchase a home
Source(s): GoBankingRates as of May, 2019. JBREC as of October, 2019 Page 21Resident Profile
• Renter by Choice
• Demographics at BB Living communities are comparable to the demographics of the surrounding areas
• Average BB Living household comprised of two (2) adults, one (1) child, and 0.5 pets
• Average age of adult residents is 38 years old (median age is 37)
• Average HH Income at BB Living at Higley Park is $95,140 (91.1% of Average HH Income of Zip Code) while Median HH
Income is $86,112 (99.2% of Median HH Income of Zip Code)
• More than 39% of households within BB Living at Higley Park have household incomes at/above $100,000
• Average “Rent to Income” ratio for BB Living at Higley Park residents is +/- 21%; well below 33% minimum ratio
• Nearly 40% of all move-outs from BB Living communities are homebuyers. These residents are not “Entry Level”
homebuyers, with an average purchase price of +/- $375,000 and average down payment of +/- 14%
• By focusing on high barrier to entry locations, residents are presented with the opportunity to rent a new home in a better
location than buying a home in a less desirable location due to their economic situation
• Renter by Necessity
• Average American household has $8,863 in savings; skewed by Americans (45 years or older) saving more as they age
• Our target demographic (couples with children) has average savings of $3,682 (BB Living at Windrose - Rent vs. Own Analysis
Lowest Priced Inventory Home $321,206
Average Options / Upgrades $0
Rent vs. Own Analysis Total Home Price $321,206
Despite declining interest rates, homeownership remains unaffordable Down Payment 3.50% $11,242
for many Americans due to continued above average home price Closing Costs 3.00% $9,636
appreciation and the upfront costs associated with purchasing a home Upfront Cost to Own $20,878
• Rent vs. Own analysis for BB Living at Windrose is shown in the following table
Upfront PMI 1.00% $3,100
• The Upfront Cost is significantly higher to Own than to Rent and is the biggest hurdle to
Total Mortgage Amount $313,063
homeownership. The loan amount is below the FHA limit in Arizona, so a down payment
of 3.50% was assumed. In addition to the down payment, other upfront costs include: Monthly P&I Payment 3.40% $1,388.38
• Closing Costs: Estimated at 3.00% of Purchase Price per discussions with TBI
Mortgage. FHA loans do not allow closing costs rolled into loan PMI 0.88% $229.58
• Upfront PMI: FHA loans, the most typically underwritten loan scenario, require a Insurance ($1,000/yr) $83.33
1.75% Upfront PMI Premium is typically rolled into the loan amount, increasing HOA Dues $60.00
the loan balance and thus the monthly payment for borrowers Repairs & Maintenance $20.00
• In order to get an “apples to apples” comparison, we included the major monthly costs Property Taxes 0.99% $265.41
of ownership including: Total Additional Payments $658.32
• PMI: In addition to Upfront PMI, FHA loans require monthly PMI payments of
0.88%. These payments are made for the life of the loan if the down payment is Total Monthly Cost to Own $2,046.70
less than 10%
• Repairs & Maintenance: Meyers Research indicated ongoing maintenance Upfront Cost to Rent (Sec. Deposit) $1,875
costs a homeowner $476/month1. This seems to overstate the cost for new
homes, thus the $20/month underwritten cost, in line with BB Living R&M costs
Underwrittend Weighted Average Rent $1,875.0
Sales Tax 0.70% $13.13
Total Monthly Payment $1,888.13
$19,003 / 91.02% Cheaper Up Front to Rent
Note: “Upfront Costs” do not include typically required items including appliances, window
coverings and rear yard landscaping; all provided by BB Living to its residents $158.58 / 7.75% Cheaper Per Month to Rent
Source(s): Belfiore Real Estate Consulting, Homes by Towne, Bankrate, TBI, Meyers Research/Redwood Homes
Page 23"Build to Rent" Timeline: BB Living “Head Start”
• The "Build to Rent" asset class has exploded in popularity in the past few years; however, there are multiple approaches being taken that are lumped
together in the category of "Build to Rent"
• Many of the “Build to Rent” developers on the list are pursuing the “horizontal apartment” strategy, building single-level, detached, 1-3 bedroom units
ranging from 600 -1,300 SF. The product ranges from 12-14 du/ac, is typically gated, includes a central amenity area of varying scale and detached
garages. The popularity of this product is driven by:
• More straightforward planning and entitlements, similar to existing multi-family
• Less equity intensive, thus easier to finance for construction
• More similar to multi-family, making the current buyer pool more robust
• Agency financing available for next buyer
• More publicly reported sales, thus proving the exit
• In addition to the “horizontal apartment” strategy, there are groups pursuing smaller-scale “Build to Rent” communities, typically with fewer than 100
homes in a community. For example, American Homes 4 Rent highlighted in their September 2019 investor update Steele Forest, a 64-home
community located in Atlanta
• This model is a hybrid of traditional single-family rental and “Build to Rent”
• Smaller-scale projects do not lend themselves to “Class A” MF management and maintenance program, but still provide superior returns for
investors due to lower operating costs and rental rate premiums achieved by new homes
• Typically building on conventional lot sizes in remaining pockets of existing communities
• Lends itself to for-sale homebuilders merchant-building for investors or close-out of a community
• Inferior strategy from a financing and next buyer perspective due to lack of scale in one location
Page 25
Source(s): Mark-Taylor Residential, American FactFinder, CNBC/Smart Asset, Zillow3+ Bedroom “Build-to-Rent”
Within the segmented strategies of “Build to Rent” focusing on more traditional housing product comparable to BB Living, entrants are limited to specific
geographies and often building smaller-scale communities ”For Rent”. While it is important to track these communities in each of the markets as they
represent the best comparables, no other group is currently executing the scale of community in the broad cross-section of locations as BB Living. Below
are brief summaries on a few of these groups:
Bridge Tower owns and manages a portfolio of SFR/MF throughout Dallas and Houston. Built a 180-home 3 and 4-bedroom SFR community in Forney,
TX that offer two-car garages and backyard patios
American Homes 4 Rent is continuing their program of purchasing or building new construction homes for rent. While they have purchased larger, more
comparable communities to BB Living, including purchasing BB Living at Verrado, they are often buying a small number of lots/homes within a
community. For example, they recently pulled 14 permits out of an identified 21 lots owned within Serene Park in Las Vegas, NV. Per their latest quarterly
report, 2-2.5% of portfolio will be new construction, which would be +/- 3,000 homes a year. The targeted yield on cost is 6%, according to their latest
report
Page 26
Source(s): Brooklyn-village.com, Prnewswire.comBB Living vs Horizontal Apartment: Comparison
BB Living Horizontal Apartments
Net Density (Du/Ac) 7-14 12-14
Bedroom Counts 3-4 1-3
Average Unit Size 1,857 SF 946 SF
3 Bedroom Size 1,442-2,150 SF 1,200-1,250 SF
% of 3+ Bedroom 100% 0-30%
BB Living product
Horizontal Apartment product
Note: BB Living average unit size includes all proposed floor plans and product types
Page 27BB Living vs Horizontal Apartment: Floor Plan Comparison
• BB Living floorplans offers superior livability with key features including: full laundry rooms, substantial closet and storage space, larger common living
areas and attached, two-car garages
BB Living (single-level floor plan) Horizontal Apartment
Note: Light green on BB Living floor plan is fenced-in private yard space and images have been scaled to accurately reflect size of home / unit
Page 28BB Living vs Horizontal Apartment: Horizontal Apartment Site Plan
Central Amenity
Gated Entry / Exit
Detached Garages
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