Blackstone Profits Handsomely From Single-Family Investment Vehicle Invitation Homes

Investment giant Blackstone Group has sold its remaining stake in Invitation Homes, a company established by Blackstone in the wake of the housing crash in the early 2010s to invest in foreclosed single-family housing on a large scale.

Blackstone has been selling off its interest in Invitation Homes since earlier this year, with the latest sale (in the form of a stock offering) representing about 11% of Invitation Homes stock, bringing Blackstone $1.7B. All together, the stock sales, plus dividend earnings in recent years, have made Blackstone about $7B, or more than twice what it invested, the Wall Street Journal reports.

Investors have proven willing to buy the stock that Blackstone has been selling. At the beginning of 2019, Dallas-based Invitation Homes traded for $20.80/share. As of mid-November, that price had risen to $29.50/share, down a little from the year's peak over $31/share in mid-October.

Blackstone bet successfully that Invitation Homes, which is structured as a real estate investment trust, would be able to efficiently manage a massive portfolio of single-family houses in various parts of the country, though concentrated in Florida and the western states. Currently, the company owns about 80,000 houses.

“The hardest part wasn’t buying the homes, it was building the business,” Blackstone President Jonathan Gray, who headed the firm’s real estate business when it launched Invitation, told the WSJ.

Invitation Homes grew organically during the 2010s by buying houses, but it vaulted to the status of largest single-family owner in the country in 2017 when it acquired Starwood Waypoint Homes, which owned about 32,000 houses at the time. Starwood itself was the result of earlier consolidation in the sector. Invitation Homes' nearest rival, American Homes 4 Rent, has a portfolio just shy of 53,000 houses.

The company is still buying houses, though it is selling them as well. During the third quarter of 2019, Invitation Homes acquired 578 houses for $183M, while during the same quarter, the company sold 668 houses for $168M. 

Invitation Homes President and CEO Dallas Tanner said during the company's most recent earnings call in late October that Invitation Homes is benefiting from strong fundamentals in its main markets, with household formation in the western U.S. and Florida pacing at over twice the national average.

"We continue to see an attractive opportunity in these markets to buy well below replacement cost and generate attractive returns relative to our cost of capital," Tanner said.

Considering that many of the new households are being formed by millennials, who are weighed down by student loan debt and other factors, rental single-family housing can serve the current generation's needs the way a for-sale starter home might have for their parents.

Tanner said demographics are favoring growth for Invitation Homes.

"Over 65 million people or roughly one-fifth of the U.S. population is aged 20 to 34 years," he said. "We believe many in this cohort will choose the single-family leasing lifestyle as they form families and age towards Invitation Homes’ average resident age of 39 years."

As an institutional landlord, Invitation Homes has also attracted its share of criticism. Last year, Reuters reported tenant dissatisfaction with property management and fees.

"In interviews with the company’s tenants in neighborhoods across the United States, the picture that emerges isn’t as much one of exceptional service as it is one of leaky pipes, vermin, toxic mold, nonfunctioning appliances and months-long waits for repairs," Reuters reported.

Invitation Homes disputed that characterization. “From time to time, things happen,” Chief Operating Officer Charles Young told Reuters. “But when there’s an issue, we work hard to resolve it as quickly as we can.”