Bloomberg News

Billionaire Hughes Chasing Blackstone as U.S. Rental King

February 13, 2013

B. Wayne Hughes, a sharecropper’s son who became a billionaire pioneering warehouses for Americans needing storage space, is buying thousands of houses to rent as more people find homeownership out of reach.

Hughes, 79, has purchased about 10,000 properties through his American Homes 4 Rent, making the Malibu, California-based firm the second-biggest owner of single-family rentals after Stephen Schwarzman’s Blackstone (BX:US) Group LP. Hughes is using $600 million from the Alaska Permanent Fund Corp. and other fundraising to buy real estate, mostly at foreclosure auctions, according to Paul Saylor, chairman of CS Capital Management Inc., who advises the Alaska fund.

The Big Rent: Wall Street Is My Landlord

Hughes founded Public Storage 40 years ago and turned it into the biggest storage-rental company in the world. Now he’s competing with an expanding pool of institutional buyers and individuals seeking low-priced properties in regions hardest hit by the housing crash. The firms are helping to drive the recovery, with home prices rising in December by the most since 2005, even after a record level of foreclosures makes it harder for millions of Americans to qualify for a mortgage.

“Wayne founded Public Storage at a time when the industry was run by Moms and Pops out of their garages, and it’s kind of the same pattern,” said Saylor, whose Atlanta-based firm manages $1.4 billion and advises institutions with $4.3 billion in real-estate assets. Buying “single-family homes has been dominated until very recently by small investors across the country doing it locally.”

Alaska Venture

The Alaska Permanent Fund’s joint venture with American Homes 4 Rent has spent $750 million to purchase about 4,500 of Hughes’ 10,000 single-family houses, according to Michael Burns, chief executive officer of the $44.8 billion Alaska fund, which invests state oil royalties that have financed annual dividends for Alaska residents since 1982. The American Homes 4 Rent venture should yield unleveraged returns of 6 percent to 7 percent from rents, before home prices and rents rise, according to Burns. By comparison, high-yield, high-risk company debt, or junk bonds, are yielding about 6.6 percent.

Alaska picked Hughes for the venture even though his background was largely storage, because “nobody has a track record in this space,” Burns said in a telephone interview from Juneau, Alaska. “Public Storage’s assets seemed to be the closest.”

Hughes stepped down as Public Storage chairman in 2011 and retired from the board last year to become chairman emeritus. He didn’t respond to repeated requests for interviews. American Homes 4 Rent executives David Singelyn, John Corrigan, David Goldberg and Sara Vogt-Lowell also didn’t reply to messages requesting comment.

Dust Storms

Hughes, born in Gotebo, Oklahoma, was the son of a sharecropper or tenant farmer, he told GQ magazine in a rare interview last year. Prairie dust storms drove his family to Los Angeles with the wave of poor migrants who inspired Woody Guthrie’s folk songs and John Steinbeck’s 1939 novel “The Grapes of Wrath.”

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He graduated in 1957 with a degree in business from the University of Southern California, becoming an enthusiast of the school’s football program through which he met O.J. Simpson, the running back who was later acquitted of murdering his ex-wife. Simpson cited Hughes among his “support group off the field” in his 1985 enshrinement speech to the Pro Football Hall of Fame.

Texas Road

Hughes’ foray in the storage business began when he noticed a self-storage warehouse while driving down a Texas road in 1972. Stopping to take a look, he saw it was filled to capacity and figured it’d be a good investment.

Public Storage, based in Glendale, California, now operates more than 2,200 locations in the U.S. and Europe and has a market capitalization of $28 billion, the third-largest for a U.S. real estate investment trust behind Simon Property Group Inc. (SPG:US) and American Tower Corp. (AMT:US) The shares yielded more than 500 percent over the past decade.

While Hughes tried to shy from the spotlight as his wealth grew, he became embroiled in the Simpson story and was named guardian of the estate of Simpson’s two children in 1994 when the retired hall of famer was charged with murder.

His donations to political causes and charities have also attracted attention. Hughes donated $1 million in 2012 and $3.25 million in 2010 to American Crossroads, a super-PAC founded by Republican Party operatives Karl Rove and Ed Gillespie, according to the Center for Responsive Politics. His family’s William Lawrence and Blanche Hughes Foundation, which supports research into treating childhood leukemia, had assets of $25.2 million, according to a filing last Feb. 15 with the California Attorney General.

Whale Harpooned

“The whale doesn’t get harpooned until it rises to the surface to blow,” Hughes told GQ.

Since retiring from Public Storage, Hughes spends about half the year living at Spendthrift, his thoroughbred stud farm outside of Lexington, Kentucky, according to Ned Toffey, general manager of the breeding center Hughes bought in 2004.

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He reduced his ownership of Public Storage to 1.37 percent as of May, worth about $370 million, according to Bloomberg data. That’s down from 16.6 percent of the shares when he stepped down as CEO in 2002. His daughter, Tamara Hughes Gustavson, owns more than 10 percent of the company and his son, Bradley Wayne Hughes Jr., owns 3.6 percent.

Landlord Friendly

Hughes incorporated American Homes 4 Rent last year as a non-public REIT with a team of executives who had worked at Public Storage. The firm mostly buys houses built in the last 20 years with three bedrooms and two bathrooms, often located in homeowner associations where the properties are likely to have been maintained, Alaska fund CEO Burns said. They try to avoid jurisdictions where tenant rights regulations make it hard to evict residents or raise rents, he said.

“We aren’t in the fixer-upper business,” Burns said. “If a place is toxic for landlords, we don’t go there.”

The rental properties are in Arizona, Georgia, Nevada, Texas, Illinois and Indiana, according to American Homes 4 Rent’s website. The company also bought houses in Colorado, North Carolina, Florida, Ohio and California last year, according to Irvine, California-based data firm RealtyTrac.

The majority of homes it bought in 2012 were through foreclosure auctions, with the greatest number of properties in Texas, followed by Arizona, data compiled by RealtyTrac showed.

Rental Need

The need for rentals has increased after more than 5 million homeowners lost their houses since prices peaked in 2006, triggering the worst recession since the Great Depression, when Hughes’ family fled Oklahoma. The U.S. homeownership rate fell to 65.4 percent at the end of 2012, matching the level last seen in 1997 and down from a peak of 69.2 percent in June 2004, the Commerce Department reported.

Mortgage availability has also become more restrictive after lax standards fueled the housing boom and crash. Borrowers whose loans for purchases closed in 2012 had an average credit score of 740, according to data compiled by real estate data service CoreLogic Inc., up from 716 in 2006.

“Even with mortgage rates near a 50-year low, too many families with solid credit who want to buy a home are being rejected,” President Barack Obama said yesterday in the State of the Union address.

Single-family rentals have represented more than 10 percent of the U.S. housing stock since 2000, said Wally Charnoff, chief executive officer of Westminster, Colorado-based data provider RentRange LLC. “So even when the market normalizes, buying homes to rent should prove a good long-term strategy for investors,” he said.

Highly Fragmented

Transactions involving investors jumped 75 percent in November from a year earlier in 25 metropolitan areas tracked by Radar Logic Inc. It’s a market that could total 12 million homes, JPMorgan analysts led by Anthony Paolone wrote in a note last month.

“The single-family rental business is highly fragmented and management-intensive, just like self-storage,” said Michael Knott, a managing director at Green Street Advisors, a Newport Beach, California-based firm that tracks REITs. “However, two bright spots about storage seem to be lacking in this new endeavor: it may be harder to scale than storage and it certainly has much greater capital expenditure requirements.”

Blackstone, the largest U.S. private real estate owner and the only firm with more homes than Hughes, has spent $3 billion on rentals, Jonathan Gray, Blackstone’s global head of real estate said today at a Credit Suisse Financial Services Forum in Miami. Blackstone said last month it spent $2.7 billion on 17,000 properties, accelerating purchases as prices rose faster than anticipated.

Blackstone Warehousing

The New York-based firm, which started buying single-family houses last year, has bought so quickly it’s “warehousing” more than half of the inventory as it completes purchases, renovates and rents the properties, Gray said in January.

Colony Capital LLC, a Santa Monica, California-based firm headed by Thomas Barrack, has bought more than 8,000 homes, the third most after Schwarzman and Hughes.

“Wayne Hughes is not only a close personal friend but is a role model and mentor both professionally and personally,” Barrack, whose company manages $25 billion in assets, said in an e-mail. “He is simply one of the smartest and best men I know.”

Institutional investors need to own enough homes in targeted markets to achieve cost efficiencies and a brand identity if they expect to succeed as operators of scattered rental properties, said Martin Lifschutz, managing director of real estate risk at Citigroup Inc. (C:US)

“A prerequisite to becoming a big player requires having a strong sponsor providing substantial capital as well as the ability to borrow,” Lifschutz said.

Citigroup Extended

Citigroup extended a $245 million line of credit in October to Waypoint Homes, an Oakland, California-based firm that owns more than 3,000 rental homes and expects to have 10,000 by the end of 2013.

While institutional money can finance these properties “better than Mom and Pop investors in the current tight mortgage credit environment, this would likely change as the economy continues to recover and mortgage availability goes up,” Sandeep Bordia, head of residential and commercial credit strategy at Barclays Plc wrote in a report this month.

Whether the single-family rental market grows from “a $10 to $20 billion market to a $100 to $200 billion market” will depend “on how successfully institutional investors are able to execute over the next few years,” Bordia said.

Hughes’ sponsorship makes American Homes 4 Rent attractive to financiers, according to Rod Petrik, an analyst with Stifel Nicolaus & Co. in Baltimore.

Simple Concept

“Hughes built a phenomenal company in Public Storage under a simple concept that we rent garages,” Petrik said. “He is very smart at understanding the cost of capital, both from his partnership days and in the public REIT days.”

The largest public REIT concentrating on single-family homes is Silver Bay Realty Trust Corp. (SBY:US), an arm of Two Harbors Investment Corp. (TWO:US), which raised $245 million in an initial public offering in December. The stock was little changed today in New York, after gaining 15 percent since the IPO. The company’s Chief Executive Officer is David Miller, a former Goldman Sachs Group Inc. executive and U.S. Treasury Department official.

American Residential Properties, a Scottsdale, Arizona- based firm with 1,500 rental homes in five states, announced plans for an IPO as early as the first quarter of this year, depending on market conditions.

Rental housing REITs are also an opportunity for investors seeking to profit from the recovery, said Petrik of Stifel Nicolaus.

Public Vehicles

“Right now investors are looking for public vehicles (SBY:US) to invest in single-family housing and they can’t find them, so this is creating a product to meet that investment demand,” he said.

This new investment class probably will reward early movers the most, said Saylor, the Alaska fund adviser.

“I’ve been representing pension funds for about 40 years,” he said. “You shoot yourself because you missed an opportunity or somebody got there first. This is the best new opportunity in pension fund investing in real estate in a very long time.”

To contact the reporters on this story: Heather Perlberg in New York at hperlberg@bloomberg.net; John Gittelsohn in Los Angeles at johngitt@bloomberg.net

To contact the editors responsible for this story: Kara Wetzel at kwetzel@bloomberg.net; Rob Urban at robprag@bloomberg.net


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