In 1998, there were more than 30 apartment REITs. Today, only one-third of that tally remains.
But the REIT universe may begin to expand again thanks to investors like housing industry veteran Tony Avlia. The co-founder and managing principal of San Francisco-based Encore Housing Opportunity Fund, has started a private REIT called Rescore Property Corp.
Rescore is developing approximately 2,000 apartments this year, with a goal of growing its portfolio to 7,000 units by 2016. But the ultimate goal is to eventually take Rescore public in 2018 with a market cap in excess of $1 billion.
“The average [apartment REIT] has properties that are 20 years old,” Avila says. “These properties will be brand new and targeting urban centers. We hand-selected markets with the highest job growth. We want to be in those markets that are growing the fastest.”
Some apartment REIT analysts wonder if the company can be a formidable competitor in a market that has seen two REITs (San Francisco-based BRE Properties and Birmingham, Ala.,-based Colonial Properties Trust) recently swallowed up by competitors (Palo Alto, Calif.,-based Essex Property Trust and Memphis-based MAA). That $1 billion market cap with put Rescore near the bottom of the apartment REIT pack.
“It’s difficult to operate as a public company at a $1 billion or $1.5 billion,” says Rod Petrik, real estate research analyst at Baltimore-based Stifel Nicolaus and Co. “You have a lot of overhead and public company costs that can eat you alive.”
Yet, a REIT at $1 billion or $1.5 billion with a brand-new portfolio and a laser-like focus on desirable cities, can get on the radar screen of investors, Petrik says. “If you came out with a concentrated company, like the old Irvine Company, you could attract somebody,” he says.
Single Family Moves
In addition to launching Rescore, Encore remains very active in the single-family space as both an investor and a builder.
“We started out as team with development and homebuilding capabilities,” Avila says. “We set out to raise a fund that was unique from any other fund that exists. The typical private equity fund will provide capital to a local developer. We differentiate ourselves as local developer as well as private equity partner [for established builders].”
As an investor, Encore has partnered with builders like Larry Webb at Aliso Viejo, Calif.-based The New Home Company, and John Ryan of Tampa-based Metro Development Group. Encore was also an investor in now-public LGI Homes, based in The Woodlands, Texas.
Home building is also a big part of the Encore model. In Central Florida, former PulteGroup and Meritage Homes veteran Jim Bagley is handling $1 billion worth of local projects for Encore in the market. That includes 3,500 lots in Central Florida.
Since 2010, Encore has raised $1.2 billion in capital and bought and developed (or are developing) 22 single-family projects and eight apartment projects since 2010. This year, it plans to close 500 homes and intends for that number to increase in coming years.
“We evaluate [whether to invest or build] depending on what gets the highest return for our partners,” Avila says.