Major Apartment Owner And Single-Family Rental Owner Team Up To Buy $3B In 'Horizontal Multifamily'
Miami-based private equity firm Transcendent Investment Management, which bought some 6,000 homes during the Great Recession, announced in February that it would be teaming up with Tampa-based Electra America/American Landmark Apartments, one of the largest multifamily owners in the country, with 33,000 units.
Their joint venture, Transcendent Electra, is planning to spend $3B acquiring about 20,000 homes throughout the Sun Belt. As more companies flood into the single-family rental market — homebuilder Lennar in March announced a $4B SFR initiative — Transcendent Electra CEO Jordan Kavana talked to Bisnow about how his firm intends to compete by taking lessons learned from multifamily operations and applying them to the single-family rental space.
Bisnow: Tell me about how you got into the SFR space during the Great Recession and how the fundamentals are different then vs. now.
Kavana: We started out in 2008, just after the real estate crash, as a distressed single-family home investor. Our play was essentially to buy, reposition and sell. By 2013, though, we saw a lot of institutional capital getting into the SFR game, so we switched to a “hold” model. By 2015, we had transacted on over 6,000 SFR homes — scattered product primarily — in 15 markets nationally.
At that point, we decided to switch our focus exclusively to newly built product (detached single-family homes and townhomes), and between 2015 and 2019, we started buying up newly built product both from private and public homebuilders. The thinking at the time was, if we’re going to buy a 20- or 30-year-old asset and we can’t compete with the cheapest capital on the street, then why not go where others aren’t going? So in 2015, we saw an opportunity to approach top public builders to buy remnant inventory at the end of their quarterly earnings periods. That’s how we ended up doing our first build-to-rent deal with Lennar, in Bradenton, Florida, and since then, we’ve been developing strategic relationships with different private and public builders around the country.
The difference between then and now is that in 2008 it was all about buying at a low price per square foot to resale — it was just a trade. Today, renting has become a lifestyle and a choice, so consumers want to live in fully amenitized communities and want the maximum amount of square footage possible relative to rental rate.
Bisnow: Are you still holding the 6,000 homes you bought then? Tell us your philosophy on holding long-term vs. trading.
Kavana: We’ve sold off about two-thirds of that portfolio. We still own about 2,000 units of older vintage product, but we are selling to help fund our growth in the BTR space.
Bisnow: How did you and Electra/American Landmark come together?
Kavana: This really started five years ago with a conversation between Joe Lubeck, CEO of multifamily firm Electra America (aka American Landmark Apartments) and myself. We both felt that there were tremendous synergies between the multifamily and single-family businesses that had yet to be realized, so we wanted to be the first to do it, to effectively bring these two asset types under one umbrella.
There are a lot of operating efficiencies, for example, that multifamily firms have realized that most SFR operators have not — everything from buying insurance to buying building products, to regional management costs. And if you’re a successfully multifamily operator like Electra America is, and there’s way too much capital in your space, then you move to the next complementary asset class, which from a strategic standpoint, is SFR/BTR. In fact, I would go so far as to say that I think SFR will eventually be defined as “horizontal multifamily.”
Another reason this joint venture makes sense strategically is there is a tremendous amount of crossover geographically between our communities and American Landmark’s that will enable us to capture those management efficiencies and provide a built-in pipeline of customers. So with this new Transcendent Electra partnership, our goal is to invest approximately $3B to take down about 15,000 to 20,000 homes over the next five years.
Bisnow: Are the homes all together geographically?
Kavana: Initially, we were doing scattered SFR/BTR, but in this new iteration/joint venture our goal for each community is to have no less than 150 units for the aforementioned economies of scale/operational efficiencies. The first part of the pipeline is around 200 units per community, but we have one that is going to be 400 units, which will be built in phases.
Bisnow: Do you have staff finding and buying individual homes? Are you working with brokers in different markets? Are you buying bulk from independent landlords with portfolios? Explain how that works, logistically.
Kavana: We developed an AI tool internally to help us evaluate where is supply, where builders have inventory that has not sold at retail, and we have algorithms and tools that help us put bids together. Every day we are looking at data points on everything from rent, home appreciation, cost management, school systems, crime rates, the number of homeowners vs. renters, so we know exactly what is out there, what meets our criteria, what is available for us to buy and what we’re willing to pay for it. We are scraping over 1,000 unique data points, both qualitative and quantitative, in the markets that we are interested in investing in to narrow down the homes that make sense for our business model.
Bisnow: The competition in this space got really hot, really fast. How does that play out day-to-day? Can you give me some examples?
Kavana: Yes, absolutely. In 2019, there were very few BTR players; now, as you know, this sector is red-hot with a lot of capital flooding the space. The credit markets have changed, equity markets are on fire, and from a housing standpoint it’s infinitely more difficult to find deals and make it happen. If this were May of last year, I would have 10 times the deals in my pipeline with half the effort.
That said, I very much enjoy the market — it forces us to work harder and smarter, and what we do tie up fits all of our criteria. My expectation is with [the] Transcendent Electra venture, we will be a top 10 player again, but it’s a larger space now and the numbers are magnified.
Bisnow: There is a major affordable housing crisis in this country, with workers and young people struggling to buy a first home, while the inventory is getting scooped up by big landlords. Does this concern you?
Kavana: There is an affordability crisis, but I don’t think the single-family rental market is the culprit — and, in fact, it might even be helping to alleviate some of the demand pressure. Consider that single-family rentals remained just under 4% of total housing construction and 12% of rental construction, so it’s a relatively small percentage of single-family construction overall.
What we’re doing is trying to meet the tremendous growth in the renter-by-choice segment of the market, which has exploded over the last several years. There are in fact many renters who could afford to purchase a home, but they simply don’t want to because they like the flexibility of being able to move around or want to rent first before investing long-term. Our target market is starter families, graduate-level students or retirees, and our rents are in the $1,800 to $2,500 range, which is mid-range for most markets — not affordable but not luxury product either.
Bisnow: Do you think you will move into development?
Kavana: We partner with builders, but if we have to we can build it ourselves as well. We’ve developed a lot of strategic relationships with builders to help them move their inventory, but we’re also taking land positions and building our own pipeline, or forming joint ventures with landowners.