Critics question investment fund's Sacramento rental venture

04/08/2013 12:00 AM

04/18/2013 3:37 PM

Blackstone wants to reassure America that bigger isn't bad.

The giant New York investment fund – with its global portfolio of shopping malls, the Weather Channel and Motel 6 – owns nearly 10 times as many rental homes in Sacramento as any other private landlord, along with thousands of other homes across the nation.

It insists that size doesn't mean it is aloof. The company says it's on a mission to fix up neglected houses and improve neighborhoods, and to provide tenants with first-rate service.

"We care. We're engaged. We want (tenants) to have a good experience," said Marcus Ridgway, chief operating officer of Blackstone's housing unit, Invitation Homes.

Dozens of Sacramento-area contractors are busy fixing up houses to Blackstone's specifications. Tenants and neighbors interviewed by The Bee gave the company high marks.

Critics, however, worry about how the investment fund will wring from rental housing the high profits that investors, including the California State Teachers' Retirement System, expect from risky ventures.

The types of profits generally promised on such investments "are completely out of whack with what a reasonable landlord can expect," said Dean Preston, executive director of Tenants Together, a statewide organization for renters' rights based in San Francisco.

"Whenever we see Wall Street investing in a big way in the rental market, it's premised on displacement of tenants or extreme increases in rent."

Blackstone arrived in Sacramento in August and began sweeping up properties through an entity it named THR California. It wasn't long before local investors started grousing about the Wall Street behemoth outbidding them in foreclosure auctions on the courthouse steps, one of several methods Blackstone uses to acquire homes.

The firm went on a buying spree in the past eight months, acquiring more than 1,200 houses across the Sacramento region for an estimated $200 million.

Almost 90 percent, or 1,075, of those homes are in Sacramento County, in communities such as Elk Grove, South Natomas, Rancho Cordova, south Sacramento, Antelope and Citrus Heights. Blackstone also has purchased about 100 homes in Placer County, 50 homes in Yolo County and a handful of homes in El Dorado County.

The firm has paid a rough average of $164,000 per house.

The buy-up was part of Blackstone's nationwide push to acquire 20,000 homes for more than $3 billion while prices remained low after the 2007 housing crash.

Blackstone and other large investment funds saw an opportunity to profit from the foreclosure crisis in a business traditionally dominated by small-time investors.

Paint and carpet

Critics raised concerns and said the firm couldn't possibly fix up so many homes in a timely manner.

And officials said they worried about the management of the homes and whether streets once occupied by homeowners would turn into problem blocks dominated by renters.

Tenant advocates, meanwhile, expressed skepticism about whether a massive investment fund based in New York would be vigilant about fixing faucets in Sacramento.

Blackstone – through Invitation Homes – has since been on a quest to prove the critics wrong and to establish a national brand with a sterling reputation.

To that end, it quickly set up sizable ground operations in Sacramento and other distressed real estate markets where it invested, including Southern California, Arizona and Florida.

Invitation Homes runs its Sacramento operation from a nondescript building in suburban Roseville. Its reach extends north to Yuba County, south to San Joaquin County, and west to Solano and Contra Costa counties.

Regional president Tommy Christy is a veteran real estate investor with detailed knowledge of area markets.

Dozens of contractors and subcontractors have been fixing up houses at a rapid clip, using a standardized set of upgrades that speed the work.

Inside, each house gets fresh coats of Behr paint in tan and off-white. Crews replace existing carpet with a speckled Mohawk pattern called Toast. Many homes receive new Frigidaire stainless steel appliances.

Roofs are replaced, front yards replanted. The company says it spends up to one-tenth of the purchase price of each home on upgrades, putting, for example, approximately $20,000 into a 1,500-square-foot house in Rocklin that it bought last month for $225,000. The cost included $14,000 for a new roof.

Invitation officials say they are able to use higher grades of paint, carpet and appliances because they buy in such vast quantities.

A 'big improvement'

Neighbors have noticed the difference.

On one street in South Natomas, Tom Haupert stood in front of his own well-kept home and pointed to several houses up and down the block that Invitation had renovated.

One house still had the company's sky-blue for-rent sign in the front yard.

Haupert said the homes had been neglected by prior landlords. Invitation had reroofed them, painted the exteriors, installed new garage doors, and put new sod and sprinklers in the front yards.

The tenants had improved, too, Haupert said. One house had been like a "motel" with regularly changing residents, he said. The new neighbors were nice and polite, and signed a two-year lease.

"Big improvement in the neighborhood," Haupert said.

To manage its single-family properties, Invitation partnered with Riverstone Residential Group, the nation's largest manager of apartment complexes. The companies share a headquarters in Dallas.

Bringing in experienced managers ensured competent customer service from the start, executives said.

Invitation Homes executives said most of the houses it purchased were initially vacant, but some had tenants. If a house was in good condition and the tenants were paying market-rate rent, they were allowed to stay. Other tenants were evicted or given "cash for keys" to leave.

At this point, the firm said, about 30 percent of the houses in its Sacramento-area portfolio are still being fixed up. Most of the others are leased. A Bee analysis of neighborhoods determined that the rents Invitation is charging are about average.

Tenants contacted by the Bee said property managers were responsive and that serious complaints were quickly addressed.

"Fantastic," Darci Sanderson said of her experience with Invitation Homes after a short time in her South Natomas rental. "These guys aren't always in your face, but they take care of things as needed."

When her three dogs dug through the decaying wood of the back porch, contractors replaced the boards and resealed the deck to prevent further decay, she said.

Making a good first impression on tenants and neighbors is part of a carefully planned strategy by Blackstone to build a business and a brand from the ground up, Ridgway said.

"We have a task of making sure the first impression is the right one so we set the standard," he said.

Concerns remain

The positive reports haven't assuaged some critics.

Preston, at Tenants Together, said he wasn't surprised that a multibillion-dollar investment fund could hire competent property managers and fix toilets. What should concern people, he said, is the immense size and market power of Blackstone and its drive to turn big profits.

Preston noted the case of billionaire real estate investor Gensiro Kawamoto, who in February 2002 ordered most of his 569 tenants in Sacramento, Placer and Sonoma counties out of their homes in 30 days so he could sell the properties. Today, the state requires that tenants get as much as 60 days' notice.

Melody Simpson, who runs the pro-tenant website watchthisproperty.com, said she shares Preston's concerns.

A former employee at a major bank, she said she worries that tenants may be the last to know when Blackstone and other large investors decide to sell their houses.

"What's going to happen to tenants when those hedge funds plan their exit strategy?" she said.

The question of evictions or rent increases is of real concern, Preston argued. Investors in Wall Street real estate funds expect a higher return on untested investment strategies, such as the mass purchase of rental homes.

CalSTRS, for instance, has committed $100 million to the $13 billion fund that Blackstone used to buy its rental homes.

CalSTRS spokesman Ricardo Duran said the retirement system's investment policies call for a 15 percent annual return on such an investment. That's more than twice as much as the public pension fund would expect from a safer real estate investment, he said.

"It's a pretty good rate of return," Duran said. "That's because it's a riskier bet."

Preston questioned how an investment in single-family rental homes – traditionally a low-margin, high-maintenance business – could yield 15 percent annual returns without harming tenants.

"How do they achieve those without massive rent increases or evicting people and changing the use of the properties?" he asked.

Invitation Homes executives insist the company has no planned end game and no intention of following Kawamoto's example. Selling the houses once prices appreciate is only one of the possibilities, they said. If that happens, sales would be structured to minimize the impact, they said.

Another possibility involves selling stock in Invitation Homes.

For now, said Ridgway, the focus is on building the brand.

"I think we are on a very positive path to be a market leader in single-family homes," he said.

A SAMPLING OF BLACKSTONE ACQUISITIONS

The hedge fund group Blackstone, operating in the Sacramento area as THR California and Invitation Homes, has spent approximately $200 million buying nearly 1,200 homes here. Three homes recently bought by Blackstone in Sacramento's South Natomas neighborhood:

1678 BRIDGE- CREEK DRIVE, a 1,492-square-foot, three-bedroom, 2 1/2- bath home was purchased Oct. 12 for $152,500 – 34 percent under its $232,500 sale price in 2004. It was listed online in February as a rental for $1,300.

2955 RED HAWK WAY, a 1,642-square-foot, four-bedroom, two-bath home, sold at auction Oct. 15 for $155,100, about 30 percent higher than its $119,500 price in 1995.

1786 URBANA WAY , a 1,443-square-foot, three-bedroom, two-bath home, was acquired at an Aug. 23 auction for $130,100, more than 63 percent less than its 2005 sale price of $353,000. It is renting for $1,300 a month.

Source: Zillow, Redfin, Truila, Invitation Homes, Oodle.com, Bee research

GRAPHIC: BUYING HOMES BY THE HUNDREDS

Blackstone purchases by ZIP code and sale price. Page A14 "I think we are on a very positive path to be a market leader in single-family homes."

MARCUS RIDGWAY

chief operating officer of Invitation Homes, Blackstone's housing arm in Sacramento "What's going to happen to tenants when those hedge funds plan their exit strategy?"

MELODY SIMPSON

A former banker who operates watchthisproperty.com, a pro-tenant website

Call The Bee's Hudson Sangree, (916) 321-1191.

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