Netflix is now worth more than $100B

Netflix crossed a fun milestone today, crossing the $100 billion mark for its market cap as it once again surprised industry observers with better-than-expected growth in its subscribers.

We’ll get to the financial numbers in a minute but, as usual, the big story here is that it continues to wow Wall Street with impressive growth in its subscriber numbers. The company said it added more than 8 million new subscribers total after already setting pretty robust targets for the fourth quarter this year, giving it a healthy push as it crossed the $100 billion mark after the report came out this afternoon.

Here’s the rundown:

Netflix’s biggest challenge has been to aggressively invest in good original content that’s going to bring in new subscribers. While its shows may clean up at various awards shows like the Emmys, it still has to show that it can convert those awards into raw subscribers. But thanks to what appears to be continuing success with its original content like Stranger Things, as well other returning seasons for shows like The Crown, it’s been able to continue its staggering run.

While the company’s core financials actually came in roughly in line with what Wall Street was looking for (which is still important), Netflix’s subscriber numbers are usually the best indicator for the core health of the company. That recurring revenue stream — and its growth — is critical as it continues to very aggressively spend on new content. The company said its free cash flow will be between negative $3 billion and negative $4 billion, compared to negative $2 billion this year.

And that aggressive spend only seems to get more aggressive every time we hear from the company. Netflix is now saying that it expects to spend between $7.5 billion and $8 billion on content in 2018 — which is around in line with what it said in October when it said it would spend between $7 billion and $8 billion. It’s the same range, but tuning up that bottom end is still an important indicator.

Netflix shows picked up 20 Emmy awards last year, but just having a shiny object on a shelf isn’t something that’s going to indicate that the company is going to continue to grow at a healthy clip. In the face of an increasingly crowded market, Netflix has to demonstrate its ability to continue to offer lasting value for subscribers — especially as it continues to grow abroad. The company, of course, has plenty of benefits in terms of how it handles its shows when it makes them itself.

The company also has to make sure its brand also fits that narrative, as it now finds itself dealing with issues like having to cancel House of Cards — and that has a monetary impact as well. Netflix said it took a $39 million “non-cash charge in Q4 for unreleased content we’ve decided not to move forward with.” The company didn’t specify what content, but it’s dealt with some issues in the past several months that might necessitate the need to recalibrate its slate.

Netflix also tucked another newsy bit into the report: the addition of new board member Rodolphe Belmer, former CEO of Canal+. As the company continues to expand internationally, bringing on people with experience like Belmer of course makes sense.

Here’s the final slash line for the company’s report today:

  • Revenue: $3.29 billion, compared to $3.28 billion estimates from Wall Street
  • Earnings: 41 cents per share, in line with estimates from Wall Street
  • Q4 US subscriber additions: 1.98 million
  • Q4 International subscriber additions: 6.36 million
  • Q1 forecast US additions: 1.45 million
  • Q1 forecast international additions: 4.90 million

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Raise softly and deliver a big exit

In the world of venture capital, the prospect of a successful “exit” looms large in the minds of investors. A VC’s business model is less about the money that goes into a startup than it is about what comes out. It’s true that most companies fail to exit gracefully, and of those that do, surprisingly few exit by going public. The majority of exits take place through mergers and acquisitions (M&A).

For most investors of this ilk, it’s not always the size of the exit that matters; rather, the focus is placed on the ratio of exit valuation to invested capital (VIC). Crunchbase Newshas previously covered exits that delivered high VIC ratios — or those that brought “the biggest bang” for the proverbial buck — and we’ve found that mobile and related sectors are particularly fertile ground for high-VIC M&A events.

But there are a couple of more general questions to be asked and answered than in those articles. For instance, from the standpoint of VIC multiples, are larger exits better? And are companies that have raised less venture funding more likely to generate higher multiples? These answers can be found.

But before getting into the weeds, let’s clear out some reminders and disclaimers. We’re not answering the question “Are startups with less venture funding more or less likely to exit?” Crunchbase News has already taken a stab at that question and found that, unless a startup raised less than around $9 million in venture funding, there isn’t a strong correlation between total capital raised and likelihood of being acquired. And like that previous foray into exit data, we’re only looking at mergers and acquisitions because there’s a larger sample set to be found.

If you’re interested in what kind of data we used for this analysis, skip to the end of the post for notes on methodology. If not, read on for answers.

Big exits are better exits for multiples

When it comes to acquisitions, in general, bigger is better if the goal is to deliver a high ratio of valuation to invested capital.

The chart below displays VIC multiple data on the vertical axis and the acquisition value on the horizontal axis. Keep in mind that this chart uses a logarithmic scale (e.g. based on powers of 10) on both axes to include the very broad range of results.

Based on the 225 acquisition events in this data set, there is a positive and statistically significant correlation between the final acquisition price and VIC ratios.

A correlation such as this shouldn’t come as a surprise. The vast majority of companies don’t raise more than a few tens of millions of dollars, and 99 percent of U.S. companies raise less than around $160 million, as Crunchbase News found last May.

So, for most companies, acquisition values over about $50 million are more likely to generate higher multiples. A well-known example would be a company like Nervana, which had raised approximately $24.4 million across three rounds, according to Crunchbase data. Nervana was then acquired by Intel in August 2016 for $350 million, producing a VIC ratio of around 14.34x.

Of course, the tendency for bigger exits to generate bigger returns is just a rough rule of thumb, and there are plenty of cases where big exits don’t correspond to big multiples. Here are two examples:

These latter two examples offer a convenient segue to the penultimate section. There, we’ll explore the relationship between how much money a startup raises, and its ratio of valuation to invested capital at time of exit.

Smaller war chests deliver bigger exits

Dollar Shave Club and Earnest are examples of companies that raised more than $100 million in funding but ended up delivering exits less than the vaunted 10x multiple that most venture investors seem to target. So is it the case that companies with less VC cash lining their pockets tend to deliver higher VIC multiples when they exit? The answer, in short, is yes.

In the chart below, you can find a plot of total equity funding measured against VIC ratios at exit, again using a logarithmic scale for the X and Y axes.

Out of our sample of 225 acquisitions, we find a slight but statistically significant negative correlation between the amount of equity funding a startup has raised and the final VIC ratio.

And here, too, the results shouldn’t be that surprising. After all, as we saw in earlier examples, a lot of venture funding can weigh down a company’s chances of getting a big exit. It’s easier for a startup with $1 million in venture funding to be acquired for $10 million than it is for a company with $100 million in VC backing to exit for $1 billion plus.

Of those companies that managed to raise a lot of money and generate an outsized VIC multiple, many of them are in the life sciences. Again, this isn’t surprising, considering that sectors like biotech, pharmaceuticals and medical devices are incredibly capital-intensive in the U.S. due to long trial periods and the high cost of regulatory compliance. Unlike the mobile sector, where a small amount of capital can go a long way, it usually takes a lot of money to create something of serious value in the life sciences.

Multiples matter, but most exits are still good exits

The goal of investing is to get more money out than you put in. This is true for investors ranging from pre-seed syndicates all the way up to massive sovereign wealth funds. If we want to characterize any exit with less than a 1.0 VIC ratio as “bad” and everything above 1.0 is “good,” then most of the exits in our data set, specifically 88 percent of them, are good. Of course, there’s some sampling and survivorship bias that probably leans in favor of the good side. But regardless, most companies will deliver more value than was put into them, assuming they can find the exit.

But assuming a company does find a buyer, we’ve found some factors correlated to higher VIC multiples. Bigger deals correspond to bigger multiples, and companies with less capital raised can often deliver bigger returns to investors.

So while venturing out, it’s always important to keep an eye on the exit.

Methodology: A dive into exit data

There are a number of places we could have started our analysis, and we opted for a fairly conservative approach. Using data from Crunchbase, we started with the set of all U.S.-based companies founded between 2003 and today. (This is what Crunchbase Newshas been calling “the Unicorn Era,” in homage to Aileen Lee’s original definition for the new breed of billion-dollar private companies.)

To ensure that we’re working with the fullest-possible funding record, we filtered out all companies that didn’t raise funds at the “seed or angel stage.” We further filtered out companies that have missing round data. (For example, having a known Series A round, a known Series C round, but missing any record of a Series B round.) Startups that raised equity funding rounds with no dollar-volume figure associated with it were also excluded.

We finally merged this set of companies with Crunchbase’s acquisition data to ultimately produce a table of acquired companies, the amount of equity funding they raised prior to acquisition, the name of the company that bought the startup and the amount of money paid in the deal. Again, by starting with acquired companies for which Crunchbase has relatively complete funding records, the resulting set of 225 M&A events, while small, is more likely to produce a more robust and defensible set of findings.

Illustration: Li-Anne Dias

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Squares dominant year hits a snag

Square is continuing to make its bid to capture the payments of small businesses around the world, as well as tap into the momentum of peer-to-peer payments products with Square Cash, as its payments volume continues a steady and methodical rise — though, Wall Street still seems a little skeptical today as the stock is down slightly.

Square’s gross payments volume, a critical metric for the company’s health and success, continued to rise year-over-year as it looks to go up against other payment providers and accrue a big share of payment volume. In fact, the growth year-over-year for its GPV has been pretty consistent, hovering around a 31 percent jump year-over-year on each quarter, while the company’s revenue saw a more significant jump than normal. Here’s a look at the numbers:

Here’s something we’ll be watching closely for the next few quarters as Square moves forward, however: its services revenue. The company said it generated $65 million in services revenue this quarter, which was nearly double last year — with Square saying Instant Deposit, Caviar and Square Capital contributed the majority. If we were to excise that $65 million from the company’s net revenue, the picture looks a little different:

That’s going to be important to Square, as it looks to crack into the entire experience of running a small business with both its Register products and its Square Capital business. Last month Square announced a $999 Register product that’s designed to serve as a one-stop point of sale for small businesses. Square has been able to tap into some demand from small businesses that are looking for an easier — or maybe slicker — approach to running their business with Register.

Still, on the hardware front, the company said it generated $10 million in revenue, which it said was slightly down on a sequential basis. That may end up changing as it looks to roll out the Register product, but Square said its hardware growth rates have normalized since the first half of 2016.

While Square has seen an enormous run-up in the past year, it could be that Wall Street has finally started to take a small step back and re-evaluate Square’s business after lifting its value by billions of dollars. And here’s a look at the revenue, which has also seen a pretty consistent rise over the past few quarters. Since the third quarter last year, Square’s adjusted revenue has grown by around 45 percent year-over-year each quarter. Here’s the chart:

In the past year, Square has been on one heck of a run, with the stock tripling since November 2016. Part of that is because the company has very consistently impressed investors as it continues to methodically grow its business, which is now worth more than $13 billion. Wall Street seems mixed on how to react here from the report today, as the stock has swung from losing 5 points up to gaining 3 following the release of the report. Here’s what the run looks like:

Overall, it was a pretty good quarter for Square when you look at the numbers, though we’ll be keeping an eye on what its revenue looks like without services as that story continues to play out. The company also raised the guidance for its financial performance for the year, saying it would see a growth of around 37 percent in its adjusted revenue (which is the better metric for its performance than net revenue).

Here’s the final slash line for the company:

  • Q3 adjusted revenue: $257 million, compared to Wall Street estimates of $244.6 million
  • Q3 earnings per share: 7 cents per share, compared to Wall Street estimates of 5 cents per share
  • Q3 GPV: $17.4 billion, up 31 percent from $13.2 billion in Q3 last year
  • Q4 revenue forecast: $262 million to $265 million

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Blue Apron is having a really bad day

Things are not going so well for Blue Apron this morning after reporting its second-quarter earnings (its first earnings report ever), and the stock is crashing as a result of it.

The companys stock is down more than 14 percent on the earnings report, which came in pretty mixed compared to what Wall Street wanted. Blue Apron is looking to pull back on its marketing spend as it tries to get its burn under control, which resulted in a drop in its number of customers. The company was able to squeeze out a small profit in a past life, but since then it began to aggressively spend on marketing as it sought to acquire customers.

The problem quickly became getting those customers to stick around and keep buying meals. This time around, the company was able to improve the health of its customer base as they are spending more money and buying slightly more meals, but it still has to show that it can grow that base even as it starts to pull back on marketing. The company reported a loss of 47 cents per share on revenue of $238.1 million, while Wall Street was looking for a loss of 30 cents per share on $235.8 million.

Chart time:

So, better than expected revenue but with a widening loss even, as it pares back its marketing expense. The company gave off some negative signals about its next quarter, forecasting a loss between $121 million and $128 million in the second half, according to Business Insider. These comments were likely made on the earnings call, which were reviewing right now. But those kinds of negative signals are going to punish a freshly-IPOd company, especially amid a period of wild uncertainty with the decline of Snap and possible fading appetite for new IPOs.

If Blue Apron sees some turbulence heading into the back half of the year, the persistent threat of Amazon definitely isnt going to help. Information is slowly dripping out that Amazon is gunning for the meal-kit delivery space, which has crushed the stock over time. The company went public at $10 per share, but has since collapsed and lost nearly half its value.

Still, the IPOs will continue to come. Dropbox is reportedly inching closer to an IPO, and TechCrunch previously reported that Stitch Fix has confidentially filed for an IPO.

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How to Fix Social Security

Alicia Munnell wants to make one thing clear. Social Security is not going bankrupt. The program that the economist calls “the most valuable component of our retirement system” is a sustainable system and can be fixed. America has just been avoiding the hard choices it has to make if it wants to keep Social Security around for future generations.

Alicia Munnell
Source: Center for Retirement Research at Boston College

Munnell, who worked at the Federal Reserve Bank of Boston for 20 years, the Treasury Department for two years during the Clinton administration 1 , and served on a U.S. Social Security Advisory Board in 2015, is director of the Center for Retirement Research at Boston CollegeShe has parsed just about every argument for how to reset Social Security’s finances. In a recent conversation and paper, Munnell, 74, laid out the stark choices Americans face, and the solutions suggested by two diametrically opposed pieces of legislation.

We all know Social Security has long-term cash-flow issues. How would you describe the challenge?

Munnell: It’s a very simple system. It’s not like the health-care system, where you have insurance companies and doctors and patients. This is money in, money out.

The recent Social Security trustee’s report said the same exact thing it’s said almost every year since 1992 or 1993. We have a deficit—it’s a little bigger now than in the past—that’s equivalent to 2 percent to 3 percent of taxable payrolls, and we need to fix it. Every year the actuaries tell us there’s a deficit; every year as a nation we do nothing. It’s very easy to put off making changes for something that won’t happen. You really won’t see anything until the trust fund actually is exhausted in 2034. At that point, benefits have to be cut or revenue increased, because the system is not allowed to pay out money that it does not have.

By the way, when people talk about how the Social Security deficit will lead to big increases in the budget deficit, well, Social Security can’t run a deficit. When people say that, either they don’t understand how the law works or are trying to create alarm about the system.

One misperception about Social Security is that it should be enough to live on, which was never really the intent. How much income does it actually replace for workers? 

The current level of tax revenues coming in mean that the replacement rate—benefits relative to preretirement earnings—would drop from 36 percent for the typical 65-year-old worker right before the trust fund is exhausted to about 27 percent by 2070. Thats a level we last saw in the 1950s. Right now, the replacement rate is already set to decrease from 39 percent to 36 percent for those claiming Social Security benefits at age 65. Thats because of the gradual increase in full retirement age, from 65 to 67, that was part of the legislation in 1983. 

Credit: Center for Retirement Research at Boston College

You describe two proposals out there as good “bookends” to consider when looking at ways to get rid of the deficit facing Social Security.

I like the proposals as bookends because they are so different, they don’t compromise at all. One is all on the benefit side, just big benefit cuts. The other says it would enhance benefits a little and make big tax increases. And those are the two ways to go. They highlight the notion that we should really decide politically—and I don’t know quite how we do this—what share of the solution Americans want in benefit cuts, and what share they want in tax increases.

It’s not really arguing about the specific provisions—should we change the inflation indexing to the Consumer Price Index for the Elderly, the CPI –E [an inflation measure geared to rising costs faced by the elderly, such as medical expenses]. The big question: Is this program important enough to people that we as a nation want to pay up and maintain current benefit levels, or are people willing to split the reform between benefit cuts and tax increases somehow.

Where do you stand on that?

Surveys say that Americans want—and this is my instinct—to pretty much maintain current benefit levels. When I look at how much money, or how little money, people have in 401(k) plans, I just don’t see any other sources of retirement income out there. So I’d argue for fixing it on the revenue side. But I do believe in democracy, and if the American people writ large want to do it on the other side, in benefit cuts, we should do it.

The first proposal you analyzed in a recent paper was legislation proposed last year by Representative Sam Johnson, a Republican from Texas who is chairman of the House Ways and Means Social Security Subcommittee. What does he propose?

The Johnson proposal wants to cut benefits sharply so that the reduced benefits match the current income for the program. He would raise the age when you can collect full benefits to 69, cut benefits for above-average income earners, and reduce cost of living adjustments (COLAs) for people making more than $85,000 ($170,000 for couples). For those who would get COLAs, he would use a chain-weighted Consumer Price Index. [That index “employs a formula that reflects the effect of substitution that consumers make across item categories in response to changes in relative prices,” according to the Bureau of Labor Statistics website.]

What would the impact of that be on average Americans?

I looked at the ratio of proposed to current benefits at different points on the earnings scale. Since doing away with COLAs has a bigger impact as retirees age, I looked at individuals who were 85 years-old. It has no impact on the benefits of lower earners. But medium earners—which I calculate as having an income of $49,121—would see benefits cut to 77 percent of what they would get under current law. [That would be for someone born in 1995, turning 85 in 2080.] Those making $118,500 would get 34 percent of what they would get under today’s benefit schedule.

Credit: Center for Retirement Research at Boston College

What does the other proposal, from Representative John Larson, the Connecticut Democrat who is the ranking member of the House Ways and Means Social Security Subcommittee, suggest? 

His proposal, a few years old, has some small enhancements to benefits and two big revenue changes. He would raise the total payroll tax paid by employers and employees by 0.1 percent a year until it reaches 14.8 percent in 2042. And he would have the payroll tax apply to earnings over $400,000. The current cap on wages that the payroll tax is applied to is $127,200. [The current gap between $127,000 and $400,000 would not be subject to payroll tax.]

It would also use a different measure of inflation when adjusting benefits—the CPI-E. This rises faster than the inflation measure used now, the CPI-W, the CPI for Urban Wage Earners and Clerical Workers. The income threshold for the taxation of Social Security benefits would be raised. [The threshold at which a portion of one’s Social Security benefit gets taxed hasn’t been adjusted since 1984. It is $25,000 for singles and $32,000 for married couples.] Larson would raise it to $50,000 for singles and $100,000 for marrieds. His proposal would also increase the “special minimum benefit” that goes to long-term low earners or people with sporadic work histories. 

Are there proposals out there now that advocate for a middle ground between the two proposals? 

No. But you could do it. You just raise payroll taxes by half as much and cuts by half as much. There are infinite ways of doing it, and no new ideas particularly. This is a solvable problem. We cant solve other things, but this should be easy.

  1. A more detailed bio is on the website for the Center for Retirement Research at Boston College.

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Honest financing as a path to economic mobility and social justice

Societal health can be assessed by a handful of factors: economic mobility (is the current generation earning more than their parents did?), upward mobility (the rate of which an individual can improve their own socioeconomic status), productivity (how efficiently one can earn income) and lastly, whether they have sufficient access to the resources and tools required to advance ones position.

The last element, accessibility, is arguably one of the most important factors in a healthy society.

When an individual does not have access to the tools and/or resources necessary for their personal advancement, theyre left with two possible outcomes; they can either maintain their current financial situation or they could backslide down the socioeconomic spectrum.

Take, for example, someone who lives near or even below the poverty line. This person must overcome the hurdles of restricted or non-existent access to the same resources that more privileged counterparts take for granted: education, financial literacy, capital; all of the things that we know to be indicators of economic mobility. This person is faced with the prospect of trying to make their way in a financial system thats designed to encourage failure, rather than success. Its not a fair playing field, and the design of our current financial systems only further reinforces this disparity by restricting their access to the credit they need to succeed

Lets say that this individual makes their living as a janitor but would like to become a delivery driver so they would have less physical labor in their job. To become a driver, they need a reliable car, which translates to the need for an auto loan. Having the financial access to an auto loan can make a tremendous impact on this one persons financial mobility, bettering their life and the community as they experience an increase in earning potential.

After acquiring the car and starting their new job as a delivery driver, the individual realizes theyd benefit greatly from the additional income that comes from working as an Uber driver, too. And, they know that by acquiring a car that qualifies for the Uber Black program vs. a similarly-priced car that does not qualify for Ubers luxury rides, theyd earn even more. That singular piece of knowledge about which car to choose represents the difference that information capital makes in the equation of economic mobility. When armed with information, or intellectual capital, people can make better choices.

And, when people make better choices, we all benefit. For one thing, the risk of incarceration is lessened by moving away from the poverty line. Further, the ability to transition from a job to a career becomes attainable, and with that comes benefits like insurance, retirement investing and increased stability for their families. As people move up the ladder, they also contribute more to the tax base and to their local communitys economy with their increased spending power.

So, when we provide people with the means to better themselves, our entire society rises with them.

Lower-income individuals often find themselves in an unfair catch-22: they need to be better off to gain access to credit, but they need something (car, education, suit, inventory capital) to become better off. But, when you provide access to financial capital and combine that funding with actionable information and data about how to best manage their capital, you offer that person economic mobility while mitigating the increased risk that can accompany access to credit.

As we approach the ten-year anniversary of the start of the second Great Recession, we need to rethink how we approach consumer finance as a society. We need to provide better access to financial capital as well as the tools and information required to manage debt effectively so that individuals can leverage it into personal advancement. If retailers and financial institutions simply created and promoted financial products that are honest, transparent and simple for consumers, we could impact economic mobility at scale, ultimately leading to a healthier society.

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The Housing Recovery Is Leaving Out Most of America

For further evidence of the uneven recovery among U.S. housing markets, how’s this: In the 10 most expensive U.S. metropolitan areas, median home values have increased by 63 percent since 2000, after adjusting for inflation. In the 10 cheapest metros, median values rose by just 3.6 percent.

That finding, and the others illustrated by the charts below, comes from the , an annual report published Friday by Harvard University’s Joint Center For Housing Studies. While home prices have increased sharply in expensive coastal cities, plenty of urban centers are lagging behind. Home prices in 3 out of 5 metropolitan areas remain below their pre-recession peak, and home prices in low-income neighborhoods are faring even worse.

Meanwhile, the number of Americans spending 50 percent of their income on rent is near historic highs, something likely to get even worse if proposed budget cuts to the U.S. Department of Housing and Urban Development eliminate rental assistance for hundreds of thousands. Demand for rental units continues to rise, pushing rents higher.

The good news—such as it is—is that slow price appreciation in much of the country outside the hot metros means for-sale units there remain relatively affordable for more families. 

Home prices increased in 97 out of the 100 largest metropolitan areas, according to the report. Nationally, nominal prices returned to the peaks they held before the Great Recession. But when you adjust for inflation, those prices are as much as 16 percent below past peaks. And appreciation hasn’t been evenly distributed: A May report from Trulia showed that nationally, just 1 in 3 homes has recovered peak value. The Harvard report, however, shows the price gains have been concentrated in high-income neighborhoods.   

The flip side of low appreciation should be greater affordability for home buyers. Indeed, 59 percent of households in U.S. metros can afford to purchase the median home, the Harvard report stated, and in 1 in 5 metros, 75 percent can afford to buy. (In this case, the report defines affordability based on a 5 percent down-payment and monthly mortgage payments of no more than 36 percent of household income.) 

But many local markets suffer from low inventory, the report notes, partly because of the sluggish pace of new construction: The U.S. added fewer housing units over the decade ending in 2016 than in any 10-year period since 1990.

Joint Center for Housing Studies

And while a significant number of Americans spend half of their income on rent, that figure did tick down a bit in 2015, to 11.1 million. That’s still 49 percent more severely rent-burdened households compared with 2001. The vast majority of those households earn less than $30,000 a year.

Regardless of income, or whether they own or rent their homes, families that spend half their income on housing are forced to make sacrifices elsewhere in their budgets. When the poorest families pay less for housing, the extra money goes to necessities like health care. Among households that fall in the bottom 25 percent for total consumer spending, those that spent less than 30 percent of their income on housing spent three times as much on health care.

Those hoping for relief in the form of new rental stock may be waiting for a while. After growing by leaps following the foreclosure crisis, the nation’s stock of single-family rentals actually fell in 2015, the last year for which the report offers data. Low-rent units, meanwhile, are being replaced by more expensive offerings, the report said. That is where the money is. 

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