Wall Street is ramping up financing to private-equity firms buying homes to rent, helping them accelerate purchases as competition increases and prices jump.
Deutsche Bank AG (DBK) arranged a $1.5 billion credit line for Blackstone Group LP (BX) to buy single-family properties last week, after providing $2.1 billion to the firm earlier this year, according to three people with knowledge of the deal, who asked not to be identified because the loan is private. Leon Black’s Apollo Global Management LLC and Tricon Capital Group Inc. (TCN), a Toronto-based real investment firm, also obtained loans for rental-home purchases this month from the Frankfurt-based bank.
The debt is giving an advantage to institutions competing with individuals, foreign investors and local landlords for a diminishing pool of distressed real estate to turn into rentals. While U.S. home prices remain about 28 percent below their 2006 peak, they’re climbing at the fastest pace in seven years, even as the homeownership rate declines and mortgage availability remains restricted after the housing crash.
“This allows us to further our acquisitions,” Gary Berman, chief executive officer of Tricon Capital, whose $150 million loan has a minimum interest rate of 4.1 percent. “It’s attractively-priced capital.”
Tricon, which has bought 2,300 homes in areas including Southern California, Phoenix and Florida aims to acquire 4,000 in total by the end of next year. By using a credit facility, Tricon will increase potential returns to 11 percent to 12 percent compared with 7.5 percent without leverage, or borrowed money, Berman said.
Blackstone, which has purchased about 29,000 single-family homes in 13 metropolitan areas to become the largest owner in the U.S. obtained a $600 million credit line in October. The New York-based firm expanded it to $2.1 billion in March with a group of lenders led by Deutsche Bank. JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. and Wells Fargo & Co. participated in the new loan, said one of the people.
Deutsche Bank spokeswoman Renee Calabro and Blackstone spokesman Peter Rose declined to comment.
Banks are increasing the credit lines as more funds start leasing thousands of homes they’ve bought at foreclosure auctions, through open market purchases and in bulk deals.
American Homes 4 Rent (AHOOZ), a Malibu, California-based single-family rental investor headed by Public Storage founderWayne Hughes, has a $500 million credit facility with Wells Fargo with an accordion feature that allows it to increase to $1 billion, according to a filing this month.
“These neighborhoods even from where they were two years ago, look so much better,” Chief Executive Officer David Miller said in an interview at his office. “You can see the difference because institutions like us are putting $20,000 or more into the homes.”
The loan “will give us enhanced flexibility to acquire additional assets,” Miller said in a call with investors last month. “The execution of this facility demonstrates the increasing recognition by the capital markets of the single-family rental industry as an asset class and we expect additional financing opportunities will materialize over time.”
The biggest lender in the industry, according to public filings and executives, is Deutsche Bank, which arranged a $200 million credit facility for Apollo this month, and a $100 million loan in April to Five Ten Capital LLC, a Piedmont, California-based single-family rental investor.
Deutsche Bank “is far and away the most sophisticated and best organized” of the lenders, Tricon’s Berman said.
In addition to earning fees from the credit lines, the bank eventually will sell debt to investors by securitizing rental payments, said Berman, whose company has $1.2 billion in U.S. real estate assets, including land and investments in builders.
The sale of asset-backed bonds will further transform a business that has traditionally been dominated by small investors into a new institutional asset class.
“It’s not a matter of if,” he said. “It’s a matter of when.”
The first securitization is about two or three months away, according to Steve Blevit, a Los Angeles attorney with Sidley Austin LLP, who’s worked on Deutsche Bank’s credit deals. The bank has a team of experts in commercial and residential real estate, who are able to structure single-family rental deals faster than competitors, Blevit said.
“No other lender in the space can do this like them,” he said.
While the credit lines can help firms increase returns, some single-family rental investors, such as Carrington Holding Co. CEO Bruce Rose, oppose using leverage because it adds a level of risk at a time when yields are shrinking as purchase prices rise faster than rents. It no longer makes sense for him to buy homes, given the cost of his capital, because they’re “too expensive for what the market has morphed into,” Rose said in an interview last month.
Home prices rose about 12 percent through April from a year earlier, according to real estate data service CoreLogic Inc., the biggest increase since February 2006. Individual buyers, spurred by low mortgage rates, pushed up sales of existing homes to an annual pace of 5 million in May, the highest since 2009 when tax incentives spurred purchases, according to the median forecast of economists surveyed by Bloomberg ahead of a June 20 report from the National Association of Realtors. Borrowing costs for a 30-year mortgage rose to a 14-month high of 3.98 percent last week, according to Freddie Mac. That’s still down from 6.8 percent almost seven years ago.
While the biggest rental buyers have been able to access either public markets or bank-arranged credit lines, some smaller investors are seeking financing opportunities through Cerberus Capital Management LP, which started First Key Lending this year with plans to lend billions of dollars to landlords too big for government programs and too small for Wall Street. Fannie Mae limits landlords to loans on a maximum of 10 properties, and Freddie Mac will lend on four.
Cerberus is seeking to fill a void left by regional lenders that prior to the housing crash were the primary source of loans for landlords buying properties. At least 475 banks have failed since the real-estate collapse, according to the Federal Deposit Insurance Corp., while larger banks have tightened mortgage underwriting standards and are focusing on the biggest investors.
This influx of investor homebuyers with capital could help drive home prices higher in some markets, reducing potential profits. As home values have risen, rental yields have also compressed to 5 percent in the most popular cities for investors, according to Goldman Sachs estimates.
“For our type of capital and the returns we hope to generate, my guess is we’re in the later stages of this,” Jonathan Gray, Blackstone’s global head of real estate, said during a June 10 interview with Bloomberg television. “That does not mean the housing recovery itself will not continue for a number of years.”