Magnetar Goes Long Ohio Town While Shorting Its Tax Base

Photographer: Ty Wright/Bloomberg

Ohio requires a countywide reassessment every three years. In the last one, in 2011, values fell 7 percent, or about $2 billion in Montgomery County. Close

Ohio requires a countywide reassessment every three years. In the last one, in 2011,... Read More

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Photographer: Ty Wright/Bloomberg

Ohio requires a countywide reassessment every three years. In the last one, in 2011, values fell 7 percent, or about $2 billion in Montgomery County.

Thousands of brick houses line the streets of Huber Heights, a leafy suburb of Dayton, Ohio, named for the builder who developed it in the 1950s and nurtured its growth. Until this year, his family was the town’s biggest landlord, with a third of all rental housing. Now the tenants’ payments are being routed to a $9 billion hedge fund.

Magnetar Capital LLC, investigated by the Securities and Exchange Commission for its housing bets leading up to the property crash, acquired a rental business in January with about 1,900 properties from Charles H. Huber’s widow. In April, its management company applied for the largest cut to property tax assessments in the county’s history. The move could curb funding for public schools, the police and fire departments and services to the disabled, said Montgomery County Auditor Karl Keith.

Private-equity firms and hedge funds have bought as many as 200,000 homes across the U.S., typically in areas hardest hit by the housing crash, to profit from soaring demand for rentals. What makes Magnetar’s investment unique so far is its focus, buying one in 11 homes in the Ohio suburb, magnifying its influence over the residents and the town’s finances.

“Everyone is very concerned about being a thumbtack on a map somewhere in a big high-rise office building,” Mark Campbell, a Huber Heights council member, said in an interview at City Hall. “We’re not bothered by out-of-town neighbors coming in and investing in our community, but we’re not going to be naïve because we work for 40,000 residents. We can’t let a rental home take down the value of others.”

Photographer: Scott Olson/Getty Images

Private-equity firms and hedge funds have bought as many as 200,000 homes across the U.S., typically in areas hardest hit by the housing crash, to profit from soaring demand for rentals. Close

Private-equity firms and hedge funds have bought as many as 200,000 homes across the... Read More

Close
Open
Photographer: Scott Olson/Getty Images

Private-equity firms and hedge funds have bought as many as 200,000 homes across the U.S., typically in areas hardest hit by the housing crash, to profit from soaring demand for rentals.

Rental Demand

Demand for rental accommodations in the U.S. has grown as almost 8 million homes were repossessed through foreclosure or sold for a loss since 2007, according to RealtyTrac. The homeownership rate dropped to 65 percent in the first half of this year, its lowest since 1998, Census data show, and may keep falling as more owners lose their homes and slow income growth and tight credit limit people’s ability to buy.

Last year, U.S. home prices dropped to a low of 35 percent below their 2006 peak, triggering a wave of acquisitions from investors trying to turn a business that’s been dominated by mom and pop landlords into an institutional asset class resembling the apartment industry.

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Blackstone Group LP (BX) has led the stampede, spending more than $7.5 billion on almost 40,000 properties, followed by American Homes 4 Rent (AMH) with more than 20,000. Investors have largely targeted Phoenix; Atlanta; Dallas; Charlotte, North Carolina; and Tampa, Florida, where growth in jobs and population is expected to drive up rents and home values.

Huber Purchase

Magnetar, named after a neutron star with a super-powerful magnetic field, raised $71 million in a private placement for Huber Funding LLC, according to an SEC filing in February. Documents from the Ohio Secretary of State show Magnetar bought Huber Investment Corp. and other companies from Huber’s widow, Teresa J. Huber, for an undisclosed sum. She didn’t return phone messages seeking comment on the sale.

The hedge fund picked Huber Heights because it found a ready-made rental company that could deliver the kind of steady returns its investors expect, according to spokesman Tony Fratto. Magnetar wouldn’t disclose its expected return for the Huber investment, Fratto said. The firm had $9.1 billion under management as of January, according to its website.

“They weren’t altering the housing mix in a community,” said Fratto, who works for Hamilton Place Strategies in Washington. “They weren’t disruptive. This was a business that was already profitable and they’re making it more profitable with good management and good technology and investments in the properties.”

Largest Landlord

Private Equity's Instant Rental Empire

While Magnetar is a mid-tier player in the burgeoning home rental industry, the purchase makes it the town’s largest landlord, housing hospital employees, tool makers and federal and civil employees of nearby Wright-Patterson Air Force Base.

Huber Heights grew after World War II along with Dayton, a crossroads for goods made in America’s industrial heartland. Workers for the predecessors of General Motors Co. and Delphi Automotive Plc churned out auto parts at factories that now are mostly shut.

Huber started to develop the town, midway between Cincinnati and Columbus, the Ohio capital, in the 1950s. He was building affordable homes selling for $13,995 with a $995 down payment, according to the Ohio Historical Society. From 1956 to 1992 the builder put up 10,707 mostly brick, single-family homes and 2,258 multifamily properties in the community, Huber Heights Chamber of Commerce records show. The average sales price for an existing home in August was $95,300, according to data from the Dayton Area Board of Realtors.

Stable Values

“The property values are stable and that’s what’s attractive,” said Fratto, a former White House and Treasury Department spokesman during the George W. Bush administration. “Maybe for other investors going to places like Las Vegas and Arizona, going to hot areas works for them. That’s not Magnetar’s style.”

The bulk purchase of Ohio residences follows a history of sometimes controversial investments the firm has made since it was started in 2005 by Chief Executive Officer Alec Litowitz, the former global head of equities at Chicago-based Citadel LLC, and Ross Laser, former president of Glenwood Capital Investments.

In 2006 and 2007, the hedge fund helped create more than 20 financial instruments called collateralized debt obligations that were named after constellations. The CDOs, which pooled mortgage bonds and sliced them into securities of varying risk, totaled at least $32 billion.

CDOs funneled loans to risky borrowers, helping to inflate the housing bubble.

Magnetar Strategy

Magnetar’s strategy involved buying the riskiest pieces of the securities and simultaneously making larger bets that less risky portions would fail. The firm wagered correctly that if subprime borrowers defaulted and housing declined, then the value of even the safest CDO pieces would suffer.

JPMorgan Chase & Co. (JPM), which allegedly marketed some of the securities without disclosing Magnetar’s role in structuring the deals, agreed to pay $153.6 million in June 2011 to settle an SEC investigation, without admitting wrongdoing. The SEC hasn’t filed a complaint against Magnetar.

In another deal, called Octans I, Magnetar invested in the equity portion of the CDO and then helped select the subprime-mortgage bonds. The manager of the transaction, Wing F. Chau, knew Magnetar’s strategy’s was also to short, or bet against other parts of CDOs, according to the SEC, which last week accused Chau of misleading investors by accommodating Magnetar’s request without telling the investors. Magnetar picked bonds that credit analysts at Chau’s firm Harding Advisory LLC disfavored, the SEC said. Steven Molo, a lawyer for Chau, didn’t return phone calls seeking comment.

Market Neutral

The hedge fund told its investors in 2010 that it offered limited input on the creation of CDOs, and made bets that would pay off if they soured as part of a “market neutral” portfolio designed to profit no matter what happened.

Magnetar learned the Huber business was for sale from Vinebrook Partners LLC, a real estate investment and management firm that was operating about 400 single-family rental properties in nearby Cincinnati and Indianapolis. Vinebrook, based in Lexington, Massachusetts, is overseeing the Huber homes for Magnetar.

Assessment Appeal

On April 1, the new property managers asked to have the assessed value on 1,218 residences in Montgomery County cut by 49 percent, to $50 million from $98.6 million, according to Keith, the county auditor.

Vinebrook co-founder Daniel Bathon, a former Drexel Burnham Lambert Inc. investment banker, said the tax cut will help them invest more in the properties, which will increase their attractiveness and value over time.

“We’re going to improve the resident base for the town, which I think is a big asset to the community,” he said in a telephone interview from Huber Heights.

The assessments, based on a combination of comparable sales and estimates of cash flow from income properties, are considered fair market values, so resale amounts are lower if they go down, Keith said. The reassessments could influence surrounding property values, if local homeowners follow suit.

“Other property owners might look at those and see those as evidence their properties are worth less,” Keith said.

Granting the appeal would reduce property tax collections by $1.39 million, including as much as about $800,000 to Huber Heights City Schools, equivalent to about 16 teaching positions, and curb financing for community colleges, police, fire, libraries and services to the disabled, according to Keith.

‘Resident Base’

Before selling the company, the former owner had begun the process of appealing tax assessments for about 300 of the units in the county, according to Vinebrook.

Ohio requires a countywide reassessment every three years. In the last one, in 2011, values fell 7 percent, or about $2 billion in Montgomery County. Magnetar is now the county’s sixth-largest property owner after Dayton Power & Light, the city of Dayton, Miami Valley Hospital, Montgomery County Board of Commissioners and the U.S. government. The government entities don’t pay property taxes, according to Keith.

The sale of the Huber homes to an institutional investor “will affect the quality of the area more than anything else,” said Charles’s brother Donald Huber, 81, who built houses in another part of town. “It’s a local business. We always tried to maintain a quality image and spent probably more money than we should have to do that. I don’t see anybody who’s interested in next quarter’s earnings doing that.”

Residents’ Lives

While the value of the hedge fund’s CDO investments was tied to cash flow from homeowners making mortgage payments, the securities were bought and sold by sophisticated financial institutions. This time, through its management company, the strategy influences the lives of residents living in a quintessential suburban town, where earlier this month kids rode bicycles as autumn leaves fell along tree-lined streets and music played from an ice cream truck in the distance.

Charles Huber, who died at age 79 in 2003, fostered the town’s expansion, building the first private utility company in the state of Ohio and donating land for several public schools.

The Huber Heights school district, which gets about half of its $58.4 million operating budget from property taxes, has filed to block the reassessments, as they will “significantly impact us,” said Superintendent Susan Gunnell.

School Cuts

State and local funding cuts since 2009 already forced the district to shrink its staff by 30 percent -- 226 positions, including 100 teachers -- according to Gunnell.

Art, choir, Advanced Placement and physical education classes have been reduced or canceled while janitors, bus drivers and teachers’ aides were laid off. Math test scores fell last year, a product of budget cuts and new state standards that teachers with limited resources were ordered to adopt, Gunnell said.

“I’m a firm believer that the schools and community are very much intertwined,” Gunnell said. “Good schools build good communities and good communities build good schools. If you want families to continue to move into the community, they’re going to be looking at how the schools are doing.”

Knowing the potential tax cut would affect the community, Bathon said he spoke in advance with the mayor and vice mayor and asked for a meeting with the school board.

“We said, ‘Look, we know this will be a hit. We want you to be able to plan for it, but if we do this it will help add to the investment we can make in the properties to improve them and get them up higher values in the long-run,’ and of course that’s great for the town and the schools and for us as well,” said Bathon.

School Donation

He told officials in a meeting at City Hall last week that Vinebrook was going to donate $25,000 to help staff a police officer at one of the city schools and that it planned to make at least $1 million in improvements to its units in fiscal 2013 and 2014. That’s an average $674 per property if the entire investment goes into the town’s homes.

Huber Heights, which incorporated as a city in 1981, has 15,875 housing units, according to 2010 Census data. About 28 percent are rentals.

Monthly rent for a Huber home ranges from about $500 to $1,500, according to Amy Logan, head of leasing, who also worked for the prior management company. The occupancy rate is about 90 percent in the homes, some of which are multifamily units or apartments.

“Many are under market, so there’s room to raise the rents,” Logan said.

Lowest Rent

Jennifer Wright, a 31-year-old quality control specialist for Community Tissue Services, has been living in a Huber home with her two kids for five years. She said she’s only stayed because her $785 monthly rent is the lowest she can find in town.

“I’ve looked every year for the last six,” Wright said. “Everybody wants over $800 a month for a three-bedroom, two-bath.”

Paul Hubbs, 42, pays $575 a month to lease a three-bedroom, one-bathroom bungalow. Rent has gone up $10 a year in the past four, said Hubbs, who works at an area toolmaker, and his payment was always $40 less if he paid before the start of the month.

Huber Heights is counting on the new landlord to put money back into the community. City officials are designating reinvestment areas to entice Vinebrook to renovate older properties and boost the community’s value.

Investor Returns

“If they’re going to show return back to the investors, they need to yield the most rent they can and increase the values of those homes,” said Campbell, who is also the vice-mayor.

The majority of companies building large-scale rental businesses are buying foreclosures at auctions, properties through short sales or on the open market. The investment firms are scouring for areas to buy amid the biggest increase in home prices in seven years. The S&P/Case-Shiller (SPCS20) index of property values in 20 cities increased 12.4 percent in July from a year earlier, the biggest advance since February 2006.

While activity has been focused in California, Arizona, Georgia and Florida, parts of the Northeast and the Midwest are emerging as attractive areas for institutional investors, according to Morgan Stanley analyst Haendel St. Juste. The bank estimates the homeownership rate will stabilize around 63 percent, which means more than 2 million households will go from being owners to renters. The institutional buy-to-rent industry could grow six-fold in the next few years to a more than $100 billion market opportunity, St. Juste estimates.

Property Values

Magnetar has bought in a region where property values are still falling. According to the Dayton Area Board of Realtors, the median existing home sales price in September in the area was $106,450, down 2.3 percent from the same month in 2012.

“Ohio in general has been a slow-growing economy at best and the housing market has been perennially soft,” said Mark Zandi, chief economist for Moody’s Analytics Inc.

The investment firm’s concentrated, mass purchase comes with advantages. Most of the Huber homes are contained within 22.4 square miles (58 square kilometers). That’s a benefit when landlord profits depend on finding efficient ways to operate scattered-site properties that have their own lawns and roofs.

Some Huber Home Rental employees said they already see a change for the better. Logan, Vinebrook’s head of leasing, described the new management as “very involved” and “efficient.”

“It was nerve-racking, when a company comes in and buys a company like this,” she said. “I see improvements already.”

Modernizing Company

Bathon said Vinebrook is modernizing the company, which was run mostly on paper, and making improvements to quality of the carpet, paint, kitchens, bathrooms and fixtures in homes.

“We believe that will increase occupancy more,” he said. “It will lower turnover -- turnover is a big expense in our business. It will allow us to charge more appropriate rents long-term.”

Bathon said he goes to Huber Heights “every single week,” to work with tenants, vendors, and the town.

“I’ve made significant efforts to make myself known, to make our plans known, to add transparency to a company that probably didn’t have that history prior,” he said.

For the family who developed and nurtured the town, donating land, fire trucks and drug dogs for the police force, their legacy might be lost, according to Donald Huber.

“You don’t have anybody like Charles that lived in the area, knew the people, was willing to put money into maintaining the quality of the community, and had a legacy he was interested in maintaining,” he said. “That is not part of the equation anymore.”

To contact the reporters on this story: Heather Perlberg in New York at hperlberg@bloomberg.net; John Gittelsohn in Los Angeles at johngitt@bloomberg.net

To contact the editors responsible for this story: Kara Wetzel at kwetzel@bloomberg.net; Rob Urban at robprag@bloomberg.net

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