Investors demanded mostly higher relative yields to buy securities tied to rental houses managed by Blackstone Group LP (BX)’s Invitation Homes as the largest single-family landlord completed the new market’s biggest deal.
A $108.5 million portion of its $993 million transaction today with the least protection against losses will pay yields that float at 375 basis points more than a borrowing benchmark, a person with knowledge of the sale said. That was the highest end of a range suggested in marketing earlier this week, and compares with a spread of 325 basis points for a similar slice of a $481 million deal by American Homes 4 Rent on May 13.
The Blackstone business is getting back almost 85 percent of the money it spent buying and improving the more-than 6,500 properties packaged into its bonds, according to a report today by Keefe, Bruyette & Woods Inc. analysts. The yields accepted mean it still can earn about 17 percent annual returns on the remaining amount, they wrote, down from the return on equity garnered for American Homes through its offering that they estimated at as much as 26.5 percent.
“Given the transaction’s successful execution, we view the deal and its terms as positives for the sector,” KBW’s Jade J. Rahmani, Bose George and Ryan Tomasello said.
Blackstone, which has bought about 45,000 houses around the country over the past three years, in 2013 became the first of the hedge funds, private-equity firms and real-estate investment trusts that ramped up in the rental business amid the U.S. foreclosure crisis to tap the securitization market. Its latest sale of bonds was the fourth for such debt, bringing total issuance to about $2.5 billion.
Christine Anderson, a spokeswoman for New York-based Blackstone, declined to comment on the latest sales.
Institutional investors, who went on a property-buying spree following a crash in prices, are bundling their rental homes into securities to recoup cash and earn higher returns on their residual investments with cheaper financing. The market could fuel an unsustainable expansion of institutional rental-home investment if demand for the bonds is too strong, according to a February report by the Center for American Progress.
The $477.5 million of top-rated securities in the Blackstone deal today yield 100 basis points, or 1 percentage point, more than the one-month London interbank offered rate, said the person, who asked not to be named because the details weren’t public. That matched the relative yields on AAA notes of the American Homes (AMH) deal as the tightest yet.
Libor, the rate at which banks say they can borrow money from each other, was set at 22.7 basis points today.
All other portions of the deal offered wider spreads than on similar classes of the American Homes transaction, and at the top end or in excess of potential spreads discussed with investors earlier this week. The second-lowest ranked slice pays a spread of 325 basis points, compared with guidance of 275 points to 300 basis points and relative yields of 250 basis points on a similar part of the American Homes sale.
In Blackstone’s first deal in November, the AAA class sold at 115 basis points more than Libor (US0003M), while the lowest-ranked class priced at 365 basis points and second-lowest at 265 basis points. Colony Capital LLC’s Colony American Homes Inc. issued $513.6 million of rental-home bonds in April in the second sale in the market.