It’s getting more expensive to finance and recoup cash from U.S. rental properties for investment firms led by Blackstone Group LP’s Invitation Homes.
Bond investors demanded some of the highest yields since the market started less than a year ago to buy securities backed by the landlord’s houses in a $684 million deal today. The offering included $59.3 million of junior securities paying a yield of 450 basis points, or 4.5 percentage points, more than a borrowing benchmark, a person with knowledge of the matter said.
The rising costs, which were also seen last month by Silver Bay Realty Trust Corp. (SBY), may combine with higher home prices to reduce the appeal of the rental-home market to the institutional investors that have sought to transform the business from an industry dominated by small, local landlords. Denise Dunckel, a spokeswoman for Dallas-based Invitation Homes, declined to immediately comment.
The junior-ranked portion of its latest deal was sold at 97.7 cents on the dollar, with the spread up from 375 basis points in an issue in May by the firm and 365 basis points in its November transaction that was the first in the market. By comparison, a similar portion of Silver Bay’s deal was sold at a 400 basis-points spread.
Bond investors are backing off the securities as competing investments such as high-yield corporate bonds cheapen. Holders sought bids through dealers on about $80 million of existing rental-home notes in widely marketed auctions Friday, according to data from Empirasign Strategies LLC, which tracks securitization trading.
The second-most senior portion of the latest Blackstone deal, which brought issuance in the segment to about $4 billion, was sold at a spread of 160 basis points, said the person who asked not to be named, citing a lack of authorization to speak publicly. That was up from 135 basis points for a similar portion of the November offering and 150 in May’s sale.
The top-ranking, AAA rated portion of this week’s deal, which accounts for a smaller portion of the transaction relative to the firm’s earlier offerings, yields 110 basis points more than the one-month London interbank offered rate, compared with 115 basis points in November and 100 in May.
Silver Bay said in a July 31 statement that the $312 million of rental bonds it sold last month carried a “blended effective interest rate” of Libor plus 1.92 percentage points. Moody’s Investors Service said in a presale report its use of external property managers in some markets would mean “less robust oversight and cost controls.”
The latest Blackstone securities, which Moody’s said lack warranties against document defects from underwriter Deutsche Bank AG, pay a weighted average spread of 2.11 percentage points, according to data compiled by Bloomberg. That compares with 1.66 percentage points in its inaugural deal, where the securities priced at par, the data show.
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