Tom Barrack’s Colony Capital LLC, which plans to acquire $1.5 billion of rental homes within a year, was among the winners of about 2,500 foreclosed properties auctioned off by Fannie Mae, according to four people with knowledge of the sale.
Colony won all or part of portfolios of homes in Phoenix, Las Vegas and Southern California, said three of the people, who asked not to be identified because bidders signed confidentiality agreements and the transactions haven’t been completed. Cogsville Group LLC, a New York-based investment fund that has worked with Colony in the past, agreed to buy a portfolio of homes in Chicago, the people said.
The auction was the largest bulk sale by Fannie Mae, the government-controlled mortgage company that owned 114,000 foreclosed properties as of March 31. The sale is likely to set a benchmark for prices and demonstrate the level of large-investor demand for single-family rental homes, according to analysts at research company Green Street Advisors Inc. and investment firm Amherst Holdings LLC.
Private-equity investors including Blackstone Group LP and GTIS Partners are buying foreclosed houses to take advantage of prices that have fallen 34 percent from their July 2006 peak. Tenant demand for rental houses is growing as people look for places to live after losing their homes to foreclosure.
The Federal Housing Finance Agency, which has overseen Fannie Mae since a September 2008 takeover of the Washington-based company, announced on July 3 that it had chosen winning bidders without disclosing the names of the companies or terms of the sale because the deals hadn’t been completed.
“FHFA undertook this initiative to help stabilize communities and home values in areas hard-hit by the foreclosure crisis,” Edward DeMarco, the agency’s acting director, said in a statement. “We are pleased with the response from the market and look forward to closing transactions in the near future.”
The 2,490 properties up for auction encompassed portfolios of 775 homes in Florida, 572 in Atlanta, 484 in Southern California, 341 in Phoenix, 219 in Las Vegas and 99 in Chicago, according to an offering document by Credit Suisse Group AG, which managed the sale. About 85 percent of the properties already are operating as rentals, according to the document.
The total estimated value of the homes was about $330 million, according to three people who viewed offering documents available only to qualified bidders. They asked not to be named because bidders signed non-disclosure agreements.
The Atlanta portfolio failed to sell at auction, according to four people with knowledge of the bidding.
Colony, based in Santa Monica, California, declined to comment, said Lisa Baker, a spokeswoman for the company, with Owen Blicksilver PR Inc. Cogsville also declined to comment, said Rick Matthews, a spokesman for the real estate investor, with Rubenstein Communications Inc.
Colony’s winning bid was reported earlier today by American Banker.
Colony’s American Homes division owns more than 1,100 residences in Arizona, California, Nevada and Texas and plans to acquire $1.5 billion worth of property by next April, according to Justin Chang, the unit’s acting president. Colony bought a portfolio of 300 homes in the Houston area for about $30 million, the company said on July 3.
The winning bids in the Fannie Mae auction were at least 90 percent of the homes’ estimated value, said five people with knowledge of the auction, who asked not to be named because they signed confidentiality agreements. The FHFA offered bidders “synthetic financing” to reduce the up-front capital required if they agreed to form a joint venture with Fannie Mae and share proceeds from the rental or sale of properties, the people said.
Cogsville, which has invested in five loan portfolios with a principal balance of $3 billion, teamed with Colony in July 2010 to buy a portfolio of commercial real estate loans seized from failed banks. Those loans were auctioned off by the Federal Deposit Insurance Corp.
Colony has won at least seven FDIC auctions with $5 billion in failed bank loans. The FDIC transactions established public-private joint ventures, similar to the Fannie Mae bulk-sale structure.
“It is a very positive development to have institutional investors commit capital,” Amherst Holdings Vice Chairman Roger Taylor said in an e-mail. “A huge shadow inventory of single-family homes remains and a well-organized national rental-conversion program can be an important part of the solution. Rental conversion creates jobs, improves the housing stock, stabilizes neighborhoods and increases tax revenues.”
Amherst purchased homes in a previous Fannie Mae auction, according to congressional testimony by Sean Dobson, chief executive officer of the Austin, Texas-based company. Taylor declined to comment on the results of the recent auction.
About 6 million U.S. borrowers will lose their homes in the next five years because of inability to pay their mortgages, creating demand for as many as 4 million new rental households, according to Scott Simon, head of mortgage bonds at Pacific Investment Management Co. in Newport Beach, California.
Single-family rentals are priced to deliver unlevered total returns in the range of 7.5 percent to 8 percent, or about 0.5 percentage point to 1 percentage point higher than institutional-quality apartments, according to a June 8 report by Ray Huang, senior associate at Green Street Advisors in Newport Beach, California. The uncertainty associated with the single-family asset class suggests returns for investors should be higher than the current level, he said.
Yields for homes bought in portfolio auctions may be even lower because bidding wars may drive up prices and because the quality of the properties is uneven, Huang said in a telephone interview. He said he hopes that lessons learned from the Fannie Mae bulk sale will help the government improve future transactions for big investors, he said.
“Bulk sales seemed like a good idea,” he said. “But the local operators that are buying the onesies and twosies are the guys that have been the most successful so far.”
Single-family investor Waypoint Homes, which has acquired 1,800 distressed rental units, has preferred individual purchases over pools that include a “mixed-bag” of quality and location, said Gary Beasley, managing director of the Oakland, California-based company.
“Our current view is that some of the more recent players to the space are willing to pay a lot more than we are for pools, either because they are willing to accept lower returns to ‘buy’ scale, don’t know exactly what they are getting themselves into or perhaps a bit of both,” Beasley, whose company was founded in 2008, said in an e-mail. “Either way we prefer buying very selectively at scale rather than buying less discriminately en masse.”
Carrington Capital Management LLC was an unsuccessful bidder for three of the portfolios, said Rick Sharga, vice president of the Santa Ana, California-based firm that received a $450 million commitment from Oaktree Capital Group LLC to buy single-family rentals.
“We hope that whoever wins these bids is successful, because it validates what we still think is a very viable concept,” Sharga said in a telephone interview. “Just because we and some other bidders didn’t offer as much as the winning bids doesn’t make it a bad decision for them. It just suggests a different valuation of the assets than we might have.”
With demand for pools rising, smaller investors have begun selling to larger funds. Landsmith LP, a San Francisco-based single-family investment group, sold 75 Phoenix-area homes for $7.5 million “to a large institutional investor,” according to a June 12 press release. G8 Capital LLC, a real estate investment group based in Ladera Ranch, California, wants to sell about 350 rental homes in inland Southern California areas, Chief Executive Officer Evan Gentry said.
“People are hungry for properties and we have a portfolio we’re willing to sell,” Gentry said in a telephone interview. “We think the market’s gotten a little frothy.”