April 25 (Bloomberg) -- Blackstone Group LP bought 1,400 properties in Atlanta, some eligible for federal low-income housing subsidies, in the biggest bulk purchase for the fledgling homes-for-lease industry.
The private-equity firm, which has spent more than $4 billion on 24,000 rental properties in the last year making it the largest buyer in the U.S., purchased the residences from Building and Land Technology, said Marcus Ridgway, chief operating officer of Invitation Homes, Blackstone’s single-family rental division.
Private-equity firms, hedge funds and individuals are racing to buy into a shrinking pool of foreclosed or distressed homes to rent. They’re seeking to profit as prices remain 29 percent below their 2006 peak and potential homebuyers can’t get mortgages with banks restricting credit. Jonathan Gray, Blackstone’s global head of real estate, said in an interview last week that it’s getting harder to acquire properties for a profit as competition intensifies.
“Some of the best deals are gone, so we’re really starting to see a consolidation,” said David Lykken, the managing partner of the Austin, Texas-based consulting firm Mortgage Banking Solutions. “It’s a great time for the small to mid-size guys that got in early to exit and start locking in some of the gains that they have.”
Blackstone, based in New York, paid more than $100 million for the properties, most of which are already leased, according to two people familiar with the transaction, who asked not to be identified because the deal was private. About 16 percent of the portfolio is Section 8 housing, another person with knowledge of the deal said. Ridgway declined to discuss the price and said the purchase is consistent with Invitation Homes’ plans.
“There has been no shift in our strategy,” he said in an e-mail. “Our goal at Invitation Homes continues to be that we’re building a company for the long term based on long-term holding and renting homes.”
Blackstone, the world’s largest private-equity firm, is leading investors in transforming an industry that historically was a mom and pop business -- which Goldman Sachs Group Inc. estimates is worth $2.8 trillion -- into an institutional asset class. The firm last month expanded a credit line from Deutsche Bank AG to $2.1 billion for acquiring properties.
Opportunities for bulk deals have been scarce, forcing investors to acquire properties one by one on the open market, at bank auctions, trustee sales and in small portfolios. They’ve targeted states such as Arizona, California, Florida and Nevada that were hardest hit by the housing crash and subsequent foreclosure crisis.
“If I had to guess, over the next six to 12 months, it will be difficult for us to continue in our current setup in terms of deploying capital,” Blackstone’s Gray, said in an interview last week.
Competition in Atlanta has pushed out some local investors who’ve complained they can’t compete with institutional firms that are willing to pay higher prices for properties.
At an October courthouse auction in Gwinnett County, northeast of Atlanta, bidders for Colony Capital LLC temporarily ran out of money. They ordered $1 million more in cashiers’ checks to keep buying, since sales at the auction must be paid for on the spot. The firm, run by Thomas Barrack and based in Santa Monica, California, has raised $2.2 billion to buy rental homes.
Investor buying has pushed up prices, with values in Atlanta surging 12.4 percent in the year through February, CoreLogic Inc. reported this month. That compares with a 10.2 percent increase across the U.S. during the period, the biggest year-over-year gain since March 2006.
The rush to buy homes at discounts as supply is dwindling means funds wanting to grow are turning to rivals.
“We have plenty of people approaching us to try to buy components of our portfolio or our entire portfolio,” said Jordan Kavana, director of Aventura, Florida-based Transcendent Investment Management, which has been acquiring single-family homes since 2008 and plans to spend $1 billion on properties over the next three years. “We’re not sellers though. We are looking at several of our competitors’ portfolios to buy.”
Over the last year Building and Land Technology’s single-family rental business, known as BLT Homes, has acquired more than 4,000 distressed homes in 10 markets, according to Carl R. Kuehner, president and CEO of the Stamford, Connecticut-based company.
BLT, which plans to purchase an additional 20,000 properties, seeks “to provide quality rental housing and superior tenant services to Americans seeking an alternative to apartment living or homeownership,” Kuehner said in an e-mailed statement.
Its website lists 202 properties with asking rents from $500 for a two-bedroom apartment in Decatur, seven miles (11 kilometers) east of Atlanta, to $1,325 for a four-bedroom home in Villa Rica, 33 miles west of the Georgia state capital. Invitation Homes for rent signs stood in yards of Decatur addresses listed on the BLT website this week.
The majority of BLT houses are eligible for rental to tenants with Section 8 vouchers from the U.S. government’s housing assistance program, according to the website. Section 8 vouchers are generally for families who earn less than 50 percent of a metro area’s median income, according to the U.S. Housing and Urban Development Department.
Homes leased to low-income and working-class tenants have higher yields and better prospects for price appreciation, said Andrew DeFrancesco, chairman of Delavaco Properties Inc., a Fort Lauderdale, Florida-based investor with 600 single-family rental residences, about 70 percent of which qualify for Section 8.
“Those are the homes that came off the most from the peak,” DeFrancesco, who owns properties in Florida, Georgia and Texas, said in a telephone interview. “It was our opinion if we could buy these homes right, they would have the largest upside and we could collect the best yield or rent along the way while we waited for the price appreciation to go back up.”
Section 8 homes in bad neighborhoods can be costlier to run, because of higher renovation costs, vacancies and uncollected rents, said James Breitenstein, chief executive officer of Landsmith LP, a San Francisco-based single-family rental investor. Investing in rent-subsidized properties in the wrong areas also raises reputational risks, he said.
“A lot of the institutional money is very careful,” Breitenstein, whose company trades as many as 300 homes a month, said in a telephone interview. “They don’t want to be known as slumlords.”
Bulk sales haven’t materialized on the scale anticipated in 2011, when the Federal Housing Finance Agency announced plans for a pilot project to sell pools of homes repossessed by Fannie Mae.
The biggest portfolio deal was for 970 properties bought by Colony Capital in a joint venture with Fannie Mae, announced in November with a value of $176 million. Fannie Mae also sold 699 Florida properties in September through a joint venture with San Diego, California-based Pacifica Cos. LLC for an announced value of $78.1 million.
Companies such as Landsmith, Detroit-based Precise Associates Inc., and Mack Cos. in Tinley Park, Illinois specialize in aggregating portfolios of single-family rental homes that they resell to larger institutional investors.
Mack sold 93 Chicago-area properties in March and 196 in December to American Residential Properties Inc., a Scottsdale, Arizona-based single-family rental company that filed plans last month for a $300 million public stock offering as a REIT.
Fundamental REO LLC, a firm headed by former Goldman Sachs managing director Donald R. Mullen Jr., this year bought Scottsdale-based Empire Group, which had acquired about $100 million worth of single-family rentals. A portfolio of 522 rental townhomes in the Baltimore area, 85 percent of which are leased through rent assistance programs, was put on the market this month by Dominion Properties and East Baltimore Investments.
While large-scale buyers are counting on profiting long-term by selling after prices appreciate, they also need to make current income on rents, which is easier to do with low-cost properties, according to Aaron Edelheit, chief executive officer of The American Home, an Atlanta-based single-family rental operator with 2,500 homes in Atlanta, Nashville, Tennessee, Charlotte, North Carolina and Tampa and Orlando, Florida.
That’s key for firms seeking to IPO such as American Residential. Others looking to sell shares include American Homes 4 Rent, and Oakland, California-based Waypoint Homes, which owns more than 3,000 rental homes.
“If you’re building a vehicle that’s going to be publicly traded, you’re going to have to show cash flow,” Edelheit said. “Wall Street is going to care about cash flow.”