Blackstone Funding Largest U.S. Single-Family RentalsJohn Gittelsohn and Heather Perlberg
Steve Schwarzman’s Blackstone Group LP has spent $7.5 billion acquiring 40,000 houses in the past two years to create the largest single-family rental business in the U.S. The private-equity firm is now planning to sell bonds backed by lease payments, the latest step in turning a small business into a mature industry.
Deutsche Bank AG may start marketing almost $500 million of the securities as soon as this week, according to a person with knowledge of the transaction. The debt will include a portion with the highest investment grade from at least one ratings company, according to another person. Both asked not to be identified because the deal isn’t public.
Blackstone has led hedge funds, private-equity firms and real estate investment trusts raising about $20 billion to purchase as many as 200,000 homes to rent after prices plunged 35 percent from the 2006 peak. The largest investors, seeking to profit from rebounding prices and rising demand for rentals among millions of Americans who went through foreclosure or can’t qualify for a mortgage, are looking to the bond market for capital to buy more properties and increase returns with borrowed money.
“Securitization is the next step in the evolution of the single-family rental business,” said Rob Bloemker, chief executive officer of investment firm Five Ten Capital LLC, which got a $100 million credit facility from Deutsche Bank in April to buy homes. “It brings consistent and conforming standards to lending, which will help bring larger pools of capital in and get comfortable investing in these types of loans.”
JPMorgan Chase & Co. and Credit Suisse Group AG also are arranging the debt, which will be tied to properties in most of the 14 markets where Blackstone owns homes, said one of the people. Moody’s Investors Service, Kroll Bond Rating Agency and Morningstar Inc. are grading the debt.
The person with knowledge of the transaction wouldn’t specify which rating company has assigned its top rating to the bonds. That grade is higher than Standard & Poor’s rating of U.S. government debt. The Financial Times reported earlier today that the deal would get a AAA grade.
Amanda Williams, a Deutsche Bank spokeswoman, declined to comment as did Oriane Schwartzman for New York-based Blackstone, JPMorgan spokesman Justin Perras and Credit Suisse spokesman Jack Grone.
Blackstone, which started its Invitation Homes division in April 2012 to buy and renovate properties to lease, is double the size of American Homes 4 Rent, the second-largest single-family home landlord.
The world’s largest private-equity firm has been spending about $100 million a week on properties in states such as California, Arizona, Florida and Nevada since the start of this year, when Wall Street increased lending to the sector. Deutsche Bank, based in Frankfurt, has arranged at least $3.6 billion of credit lines for Blackstone’s home-buying unit.
“We were the first people who actually could borrow against these because people said, ‘Well, what’s going on here? What is this?’” Schwarzman said last week during an earnings conference call with investors and analysts.
The firm has bought most of the properties individually, including through foreclosure auctions and short sales.
“You know how hard it is for you to buy a house?” the Blackstone chairman said. “I mean, you’ve got to negotiate with somebody, you’ve got all kinds of stuff, you’ve got the title. We did it for 40,000 houses.”
Investment firms have been buying amid the biggest home price gains in seven years. The S&P/Case-Shiller index of property values in 20 cities increased 12.4 percent in July from a year earlier, the biggest advance since February 2006. While real estate values nationally are still 21 percent below their peak, investors’ mass purchases are helping push up values in cities hardest hit by the property crash, with a 27.5 percent surge in Las Vegas and gains of 18.5 percent in Atlanta in July from a year earlier.
Rising home values combined with higher mortgage rates are making it more expensive for homebuyers to compete for a tight supply of properties on the market. The average rate on 30-year home loans reached 4.58 percent in late August, a two-year high, according to McLean, Virginia-based Freddie Mac, as Federal Reserve policy makers signaled they may begin to curb bond purchases.
The Federal Housing Administration has also put in place stricter guidelines reducing credit availability and increasing costs for first-time buyers. That could also work to the advantage of institutional landlords, said Jack Micenko, an analyst at Susquehanna International Group LLP.
“Renters could stay renters longer than in prior economic recoveries,” he said in a report yesterday.
The homeownership rate declined to 65 percent in the first half of this year from a peak of 69.2 percent in June 2004. The level is expected to stabilize at about 63 percent, adding more than 2 million households to the rental population, according to Morgan Stanley analyst Haendel St. Juste.
Securitizing rental cash flow will be “the most innovative” new mortgage-related product since the 2008 financial crisis, which was fueled by creative financing of home loans, according to Laurie Goodman, director of the housing finance policy center at the Urban Institute in Washington.
Wall Street created $1.2 trillion in non-agency mortgage securities in both 2005 and 2006, helping funnel risky loans to borrowers that inflated the housing bubble. Issuance collapsed as defaults soared and real-estate values plunged.
The new bonds would provide a low-risk opportunity for investors seeking higher yields than the government-backed mortgages that account for about 90 percent of the home-loan market, Goodman said.
“The investor appetite is certainly there for new products,” she said in a telephone interview.
“Having these bonds come out into the public capital markets could buoy the industry for more financing options going forward and potentially for lower cost of capital for operators,” said Dennis Cisterna, co-head of the opportunistic-finance division at Irvine, California-based Johnson Capital, which arranges loans to rental investors.
Institutional investors have already tapped multiple financing sources for buying homes. American Homes 4 Rent obtained a credit facility for up to a $1 billion from Wells Fargo & Co. and also went public in July. Silver Bay Realty Trust Corp. got a loan in May from Bank of America Corp. and JPMorgan after selling shares to the public last year.
Raising capital from rental securities would require a higher yield than other types of asset-backed securities with a longer history, according to Bryan Whalen, managing director of the U.S. fixed-income group at TCW Group Inc. in Los Angeles, which oversees $130.8 billion.
“Financing this asset class through securitization is untested,” Whalen said in a telephone interview. “When you take into account the operational risks, the property management risks, the liquidity risks -- which are huge -- you’re requiring more coupon or income than you might normally have.”
Blackstone plans to hold onto its rental homes for years to take advantage of rising prices amid an expected shortage of housing following years of underproduction of new residences after the financial crisis, according to Schwarzman.
“We took a strategy of wanting to be as patient as possible for what will be a very long-cycle investment,” Schwarzman said during last week’s earnings call. “There’s a real dislocation and we think that this is a very sensible, long-term way to develop our business.”