Deutsche Bank Opening Rental Bond Spigot to CerberusJohn Gittelsohn, Heather Perlberg and Sarah Mulholland
Blackstone Group LP’s debut sale of bonds backed by rental homes is paving the way for Cerberus Capital Management LP and Colony Capital LLC as Wall Street creates a new market to expand funding for the industry.
Deutsche Bank AG unveiled the $479.1 million deal, which bundles mortgages on 3,207 single-family homes acquired by Blackstone into securities of varying risk, at the Waldorf Astoria hotel in New York yesterday, after spending more than six months structuring the transaction. Almost 60 percent of the securitization received AAA, or top ratings, from Moody’s Investors Service, Kroll Bond Rating Agency and Morningstar Inc.
Demand for rental bonds would give private-equity firms, hedge funds and other investors a new source of capital to increase buying of single-family homes after they raised more than $20 billion to acquire as many as 200,000 properties in the past two years. Issuance may eventually exceed $70 billion a year, equivalent to this year’s expected sales in the two-decade old commercial mortgage-backed securities market, said Jade Rahmani, a housing analyst with Keefe Bruyette & Woods Inc.
“Blackstone has borrowed multiples of what is reflected in this deal, so this is the first of many transactions for them as well as for the market as a whole,” said Carl Bell, a managing director at Amundi Smith Breeden, the U.S. subsidiary of French asset-manager Amundi, which oversees about $1 trillion. “A big part of this is laying the groundwork for future deals.”
Blackstone has spent $7.5 billion on about 40,000 homes, the most of any firm after homes prices plunged as much as 35 percent from the 2006 peak. The New York-based firm has obtained $3.6 billion in credit lines from lenders led by Deutsche Bank. Christine Anderson, spokeswoman for New York-based Blackstone, declined to comment on the bond offering, which is also being arranged by Credit Suisse Group AG and JPMorgan Chase & Co.
Renters in the U.S. occupy about 14 million single-family homes worth as much as $2.8 trillion, according to Goldman Sachs Group Inc. Demand for leased housing is increasing as fewer Americans are able to qualify for a mortgage after the financial crisis, which forced millions of homeowners into foreclosure.
The U.S. homeownership rate will stabilize in a few years at 63 percent, down from the current 65 percent and a 2004 peak of 69.2 percent, according to Morgan Stanley analyst Haendel St. Juste. That would add more than 2 million rental households to the current 40.1 million.
Colony American Homes Inc., the third-largest single-family landlord with more than 15,000 homes, is exploring securitizing debt on its properties and with loans provided to smaller operators, according to Justin Chang, chief executive officer of the firm.
“The securitization opportunity is here for both the owned-homes-to-rent business and it’s also for the lending business,” Chang said in a telephone interview. “Bringing additional institutional capital to this market, whether in the form of equity or the form of debt, is a good thing and speaks to the continued professionalization and institutionalization of this asset class.”
Colony American Homes is the Scottsdale, Arizona-based unit of Colony Capital, a private-equity firm founded by Tom Barrack that started out buying distressed real estate and debt sold by the U.S. government’s Resolution Trust Corp.
Wells Fargo & Co. is working on a securitization for American Homes 4 Rent, the second-largest single-family landlord, with an offering expected in the first half of next year, according to a person with knowledge of the offering, who asked not to be named because the information is private. Cerberus, which is providing debt to landlords through its First Key Lending unit, is also working to create securities, according to two people with knowledge of the business, who asked not to be identified because the information is private.
Wells Fargo spokeswoman Elise Wilkinson and John Dillard, a spokesman for Cerberus, declined to comment. American Homes 4 Rent Chief Financial Officer Peter Nelson didn’t return calls.
The Blackstone offering is linked to homes in five states across the U.S., focused in areas that suffered among the largest declines during the recession, according to deal documents distributed to investors. Houses in Phoenix, Arizona account for 34 percent of the pool, the highest concentration, followed by Riverside, California with 17.2 percent of the deal. Rental rates range from $501-per-month to $3,250-per-month, the documents show.
“It is certainly the flavor du jour,” said Ed Shugrue, CEO of Talmage LLC, which oversees $2 billion of commercial property debt. “If you’re going to participate as a bond buyer it’s better to participate early and with a marquee sponsor like Blackstone,” he said. “The first few deals of a new asset-class always have the best pricing and best collateral for investors.”
Issuance of securities backed by rental homes has the potential to exceed $70 billion a year by 2016, said KBW’s Rahmani. Sales of CMBS, linked to hotel, skyscraper and office debt, are expected to be about $70 billion this year, according to Credit Suisse.
Home purchases by institutional investors reached a record high of 14 percent of sales in September and all-cash buyers accounted for almost half of transactions as the share of first-time homeowners continued to shrink, according to an Oct. 24 report by RealtyTrac.
Many rentals owned by limited partnerships or small landlords have little or no debt and could become a source for future mortgage-backed securitizations, KBW’s Rahmani said.
Just 10 percent of existing rental homes, with an average value of $150,000, would create about $140 billion in potential debt for securities, according to Rahmani. Debt on 5 percent of the 5.3 million homes sold this year would represent $37 billion in potential securitizations at 70 percent loan-to-value of $200,000 per home, Rahmani said.
It could become a big liquid market “because there’s a lot of single-family rentals,” said Lewis Ranieri, who helped pioneer mortgage-backed securities in the 1980s at Salomon Brothers Inc. and now runs a real-estate finance firm.
Still, the market is untested and comes with challenges, said Ranieri.
“Because a house was never built to be rented, the wear and tear on the house makes it prohibitive to keep renting over a period of time because the cost of the rehab becomes overwhelming,” he said. “There’s no historic evidence of long term single-family rental.”
Fitch Ratings won’t consider AAA grades on the debt because of concerns about investors’ recovery prospects in the event of a bankruptcy and the lack of a track record that owners can profitably manage large numbers of scattered homes, according to an Oct. 29 note by analysts Suzanne Mistretta, Dan Chambers and Rui Pereira in New York.
The transaction consists of a single loan from Deutsche Bank secured by mortgages on the properties and an equity pledge by Blackstone’s single-family rental unit, Invitation Homes, according to a deal document. “Unless the structure involves mortgages, we would not likely be able to get beyond the Baa threshold,” Kruti Muni, an analyst with the New York ratings firm, said in an e-mail last week.
Wall Street bankers have stepped up lending to single-family home landlords since last year, when Citigroup Inc. extended a $245 million line of credit to Waypoint Homes Inc. In addition to Blackstone, Deutsche Bank has also extended credit to landlords including Progressive Residential LP, Apollo Global Management LLC and Five Ten Capital LLC.
American Homes 4 Rent, an Agoura Hills, California-based landlord founded by billionaire B. Wayne Hughes, had a $670 million credit facility from Wells Fargo as of June 30. American Residential Properties Inc., a single-family rental REIT, has a credit facility from Citigroup. Colony announced a $500 million line of credit from JPMorgan in September with an accordion feature that could double its size to $1 billion.
Firms including American Homes 4 Rent have also tapped the equity markets for capital. The company rose 0.4 percent to $15.72 at 11:53 a.m. in New York. Silver Bay Realty Trust Corp., which got a loan in May from Bank of America Corp. and JPMorgan, rose 0.2 percent to $15.55.
For now, Blackstone is helping itself and the wider industry.
“This is a real estate asset class that’s here to stay,” Laurie Goodman, director of the housing finance policy center at the Urban Institute, said in a telephone interview. “This is one of the early attempts to put financing on it.”