Banks Face Competition From Bonds on Landlord FinancingJody Shenn and Heather Perlberg
Gary Beasley, one of the earliest to build a corporate rental-home business amid the U.S. foreclosure crisis, said the birth of a bond market backed by the properties is compelling banks to lend more cheaply to firms like his.
“It’s nice to have the competition of securitization to make the banks want to keep their credit lines competitive,” Beasley, co-chief executive officer of Starwood Waypoint Residential Trust, said in an interview yesterday at Bloomberg News headquarters in New York.
Beasley’s Oakland, California-based company owns more than 9,000 homes and is planning to sell its first bonds this year, joining firms such as Blackstone Group LP and American Homes 4 Rent in issuing securities tied to rental payments. They’re seeking to recoup cash and earn higher returns with cheaper financing after a homebuying spree by institutional investors created a new industry of single-family landlords.
Bond issuance in the industry totals about $4.4 billion, with American Residential Properties Inc. selling $342.2 million of securities today. Beasley said that he last year leveraged the market’s growing appetite for rental-home bonds to refinance a $245 million loan that Citigroup Inc. gave to one of his funds in October 2012.
“We basically went to Citi and said, ‘The market’s changed, we’d be interested talking to you about getting more proceeds and cutting our rate. If you’re willing to entertain that, we’d love to talk to you about it. If not, we’re interested in perusing a securitization, because it’s just too compelling,’” he said.
“It took them about 12 minutes to come back and say, ‘This is what we can do.’”
Beasley declined to provide details on the terms offered. Scott Helfman, a spokesman for New York-based Citigroup, declined to comment on the loan.
Starwood Waypoint was spun off from Starwood Property Trust Inc., a Greenwich, Connecticut-based commercial real estate investment and finance company, earlier this year following a merger between Beasley’s Waypoint Homes and an affiliate of Barry Sternlicht’s Starwood Capital Group LLC. Sternlicht is the single-family landlord’s chairman.
Starwood Waypoint has $1.4 billion invested in 9,122 rental homes and has spent $397 million on 3,080 nonperforming loans. The company, which boosted its monthly property purchases by $40 million to $100 million last quarter, expects to buy more mortgages than homes this quarter, according to Beasley. The soured debt has become more popular for investment firms as home prices rise and the inventory of distressed properties dwindles.
“Right now there’s an ability to put a lot of capital to work in the loan space,” he said. “It’s still attractive pricing but not as attractive as it was a year ago. Three years from now, will anybody be able to do that? My guess is probably not.”
Beasley’s Waypoint Homes was a pioneer in the rental-home industry, starting to purchase houses through distressed sales in 2009, several years before Wall Street-backed firms began aggressively buying in bulk.
Waypoint’s initial credit facility started a wave of financing for institutional landlords from banks including Deutsche Bank AG and JPMorgan Chase & Co. Borrowing options expanded last year to sales of a new type of securities bought by investors including U.S. mutual funds, insurers, hedge funds and institutions in Europe.
Banks are still one of landlords’ main sources of financing. In February, Starwood Waypoint received a $500 million credit facility with Citigroup that it expanded in May with a syndicate of lenders to as much as $1.25 billion, according to regulatory filings. The debt carries a variable rate 3 percentage points above the London interbank offered rate.
American Residential Properties has a credit facility with banks that it entered into in January 2013 that carries a rate of as much as 3.25 percent more than Libor, while competitor Silver Bay Realty Trust Corp. said in May 2013 that it won a $200 million line with a rate of Libor plus 3.5 percent point.
Silver Bay’s sale of $312 million of rental-home bonds last month offered an “effective” rate of Libor plus 1.92 percentage points, along with about 0.75 percentage points annually in “deferred financing cost,” Chief Financial Officer Christine Battist said this month on an earnings call.
Bond deals carry costs such as legal, credit-ratings and underwriting fees. Beasley said that he prefers to do a $450 million to $500 million transaction to spread those costs over more properties.
Securitization is still cheaper than bank loans even as yields are rising as investors face more supply. The latest bonds from Blackstone’s Invitation Homes, the market’s first issuer, paid 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 in November.
In American Residential’s deal today, the weighted average spread was about 2.1 percent. The company issued bonds equal to 70 percent of the estimated value of the underlying properties, compared with 79 percent in Blackstone deal on Aug. 4, in which the issuer retained 5 percent of the debt. The loan-to-value ratio in Silver Bay’s offering was 65 percent.