Cerberus Joins the Wall Street Landlord ClubHeather Perlberg and John Gittelsohn
Cerberus Capital Management is becoming a landlord for U.S. homes, three years after Wall Street-backed firms began a rush to buy single-family houses and build large rental companies.
The investment firm, with about $25 billion under management, is acquiring Five Ten Capital, a rental business with more than 1,500 houses in states including Florida, Illinois and Texas, said two people with knowledge of the deal. New York-based Cerberus also is hiring Five Ten’s founder, Rob Bloemker, to oversee the rental business and play a role in broader mortgage investments, said the people, who asked not to be identified because the information is private.
The rental-home industry is consolidating as smaller operators without the advantages of scale cash out. Two years after it started lending to landlords, Cerberus will now be one itself, betting that it can use financial-market expertise to boost returns even after a 24 percent gain nationally in home prices from a low in December 2011.
“Now people are able to come in and build debt into the equation, whereas, for the pioneers in the space, this was all being done with equity,” Rich Ford, a managing director in Jefferies Group LLC’s real estate investment-banking group, said in a telephone interview.
Bloemker declined to comment on the company’s sale to Cerberus and any future role with the firm. Peter Duda, a spokesman for Cerberus, also declined to comment. The people with knowledge of the deal didn’t disclose financial terms.
Since the housing crash, Wall Street-backed firms, led by Blackstone Group LP, have institutionalized the historically mom and pop business of renting single-family homes. Real estate investment trusts, private-equity firms and hedge funds have spent at least $25 billion purchasing more than 150,000 houses since 2012, according to Keefe, Bruyette & Woods Inc.
Unlike competitors that started buying distressed property years earlier, Cerberus will be under less pressure to depend on home-price appreciation now that securitization markets have opened up to the largest operators. The low-interest-rate debt provides landlords leverage to increase returns on their investments.
“As home prices have gone up, invariably, investment returns have come down,” said Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute in Washington. “If you use leverage, you can bring them back up, and that’s exactly what firms are doing.”
Since November 2013, Wall Street has issued more than $8 billion of securities tied to almost 60,000 houses owned by companies including Blackstone and Thomas Barrack Jr.’s Colony Capital. American Homes 4 Rent this week is offering more than $522 million of the debt.
U.S. home prices rose 0.8 percent in December from November, more than economists estimated, the Federal Housing Finance Agency said in a report Thursday.
Cerberus already has a multimillion-dollar investment in the industry through its FirstKey Holdings unit, which lends to the smaller landlords who make up the majority of the market and have limited ability to finance their purchases.
Cerberus, Blackstone and Colony are racing to package the debt on homes managed by separate landlords for the first multiborrower-bond sale, which Morningstar Inc. is expecting within the next two to three months, according to Brian Grow, a managing director at the Chicago-based research company.
The largest landlords slowed their purchases as prices rose. Jonathan Gray, Blackstone’s global head of real estate, said last March that “the institutional wave has passed.”
Single-family home purchases by institutional investors fell 31 percent in 2014 to about 105,000 properties, the fewest in four years, according to RealtyTrac, which counts buyers of at least 10 houses in a one-year period among the group. Some early entrants have begun selling homes to profit from price gains, return cash to investors or find higher returns elsewhere.
Cerberus’s rental-home business could expand with bulk purchases, to attain the benefits of scale and attempt to catch up with competitors who got an earlier start. The larger companies with more financing options have found ways to use their size to cut costs and increase efficiencies, such as bringing property management in-house and buying flooring and appliances wholesale from national suppliers.
“There’s a big opportunity for consolidation, and there is an opportunity to aggregate and finance the portfolios of mom and pops through securitization,” said Jade Rahmani, a Keefe, Bruyette & Woods analyst. “It’s the same addressable market from two vantage points.”
This month, Silver Bay Realty Trust Corp., the first single-family-rental firm to go public, agreed to buy about 2,460 houses owned by Aaron Edelheit’s The American Home for $263 million in one of the industry’s largest bulk purchases.
“Over the past 12 to 18 months, we have seen an increasing number of portfolios cross our desk,” Silver Bay Chief Executive Officer David Miller said on an earnings conference call Thursday.
The American Home deal will bring Silver Bay’s total portfolio to about 9,200 homes, he said.
“The companies with the lowest cost of capital win,” Edelheit said in a telephone interview last week. “The American Home did not have the lowest cost of capital.”
While Salt Lake City-based Five Ten is small compared to landlords such as Blackstone, which has 47,000 homes, it was one of the earliest rental-home firms to get institutional capital. Deutsche Bank AG arranged a $100 million credit facility for the company in April 2013.
Bloemker started Five Ten in 2011. He previously worked as head of fixed income at Putnam Investments after mortgage-related roles at Lehman Brothers Holdings Inc. and Salomon Brothers. He also co-founded financing company Dwell, which competed with Cerberus’s FirstKey in offering loans to landlords.
One of Five Ten’s funds, started in December 2011, had a net return of 51 percent through November, according to an investor letter obtained by Bloomberg News. Other funds, with inception dates in 2012 and 2013, have gained 33 percent and 12 percent, respectively. The firm made a 60 percent to 75 percent profit from selling most of its Phoenix properties to individual homeowners, according to the letter.
“We’ve also had unsolicited offers for large portions of our leased properties as institutional investors continue to ferret out yield opportunities in a low-interest-rate environment,” Bloemker said in the letter.
Cerberus, founded in 1992 by Stephen Feinberg and William Richter, invests in private-equity deals, distressed assets and real estate, and also originates loans.
Among its high-profile deals were purchases in 2006 and 2007 of majority stakes in Chrysler LLC and GMAC, the former financing arm of General Motors. Chrysler filed for bankruptcy, and GMAC received a government bailout. Cerberus still owns a stake in Ally Financial Inc., formerly GMAC and now publicly traded. Cerberus recouped most or all of its Chrysler investment.
Now Cerberus is seeking to profit from the lingering effects of the housing crisis, which left more than 5 million foreclosed homes and damaged the credit of families hoping to buy again. The U.S. homeownership rate, which soared to a record 69.2 percent in 2004, is at 64 percent, back where it was two decades ago, according to the Census Bureau.
The country’s worst rental-housing shortage in more than a decade is giving landlords the ability to raise rents more aggressively. Rents on all single-family homes and multifamily units are expected to climb 3.5 percent this year, compared with a 2.5 percent increase for home purchase prices, according to Zillow Group Inc. Chief Economist Stan Humphries.
“How attractive this investment is depends on your view on two sources of potential upside: rental increases and further home-price appreciation,” said Goodman of the Urban Institute. “And to the extent you add leverage, you are magnifying those bets.”
(Earlier versions of this story were corrected to change the characterization of Cerberus’s GMAC and Chrysler investments and correct the spelling of Salomon Brothers.)