Investors welcome single-family rental-backed bonds, despite risks, writes Al Barbarino
Blackstone’s Investment Homes 2013-SFR1 bond, launched in November, has paved the way for a new securitisation asset class in the US that is expected to grow exponentially as the firm and its competitors forge ahead with more deals.
As the first bond from a big, institutional player backed exclusively by single-family rental (SFR) income, the $479m SFR1 bond was fervently received by investors, five times oversubscribed, with the top tranche priced just 115 basis points over Libor. Blackstone is said to be working on a new $1bn offering, while competitors Colony American Homes and American Homes 4 Rent have respectively launched similar, $513.6m and $482.7m, offerings.
“About 10 or 12 institutional investors with big investment bank lines of credit are likely to refinance into the capital markets,” says a person involved in the SFR1 deal. Big institutions spent as much as $25bn plucking an estimated 200,000 properties out of foreclosure since the 2008 crash, refurbishing and renting them out. The lower borrowing costs and greater leverage offered by securitisation will allow them to buy more properties, with some estimating that deals could total $8bn this year.
The rate of housing purchases is expected to taper off, but ultimately 400,000 homes could end up in institutional ownership, says Laurie Goodman, director of the Urban Institute’s Housing Finance Policy Center. “We’ve just barely begun to scratch the surface,” she says. “I expect there to be much more securitisation of these assets.”
Blackstone, the largest owner of single-family homes in the US, with 43,000 in total, created Invitation Homes in 2012 to manage its single-family rental business. It began buying when values were 35-50% down, focusing on markets well positioned for a strong recovery, says Blackstone chairman and CEO Stephen Schwarzman.
FURTHER OFFERINGS POSSIBLE
The Invitation Homes bond, arranged by Deutsche Bank, JPMorgan and Credit Suisse, bundled 3,207 single-family home mortgages, mostly across Arizona, California and Florida. The company spent an average $22,000, or 14% of the purchase price, fixing up each home, says a Blackstone real estate associate, while not ruling out the possibility of a future offering.
“We’ve acquired a large number of homes that are going through the same process as those in our first securitisation,” he adds. Blackstone worked with the big ratings agencies for nearly a year to underwrite its first offering, he says, with Moody’s, KBRA and Morningstar awarding the top of six tranches ($278.7m) the sterling AAA rating.
“If all these rental properties had to be liquidated in a highly stressed environment, they’d still have enough money to pay the bondholders,” says Thomas Lemmon, a spokesman for Moody’s. Blackstone could exit the SFR business through an initial public offering, as other major players have done. But some publicly traded companies, such as Silver Bay Realty Trust and American Residential Properties, have traded below their IPO prices, reportedly dampening investor interest.
However, with an offering twice the size of SFR1 potentially in the works, that scenario seems less likely in the short term. “If we want to go public, we have the infrastructure in place,” says the Blackstone associate. “But we are not focused on exiting the business; our focus is running it and stabilising the portfolio. The housing fundamentals remain very, very attractive.”
SFR issue raises spectre of RMBS crisis
Blackstone’s securitisation strategy has its risks, which could quell future investor demand. The properties lack long-term rent history, are clustered geographically, and Blackstone’s limited $63.7m equity could reduce its incentive to maintain the homes, the Urban Institute’s Laurie Goodman noted in a report.
But she pointed to built-in protections to counter risk and believes the “REO-to-rental” operators will do their best for equity investors. The securitisations have drawn comparisons to the RMBS crisis, with Federal Reserve economists warning: “Should debt financing become more prevalent or if the share of homes owned by investors in certain markets rises significantly,” SFR securitisations should be monitored for signs that they could destabilise financial markets.
Democratic congressman Mark Takano reportedly wrote to US regulators urging them to “promptly [look] into these complex financial instruments so that we can prevent any potential downturn that could affect millions of Americans”.