Blackstone, an institutional real estate investor known for scooping up thousands of single-family homes during the housing market crisis, is now offering a bond to investors backed by the projected rental income of those homes. Ratings agencies are giving the bond high marks despite the fact that an investment vehicle of its like has never been seen on the market. Critics believe that basing bond yield on rental income not yet collected is too speculative to be successful, but investors and Wall Street at large are betting on Blackstone, which may make the securitization of rent as an investment a popular new market buy. For more on this continue reading the following article from TheStreet.
The business of buying, fixing and renting single-family homes that helped kick off the housing recovery has just achieved a significant milestone.
Earlier this week, Blackstone (BX) offered the first bond to be backed by rental incomes from over 3,000 U.S. single-family homes.
The $479 million offering, arranged by Deutsche Bank (DB), received significant interest from investors, despite the fact that the business model of operating and maintaining geographically- scattered, single-family homes as rentals on a large scale is untested.
According to press reports, the offer was oversubscribed on the first day, prompting Blackstone to lower the yields on the offering.
KBW analyst Jade Rahmani believes the participation of several ratings agencies lent credibility to the sector.
Close to 60% of the deal received Triple A rating from Moody’s Investor Services, Kroll Bond Rating Agency and Morningstar.
The ratings were more positive than expected, although one agency, Fitch Ratings, said the deal would not receive a rating higher than A due to insufficient track record of institutional investors in this business.
Still, the strong demand and attractive pricing of the deal might pave the way for future securitizations, according to Rahmani. The analyst estimates the total addressable opportunity for single-family rental securitization market could top $900 billion. Annual production could total $100 billion.
Deutsche Bank analyst Harris Trifon also sees a boom in rental-backed bond sales. "Considering that almost $20B has already been spent by private equity funds and public companies like American Home 4 Rent over the last year or so, securitized loans backed by home rentals totaling in the billions is not out of the question by this time next year. Indeed, barring another recession, we find it hard to imagine how a relative flood in deals won’t happen in the next year or two," he wrote in a note this week.
The analyst believes that all market participants would gain from such transactions. "Bond investors would benefit by having another liquid stable market to participate in, especially in an environment where valuations across the fixed-income credit universe are at or very close to full valuations," he wrote. "Obviously the firms that have already committed capital to the sector would benefit from having a new and potentially deep alternative financing source, but we think the general public could be the biggest beneficiary due to the stabilizing effect that a growing rental market should have on property values and the coffers of local governments."
Securitization lowers the cost of capital for institutional investors and boosts returns. Access to leverage might help sustain investor activity at a time when rising prices and a shortage of inventory has made it difficult for investors to find bargains in the market.
Housing bears have expressed concerns that investors would begin to dump properties en masse as yields wane, affecting prices in those markets where investor activity has been particularly high such as Phoenix and Las Vegas.
But the latest development suggests that Wall Street is not looking to walk away from the housing market anytime soon.
In fact, if the securitization market takes off and single-family rentals become a legitimate asset class, institutional investors might become a more permanent presence in the market. In other words, this has the potential to be a big business and not a mere trade.
Of course, everything depends upon the underlying thesis that there is a fundamental shift in the market towards renting. Homeownership rates have declined from a peak of 69% to about 65% currently. Economists believe there is pent up demand for housing but tight credit conditions would force many newly formed households to rent.
In addition to occupancy, rents have to rise atleast in line with home prices for companies to be able to deliver the yields they promised.
And in a business where scale matters , smaller players might choose to exit at some point, but they might not necessarily have to dump their properties to do so. They might instead choose to sell their portfolios to real estate investment trusts or sell to a bigger player.
But changes in operators could prove to be disruptive.
Securitization could well be a game-changer for single-family rental market and housing, but it is still very early in the game.
This article was republished with permission from TheStreet.