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Colony Plans $513.6 Million of Debt Tied to Rental Payments

MAR 20, 2014 1:09pm ET
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Colony American Homes Inc., the third-largest single-family landlord in the U.S., is selling $513.6 million of bonds tied to rental payments, according to deal documents.

The securities are linked to 3,399 properties in 20 metropolitan areas in seven states, the document shows, and the homes were fully leased as of Feb. 1. The deal would be the second connected to rental homes after Blackstone Group LP, the largest single-family landlord, issued the first such bond last year. Santa Monica, California-based Colony owns more than 15,600 homes.

Private equity firms, hedge funds and real estate investment trusts have purchased as many as 200,000 houses during the past two years. They are seeking to profit from rebounding prices and rising demand for rentals among millions of Americans who went through foreclosure or can’t qualify for a mortgage. Wall Street ultimately may sell more than $20 billion a year of rental-home bonds, according to Ryan Stark, a director at Deutsche Bank AG, which structured and helped underwrite the first transaction.

Colony “has demonstrated its ability to effectively handle the day-to-day business of managing a national single-family rental platform,” Moody’s Investors Service said in an emailed statement today.

Moody’s concern related to equity foreclosure “was mitigated for this transaction because both mortgages and pledges of the borrower’s equity secure the loan that backs the transaction,” the statement said.

American Homes 4 Rent, the second-largest single-family rental landlord with more than 25,000 homes, plans to “aggressively pursue a securitization transaction, which it expects to be completed in the next 60 days,” the Agoura Hills, Calif.-based company said in a March 13 statement.

A $291 million portion of the Colony deal is rated AAA, the top credit rating, by Moody’s, Kroll Bond Rating Agency and Morningstar Inc.

Standard & Poor’s said last month that new securities backed by U.S. rental homes don’t meet the criteria for the highest credit grade. S&P has yet to see a transaction with portions warranting AAA grades based on the amount of risk protection including credit enhancement, New York-based analysts Rasool Alizadeh, Weili Chen and John Connorton III wrote in the Feb. 27 report.

Colony declined to comment on the offering, according to Caroline Luz, a spokeswoman for the company with Owen Blicksilver Public Relations.

JPMorgan Chase & Co. and Credit Suisse Group AG are marketing the Colony deal, according to the documents. Justin Perras, a spokesman for New York-based JPMorgan Chase, and Drew Benson, a spokesman for Credit Suisse, declined to comment on the rental bond sale.

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