Investors in Blackstone Group LP’s debut sale of bonds backed by U.S. rental homes are agreeing to accept more risk than in traditional mortgage deals by at least two measures, along with an unproven business.
Blackstone’s Invitation Homes borrowed more through Tuesday’s deal relative to the value of the houses serving as collateral for the bonds than recent residential-mortgage securities, according to data from ratings companies. The cushion to cover interest payments is also smaller than in deals tied to apartment complexes. Monthly rent checks from 3,207 properties will service the $479 million of debt.
Five years after defaults on home loans packaged into securities helped trigger the worst financial crisis since the Great Depression, Wall Street is turning to bundling assets into bonds to help institutions buy and rent out properties. The transaction comes after Federal Reserve stimulus to bolster credit markets contributed to property gains exceeding 40% in some regions where Blackstone has been investing from California to Florida.
“Given the rapid increase in prices in the areas in which the properties are concentrated, the amount of protection for bond investors doesn’t make one feel all that warm and fuzzy,” David Liu, co-manager of a $340 million securitized-asset fund run by New York-based TIG Advisors LLC, said last week, adding that he expected the offering to find buyers easily given the momentum in housing and other features of the debt.
The Blackstone deal heralds the latest use of securitization, an investment-banking strategy pioneered in the 1980s and later blamed for fueling the shoddy lending that contributed to more than $2 trillion in losses at the world’s largest financial institutions.
The market for rental-home securities may grow as large as $900 billion, assuming 15% of annual home purchases are conducted by investors and 35% of those and existing rental-home owners turn to the market for financing, according to Keefe Bruyette & Woods Inc. Banks have been the main source of financing for new property landlords such as Colony Capital LLC and Blackstone, which has spent $7.5 billion on about 40,000 houses.
Deutsche Bank AG, the lender to Invitation Homes that structured the deal and other underwriters marketed six separate classes of the Blackstone bonds, according to reports from Moody’s Investors Service, Kroll Bond Rating Agency and Morningstar Inc. As with other securitizations, some of the bonds are designed to have less default risk because they stand in line for losses after other notes.
Fitch Ratings has disagreed with rivals that any rental-home securities should get top ratings now, citing in part the “limited track record” of big institutions in the business and incomplete historical data on how rents, vacancies and other considerations can vary over economic cycles.
Christine Anderson, a spokeswoman for New York-based Blackstone, the world’s largest private-equity firm, declined to comment on the deal, as did Amanda Williams, a spokeswoman for Deutsche Bank.
A top-rated $279 million class yields 115 basis points, or 1.15 percentage points, more than the London interbank offered rate, according to people with knowledge of the transaction. It was earlier offered at about 120 basis points. A $41.5 million portion rated BB by Kroll priced at 365 basis points, down from about 400.
The levels are about the same or less than similar existing types of securities, said other people, who asked not to be named because the pricing details aren’t public.