Blackstone began marketing the first-ever US home-rental asset-backed security on Wednesday, with some 300 potential investors expected in New York to peruse the nearly $480 million deal.
The collateral behind the deal is rental cash flow from 3,207 foreclosed single-family homes bought up by Blackstone, a private equity firm, in the wake of the financial crisis. Blackstone said nearly 90 percent of the homes underpinning the ABS are located in and around Phoenix, Arizona; Riverside, Los Angeles and Sacramento, California; Atlanta, Georgia; and Tampa, Florida.
Deutsche Bank is the lead structurer on the deal, which is being jointly led by Credit Suisse and JP Morgan. The deal will include a $278.7 million tranche that will have initial credit support of around 41.8%. The $500 million transaction from Invitation Homes, a wholly owned Blackstone subsidiary, will be rated by Kroll, Morningstar and Moody’s, and will receive at least one Triple A rating. Blackstone announced yesterday it would receive a AAA rating.
The rating shocked some investors relying on numerous rating agency reports over the past year that indicated a first-time REO-to-rental deal would never reach a rating higher than Single A. Fitch Ratings, said Tuesday that it will not consider giving its highest AAA rating to securitized products based on single-family rentals (SFR), as the first such deal gets ready to come to market.
“While near-record low rates and investor yield requirements are likely to drive demand for the underlying SFR assets in the short term, Fitch reiterates that several notable challenges would prevent the agency from assigning high investment grade ratings to transactions backed by SFR collateral,” the agency said in a new report. “Fitch would more likely cap its ratings at the A level.”
The ratings agency also noted that there were also concerns about investors buying up single-family properties en masse in just a handful of states and metropolitan areas.
“Because of the specific demographic targeted by these institutional buyers and the inelasticity of rents, transactions are highly vulnerable to unknown variables that could potentially impact the cash flows and yields. Among them include repair and maintenance expense, capital expenditures, rising property taxes, homeowners association restrictions, or the potential for municipality involvement.”
In stress scenarios, the rating agency expressed apprehension over refinancing risk or the absence of a bulk purchaser.
Fitch said that if liquidations are needed to pay off a bond at maturity, retail sales might be the only exit strategy. The impact of a large scale listing at the neighborhood level could have a significant impact on market clearing prices.
Given the incremental risk associated with transactions secured only by the sponsors’ equity, Fitch would likely cap ratings at the BBB category, absent mitigating factors
After New York, the roadshow for the deal will hit Boston on Thursday and Los Angeles on Friday, with the offering expected to be officially announced on Monday.
The deal is the first fruits of Blackstone’s plan to market a new class of asset-backed securities derived from the 40,000 single family rentals firm, has purchased for $7.5 billion over the past two years. If successful, the new single family rental equities will create a new secondary market and a new business for several dozen institutional investment firms. American real estate will never be quite the same.
Last year several dozen investment firms backed $20 billion to purchase as many as 200,000 homes. Investment bankers at Keefe Bruyette and Woods estimated that total potential returns could reach as high as 20 percent on some investments depending on leverage and how much home prices can appreciate in the months or years ahead.