Also This Week in Capital Markets Report: A “Wee” Example of a Successful Single-Family Rental Exit Strategy; and a nice profit for KBS Real Estate Investment Trust II and big bucks for Realty Income Corp.
It’s beginning to look almost certain that The Blackstone Group will become the first major Wall Street player to package and offer securities backed exclusively by income from single-family rental (SFR) properties.
While there has been at least one securitization that included some SFR properties, Blackstone’s Invitation Homes this week is poised to be the first to market with one backed by more than $500 million single-family mortgages from homes it has acquired and rented out since the onset of the Great Recession in 2007.
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The offering, to be called Invitation Homes 2013-SFR1, is being shopped by Deutsche Bank and has reportedly secured credit ratings from agencies including Kroll Bond Ratings, Morningstar and Moody’s Investor Services.
Blackstone Group has acquired a portfolio of nearly 40,000 homes over the past five to six years, building its portfolio in small increments.
“We started buying properties when the markets were down, individual markets [down] between 35% or 40% [in value],” Stephen Schwarzman, co-founder, chairman and CEO of Blackstone explained last week. “What we tried to do was not buy assets all over the country in some kind of scattershot way. What we tried to do was limit our purchases to certain markets where we thought that the recovery would be quite good.
“And if the cycle works the way we think, this should be a good thing for everybody involved.”
Because of the scope of its purchases, Blackstone was one of the first major buyers to borrow money against its properties. The securities offering will now allow some of those noteholders to cash out on Blackstone’s strategy.
“We’re into significantly profitable scale even without the access to debt capital,” explained Hamilton Evans James, Blackstone’s president and chief operations officer. “We’ve pioneered in that, so we were able to securitize these things and get access to very attractive debt financing that no one else can, both because they haven’t done it and because they don’t have the scale.”
Moody’s Investors Service, which is expected to be one of the ratings agencies to review the securitization, generically outlined the main types of risks that securitizations backed by cash flows from single-family rental properties could present in a report issued earlier this month.
There are risks related to the performance of an operator or manager of the properties and those posed by the variability of cash flows from the rental and ultimate sale of the properties. The lack of historical data on the single-family rental market is another concern, Moody’s said.
The ratings firm noted that interest in launching so-called real estate owned (REO) to rental securitizations has increased over the past several months, driven in part by the sizable inventory of REO properties held by government sponsored entities (GSEs), residential mortgage-backed securities (RMBS) trusts and various financial institutions.
“Numerous real estate market participants have asked how we would analyze the credit quality of these securitizations,” said Kruti Muni, a Moody’s vice president and co-author of the report.
Moody’s report described the potential risks in single family rental securitizations as relates to both sources of cash flows.
“Rental rates can decline in weak markets, leaving rental income insufficient to cover expenditures and meet ongoing liabilities,” Muni said. “Another concern is the possibility that proceeds from the sale of properties will be insufficient to repay the noteholders’ principal.”
Last month, VFC Partners, another of the early investors to buy up large numbers of foreclosed single-family homes, brought the first mortgage bond offering to market that was backed in part by loans on SFR properties.
Värde Partners Inc. and FirstCity Financial Corp. jointly completed a $185.5 million private bond issuance. The securitization - VFC Series 2013-1 was backed by a pool of seasoned performing and non-performing secured and unsecured commercial loans and real estate owned properties (REO) and included loans backed by single-family properties primarily in Detroit and Ohio.
A “Wee” Example of a Successful Single-Family Rental Exit Strategy
Although it’s a small and single example, Australia-based US Masters Residential Property Fund showed that the strategy of buying single-family homes at a discount, renting them out for a while and then re-selling the properties for a nice profit, may work.
The fund is a long-term investor and does not intend to dispose of its total portfolio, but last month it sold one property at 997-999 Boulevard East in Weehawken, NJ.
The sale price was $1.9 million. It had purchased the property 11 months ago for $1,655,273. The sale represented a return of nearly 15%.
The two-family detached home one block from the Hudson River with an unobstructed view of Midtown Manhattan was marketed with the potential of it being converted to a one-family home.
The sale was conducted as a “like-kind exchange” under Internal Revenue Code 1031, which will allow US Masters Residential Property Fund to reinvest the proceeds in a replacement property and defer recognition of capital gains until the sale of such replacement property.
In September, the fund received conditional acceptances for four new property purchases, with an estimated combined acquisition cost of $4.2 million.
Capital Market Round-Up
Realty Income Corp.
is expected to raise nearly $330 million this week from an offering of common stock. Net proceeds will be used to repay borrowings under its $1 billion acquisition credit facility used to fund real estate acquisitions. During the third quarter, the company invested $503 million in new properties and properties under development or expansion. In the first nine months of the year, it has invested $1.37 billion in new properties, in addition to its $3.2 billion acquisition of American Realty Capital Trust Inc. in January.
KBS Real Estate Investment Trust II
sold its first mortgage notes on One Liberty Plaza for $114.3 million, amounting to a gain of approximately $48.6 million after closing costs. KBS REIT II’s investment involved a secured interest in a first mortgage on the 53-story office building
in Manhattan’s World Financial Center submarket. KBS REIT II purchased the two promissory notes in February 2009 for $66.7 million - a 42% discount to the par value at the time of acquisition.
The REIT received interest income over its holding period of $33 million. KBS said the combined economic gain and the income earned on this $66.7 million investment totaled $81.6 million.
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