Here We Go Again: Step Aside RMBS, Rent-Backed Securities Are Here, And With Them The Beginning Of The End
Two major Wall Street firms are in detailed discussions to create and sell the world's first bond backed by home-rental payments, people familiar with the matter say.Blackstone Group LP is in negotiations to bundle monthly rental payments on around 1,500 to 1,700 of its homes. The private-equity giant is among the firms that have spent billions buying homes out of foreclosure, an investment strategy that has helped to bolster demand and strengthen the U.S. housing market.The bond comprised of the Blackstone homes would be structured and marketed to investors by Deutsche Bank AG, the people say.
The creation of a new type of security shows that Wall Street's financial engineering, blamed for deepening the financial crisis, is revving back up.Some investors and analysts have said they are wary of a bond backed by rental payments, citing the dearth of long-term data on how often tenants living in previously foreclosed homes pay their rent on time.Also, some investors and analysts have raised concerns about how quickly firms have purchased thousands of homes, and whether they have the management track record and expertise to oversee the maintenance of properties scattered across the country.
But investors are still hungry for the high returns that are likely to accompany a first-of-its-kind deal, which will be viewed as more risky than well-known securities.
The size of the Blackstone-Deutsche Bank deal is expected to be around $240 million to $275 million, the people familiar with the bond say. The top-rated slice could receive a rating as high as single-A or triple-B from some of the credit-rating firms, some of the people familiar with the deal add. The deal is expected to be backed by equity and properties that are worth between $300 million to $350 million, the people familiar with the matter said.The deal could be available to investors as soon as August or September. But the metrics could change as the details aren't completed, cautioned some of those people.
Blackstone has emerged as the biggest investor in single-family rental homes, spending more than $5.5 billion since the beginning of last year to acquire about 32,000 homes in around a dozen major U.S. markets.Other companies, such as American Homes 4 Rent, Colony Capital LLC and Waypoint Real Estate Group LLC also have been snapping up thousands of foreclosed homes, revamping them and renting them out. American Homes 4 Rent, with 19,000 homes owned or controlled, is expected to price shares of its stock Wednesday in a bid to raise $750 million in an initial offering on the New York Stock Exchange.The companies have transformed what has traditionally been a space for "mom and pop" investors to earn cash into an institutional investment strategy that has helped to boost home prices in cities across the U.S. The investment strategy is often known as buy-to-rent.
Securitization is the process of pooling together assets—whether that is rental or mortgage payments—to back a deal. That deal is then "sliced" into different layers, or bonds, according to the risk of the underlying assets and the order in which bondholders will be paid as the payments from the underlying assets roll in.Each layer is sold as a "class" of bonds to investors. The top layer is paid first, then the second and so on. The riskiest slices offer the highest potential returns.While securitization got a bad rap because of the losses investors suffered after purchasing such deals before the financial crisis, proponents say it can be an effective process to tap the capital markets for financing by turning thousands of separate cash-generating assets into bonds.Analysts have said in recent months that Blackstone and Deutsche Bank were a likely pairing on an initial rental securitization. Blackstone's real-estate prowess could quell some investors' fears about management of the properties, while Deutsche Bank has led the charge among Wall Street banks offering loans to real-estate firms buying foreclosed homes.Deutsche Bank has led the issuance of around $3.6 billion of loans to Blackstone in recent months, coordinating with other major Wall Street banks. Debt financing allows borrowers such as Blackstone to buy more properties at lower costs. The sale of a Blackstone-backed securitization would bring still more money to the company.