Last year, the huge Wall Street investment firm Blackstone came to Sacramento and started buying up hundreds of foreclosed homes. It was part of the firm’s strategy to turn rental houses, traditionally a mainstay of mom-and-pop investors, into big business.
Today, after spending $7.5 billion nationwide, Blackstone’s Invitation Homes is the largest landlord of single-family rentals in the United States. It owns about 40,000 houses, including more than 1,500 in the greater Sacramento area.
Many assumed the firm simply meant to wait until home prices rose and then sell off its inventory. While that could still happen, another strategy recently emerged. Earlier this month, Invitation Homes sold $479 million in securities backed by 3,200 rental houses in five states, including 239 homes in the Sacramento area and hundreds more in Los Angeles and Southern California’s Inland Empire.
In essence, the firm took out a single giant mortgage on those houses and others in Arizona, Florida, Georgia and Illinois and sold off pieces of the debt to large institutional investors, such as pension funds.
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Monthly rents – paid by residents in communities such as Elk Grove, South Natomas and Citrus Heights – will service the half-billion-dollar debt.
It’s a novel strategy that has some observers worried. The bonds Blackstone sold are structured much like the subprime mortgage-backed securities at the center of last decade’s housing collapse. Selling bonds to global investors backed by housing payments of middle- and working-class families has already proved to be a very shaky proposition, they say.
“We’ve seen this movie before, and it doesn’t end well,” said Dean Preston, head of the statewide renters rights group Tenants Together.
The securitization of rentals will put pressure on Blackstone to raise revenue through rent hikes and skimping on repairs, and could lead to mass evictions when the firm decides to sell, Preston argued. Investors will lack accountability because they have no connection to the community, he said.
“I cannot imagine a greater threat to tenants across the country,” Preston said. “What do these investors know about being landlords? Nothing. Their goal is to suck as much as they can from the properties, drive up the price of their securitized interests, and then sell for quick profit. It’s a scheme cooked up by Wall Street that benefits nobody other than some investors.”
Blackstone declined to respond directly to the criticism.
Christine Anderson, Blackstone’s senior vice president for public affairs, said the recent bond offering prevented the firm from discussing it in detail.
“It’s a public offering. We’re legally restricted in what we can say,” she said.
Anderson reiterated what Blackstone has said since it started buying houses – that it’s in the rental business for the long haul.
“The intention is not to sell them; the intention is to own them for the long term,” she said. “The business model is to buy houses, fix them up and rent them out. As the rental market grows, there will be a portion of that population looking for professionally managed properties.”
So far the firm has gotten decent reviews from tenants and neighbors. In prior interviews with The Sacramento Bee, tenants who rented from Blackstone’s Invitation Homes said the firm had been responsive to repair requests, while neighbors said it had improved neighborhoods by putting on new roofs, painting exteriors and replanting lawns.
Invitation Homes representatives said the company spent about one-tenth of its homes’ purchase prices on upgrades, and had no intention of unloading all its homes at once. Rents were about average for Sacramento neighborhoods.
Experts in housing finance said the securitization of rental homes is a logical step in the process that Blackstone and other mass landlords started when crashing real estate values hit bottom in early 2012, and they began buying houses by the hundreds.
“This issue represents less than 10 percent of the rental homes Blackstone has bought, so we can expect much more of this to come from them and potentially others,” said Jeffrey Michael, head of the Business Forecasting Center at the University of the Pacific in Stockton.
Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute in Washington, D.C. and a veteran Wall Street analyst, said Blackstone may already be preparing another bond offering based on the success of its first sales.
“Given how well it did in the market ... I think a second one will be teed up now,” she said.
For a firm like Blackstone, the bond offerings are a way to leverage rental holdings, potentially to buy more homes, Goodman said. The firm may well be counting on prices to continue rising so that they can sell all the houses in the future at a huge profit.
“If you still think there’s price appreciation to come, why not raise more money and buy more using the existing homes as collateral,” she said.
Goodman disputed the idea that the debt Blackstone is incurring on its rental houses is like the subprime mortgage securities of last decade. In many cases, those securities were backed by homes where buyers had financed 100 percent of the purchase price and walked away when prices fell.
Blackstone’s debt amounts to about 75 percent of the homes’ value, she said.
Ratings agencies, including Kroll Bond Ratings and Moody’s Investors Service, generally gave the Invitation Homes bond high marks, saying it had a low risk of default and investors were likely to be repaid.
Fitch Ratings disagreed that a top rating was warranted. Major investors such as Blackstone only recently joined the ranks of single-family landlords and have a “limited track record” in the business, it said in a written statement.
Many of the homes are concentrated in a few regions hit hard by the foreclosure crisis. If it becomes necessary to sell large numbers of houses to pay off the bonds, “the impact of a large-scale listing at the neighborhood level could have a significant impact ... on prices,” Fitch said.
Marilyn Cohen, a bond expert and president of Envision Capital Management in Los Angeles, said that whether the agencies have rated the bonds correctly remains a major question.
Moody’s and others were heavily criticized for giving top ratings to bonds largely backed by worthless loans during the housing bubble.
But Cohen said it makes sense that Blackstone would turn its rental homes into securities. Bonds, once issued mainly by governments and big corporations, have been used to raise cash from batches of car loans, credit cards and other consumer debt.
Rental houses are a natural progression, Cohen said.
“I think the whole genesis of what they did was brilliant and their timing was par excellence,” she said. “When everybody was being foreclosed on, they step into the market with their big foot. ... move. It paid them well. And now they’re just monetizing some of that success.
“It’s brilliant,” she said. “Whether it will work out for the bond investor, stay tuned.”