Blackstone’s New Bond Banks on Renters



Move over mortgage-backed securities, there is a new game in town. The Blackstone Group L.P. (NYSE: BX) is preparing to pepper the bond market with a new investment, bonds backed by single-family home rental income. Under evaluation by bond buyers are $479 million worth of securities. The bonds are backed by Deutsche Bank AG (NYSE: DB) and interest on the securities paid by rental income from Blackstone’s single-family home rental company, Invitation Homes LP.

An executive at Deutsche Bank told the Wall Street Journal that the first offer is expected next week. The paper also covered a conference by the New York University Schack Institute of Real Estate where Richard Saltzman, Colony Capital’s President said, “We’re rooting for them.” Colony Capital is a private real estate investment firm.

It is easy to see why Colony Capital is rooting for Blackstone’s success. The rental market does not appear to be going anywhere soon. Homeownership between 2006 and 2010 slowly but consistently declined according to data provided by the U.S. Census Bureau. Research by the National Multi Housing Council shows that 32 percent of the U.S. population is in a renter-occupied dwelling, and that single-family households account for 40 percent of the rentals.

With rentals rising as housing fell, a section of the market was available, and Blackstone created a way to capitalize on it. Chair, CEO, and Co-Founder of Blackstone Steve Schwarzman explained the strategy on during a conference call in October. Blackstone “started buying properties when the markets were down”, knowing eventually it could benefit when the market returned. Along the way, Blackstone ended up renting houses it was buying to “people who need shelter.” After that is when Blackstone realized it had an investment opportunity as “the first people who actually could borrow money against these.”

Blackstone sees itself as positioned to do so because, as Schwarzman said, “We rent the houses very quickly, almost all of them are done within 30 days, something like that, and so this is like a good thing. The idea that some other people haven’t approached this in the way we have don’t have access to capital the way we do, are not used to building a business like we do in private equity across multiple cities.”

Blackstone may be enthusiastic, but bond rating agencies are displaying skepticism. The Wall Street Journal reported on a Kroll Bond Ratings pre-sale document that gives information about the deal. Ratings for the bond run the gamut from the lowly “junk” status to highs of AAA. Ratings agency Fitch announced on October 29 it was too soon to rate the new investment. Fitch denied a rating AAA, saying the “uncertainty” of the bonds “is not consistent with other asset classes that have achieved high investment grade ratings from Fitch.” Instead, Fitch said, it ”would more likely cap its ratings at the ‘A’ level.”

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