Monthly rent checks from thousands of South Floridians could be Wall Street’s next big payday as corporate firms hoarding single-family homes move to bundle the assets to sell as bonds.
Blackstone Group, which has spent $7.5 billion nationwide on home purchases and is one of the biggest corporate landlords in Palm Beach County, made a $479 million deal last week that combined cash flows from 3,200 rental homes in Arizona, California, Florida, Illinois and Georgia.
American Homes 4 Rent, which owns 21,300 homes nationwide and 40 in Palm Beach County, followed Blackstone’s lead with a Nov. 8 announcement that it intends to market a rent-backed bond within the next 90 days.
And even as Santa Monica, Calif.-based Colony Financial officials said they slowed third-quarter buying through their subsidiary Colony American Homes, CEO Richard Saltzman called the securitization of assets from the single-family rents a “game changer” that the company expects to join early next year.
“The first securitization closed this week, and the execution was superb,” Saltzman said Nov. 8, referring to the Blackstone deal.
Colony owns more than 2,000 homes statewide and about 45 in Palm Beach County, according to SEC filings and official county records.
Securitization earned a bad name during the real estate boom because toxic home loans doomed to default were packaged and sold to investors in bundles. The flawed practice contributed to the worst recession since the Great Depression and left the average American wary of anything securitized.
But Ken Johnson, a professor in the Hollo School of Real Estate at Florida International University, said securitization is a regular corporate practice that helps companies gain capital while offering a cash flow to purchasers.
That doesn’t mean Johnson thinks investing in securities based on rental income is a good idea.
He fears there will be high overhead costs in managing the properties. Unlike multi-family dwellings, which are common in corporate portfolios, single-family homes are spread apart and will have unique problems that need individual attention.
“The management of these homes is going to be incredibly costly, which will ultimately influence the ability to pay out the bond,” Johnson said. “I think they bit off more than they can chew.”
Corporate buyers and billion-dollar hedge funds began buying single-family homes in 2012 after prices hit bottom. The rentals were a new business model for Wall Street, and created offshoot companies to manage properties such as Blackstone’s Invitation Homes, which has about 715 Palm Beach County homes and 7,000 statewide.
Colony American Homes snapped up John Farrell’s Wellington property in September after it was on the market just two weeks. The company paid $213,000 in cash for the 2,700-square-foot home Farrell bought in 2008.
But now, Farrell, who married in October, is trying to buy a home in a market still crowded with investors.
“I’m competing with the same type of people who bought my house, and they are buying up everything,” Farrell said. “It was good for me in getting rid of the house, but bad because I can’t find one now.”
Johnson said securitizing rental housing won’t have much impact on tenants and could stabilize the real estate market in the short term.
Still, Blackstone’s $479 million securitization deal has some market analysts on alert.
Fitch Ratings issued a statement this month warning that the industry is untested and vulnerable to such “unknown variables” as homeowner association restrictions, and rising property taxes.
“Although some firms have a few years’ operating history, most do not have a proven track record managing outside their footprint or on a large-scale basis,” the statement said.
Fitch did not rate the new asset class of single-family rentals.
Moody’s Investors Service was more optimistic. It gave the largest portion of Blackstone’s deal a top triple-A rating partly based on the competence of the company’s property management firm. The firm uses advanced technology to handle the day-to-day business of renting single-family homes, and, “more importantly, attract, respond to, and retain tenants,” Moody’s said.
Colony American Homes has 1,000 employees dedicated to buying, renovating and managing its 14,500 rental properties, Saltzman said. About 61 percent of Colony’s homes are leased. That’s up from 49 percent during the second quarter of the year.
“What scares me is these groups are not property managers, not of single-family homes, and they have never been property managers before, and I’m not sure they can do it now,” Johnson said. “I think I could do a two-hour class on problems with this investment.”
Corporations own hundreds of Palm Beach County single-family homes that they are renting out. They’ve recently started securitizing the rental income to sell as bonds.
Homes owned by corporate interests
Blackstone’s Invitation Homes, 715
Starwood Property Trust, 325
Southeast Florida Rental Housing, 145
American Homes for Rent, 80
FREO Florida, 45
Colony Financial, 43
Source: RealtyTrac, Palm Beach Post research