Last week Blackstone’s Invitation Homes completed the first ever U.S. securitization of single family rental homes (SFR) – and from all accounts the deal was a wild success for Blackstone. Now, this is obviously great for Blackstone – but what does this mean to you, the average SFR investor?
I would like to take a step back to explain a couple basics of the deal for those that might be unfamiliar with securitization (which has a negative connotation to most of America now because of its correlation with the housing crash). Securitization is basically a fancy form of financing that enables those investors that are capable of it (large investors, with assets in the $100’s of millions) access to the bond market, where they can get cheaper debt than can be had in a traditional real estate transaction.
Blackstone’s initial securitization is only comprised of 3,207 of their total 40,000+ homes. Blackstone purchased the properties for $444.7M, and put repairs of $98.1M into them, for a total cost basis of $542.8M. According to the brokers hired to value the properties, they were worth a total of $638.8M. Blackstone securitized the rental income stream on these 3,207 rental homes (spread across 5 different states) for a total of $479.1M. This means that they offered new debt to bond investors that is collateralized with the rental income stream on those properties. Rating agencies (Moody’s, Kroll, and Morningstar) were hired to rate the quality of the debt they were offering. The rating affects how risky investors view the securities, and therefore the interest rate that the investors will require to be paid to account for that risk. Almost 60% of the debt was rated AAA, the highest rating. The overall cost of capital to Blackstone from the securitization was ~2.01% (~1.66% + LIBOR, currently .35%).
While individual investors like you and I need to go to banks or private individuals for loans and pay 5% or 6% interest rates because of securitization, large investors such as Blackstone can get insanely low interest rates on their properties.
So, back to the original question: What does this mean to you, the average SFR investor?
- SFR as an institutional asset class is here to stay. There has been a debate going on in the institutional world about whether single family rental properties as an institutional asset class were going to be a flash in the pan, or here to stay for the long haul. The success and valuation of Blackstone’s offering is a clear indication that bond investors view it as a viable, long-term asset class. This leads to the main takeaway…
- Investor demand should remain strong, which will continue to buoy prices. Blackstone and other large investors have been buying properties at 5-7% cap rates (the cap rate is the net cash-on-cash return from the rental income on a property if the investor paid all cash for the property). 5-7% is historically a low return for SFR real estate investors. However, if large investors are able to get financing at 2% from securitization, it makes a lot of financial sense for them to buy properties at 5-7% cap rates – they are getting a 3-5% spread between their income stream and their debt payment. This will continue to spur demand from those large investors, which will spur demand from the medium size “aggregators”, who can provide properties to those large investors. As we all know, increased demand leads to increased prices.
So, overall, the news of Blackstone’s securitization is extremely positive news for real estate investors and the housing market as a whole, especially in the short term (2-3 years).
In the long term (3-8 years), low cost of capital and “irrational exuberance” among investors could lead to rapidly increasing prices and another housing bubble. However, we are a long ways away from that currently (the CURRENT rapid rise in prices is due to a historically low supply of houses, not to any investor “irrational exuberance”, and is being driven primarily by homeowners). Now is a pretty exciting time for us in the SFR space, and we will continue to monitor future developments and keep our investors informed!