By Adam Tempkin
NEW YORK, Oct 22 (IFR) - The first-ever bond backed by
home-rental cashflows, a US$300 million trade from private
equity giant Blackstone, will begin pre-marketing within
two weeks, sources close to the deal said on Tuesday.
The asset-backed security is expected to have credit
ratings from Kroll, Morningstar, and Moody's, they said.
Lead underwriter Deutsche Bank has worked for nearly a year
on developing the transaction with Blackstone, which owns more
than US$6 billion in distressed properties across the US.
With a nascent recovery in home prices, REO-to-rental - the
renting out of foreclosed single family homes that were
purchased at rock-bottom prices - has become big business.
The sector has attracted investments from private equity
firms, REITs and others over the last two years.
Deutsche Bank declined to comment. Blackstone was not
immediately available to comment.
Asset managers buying up distressed single-family homes en
masse have typically tapped equity investments and warehouse
financing from investment banks to fund themselves.
But tapping the capital markets via a securitization is
viewed as the final step in securing low-cost funding for such
purchases, and will likely open up a whole new asset class,
securitization experts say.
Over the past two years, S&P, Moody's, Fitch, Morningstar,
DBRS, and Kroll have all devoted resources to analyzing the
sector and building methodologies.
However, only Morningstar has published an official
methodology for the new asset class, which came out in
For legal reasons, the agency, which is only designated to
rate asset-backed securities by the SEC, had to specify in its
methodology that any forthcoming deal had certain features which
legally define it as an ABS.
If the transaction did not have at least one of these
features - including an asset that can be monetized, or one that
has a defined maturity and amortizes - then Morningstar would
not have been able to rate the deal.
Morningstar declined comment on any potential upcoming deal.
However, in its public methodology, the agency said that it
would approach the rating of such a deal by estimating net
cashflows from the rental properties.
It would receive a data tape with relevant information -
such as property value, rent amount, property expense amounts,
and location - and stress those values, taking into
consideration factors such as the concessions that property
managers or leasing companies might give to tenants.
It would also take into consideration repair and maintenance
expenses and capital expenditures as part of its quantitative
and qualitative analysis. Morningstar has already developed a
so-called single-family rental subordination model to rate this
new class of deals, the agency said.
Similar to the approach taken at Wall Street investment
banks, all of the rating agencies created teams this year made
up of CMBS and RMBS analysts to evaluate the sector.
Wall Street banks attempting to forge the new asset class,
however, were hampered by the agencies, who struggled with how
to properly assess the emerging sector.
A coveted rating on a first securitization would make the
deal more attractive to a wider array of investors.
The agencies' reservations included a lack of historical
rental data, issuer reliance on operators who manage rental
property cash flow, the variability of cash flow from the rental
and ultimate sale of the properties, and risks involved with the
issuance vehicle owning the properties and renting them out to
tenants (or alternatively, the borrower owning and renting out
the properties while the vehicle owns the mortgage loan on the
While the agencies were still getting their heads around the
possibility of securitizing the asset, Deutsche Bank has lent to
clients via credit facilities. Earlier this year, Deutsche Bank
extended a syndicated financing facility of US$2.075bn to
Blackstone's Invitation Homes.
It also created five additional single-family rental
facilities this year totaling US$2.6bn, including a second
facility for Blackstone.