* High-teens return on equity
* Slimmer size, bigger spreads
* Investors note eased standards
By Joy Wiltermuth
NEW YORK, May 23 (IFR) - The Blackstone Group is poised for
a healthy 17% return on its new single-family rental (SFR) bond,
even though it had to pay more than expected to get the nearly
US$1bn deal over the line.
Investors pushed back on five of the six tranches in this
week's Invitation Homes trade, demanding 15bp-75bp more in the
riskier parts of the structure.
But even with the heftier coupons, Blackstone is still
poised for a more than satisfactory return on the trade - just
the fourth ever in the nascent SFR sector.
"The dealers were right in widening out the lower classes,"
said Gary Greenberg, a portfolio manager at Payden & Rygel, who
bought bonds in the senior class.
"But there is nothing to suggest there is anything wrong
with the asset class."
Many investors felt the private equity giant was pushing too
hard on the trade, which is backed by rental income on more than
6,500 homes, most of them foreclosed on and repurchased in the
wake of the financial crisis.
Unlike the previous three SFR securitisations, the
collateral pool on the Invitation Homes 2014-SFR1 was 5.1% made
up of vacant homes - which incur expenses and provide no cash.
Previous deals consisted only of occupied properties.
Blackstone was seen as coming aggressively with the size of
the deal as well. At US$1bn, it was larger than the other three
SFR deals combined, though that was finally trimmed to US$993m.
The transaction also ditched tenant income criteria that
other deals relied on, including a lease eligibility clause that
capped annual rent at 40% of a tenant's income, according to a
Moody's Investors Service pre-sale report.
"It does matter, particularly with this type of renter,"
said John Kerschner, global head of securitised products at
Janus Capital Group, speaking of tenant affordability tests.
"Removing this just rubs investors the wrong way. Quite
frankly, already has stupendous financing. Why
nickel and dime investors?"
Yet a person familiar with the platform said that Blackstone
has adopted a tenant screening process similar to that used by
the big apartment REITs to vet tenants for multifamily units.
The firm views the underwriting standard as akin to that on
multifamily CMBS deals, which typically avoid tying contractual
representations and warranties to individual tenants, the person
STILL A HIT
Even with the gripes, however, the trade was nothing less
than a success for Blackstone, which came away with an 2.08%
average funding cost - a tad higher than the 1.85% figure it
would have paid based on whisper prices, one analyst said.
Factor in 1% for extra administrative costs needed to roll
out a securitisation of this type, and Blackstone looks to have
ended up with an all-in cost of about 3.08%.
With a 5.2% return on the homes themselves, the company
looks to be getting a return on equity from the trade of about
17%, said Jade Rahmani, an analyst at investment bank Keefe,
Bruyette & Woods.
Another market source concurred with those calculations. The
previous three SFR bonds achieved returns between 19% and 26%,
one analyst told IFR.
Blackstone's solid return comes even as it pushed spreads
wider to get investors to buy into the deal.
While spreads held firm from whispers on the Triple As at
Libor plus 100bp, Blackstone had to give concessions further
down the curve.
Lead managers Deutsche Bank, Credit Suisse and JP Morgan
priced the Class B (Aa2/AA+/AA) at 150bp; the Class C (A2/A+/A)
at 210bp; the Class D (Baa2/BBB+/BBB+) at 260bp; the Triple B
minus Class E at 325bp; and the most deeply subordinated Class F
(BB-/BB+) at 375bp.
The Triple A piece was at least once covered and the lower
tranches ended up twice subscribed after Blackstone fattened the
coupons on offer.
Some saw the investor pushback as indication that future SFR
deals - including one in the works from American Residential
Properties - will be held to tougher buy-side scrutiny.
But many agreed that Blackstone had carried the day.
"You can't expect every deal to come multiple times
oversubscribed," said Payden & Rygel's Greenberg. "It was a fair
amount of bonds for the client base."
(Reporting by Joy Wiltermuth; Editing by Anil Mayre and Marc