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 September.
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 properties).
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.