by Wolf Richter, Wolf Street:
It blames the Fed & Bernanke; the dark side of “healing” the housing market.
The housing collapse during the Financial Crisis keeps on giving. On Friday, Invitation Homes, a creature of private-equity firm Blackstone, and largest landlord of single-family rental homes in the US, filed with the SEC to raise up to $1.5 billion in an IPO. Deutsche Bank, JP Morgan, BofA Merrill Lynch, Goldman Sachs, Wells Fargo, Credit Suisse, Morgan Stanley, and RBC Capital Markets are the joint bookrunners and get to cash in on the fees.
Invitation Homes, founded in 2012, now owns 48,431 single-family homes, according to the filing. It bought them out of foreclosure and turned them into rental properties, concentrated in 12 urban areas. Revenues for the nine months through September 30 rose 11.4% to $655 million, producing a net loss of $52 million. It lists $9.7 billion in single-family properties and $7.7 billion in debt.
Blackstone was a pioneer in the post-Financial Crisis buy-to-rent scheme, including issuing the first rent-backed structured securities in November 2013. The collateral for the $479-million deal was rental income from 3,207 homes. Blackstone paid rating agencies Moody’s, Kroll, and Morningstar to rate the bonds; so nearly 60% of the debt was rated AAA. Other tranches carried lower ratings. The overall cost of capital to Blackstone from the securitization of these rents was about 2.01%. Cheap money! Thank you hallelujah QE and ZIRP.
Rent-backed securities have since become a common funding mechanism.
Other players in the buy-to-rent scheme have already gone public. American Homes 4 Rent, which owns about 48,000 rental houses in 22 states, went public in August 2013. It has produced a net loss every year since, sports negative EPS of -25 cents and a negative PE ratio of -84.
Starwood Waypoint Residential Trust was spun off from Starwood Property Trust Inc. and started trading in February 2014. In 2016, it merged with Thomas Barrack’s Colony Capital and changed its name to Colony Starwood Homes. Colony is now the third-largest single-family landlord. It too has lost money every year since going public, has negative EPS of -47 cents and a negative PE ratio of -62. Colony founder Barrack is now chairman of Trump’s inauguration committee.
But there’s a drawback: 32% of Colony’s properties in Atlanta and adjacent suburbs have eviction filings, by far the highest rate among the Wall Street landlords, according to a study by the Atlanta Fed on the impact of Wall Street landlords on surging “housing instability.”
The report doesn’t name names, but Ben Miller, co-author of the report, filled in the blanks for Bloomberg. Next in line in eviction rates: American Homes 4 Rent, HavenBrook, owned by Pimco, and Invitations Homes. The percentage of properties with eviction filings in Atlanta by the largest Wall-Street landlords:
The report indicated that eviction rates in some other cities are lower. But this being the Atlanta Fed, it focused on Atlanta, one of the hotbeds of the buy-to-rent scheme. And it focused on single-family rentals because Wall Street’s muscling into this space is new and perhaps a generational shift in the US housing market.
So how did this Wall Street landlord nirvana – and the ensuing “housing instability” – come about after the housing bust? The report blames the Fed, and Fed Chairman Ben Bernanke:
In unwinding their bank-owned properties, the GSEs [Fannie Mae, Freddy Mac, etc.], U.S. Treasury, and Federal Reserve innovated new structured transactions for disposing of hundreds of thousands of bank-owned homes, also known as real estate owned (REO). The Federal Reserve was the first to suggest that private equity firms were the one group with cash on hand to invest in foreclosed homes (Bernanke, 2012).
In 2012, the Federal Housing Finance Agency (FHFA), conservator of the GSEs, issued a pilot to develop structured transactions that could be used to sell its REO homes in bulk. The private market followed by developing and standardizing financial instruments to allow broader market investment in converting foreclosed homes into single-family rentals. Rental housing, traditionally the purview of mom-and-pop landlords, caught the attention of large financial firms.
Nationwide, an estimated 350,000 homes were purchased by institutional investors from 2011 to 2013, and these were spatially concentrated in cities like Atlanta with high numbers of bank-owned homes and the prospect of future home price appreciation. Today there is high concentration in the single-family rental business, with an estimated 170,000 single-family rental homes owned by the seven largest firms.
“My hope was that these private equity firms would provide a new kind of rental housing for people who couldn’t – or didn’t want to – buy during the housing recovery,” Elora Raymond, the report’s lead author, told Bloomberg. “Instead, it seems like they’re contributing to housing instability in Atlanta, and possibly other places.”
Evictions are cheap in Atlanta: about $85 in court fees and another $20 to have the tenant ejected, report co-author Michael Lucas told Bloomberg, which added: “With few of the tenant protections of places like New York, a family can find itself homeless in less than a month.”