US Structured Finance Issue: Blackstone Invitation Homes 2013-SFR1
An asset class is born
Blackstone’s Invitation Homes division, with the help of lead structurer Deutsche Bank, created a new US residential real estate ABS asset class with the first REO-to-rental, or single-family rental bond, in early November.
The most hotly anticipated deal in 2013, the US$479m Invitation Homes 2013-SFR1 surprised some by being rated Triple A, but it was an absolute blowout, attracting scores of investors desperate for access to any aspect of US residential mortgage credit after a five-year drought.
The Triple A tranche tightened roughly 35bp from initial price whispers to final pricing at 115bp – and proved to be the first step for a market potentially worth hundreds of billions of dollars in coming years, according to analysts at Keefe, Bruyette & Woods.
Robert Shiller, the Nobel Prize winner and housing markets expert, tweeted on the day the transaction priced that it could mark a revolution.
And Blackstone could drive that trend: this deal was backed by rental income from only 3,207 out of more than 40,000 foreclosed US properties that the private equity firm snapped up over the past two years.
“The success of this deal is clearly a positive for the continued housing recovery,” said Carl Bell, a managing director at asset manager Amundi Smith Breeden. “The transaction established that the capital markets are ready for this new asset class.”
The deal resulted in much better execution than the bank financing which Blackstone and other private equity firms typically use to fund their purchases.
Deutsche and a syndicate of several banks had bankrolled Blackstone via loans and more than US$3bn in debt facilities. But securitisation represented a much lower cost of capital, and Deutsche always saw a term deal as the ultimate goal.
The deal was the culmination of nearly two years of work and a massive campaign by Deutsche and co-leads Credit Suisse and JP Morgan to educate the ratings agencies and convince them that rental income from thousands of tenants in foreclosed homes across the country could be securitised safely.
At first this seemed like a longshot. At least six agencies published methodologies or reports over the past year indicating they would likely cap SFR deals at A– due to structural reservations.
Morningstar, Kroll and Moody’s then shocked the market by upgrading the deal to Triple A. Part of the reason was that, at the request of the agencies, the deal was structured conservatively with a real estate mortgage investment conduit structure, with mortgages taken out on each of the homes in order to improve investors’ legal protections.
Invitation Homes has definitely set the wheels in motion. American Homes 4 Rent said it would have its first REO-to-rental ABS by early 2014, and Colony Capital is rumoured to have a deal circulating with the rating agencies as well.
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