Blackstone pays up but wins big on new SFR bond

Investors pushed back on five of the six tranches in the mid-May Invitation Homes trade, demanding 15bp-75bp more in the riskier parts of the structure, sister publication International Financing Review reported. 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 securitizations, the collateral pool on the Invitation Homes 2014-SFR1 was 5.1 percent 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 $1 billion, it was larger than the other three SFR deals combined, though that was finally trimmed to $993 million. The transaction also ditched tenant income criteria that other deals relied on, including a lease eligibility clause that capped annual rent at 40 percent 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 securitized products at Janus Capital Group, speaking of tenant affordability tests. “Removing this just rubs investors the wrong way. Quite frankly, (the deal) 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 said.

Even with the gripes, however, the trade was nothing less than a success for Blackstone, which came away with an 2.08 percent average funding cost—a tad higher than the 1.85 percent figure it would have paid based on whisper prices, one analyst said.

Factor in 1 percent for extra administrative costs needed to roll out a securitization of this type, and Blackstone looks to have ended up with an all-in cost of about 3.08 percent.

With a 5.2 percent return on the homes themselves, the company looks to be getting a return on equity from the trade of about 17 percent, 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 percent and 26 percent, 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. 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.”

Joy Wiltermuth is a bond reporter for Thomson Reuters IFR.