Wallstreet cashing out on rental market investments

[livinincali]

Looks like Wall Street is dong what it does best, cashing out of an investment when everybody else still thinks it’s a great place to put your money.

[quote]
The Blackstone Group LP, the world’s largest private equity firm, became the largest owner of rental homes in the U.S. , acquiring 41,000 homes in the past two years. In October, Blackstone offered the first-ever “rental-home-backed” security on Wall Street. The bond is backed by just a fraction — 3,207 — of the rental properties owned by Blackstone. Monthly rent checks from the properties will be used to service the $479.1 million security.
[/quote]

http://www.bloomberg.com/infographics/2013-12-20/blackstones-big-bet-on-rental-homes.html

[Coronita]

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[Coronita]

I don’t see what the problem here is. Blackstone doesn’t seem to be cashing out and selling their portfolio. They were active in high distress areas and bought distressed homes primarily sfh around 200k or lower. If it all, it proves.

1. Shadow inventory was a myth.

2. Institutions were active in the residential markets not just as flippers but as landlords. But we already knew this. Some of us suspected blackstone was active in MM buying inventory in 2010-2011.

If at all, it means its major suckville for folks trying to buy in those areas affordable housing or cash flow residentials because now you have one more 800lb gorilla to deal with

[SK in CV]

[quote=flu]
If at all, it means its major suckville for folks trying to buy in those areas affordable housing or cash flow residentials because now you have one more 800lb gorilla to deal with[/quote]

I think most of your comment is spot on, though I’m not sure if they were active in MM. It doesn’t appear that they have any homes for rent there.

But with regards to the quoted part, they pretty much finished buying in most markets for much of the last year. They probably did drive prices up in the handful of markets they entered. And they only attacked very specific markets. While they were buying, they probably did push a lot of other buyers out. But I suspect that’s over with. So it should be past tense. Buyers did have an 800 lb gorilla to deal with. That gorilla is sleeping and the market is flattening out. Though it wouldn’t surprise me if they start marketing the properties that are not security for this bond offering in areas that experienced some pretty decent appreciation.

[livinincali]

[quote=flu]I don’t see what the problem here is. Blackstone doesn’t seem to be cashing out and selling their portfolio. They were active in high distress areas and bought distressed homes primarily sfh around 200k or lower. If it all, it proves.
[/quote]

They aren’t cashing out in terms of selling the properties on the open market. They are cashing out in the sense that they are transferring their personal ownership to investors buying the bonds. Blackstone no longer owns the properties, the bond holders own the properties. The bond asset prices are priced at the newly appreciated homes belonging to the portfolio. It’s highly likely Blackstone is selling the crappy part of the 41K portfolio to a bunch of unsuspecting investors because the rental market is hot and appreciation is good right now. Just like the banks we’re selling garbage MBS, the rental market investors are doing the same thing.

Will this effect the price of your San Diego home? Probably not. The portfolio probably contains a bunch of junky properties in Stockton, Phoenix, Las Vegas and some Miami condos for good measure. The point is that Blackstone is betting the rate of appreciation in rents and house prices is going to slow down and they are going to unload while the getting is good.

[Coronita]

[quote=livinincali][quote=flu]I don’t see what the problem here is. Blackstone doesn’t seem to be cashing out and selling their portfolio. They were active in high distress areas and bought distressed homes primarily sfh around 200k or lower. If it all, it proves.
[/quote]

They aren’t cashing out in terms of selling the properties on the open market. They are cashing out in the sense that they are transferring their personal ownership to investors buying the bonds. Blackstone no longer owns the properties, the bond holders own the properties. The bond asset prices are priced at the newly appreciated homes belonging to the portfolio. It’s highly likely Blackstone is selling the crappy part of the 41K portfolio to a bunch of unsuspecting investors because the rental market is hot and appreciation is good right now. Just like the banks we’re selling garbage MBS, the rental market investors are doing the same thing.

Will this effect the price of your San Diego home? Probably not. The portfolio probably contains a bunch of junky properties in Stockton, Phoenix, Las Vegas and some Miami condos for good measure. The point is that Blackstone is betting the rate of appreciation in rents and house prices is going to slow down and they are going to unload while the getting is good.[/quote]

Well they aren’t selling everything. Just the stuff that isnt good 🙂

I wasn’t sure what you meant about not touching that “investment”. I thought you were referring to properties. But if you were referring to their bonds…well can’t really disagree with you there. I won’t touch it.

[Coronita]

[quote=SK in CV][quote=flu]
If at all, it means its major suckville for folks trying to buy in those areas affordable housing or cash flow residentials because now you have one more 800lb gorilla to deal with[/quote]

I think most of your comment is spot on, though I’m not sure if they were active in MM. It doesn’t appear that they have any homes for rent there.

But with regards to the quoted part, they pretty much finished buying in most markets for much of the last year. They probably did drive prices up in the handful of markets they entered. And they only attacked very specific markets. While they were buying, they probably did push a lot of other buyers out. But I suspect that’s over with. So it should be past tense. Buyers did have an 800 lb gorilla to deal with. That gorilla is sleeping and the market is flattening out. Though it wouldn’t surprise me if they start marketing the properties that are not security for this bond offering in areas that experienced some pretty decent appreciation.[/quote]

I meant past tense on BS’s buying spree. But I agree. The point is they are sitting in a pile of dirt cheap properties that apparently cash flows for them.

I am more curious if they are going to come up with some more creative schemes to offer rent to own plans for subprime people that can’t own otherwise. Seems like if we are expecting a flat resale market in those areas, it would be a way to offer ownership to those who cant under traditional ways and increase profits at the same time.

[livinincali]

[quote=flu]
I am more curious if they are going to come up with some more creative schemes to offer rent to own plans for subprime people that can’t own otherwise. Seems like if we are expecting a flat resale market in those areas, it would be a way to offer ownership to those who cant under traditional ways and increase profits at the same time.[/quote]

I doubt it. I think they’ll just keep securitizing the under performing assets and dump them on some pension fund like CalPRES. What those eventual owner do with the assets if prices fall or the rental market softens, who knows. If you’re CalPRES you probably just hold on, if your some small hedge fund holding this junk maybe you liquidate or you get liquidated.

At some point there will likely be a negative consequence of the mad dash to gobble up rental properties that we saw the previous 2 years but knows when and how it play out. We’ve never seen a huge institutional investor push into residential real estate before.

[livinincali]

[quote=flu]
Well they aren’t selling everything. Just the stuff that isnt good 🙂
[/quote]

Honestly that’s just a guess on my part, but considering how the bonds were rated it’s not a bad guess.

Bottom line this probably won’t have any impact on the price of your San Diego home. It’s also probably very wise to stay as far away as you can from these bonds.

[SK in CV]

[quote=livinincali]

They aren’t cashing out in terms of selling the properties on the open market. They are cashing out in the sense that they are transferring their personal ownership to investors buying the bonds. Blackstone no longer owns the properties, the bond holders own the properties. The bond asset prices are priced at the newly appreciated homes belonging to the portfolio. It’s highly likely Blackstone is selling the crappy part of the 41K portfolio to a bunch of unsuspecting investors because the rental market is hot and appreciation is good right now. Just like the banks we’re selling garbage MBS, the rental market investors are doing the same thing.

Will this effect the price of your San Diego home? Probably not. The portfolio probably contains a bunch of junky properties in Stockton, Phoenix, Las Vegas and some Miami condos for good measure. The point is that Blackstone is betting the rate of appreciation in rents and house prices is going to slow down and they are going to unload while the getting is good.[/quote]

I don’t think this is what they’re doing. It looks like a straight securitized bond offering. Appreciation of the properties belongs to Blackstone (or their subsidiaries). What they’ve created is a new form of collateralized mortgage obligations, where the security is both the properties and the cash flow. (I don’t see how that’s a lot different than previous generations of CMO’s.) They bought the properties for cash and have now financed the properties and pulled cash out, on a small percentage of the properties they bought.

If you look at the charts in the link, the biggest chunk of properties that secure this offering are in AZ. Probably the west valley in Phoenix. (They’re NOT junk properties. They are properties that experienced some of the biggest drops in values 5 years ago.) They bought very little in the East Valley. Next largest chunk is in CA, though I suspect very little of that is in San Diego. The Stockton area is my guess. Next was FL and GA. Oddly, nothing or near nothing in NV.

[CA renter]

[quote=livinincali][quote=flu]I don’t see what the problem here is. Blackstone doesn’t seem to be cashing out and selling their portfolio. They were active in high distress areas and bought distressed homes primarily sfh around 200k or lower. If it all, it proves.
[/quote]

They aren’t cashing out in terms of selling the properties on the open market. They are cashing out in the sense that they are transferring their personal ownership to investors buying the bonds. Blackstone no longer owns the properties, the bond holders own the properties. The bond asset prices are priced at the newly appreciated homes belonging to the portfolio. It’s highly likely Blackstone is selling the crappy part of the 41K portfolio to a bunch of unsuspecting investors because the rental market is hot and appreciation is good right now. Just like the banks we’re selling garbage MBS, the rental market investors are doing the same thing.

Will this effect the price of your San Diego home? Probably not. The portfolio probably contains a bunch of junky properties in Stockton, Phoenix, Las Vegas and some Miami condos for good measure. The point is that Blackstone is betting the rate of appreciation in rents and house prices is going to slow down and they are going to unload while the getting is good.[/quote]

Yes, they *are* cashing out, but the homes will not belong to the bond investors. These are more like revenue bonds — it is only the rental payments that back these bonds. And I also have no doubt that CalPERS (and others) are going to be investing in these, if they haven’t already…and the union workers will be blamed, once again, for Wall Street’s scams.

They had initially planned to include only 1,700 properties…

The Journal, citing sources familiar with the proposed deal, says that Blackstone would bundle monthly rental payments on up to 1,700 of the homes it has bought.

http://www.heraldtribune.com/article/20130801/COLUMNIST/308019990?p=all&tc=pgall

…and have already doubled that number in just the past few months. While it is still a rather small percentage of their total portfolio, I imagine it will grow quite a bit over the next year or so.

Here’s an article from August 2012 about these securities, as discussed on this thread:

February 2013 Resale Data Rodeo (Graphs Only)

http://news.firedoglake.com/2012/08/26/the-worst-idea-in-the-world-securitizing-rental-revenue/

[The comments are the best part of that article, BTW; some pretty smart cookies there.]

———–

The value of these bonds is more affected by rents (which is what’s backing the bonds), rather than sales prices of these homes. A cynic would think that this is marking the ~top of the rent cycle. It also might mean that these large investors think that prices will still continue to rise, since they are entitled to the appreciation on home prices…unless they collateralize that, too (entirely possible).

[livinincali]

Here’s the full article at Bloomberg.

Bloomberg article

Some answers to the thoughts above without speculation.

About whether the homes in the portfolio can be sold to pay back the financing. The answer appears to be yes with some stipulations.

[quote]
The deal’s covenants can allow individual properties to be sold, for between 105 percent and 120 percent of their allocated share of the total loan, according to information in the Kroll report, a release of liens that may leave the worst properties backing the remaining securities.

The largest danger may be that Blackstone will be allowed to sell the Invitation Homes business or take it public before the securities mature, said TCW’s Whalen, who described the deal as “well-structured and really well thought in terms of the way they put it together” in general.

“Even if can you get comfortable with a business that’s fairly new, you’ll be subject to the performance and disposition strategy of a company other than Blackstone,” he said. While many of the notes carry substantial loss cushions, “the further down you go” in buying bonds with less protection, “the more subject you are going be to that big risk.”
[/quote]

Here’s where the properties in the portfolio are located.

[quote]
The breakdown includes 34 percent from the Phoenix area, 17 percent from the Riverside-San Bernardino-Ontario region in southern California and the rest from other parts of the state, as well as Florida, Georgia and Illinois.
[/quote]

About how they are going to repay at the end of the bond offering. These are 5 year bonds, if credit conditions are tight and they can’t refinance to pay back the principle it’s possible they could flood the market with the homes in 5 years.

[quote]
Along with the Fed’s $85 billion of monthly bond buying that’s reduced mortgage rates, investors including Blackstone have helped drive property-value gains in the regions. Prices in Phoenix have soared 41 percent from a bottom in 2011, according to an S&P/Case-Shiller index.

When it’s time to repay the debt, rental-home owners may be unable to refinance or sell the bond collateral in bulk and flood the markets, Fitch analysts Suzanne Mistretta,Dan Chambers and Rui Pereira in New York wrote in a statement last month.

The transactions can also be “highly vulnerable to unknown variables” including property taxes, restrictions from homeowner associations and actions by local governments, they said.
[/quote]

[livinincali]

[quote=CA renter]
Yes, they *are* cashing out, but the homes will not belong to the bond investors. These are more like revenue bonds — it is only the rental payments that back these bonds. And I also have no doubt that CalPERS (and others) are going to be investing in these, if they haven’t already…and the union workers will be blamed, once again, for Wall Street’s scams.
[/quote]

Who selects the company to manage the CalPRES fund? That’s where the blame should lie. Certainly public sector employees and their unions should be advocating for a well funded fund that doesn’t invest in junk but they don’t care because they still think they have a tax payer backstop. Get rid of that backstop and then figure it out.

I really don’t care how public sector employees chose to set up their retirement plan. It just needs to be defined contribution from the tax payers perspective. If your managed plan actuaries screw up then share the burden among the current employees and retirees.

[CA renter]

Unions DO want well-funded plans, and they’ve fought against things like pension holidays (when the employers paid NOTHING toward retirement contributions) because they knew where it would lead. But the other special interests who are lined up fought the unions.

BTW, I’m fine if you want to get rid of taxpayer backstops, but ONLY if we get rid of backstops for **everyone.** Why should bondholders or other stakeholders be backstopped if public employees are not?

And since public employee pension benefits are deferred compensation (it is money the employees have already earned for services performed), we should also be able to claw back monies paid to private contractors if they don’t perform or if the public entities decides they can’t afford it, as well. Fair is fair, right? Or, do you think we should just penalize one specific group of taxpayer-backed stakeholders (who have had NOTHING AT ALL to do with the financial crisis); and if so, why?

[livinincali]

[quote=CA renter]
BTW, I’m fine if you want to get rid of taxpayer backstops, but ONLY if we get rid of backstops for **everyone.** Why should bondholders or other stakeholders be backstopped if public employees are not?
[/quote]

I do think we should get rid of tax payer backstops for everybody. I wasn’t in favor of the bailouts for GM, AIG, TARP or any of that nonsense. Let people that make malinvestments bear the consequences of their actions.

I haven’t really seen a case in a municipal bankruptcy where bond holders didn’t also take losses. Of course CalPRES and other big pensions probably hold a lot of those bonds so attempting to put differed compensation at the front of the bond holders probably doesn’t help you too much.

[quote=CA renter]
And since public employee pension benefits are deferred compensation (it is money the employees have already earned for services performed), we should also be able to claw back monies paid to private contractors if they don’t perform or if the public entities decides they can’t afford it, as well. Fair is fair, right? Or, do you think we should just penalize one specific group of taxpayer-backed stakeholders (who have had NOTHING AT ALL to do with the financial crisis); and if so, why?[/quote]

Usually a contract is only paid upon delivery of work that has been deemed satisfactory. I don’t think your going to find a court that will let you claw back money from a contract unless there was some sort of deception in the delivered work. Contractors aren’t going to take a contract that calls them to work for years with no payments and then get paid all at the end. They aren’t that stupid.

As for CalPRES I have no problem if they want to try to sue Wall Street for deceptive investments. They were the lead plaintiff in the Enron civil case and I believe the big investment banks settled for 6-7 billion on that case. CalPRES probably lost more than they’ll get back but they can and should try to get money back from Wall Street if it can be proven as a scam investment.

Of course with all that said we know that the only pot of money that’s big enough to pay all public sector employees in full is the tax payers.

[Author]

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