Blackstone home-rental bond may open up new asset class


By Adam Tempkin

NEW YORK, Oct 25 (IFR) - Bankers are hoping that aninnovative, long awaited US home-rental ABS from private equitygiant Blackstone will open up a brand new single-familyrental asset class with issuance of US$10bn likely over the next18 months - providing they can win investors over.

The new sector, built on what some naysayers are calling thehousing "detritus" of the financial crisis, is not expected tobe met with tons of praise in the court of public opinion, someindustry participants say.

"I think there's a potential for a backlash on this," saidone RMBS investor.

Marketing on the US$500m Invitation Homes 2013-SFR1transaction, backed by rental cashflows from tenants living inforeclosed single-family homes bought up by Blackstone atrock-bottom prices, will begin next Wednesday in New York. Theteams will hit Boston and Los Angeles on Thursday and Friday.

Deutsche Bank is structuring lead, with Credit Suisse and JPMorgan as joint lead bookrunners. Deutsche has worked for nearlya year on developing the transaction with Blackstone, which hasspent US$7.5bn on 40,000 distressed properties across the US.

IFR first reported in March that Blackstone and DeutscheBank were working together on a potential securitization.

The trade will receive ratings from Kroll, Morningstar, andMoody's. At least one of those ratings will be Triple A, a factthat shocked some investors relying on numerous rating agencyreports over the past year that indicated a first-timeREO-to-rental deal would never reach a rating higher than SingleA.

"Almost every rating agency came out with criteria reportsor commentaries this year saying an inaugural deal cannot get toTriple A. They said it would be Single A at most. It doesn'tmake sense," said a senior structured credit portfolio managerwith expertise in REO properties. "I thought the agencies drewthat line in the sand; they're on the record."


One clue as to how the deal may get the top rating is thatit will be secured by individual mortgage liens on eachunderlying property rather than an equity pledge in theproperty-owning SPV. That will allow for the creation of aso-called real estate mortgage investment conduit (Remic)structure, according to people close to the deal.

Remics, which are also used in CMBS, allow for the poolingof a diverse set of loans from different originators and offerflexibility in assembling a security.

Rating agencies had preferred that mortgages were in placeas legal instruments in any potential REO-to-rentalsecuritization structure, so that bondholders did not get shutout of payments in case competing liens were placed on anyparticular property.

Agencies also cautioned that in the absence of a recordedmortgage, bondholders could be on the hook if an issuer/sponsorwere to put an SPV owning the homes into bankruptcy.

Therefore, despite the recording fees and administrativecosts involved with filing individual mortgages on eachproperty, the mortgage structure seemed the best route for thefirst single-family rental securitization deal, those involvedsaid.

Investors said a Triple A rating would likely not have beenpossible without the mortgage structure.


The basic template for the structure was first used in atriple net lease ABS deal issued earlier this year by STORECapital, a private REIT. The issuer's ability in that deal tokeep multiple commercial real estate (CRE) properties onshort-term leases gave bankers confidence that a similarscenario could be reproduced in the residential single-familyrental arena.

The master trust structure used in the STORE trade alsopermitted additional collateral to be added to the pool at alater date. Tenants in the collateral pool collectively operated287 owned CRE properties representing eight different businesssectors. The technology was adapted to the REO-to-rental spacefor the Blackstone offering.

"Securitization technology can be applied to cashflows ofany asset class, as long as there is a transparent andsupportable basis for estimating the underwritten cashflows asthe basis of paying the debt-holders," said Ron D'Vari, CEO ofNewOak Capital, a financial advisory and investment bankingfirm.

"Single-family rental cashflows are no exception if they canbe properly managed and modeled.

"One thing is for sure, investors will be looking for a lotof details and full proof of ability to manage single-familyrental at a national level. Also, a simpler structure andconservative waterfalls matters. Full amortization of the seniornotes makes them more attractive and provides deleveraging butwill be less attractive to the equity."

Some market players say the newness of the asset class, andliquidity risk, means investors will demand a premium on thedeal, even with top ratings.

"I'm surprised that the banks think that a Triple A willhelp execution that much," said a senior structured creditportfolio manager at a large asset manager. "Guys buying atTriple A will want a significant spread versus other sectors inthe market, such as Triple A CMBS, which already has goodliquidity, has been around for twenty years, and has gonethrough recessions. REO is a new asset class, so investors willneed spread pick-up versus CMBS."

"Because of the demand for a spread pick-up, I don't think aTriple A on this new single-family rental bond will price thatmuch tighter than a Single A on a senior mezzanine bond."

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