By Adam Tempkin
NEW YORK, Oct 25 (IFR) - Bankers are hoping that an innovative, long awaited US home-rental ABS from private equity giant Blackstone will open up a brand new single-family rental asset class with issuance of US$10bn likely over the next 18 months - providing they can win investors over.
The new sector, built on what some naysayers are calling the housing "detritus" of the financial crisis, is not expected to be met with tons of praise in the court of public opinion, some industry participants say.
"I think there's a potential for a backlash on this," said one RMBS investor.
Marketing on the US$500m Invitation Homes 2013-SFR1 transaction, backed by rental cashflows from tenants living in foreclosed single-family homes bought up by Blackstone at rock-bottom prices, will begin next Wednesday in New York. The teams will hit Boston and Los Angeles on Thursday and Friday.
Deutsche Bank is structuring lead, with Credit Suisse and JP Morgan as joint lead bookrunners. Deutsche has worked for nearly a year on developing the transaction with Blackstone, which has spent US$7.5bn on 40,000 distressed properties across the US.
IFR first reported in March that Blackstone and Deutsche Bank were working together on a potential securitization.
The trade will receive ratings from Kroll, Morningstar, and Moody's. At least one of those ratings will be Triple A, a fact that shocked some investors relying on numerous rating agency reports over the past year that indicated a first-time REO-to-rental deal would never reach a rating higher than Single A.
"Almost every rating agency came out with criteria reports or commentaries this year saying an inaugural deal cannot get to Triple A. They said it would be Single A at most. It doesn't make sense," said a senior structured credit portfolio manager with expertise in REO properties. "I thought the agencies drew that line in the sand; they're on the record."
One clue as to how the deal may get the top rating is that it will be secured by individual mortgage liens on each underlying property rather than an equity pledge in the property-owning SPV. That will allow for the creation of a so-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 pooling of a diverse set of loans from different originators and offer flexibility in assembling a security.
Rating agencies had preferred that mortgages were in place as legal instruments in any potential REO-to-rental securitization structure, so that bondholders did not get shut out of payments in case competing liens were placed on any particular property.
Agencies also cautioned that in the absence of a recorded mortgage, bondholders could be on the hook if an issuer/sponsor were to put an SPV owning the homes into bankruptcy.
Therefore, despite the recording fees and administrative costs involved with filing individual mortgages on each property, the mortgage structure seemed the best route for the first single-family rental securitization deal, those involved said.
Investors said a Triple A rating would likely not have been possible without the mortgage structure.
A RECENT TEMPLATE
The basic template for the structure was first used in a triple net lease ABS deal issued earlier this year by STORE Capital, a private REIT. The issuer's ability in that deal to keep multiple commercial real estate (CRE) properties on short-term leases gave bankers confidence that a similar scenario could be reproduced in the residential single-family rental arena.
The master trust structure used in the STORE trade also permitted additional collateral to be added to the pool at a later date. Tenants in the collateral pool collectively operated 287 owned CRE properties representing eight different business sectors. The technology was adapted to the REO-to-rental space for the Blackstone offering.
"Securitization technology can be applied to cashflows of any asset class, as long as there is a transparent and supportable basis for estimating the underwritten cashflows as the basis of paying the debt-holders," said Ron D'Vari, CEO of NewOak Capital, a financial advisory and investment banking firm.
"Single-family rental cashflows are no exception if they can be properly managed and modeled.
"One thing is for sure, investors will be looking for a lot of details and full proof of ability to manage single-family rental at a national level. Also, a simpler structure and conservative waterfalls matters. Full amortization of the senior notes makes them more attractive and provides deleveraging but will be less attractive to the equity."
Some market players say the newness of the asset class, and liquidity risk, means investors will demand a premium on the deal, even with top ratings.
"I'm surprised that the banks think that a Triple A will help execution that much," said a senior structured credit portfolio manager at a large asset manager. "Guys buying at Triple A will want a significant spread versus other sectors in the market, such as Triple A CMBS, which already has good liquidity, has been around for twenty years, and has gone through recessions. REO is a new asset class, so investors will need spread pick-up versus CMBS."
"Because of the demand for a spread pick-up, I don't think a Triple A on this new single-family rental bond will price that much tighter than a Single A on a senior mezzanine bond."