Blackstone Group LP, the private- equity firm that has spent $5 billion on more than 30,000 distressed houses, is preparing to expand its bet on the housing recovery by lending to other landlords.
The firm, which already owns more rental homes than any other investor, has set up B2R Finance LP to offer loans starting at $10 million, according to four people who reviewed the terms. B2R is reaching out to landlords with portfolios of properties seeking to grow in the burgeoning industry for single-family homes to rent, said the people, who asked not to be identified because the discussions are private.
The world’s largest private-equity firm said last month that it was entering the later stages of its buying spree after leading a group of institutional investors who’ve spent at least $17 billion on more than 100,000 homes over two years, helping fuel the fastest price gains since 2006. By increasing its stake in the rebound through lending, New York-based Blackstone could benefit from smaller landlords already investing in what Goldman Sachs Group Inc. estimates to be a $2.8 trillion market.
“The more financing that comes to the space, the better to legitimize the industry,” said Sudha Reddy, chief executive officer of Haven Realty Capital LLC, an investor with 1,500 rental homes backed by Leon Black’s Apollo Global Management LLC. “Not all investors are able to get a large credit facility and small ones from community banks aren’t big enough.”
Term Sheets
At least five rental companies have received nonbinding term sheets from B2R, according to the people. Jeffrey Tennyson, the former chief executive officer of mortgage originator EquiFirst Corp., is running the firm, which stands for buy-to- rent. He previously led EquiFirst to become the 12th-largest wholesale subprime lender in the U.S. by 2007, when Barclays Bank PLC bought it. The London-based bank closed the business two years later after the market collapsed.
Tennyson didn’t return phone messages seeking comment on his role at B2R. Peter Rose, a spokesman for Blackstone, declined to comment.
With the creation of a lending unit, Blackstone would be adding to a big wager on the residential real estate recovery it began making after the crash, when prices fell as much as 35 percent from the 2006 peak.
The private-equity firm in 2011 purchased $220 million in residential nonperforming loans, invested as much as $475 million in homebuilders including Hovnanian Enterprises Inc. through its credit investment arm GSO Capital Partners LP and started acquiring thousands of foreclosed properties.
Market Turning
“This is the kind of thing that happens once — every once in a while, where you see something that’s a market-turning trend and we are loading the boat,” Blackstone CEO Stephen Schwarzman said during an October earnings call.
Firms including Blackstone, Apollo, Thomas Barrack Jr.’s Colony Capital LLC and Public Storage founder Wayne Hughes’s American Homes 4 Rent started emerging as large-scale landlords after more than 7 million homeowners lost their properties through foreclosure or by selling for a loss since 2007, according to RealtyTrac.
That’s helped drive the recovery in home prices, which rose 12.1 percent in April from the prior year, according to a S&P/Case-Shiller index. Even as the economy has strengthened, the homeownership rate declined to 65 percent at the end of first quarter, from a peak of 69.2 percent in June 2004, as fewer Americans have been able to qualify for mortgages.
Fledgling Business
Blackstone’s fledgling lending business could help extend the reach of rental-home buyers who can’t access investment bank funding, a gap Cerberus Capital Management LP is also trying to fill with First Key Lending, which it started this year.
Prior to the crash, regional banks were the primary source of loans for landlords buying properties. More than 475 banks have failed since the real estate collapse, according to the Federal Deposit Insurance Corp., while larger banks have tightened mortgage underwriting standards and are focusing on the biggest investors. Fannie Mae, meanwhile, limits landlords to loans on a maximum of 10 properties and Freddie Mac has a limit of four.
Johnson Capital, a commercial real estate advisory firm, will originate and underwrite the B2R financing, according to people familiar with the offering. Loans will be offered at 75 percent of home values for pools of leased properties, and 65 percent of the cost of portfolios without tenants, according to terms sent to potential borrowers obtained by Bloomberg News. The debt would have floating interest rates of 5 percent to 7 percent for up to five years.
‘Absolutely Huge’
Dennis Cisterna, co-head of Irvine, California-based Johnson Capital’s opportunistic finance division, declined to comment on the company’s relationship with Blackstone. He said Johnson Capital has arranged more than $100 million of loans for rental investors in the last 18 months through several different lenders.
“The market potential is absolutely huge,” Cisterna said. “There are about 14 million rental homes in the U.S. with an average price of nearly $200,000. Even if you are financing 10 percent of that, it’s certainly a large enough amount to warrant a new institutional lending sector.”
Many landlords have been constrained since they’ve deployed all their equity and would have to sell assets to buy more homes, according to Cisterna.
“A lot of our clients are capped between 25 and 100 homes, and with good loans these investors are going to be able to triple their holdings,” he said.
Cerberus Loans
Cerberus’s First Key has completed two loans, according to a person familiar with the business started by the New York- based investment firm. The company aims to provide $5 million to $100 million of financing to rental investors — unable to secure credit lines from Wall Street — who’ve also outgrown government-backed mortgage guarantors.
The loans typically have a 24-year term with a 6 percent to 7 percent interest rate and are secured by the real estate, senior vice president Eric Atlas said at a forum on single- family rental homes in Miami in May.
CapitalSource Inc., a Los Angeles-based bank with $8.5 billion in assets, has also closed two loans — for $29 million and $29.5 million — providing as much as 60 percent debt to owners of leased houses. Two other loans are in the underwriting stages, according to Chris Kelly, CapitalSource’s managing director overseeing commercial real estate.
“We’re trying to play in the middle,” Kelly said in a telephone interview. “The big guys get debt from investment banks. The smaller guys get it from local banks.”
Largest Buyers
The largest buyers have been able to access either public markets or bank-arranged credit lines to finance properties, which has helped them accelerate purchases as competition increases.
Blackstone has a $3.6 billion credit line from lenders led by Deutsche Bank AG. Apollo also received a $200 million facility from the Frankfurt-based lender and American Homes 4 Rent obtained a credit facility for up to $1 billion with Wells Fargo & Co. Silver Bay Realty Trust Corp., a real estate investment trust with more than 5,000 homes, got a $200 million loan in May from Bank of America Corp. and JPMorgan Chase & Co.
Silver Bay also raised $245 million in December by selling shares to the public. The stock declined 1.2 percent to $16.79 at 9:59 a.m. in New York, down from the $18.50 offering price.
Natural Progression
“Lending to smaller aggregators of single family rentals is a sound natural progression,” Martin Lifschutz, managing director for real estate risk at Citigroup Inc.’s institutional clients group, said in an e-mail. “One of the main concerns has always been operational risk for those investors aggregating single family rentals nationally. By lending to smaller investors who tend to be in only one and two markets, there is less operational risk and more local market knowledge,” he said. The loans may also be included in securitized bonds, he said.
Still, B2R could struggle to get business without offering fixed-rate loans at a time rates are rising from historic lows.
Jimmy Levy, president of Miami-based PIA Group USA LLC passed on the B2R loan because of the floating rate.
“You definitely want fixed rates,” said Levy. “If there is going to be a hedge against inflation, you don’t want the interest rates to hurt you when they go up.”
PIA Group is seeking to more than triple its 500-home portfolio in the next 3 1/2 years with the help of financing.
“I’m not sure we’ll get there, because the voracity of the investors is huge,” Levy said.
Potential Returns
While investor buying has pushed up prices, home values are still 26 percent below their 2006 peak and the addition of debt could increase potential returns for landlords.
Arrowhead Residential Funds paid an average $35,000 per home to buy and renovate about 250 rental properties in Missouri since 2011 using no debt. County appraisers estimate the houses now are worth more than $60,000 apiece, according to Paul Habibi, who co-owns Arrowhead and is also a lecturer at the Ziman Center for Real Estate at the University of California, Los Angeles.
The houses rent for an average $720 a month, which nets out to 16 percent return after expenses, Habibi said. A loan at 75 percent of the properties’ current value would be $45,000 per home, bringing his effective cost basis below zero, he said.
“Returns are exponentially increased,” he said.
Manage Risks
Direct lenders have more ability to manage risk than investors in securities tied to the rental properties, which large landlords expect to issue later this year, according to Suzanne Mistretta, a residential mortgage-backed securities analyst for Fitch Ratings.
“They can go in and demand information and really get granular and then pull the plug if they start to see a deterioration,” Mistretta said in a telephone interview from New York.
Blackstone’s role as a lender may also be an opportunity to “get a first look” at potential acquisitions for its single- family rental venture, according to Peter Martin, a San Francisco-based analyst with JMP Securities LLC. Having an in- house rental operation is also a safety net if the loans go bad, he said.
“They have two choices,” Martin said in a telephone interview. “They could put them out on the market and get their capital back. Or they can absorb those assets and push them over to their manager.”
While this particular type of lending may be new for Blackstone, it’s the kind of deal the private-equity firm has done before, according to Martin.
“This is their business model,” he said. “They find holes in the system and they bring capital in an opportunistic manner to those pain points.”
