From Bloomberg:

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.

Click for gigantic infographic.

Source: Bloomberg

Category: Real Estate, Venture Capital

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19 Responses to “Blackstone’s Big Bet On Rental Homes”

  1. pcurve says:

    What do you think are some short, medium, long term outcome of this trend? Permanent decrease in personal home ownership, decreased inventory of home for sale, etc. But maybe lower rental price? I’m trying to see pros and cons of this trend…

  2. cobaltbluedolphins says:

    There’s one (and apparently hundreds) born every minute. And Wall Street seems to draw them.

  3. DeDude says:

    Interesting and complicated construct. But what is the sales argument for why I would buy these bonds rather than Fannie and Freddie bonds?

  4. GeorgeBurnsWasRight says:

    Before I bought into the Blackstone offering I’d want some proof that they hadn’t bundled the less-desirable ones into the security while keeping the better ones for their own portfolio.

  5. Willy2 says:

    I think Blackstone (BS) is testing the waters. If investors are lining up to buy these “Rental bonds” then BS will flood the markets with these “RBS” securities. The only question that remains is: “Are investors that stupid (enough) to buy this garbage ????”.

  6. Willy2 says:

    It’s simply a sign Blackstone wants to get rid of the (financial) liabilities of those rental homes.

  7. BennyProfane says:

    So, there’re saying, that, if all goes well, which is scenario A near the bottom of the graphic, the bondholders will only receive 1.3%?? Really? And, c’mon, does anybody know a small landlord? Tell him or her that you have a plan to buy hundreds and hundreds of homes scattered around a metro area, all built at different times by different builders, and then expect the rent to flow immediately at constant levels, with no hassles from the wonderful tenants who will magically appear to pay this rent. Now duck as the experienced landlord practically spits in your face from uncontrolled laughter.

  8. romerjt says:

    So let me see if I got this. . . . . fewer and fewer Americans will own thier home and the landlords they pay the rent to will be Blackstone and other corporate entities not people who live in their town or near by. Hey, it really doesn’t matter who you pay your rent to, right? right? ………. right? Wanna bet?

  9. WallaWalla says:

    43% of the homes are in Arizona… but does Arizona have much of a future?

    Arizona has some daunting environmental challenges to overcome, especially considering future climate projections. Wind storms, heat waves, and droughts all pose significant risks which will increase the cost of living. The water situation is particularly foreboding.

    Phoenix may not survive climate change
    http://www.salon.com/2013/03/14/tk_5_partner_5/

    • RW says:

      Good observation. Arizona won their water lawsuit against California et al to gain more water from the Colorado River but they had to accept the condition that, if the river runs low, they must be first to accept cuts.

      Virtually every South Western city from Phoenix and Tucson to Albuquerque is living on the knife’s edge: They have over-mined their aquifers and the water from both the Colorado and Rio Grande river basins is fully subscribed (actually oversubscribed but why quibble).

      Arizona has a future, of that I have little doubt, but how much more growth it can support is another question. Add to that the observations of others up-thread WRT the difficulty of managing multiple rental properties at a distance (never mind whether Blackrock in fact has any expertise in doing so) leaves a lot of this offering in very questionable territory.

      Maybe it will fly, maybe it won’t, but personally I wouldn’t touch it with a fork.

  10. lburgler says:

    Oh man. Wow. Hair of the dog, eh Johnny?

  11. gc says:

    Is the bond backed by the rental properties, or just the rents?
    There is 100% occupancy; so, the particular rental properties were cherry-picked, no?
    Blackstone buys the homes for not quite $140k each, and makes them rental ready for not quite $25k each, but it has been 11-17 months since purchase; so are any carrying costs chargeable to the rents which pay the bondholders?
    An opinion says that the homes are now worth $200k each, average; does this opinion reflect that the neighborhoods were chosen for clustering rentals, and thus the neighborhoods will change from owned to rental?
    Why isn’t Blackstone required to guarantee payments of all principal and interest to the bondholders?
    The accompanying written article had statements, like properties were rented and occupied within 60 days of foreclosure auction, which I hear as a lie to the gullible; why can’t we have a better press corp?

  12. BuildingCom says:

    The last I heard, the vacancy rates are in excess of 50%. BS substantially overpaid for these depreciating houses.

    This is a another disaster in the making for the housing debacle.

  13. Wade says:

    Does Arizona have much of a future?
    I have friends and relatives there, and it is a nice place to visit, but the state is basically a hot dust bowl filled with retirees. Most employment comes from serving the retirees one way or the other, through government services, health care, retail sales and food services. It is a right-to-work state with very low wages (nice for retirees, not so good for workers), has basically no restrictions on guns, and a fairly poor population that hates taxes, so you know the schools and state services are good.
    With all these things going for it, it is obvious to anyone trying to sell rental home-backed securities to Wall Street investors, that people will soon be flocking to the state and standing in line to rent $200,000 houses while waiting for their job application at Circle-K to be processed.
    The real question is, how is Blackstone going to make money and stick someone else with the bill when this “investment” goes bust?

  14. LeftCoastIndependent says:

    A high risk investment is supposed to pay better than this. Much better off just buying a house yourself and renting it out.

    • DeDude says:

      Problem is that companies have been betting up prices such that it is no longer possible to make any money that way. But how can those companies make any money if they purchase houses at way to high a price – you ask? That is a good question. Do you remember the good days of CDO’s backed by rotten mortgages; who made money and who lost money on those?

    • BuildingCom says:

      That’s a novel thought but cap rates are negative at current grossly inflated asking prices of resale housing.

  15. Alex says:

    While I agree with RW in general, there actually is quite a bit of water in the west that is used for agriculture and could easily be reclaimed. Of course there are political issues, but when water starts being rationed, it will happen.

    I’m speaking specifically about CAFOs – Concentrated Animal Feed Operations. The definition has been expanded to include things like dairies. I live in Idaho. When I moved here in the 80s, the hot dry climate of southern Idaho didn’t support many dairies. It made more sense to place them in cooler, damper locations like Wisconsin and New York. By some measures, Idaho is now the No. 3 dairy state in the country, and the dairies are concentrated in the hottest, driest part of the state. They came here for the lax environmental regulations. They will leave if we run out of water.

    Idaho exports most of its dairy output, and it takes about 8 gallons of water to create one gallon of milk. There is a lot of water to be reclaimed here. Moreover, these CAFOs don’t employ very many people, so if they do go away, it is unlikely to cause much of a ripple in the housing market. Arizona is different, of course, and worse, but in spite of the tremendous political power these CAFOs wield, they will start scaling back once we experience real water problems.

    I would never invest in one of these Blackstone securities, but I think we will keep finding water for these homes.

    • BuildingCom says:

      Water isn’t going to make these depreciating houses cashflow. It’s going to require tenants. A lot of them….. and they don’t exist at the rates required to make these houses cashflow.