Wall Street Firms Become Landlords; Companies Rent Out Single-Family Homes They Bought During Foreclosure Crisis

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Los Angeles Times
By: Alejandro Lazo and Andrew Tangel
August 1, 2013

Prepare to send your rent check to a Wall Street address.

After buying tens of thousands of single-family homes in beaten-down markets, major investment firms have quickly become major landlords -- and analysts say they're in it for the long haul.

New research from Morgan Stanley predicts that the buy-to-rent sector will grow from $17 billion now to $100 billion over the next several years. These companies have proved the business model viable and will be able to get debt financing to grow their stake in the suburbs, the analysts wrote.

Blackstone Group, the biggest player in the emerging industry, has already spent $5 billion through a subsidiary on 30,000 homes, according to the report Morgan Stanley published Wednesday. American Homes 4 Rent -- an Agoura Hills company created by Public Storage billionaire B. Wayne Hughes -- has spent $3.1 billion on a portfolio of nearly 18,000 homes.

The foreclosure crisis enabled the firms to buy distressed properties en masse, often at bargain prices. Meanwhile, individual home shoppers have often struggled to get approved for mortgages and compete with investors' cash offers.

The net effect is surging home prices -- and predictions that more Americans will turn to renting, further boosting the prospects of the new investor-landlords.

"We expect homeownership to continue to decline for the next few years," the Morgan Stanley analysts wrote. "While the stock of distressed housing has declined noticeably, it is still sizable enough to meet this growing demand for rentals."

Now on solid footing, the investment groups should be able to tap new sources of financing -- including packaging rental income streams into securities, similar to the way mortgages were bundled during the housing boom.

Many of those mortgage bonds went belly up in the subsequent crash. But analysts nonetheless see securitization as crucial for the nascent buy-to-rent industry.

In what would be the first such security, Blackstone Group is reportedly planning to bundle monthly rental payments on about 1,500 to 1,700 of the homes it owns in a deal valued at $240 million to $275 million, the Wall Street Journal said this week, citing anonymous sources. Deutsche Bank, a major packager of risky subprime loans during the housing bubble, would structure and market the rental bonds to investors.

American Homes 4 Rent, meanwhile, on Wednesday was prepping the largest public stock offering of a company leasing single-family homes. The firm hoped to raise net proceeds of $770 million to $870 million by offering 50.7 million shares expected to be priced at about $16 or $18 each. An extra $75 million worth of stock is expected to be placed privately.

With those proceeds, the company will have no major debt, according to Green Street Advisor analysts, "a major positive that provides for significant flexibility."

American Homes 4 Rent is the third and largest leasing company to become publicly traded. The first two were Silver Bay Realty Trust Corp. and American Residential Properties. Two other companies, Waypoint Homes and Colony American Homes, are also planning initial public stock offerings, the Green Street Advisors report said.

The sector's long-term profit potential remains murky. The buying sprees have given some companies a glut of rentals in certain markets, lowering the rents they can charge. Once the market stabilizes, however, these companies' profits may begin to rival those of major apartment owners, according to the Green Street Advisors report.

Jade Rahmani, an analyst with investment bank Keefe, Bruyette & Woods, said investors remain skeptical of the single-family-home rental business. Home prices have risen sharply in recent months while increases in rent prices have slowed. It's also unclear whether these companies have the kind of scale it would take to service big swaths of homes over diverse geographic regions.

But even if the long-term rental strategy flops, these companies hold large poName

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