Single-Family Rent Bonds: Will REITs Follow This Lead?


Photo: Blackstone

The Blackstone Group is gearing up to issue bonds backed by single-family home rents across its 40,000 properties. Although the publicly traded single-family real estate investment trusts are much smaller, will they follow Blackstone's lead?

An industry leader
Blackstone was among the first to see the carnage left behind by the housing crisis as an investment opportunity. It has by far been the largest investor in the space, spending more than $7 billion to scoop up a portfolio of 40,000 homes. That's double American Homes 4 Rent's portfolio of around 20,000 homes. It also dwarfs the portfolios of Silver Bay Realty Trust and American Residential Properties , which at mid-year owned around 5,500 and 4,000 homes, respectively.

Size isn't the only difference. Blackstone's portfolio is housed in a much larger financial institution that isn't guided by the legal and regulatory mandates of the REIT structure. This means that Blackstone can use revenues from other sources to build its home portfolio, and then repair and lease it out. The REITs, which are focused only on single-family homes and have to answer directly to shareholders, don't have that luxury.

Time is of the essence
That said, the housing market is slowly recovering. The bargains that were available a few years ago simply aren't as prevalent today. That's why American Homes 4 Rent blatantly stated in its prospectus that growth is more important than passing income on to shareholders. It's also why American Residential Properties still isn't paying a dividend even though it's been public since May. Silver Bay, meanwhile, pays just a token quarterly dividend of a penny a share.

Of this trio of REITs, only Silver Bay has pledged to be more generous -- but not until next year. The CEO noted in the company's second-quarter earnings call that "2014 will be the time that we've got a good, solid leased portfolio and we'll be focused on increasing our cash flow and distributing that to shareholders." That said, there's no indication of what dividend level investors should expect or exactly when. The shares yield less than half a percent today. Would a 2% yield be enough to satisfy investors and support continued acquisitions?

Financial alchemy
Blackstone's decision to issue bonds backed by single-family home rents is an interesting move. The asset manager is essentially giving away its future rent revenues in exchange for dollars today that it can use to invest. The assumption clearly has to be that Blackstone can make more money investing that money today than the rents will be worth if they were earned over time.

With American Homes 4 Rent basically saying that growth is more important than dividends, it isn't a stretch of the imagination to think that management might like to do the same thing. Issuing bonds backed by rents would allow American Homes 4 Rent to focus all of its attention on capital appreciation and boost the money it has available for investing today. That almost sounds like getting your cake and eating it, too, however, since Blackstone's bonds appear to be backed by just the rents -- not the properties.

With a portfolio about a quarter of the size of Blackstone's, American Residential Properties probably doesn't have the same scale available to issue bonds. That said, its portfolio was about 80% leased at mid-year, giving it a lot of rented homes against which to issue bonds. The company also focused heavily on portfolio growth in its second-quarter earnings release -- discussing shareholder "returns," not distributions.

In the cards?
Although Silver Bay's comments about dividends suggests that it won't go down Blackstone's bond road, that doesn't mean American Homes 4 Rent and American Residential Properties won't. Regardless of what they end up doing, though, all three will be paying close attention to Blackstone's endeavor since it could open up an entirely new funding source. If you like the idea of single-family REITs, you should be watching, too.

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