Blackstone (NYSE:BX) has become well-known since the financial crisis for its large, bullish bet on US housing. The private-equity firm has spent over $7.5 billion to acquire roughly 40,000 homes, mostly in foreclosure. The firm then spends some money to refurbish the homes and rents them out. With many Americans hesitant to buy homes because of fears of prices falling again or an unavailability of credit, rental rates have soared, eclipsing comparable mortgage payments in some locales. These trends have pushed home-ownership rates to generational lows.
Starting large scale purchases in 2011, Blackstone has absolutely nailed this trade, buying homes when they were extremely cheap, and locking in great rental rates thanks to the surplus of potential renters. Many have wondered how Blackstone would exit this trade when it felt the market was beginning to show signs of excess, given the massive size of its position. This week, we have gotten news that suggests Blackstone may be starting to shift its view on housing.
Blackstone is preparing to sell $500 million in rent-backed securities. These bonds will be similar to mortgage-backed securities, which played the leading role in the financial crisis. MBS bonds are backed by the monthly mortgage payments of homeowners. These bonds will instead be backed by monthly rent paid by the renters. Historically, mortgage payments have been more reliable than rental payments since renters have no ownership of the home and plan on leaving the home at the end of the lease (or after a subsequent renewal) anyway. As such, market participants do expect these bonds to offer a higher yield than comparable MBS. However, the offering is planned to have enough subordination so that the top tranche will garner the coveted "AAA" rating.
These bonds allow a transfer of risk from Blackstone partners to bondholders. If renters of these $500 million homes fail to meet payments, bondholders suffer, and declining home prices will impact their recovery of principal. Blackstone has not stated what it will do with the $500 million it raises. It can use some of the funds to pay dividends to partners and even use some to buy new homes to rent out and later securitize. However, it is clear BX is shifting risk from its investors to bondholders when it comes to the value of its rental-home unit.
Clearly, it is important to note that after this deal, BX will still have a $7 billion net-long position on housing. It is difficult to construe the firm as negative on housing, rather the best reading on this action is that it is "less bullish." Also just because Blackstone nailed the bottom, it does not mean that the firm will nail the housing top, though given their track record, it is a noteworthy action. The widespread securitization that began after 2002 proved to be a sign of an excess in the housing market, as the smartest players sold their risk to unsuspecting market participants. Perhaps someday, we will look back at this rental-back securitization as a sign that housing once again got ahead of itself in 2013. In that case, I wouldn't want to be long homebuilders (NYSEARCA:XHB).
Investors should never make an investing decision solely based on the decision of another investor, but it can be useful to use another's view to better color one's opinion. Housing bulls may want to take a moment to reconsider their optimism, given decreasing optimism from Blackstone. It never hurts to critically analyze one's views after all!