Investors in the second-ever sale of securities backed by U.S. rental homes demanded higher relative yields to buy the debt this time around, a person with knowledge of the transaction said.
Colony American Homes Inc., the third-largest single-family landlord in the U.S., sold $291 million of top-rated notes today at 120 basis points more than a benchmark rate, said the person, who asked not to be identified, citing lack of authorization to speak publicly. The transaction totaled $513.6 million.
Blackstone Group LP (BX:US)’s Invitation Homes, the largest competitor to the Colony Capital LLC business, sold similar debt in a $479.1 million offering in November at a 115 basis-point spread.
Most of the Colony securities were sold below par at spreads wider than those sought on Blackstone’s notes even as they offer more loss protection to investors. Bond buyers are weighing the risks and rewards of the new market, which American Residential Properties Inc. and American Homes 4 Rent (AMH:US) have said they will also seek to tap for financing. JPMorgan Chase & Co. and Credit Suisse Group AG managed Colony’s offering.
Institutional investors have spent more than $20 billion scooping up U.S. properties to lease out over the last few years. They’ve taken advantage of real-estate prices that fell by more than one-third from the 2006 peak, and rising demand for rentals among Americans who lost their houses in the foreclosure crisis. Their buying, funded mostly by equity and credit lines from banks, has helped spur a recovery in housing.
Moody’s Investors Service, Kroll Bond Rating Agency and Morningstar Inc. plan to grant top ratings to portions of the Colony deal with loss protection known as credit enhancement of 43.3 percent, compared with 41.8 percent in the Blackstone deal. The protection is created by other slices that would incur losses first.
The notes in both deals carry floating rates, with those sold by Colony having an initial maturity of three years, compared with two years in the Blackstone transaction. Maturities of both sets of bonds can be extended to five years.
The $84.1 million portion of the Colony deal first in line for losses was sold at a margin of 350 basis points more than the one-month London interbank offered rate, down from 365 basis points, or 3.65 percentage points, on the junior-ranking notes in Blackstone’s offering, the person said.
The relatively smaller size of the class in the Blackstone offering means that it can be wiped out faster by losses if the underlying homes need to be sold to repay investors’ principal.
Wall Street ultimately may sell more than $20 billion a year of rental-home bonds, according to Ryan Stark, a director at Deutsche Bank AG, which structured and helped sell the first transaction. Bank of America Corp. analysts forecasted $4 billion of issuance this year in a 2014 outlook, while Barclays Plc said sales “could easily be” $3 billion to $5 billion.
Caroline Luz, a spokeswoman for Colony with Owen Blicksilver Public Relations, said she had no comment on its offering earlier today. She didn’t immediately return a telephone message seeking comment after the deal priced.
To contact the reporter on this story: Jody Shenn in New York at firstname.lastname@example.org
To contact the editors responsible for this story: Shannon D. Harrington at email@example.com Richard Bravo, John Parry