Blackstone Funding Largest U.S. Single-Family Rentals

By John Gittelsohn & Heather Perlberg

Oct 23, 2013 11:31 AM ET

Steve Schwarzman’s Blackstone Group LP (BX) has spent $7.5 billion acquiring 40,000 houses in the past two years to create the largest single-family rental business in the U.S. The private-equity firm is now planning to sell bonds backed by lease payments, the latest step in turning a small business into a mature industry.

Deutsche Bank AG (DBK) may start marketing almost $500 million of the securities as soon as this week, according to a person with knowledge of the transaction. The debt will include a portion with the highest investment grade from at least one ratings company, according to another person. Both asked not to be identified because the deal isn’t public.                   

Family Houses in U.S.

Family Houses in U.S.
Andrew Harrer/Bloomberg
Rising home values combined with higher mortgage rates are making it more expensive for homebuyers to compete for a tight supply of properties on the market.
Blackstone has led hedge funds, private-equity firms and real estate investment trusts raising about $20 billion to purchase as many as 200,000 homes to rent after prices plunged 35 percent from the 2006 peak. The largest investors, seeking to profit from rebounding prices and rising demand for rentals among millions of Americans who went through foreclosure or can’t qualify for a mortgage, are looking to the bond market for capital to buy more properties and increase returns with borrowed money.
Securitization is the next step in the evolution of the single-family rental business,” said Rob Bloemker, chief executive officer of investment firm Five Ten Capital LLC, which got a $100 million credit facility from Deutsche Bank in April to buy homes. “It brings consistent and conforming standards to lending, which will help bring larger pools of capital in and get comfortable investing in these types of loans.”

Debt Underwriters

JPMorgan Chase & Co. and Credit Suisse Group AG also are arranging the debt, which will be tied to properties in most of the 14 markets where Blackstone owns homes, said one of the people. Moody’s Investors Service, Kroll Bond Rating Agency and Morningstar Inc. are grading the debt.
The person with knowledge of the transaction wouldn’t specify which rating company has assigned its top rating to the bonds. That grade is higher than Standard & Poor’s rating of U.S. government debt. The Financial Times reported earlier today that the deal would get a AAA grade.
Amanda Williams, a Deutsche Bank spokeswoman, declined to comment as did Oriane Schwartzman for New York-based Blackstone, JPMorgan spokesman Justin Perras and Credit Suisse spokesman Jack Grone.
Blackstone, which started its Invitation Homes division in April 2012 to buy and renovate properties to lease, is double the size of American Homes 4 Rent (AMH), the second-largest single-family home landlord.

The world’s largest private-equity firm has been spending about $100 million a week on properties in states such as California, Arizona, Florida and Nevada since the start of this year, when Wall Street increased lending to the sector. Deutsche Bank, based in Frankfurt, has arranged at least $3.6 billion of credit lines for Blackstone’s home-buying unit. What’s This?

“We were the first people who actually could borrow against these because people said, ‘Well, what’s going on here? What is this?’” Schwarzman said last week during an earnings conference call with investors and analysts.

The firm has bought most of the properties individually, including through foreclosure auctions and short sales.

“You know how hard it is for you to buy a house?” the Blackstone chairman said. “I mean, you’ve got to negotiate with somebody, you’ve got all kinds of stuff, you’ve got the title. We did it for 40,000 houses.”

Price Gains

Investment firms have been buying amid the biggest home price gains in seven years. The S&P/Case-Shiller index of property values in 20 cities increased 12.4 percent in July from a year earlier, the biggest advance since February 2006. While real estate values nationally are still 21 percent below their peak, investors’ mass purchases are helping push up values in cities hardest hit by the property crash, with a 27.5 percent surge in Las Vegas and gains of 18.5 percent in Atlanta in July from a year earlier.

Rising home values combined with higher mortgage rates are making it more expensive for homebuyers to compete for a tight supply of properties on the market. The average rate on 30-year home loans reached 4.58 percent in late August, a two-year high, according to McLean, Virginia-based Freddie Mac, as Federal Reserve policy makers signaled they may begin to curb bond purchases.

Homeownership Rate

The Federal Housing Administration has also put in place stricter guidelines reducing credit availability and increasing costs for first-time buyers. That could also work to the advantage of institutional landlords, said Jack Micenko, an analyst at Susquehanna International Group LLP.

Renters could stay renters longer than in prior economic recoveries,” he said in a report yesterday.

The homeownership rate declined to 65 percent in the first half of this year from a peak of 69.2 percent in June 2004. The level is expected to stabilize at about 63 percent, adding more than 2 million households to the rental population, according to Morgan Stanley analyst Haendel St. Juste.

Securitizing rental cash flow will be “the most innovativenew mortgage-related product since the 2008 financial crisis, which was fueled by creative financing of home loans, according to Laurie Goodman, director of the housing finance policy center at the Urban Institute in Washington.

Wall Street created $1.2 trillion in non-agency mortgage securities in both 2005 and 2006, helping funnel risky loans to borrowers that inflated the housing bubble. Issuance collapsed as defaults soared and real-estate values plunged.

Low-Risk Opportunity

The new bonds would provide a low-risk opportunity for investors seeking higher yields than the government-backed mortgages that account for about 90 percent of the home-loan market, Goodman said.

“The investor appetite is certainly there for new products,” she said in a telephone interview.

“Having these bonds come out into the public capital markets could buoy the industry for more financing options going forward and potentially for lower cost of capital for operators,” said Dennis Cisterna, co-head of the opportunistic-finance division at Irvine, California-based Johnson Capital, which arranges loans to rental investors.

Institutional investors have already tapped multiple financing sources for buying homes. American Homes 4 Rent obtained a credit facility for up to a $1 billion from Wells Fargo & Co. and also went public in July. Silver Bay Realty Trust Corp. (SBY) got a loan in May from Bank of America Corp. and JPMorgan after selling shares to the public last year.

Higher Yield
Raising capital from rental securities would require a higher yield than other types of asset-backed securities with a longer history, according to Bryan Whalen, managing director of the U.S. fixed-income group at TCW Group Inc. in Los Angeles, which oversees $130.8 billion.

Financing this asset class through securitization is untested,” Whalen said in a telephone interview. “When you take into account the operational risks, the property management risks, the liquidity risks -- which are huge -- you’re requiring more coupon or income than you might normally have.”

Blackstone plans to hold onto its rental homes for years to take advantage of rising prices amid an expected shortage of housing following years of underproduction of new residences after the financial crisis, according to Schwarzman.

“We took a strategy of wanting to be as patient as possible for what will be a very long-cycle investment,” Schwarzman said during last week’s earnings call.

“There’s a real dislocation and we think that this is a very sensible, long-term way to develop our business.”

Wall Street's Best Minds


A Shift in Country Bets


A Wells Fargo Advisors strategist writes that he is moving stock exposure to Japan and several European nations.


Much of Asia's equity market performance this year has followed Beijing's policies to restructure the Chinese economy. The equity markets of Hong Kong and Australia tend to move closely with economic developments in China, and we added these markets as favorites, while international markets seemed too pessimistic on China.

The early-year caution about China eventually gave way to optimism that has supported Hong Kong and Australian equity markets, but we think the optimism has become excessive, considering the challenges that China faces in 2014.

We consequently removed Hong Kong and Australia from our list of favorite developed equity markets, retaining Japan but otherwise holding a mostly European emphasis.

China's economy has been slowing since early 2010, but since last year we have expected the second half of 2013 to improve. Part of the problem was the global economic slowdown, which weakened orders for Chinese export goods.

Simultaneously, China's leaders realized that their export-driven economy might be less vulnerable to world economic shocks if China can better balance the contributions from exports and domestic spending. The change is potentially profound for China and for the countries that supply China's manufacturing industries. As Chinese manufacturers downsize and reduce exports, local unemployment should rise.

Negative spillovers also are very likely to wash over Hong Kong, a principal port for Chinese manufactures, and Australia, which supplies China with many industrial raw materials. China's new and reform-minded government administration took over in March 2013 and quickly prompted questions about how much economic disruption China might create – both for itself and for its main supplier countries.

Uncertainty about the pace and effects of China's reforms, plus sluggish global trade early this year, encouraged investors to sell Asian currencies and securities, and those of countries that supply China. We thought the negative reaction too strong. After all, global trade is gradually improving, and so is U.S. household spending. These developments boost orders for China's manufactures. In addition, we think it important to remember that China's leaders are managing the rebalancing process.

The Chinese economy is likely to slow – we think it must slow, if Beijing is as serious about reform as government statements all year suggest -- but Beijing appears to be watching carefully the trends in unemployment and spending. Thus, when the economy seemed to be slipping too quickly during the spring, Beijing implemented new government spending and monetary easing, which stabilized the economy.

As China's economy gathered pace in mid-summer and into autumn, the pessimism about other countries linked to China's economy also faded quickly. Two other factors have helped: The U.S. Federal Reserve relented in September on a threat to reduce its monetary stimulus. The September decision extended the prospect of a large increase in the supply of U.S. dollars, weakening the dollar's value and broadening the potential attractiveness of international investments.

Second, the end of Europe's economic recession at mid-year injected hope that China's single largest regional customer will begin buying Chinese goods at a faster pace.

We think the enthusiasm for Australia and Hong Kong has now gone too far. Their domestic economies have been unimpressive. Hong Kong's retail sales have weakened. Also, Australia's mining sector figures need years to downsize, but Australia's other sectors have failed to pick up the spending slack in the economy. The external factors supporting the optimism also seem transitory.

We believe the Federal Reserve inevitably will begin removing economic stimulus and so add a headwind for international investment returns. In addition, we think global trade will gain only slowly next year: U.S. and European economic growth, while now both positive, may improve only gradually. (We consider, for example, that European bank loans are still unchanged or contracting in many countries.)

Most importantly, we think the optimism about China's recent economic improvement risks are being extrapolated too far. China's second-half rebound has been a deliberate government policy to stabilize the economy: In late summer, Beijing announced it was dusting off some previously shelved building plans for railroads, sewers, and other infrastructure projects.

China seems to have many such plansindeed, we think China has years and trillions of dollars in infrastructure work yet to finish – but Beijing's rebalancing plans ultimately are about stimulating service-sector development and consumer spending, which could take years to complete.

In the meantime, we believe Beijing will continue to use government spending for building projects and bailouts (where needed) to avoid the social pressures of rising unemployment.

Investment recommendations

International investors extrapolate China's outlook even further, and considering the lackluster domestic spending outlook in Hong Kong and Australia, we removed both from our list of favored or satellite markets. Both seem likely to see increased price volatility in the coming months.

We maintain some equity exposure within Asia, namely in Japan and, on the emerging-market side, Taiwan. These two economies have a more balanced economic exposure, meaning that they depend on business in the United States and Europe, at least as much as they do on China.

By contrast the economies of Australia and Hong Kong are more China-centric. The change has implications for our recommended investment strategy. In general, we suggest splitting international equity positions into developed and emerging and, within each category, to divide the allocation equally between a diversified position (the core) and the satellite group.

In dropping Hong Kong and Australia, we thereby recommend liquidating Australian and Hong Kong equity positions and reallocating the proceeds equally among our remaining satellite picks (Japan, Germany, Belgium, and Switzerland), or to reallocate the proceeds to a core and broadly diversified position in developed-market equities.

Christopher is chief international strategist with Wells Fargo Advisors, a unit of Wells Fargo & Co.
Copyright 2013 Dow Jones & Company, Inc. All Rights Reserved

viernes, octubre 25, 2013



Japan’s Tax-Hike Test

Koichi Hamada

24 October 2013

 This illustration is by Chris Van Es and comes from <a href=""></a>, and is the property of the NewsArt organization and of its artist. Reproducing this image is a violation of copyright law.TOKYO As October began, Japanese Prime Minister Shinzo Abe announced that his government would raise the country’s consumption-tax rate from 5% to 8% next April, and presumably to 10% 18 months after that. The contrast with what is now happening in the United States could not be sharper. As US President Barack Obama’s domestic opponents resist his signature health-care legislation, owing to the wealth transfers that it implies, Japanese bureaucrats are trying to recover the authority to administer tax revenue to support social-welfare programs.

 There are many arguments for raising Japan’s consumption-tax rate. Japan’s government has a huge debt burden, and its consumption-tax rate is far lower than the value-added-tax rates that prevail in Europe. At the same time, the effective corporate-tax rate in Japan is higher than it is elsewhere, making it difficult for Japan to attract investment, foreign or domestic. In order to survive international tax competition – and thus be able to rely on corporate taxes as a source of revenueJapan’s corporate-tax rate should be lowered in the long run.
Nonetheless, with Japan’s economy just beginning to recover from more than 15 years of stagnation, such a steep consumption-tax hike is not advisable. In fact, such a large increase has seldom if ever – been attempted, owing to the risk that it would spur consumers to spend before it takes effect, thereby reducing future consumption. Moreover, any sudden rise in the tax burden results in deadweight losses.
A consumption-tax hike should be timed in such a way that it does not suffocate the economic recovery that Abe’s bold economic program, dubbed “Abenomics,” is facilitating. Western economists typically favor gradual tax increases; Jeffrey Frankel, for example, recommends a pre-announced plan to increase the tax rate by, say, one percentage point annually for five years. But Japanese policymakers, media, and academics largely continue to favor a sudden and substantial hike.
Last year, when Japan’s Diet passed the legislation to raise the consumption tax, it included a provision calling for the plan to be reevaluated if economic conditions required it. When the Cabinet Office called upon 60 business leaders, academics, and economists (including me) to perform such an evaluation, more than 70% favored the hike.
But the selection of experts reflected a clear bias toward the finance ministry’s views. In fact, the ministry has used its “informational campaign” to shape public discussion, convincing scholars, business economists, and the general public to be more concerned about keeping the budget deficit under control than about the effects of a negative demand shock. This is a typical example of what economists like Joseph Stiglitz callcognitive capture.”
For more than two decades – a period characterized by chronic recession and deflationJapan has retained its position as the world’s richest country in terms of net wealth abroad. At the end of last year, Japan’s net international wealth amounted to ¥296 trillion ($3 trillion). But Japan’s government is believed to be the world’s poorest, with the finance ministry reporting that the gross debt/GDP ratio exceeds 200%.
That is an exaggeration. For example, Ichizo Miyamoto, a former senior finance-ministry official, claims that, accounting for the government’s assets, Japan’s net debt/GDP ratio is below 100%, similar to that of the United States.
The validity of the finance ministry’s position on the tax increase was called into question by the decline in Japan’s Nikkei index of stock futures after Abe’s October 1 announcement. To be sure, the budget crisis in the US caused most stock futures to decline on that day. But, if the ministry’s view of the consumption tax was correct, Nikkei futures would have gained more – or at least lost less – than futures in other countries. Instead, the index declined three times more steeply than others.
And yet, while the consumption-tax increase is not ideally timed, I am not entirely pessimistic about its impact. The Mundell-Fleming framework – which describes the short-run relationship between the nominal exchange rate, interest rates, and output in an open economyindicates that, under Japan’s flexible exchange-rate regime, the post-hike decline in demand could be addressed relatively easily with more expansionary monetary policy.
That is why Bank of Japan Governor Haruhiko Kuroda should respond accordingly if the tax increase has a deflationary impact. In doing so, he would avoid the criticism that former Bank of England Governor Mervyn King faced for supporting a consumer-tax hike in 2011 but failing to use monetary policy to offset its recessionary effects.
Just a year ago, former Prime Minister Yoshihiko Noda attempted, despite a deep recession, to raise the consumption tax without monetary easing – a strategy that could have brought only continued economic stagnation. Abe must not make the same mistake. If Japan’s government can overcome a demand setback after the tax increase takes effectleaving the economy functioning smoothly and initiating a recovery in government revenueAbe will be able to declare Abenomics an unequivocal success.

Koichi Hamada, Special Economic Adviser to Japanese Prime Minister Shinzo Abe, is Professor of Economics at Yale University and Professor Emeritus of Economics at the University of Tokyo.

Wonder Land

Henninger: Obama's Credibility Is Melting

Here and abroad, Obama's partners are concluding they cannot trust him.

By Daniel Henninger

Oct. 23, 2013 7:14 p.m. ET

The collapse of ObamaCare is the tip of the iceberg for the magical Obama presidency.

From the moment he emerged in the public eye with his 2004 speech at the Democratic Convention and through his astonishing defeat of the Clintons in 2008, Barack Obama's calling card has been credibility. He speaks, and enough of the world believes to keep his presidency afloat. Or used to.
All of a sudden, from Washington to Riyadh, Barack Obama's credibility is melting.

Amid the predictable collapse the past week of's too-complex technology, not enough notice was given to Sen. Marco Rubio's statement that the chances for success on immigration reform are about dead. Why? Because, said Sen. Rubio, there is "a lack of trust" in the president's commitments.
"This notion that they're going to get in a room and negotiate a deal with the president on immigration," Sen. Rubio said Sunday on Fox News, "is much more difficult to do" after the shutdown negotiations of the past three weeks.

Sen. Rubio said he and other reform participants, such as Idaho's Rep. Raul Labrador, are afraid that if they cut an immigration deal with the White House—say, offering a path to citizenship in return for strong enforcement of any new lawMr. Obama will desert them by reneging on the enforcement.

When belief in the average politician's word diminishes, the political world marks him down and moves away. With the president of the United States, especially one in his second term, the costs of the credibility markdown become immeasurably greater. Ask the Saudis.
Last weekend the diplomatic world was agog at the refusal of Saudi Arabia's King Abdullah to accept a seat on the U.N. Security Council. Global disbelief gave way fast to clear understanding: The Saudis have decided that the United States is no longer a reliable partner in Middle Eastern affairs.

The Saudi king, who supported Syria's anti-Assad rebels early, before Islamic jihadists polluted the coalition, watched Mr. Obama's red line over Assad's use of chemical weapons disappear into an about-face deal with Vladimir Putin. The next time King Abdullah looked up, Mr. Obama was hanging the Saudis out to dry yet again by phoning up Iran's President Hasan Rouhani, Assad's primary banker and armorer, to chase a deal on nuclear weapons. Within days, Saudi Arabia's intelligence chief, Prince Bandar, let it be known that the Saudis intend to distance themselves from the U.S.

What is at issue here is not some sacred moral value, such as "In God We Trust." Domestic politics or the affairs of nations are not an avocation for angels. But the coin of this imperfect realm is credibility. Sydney Greenstreet's Kasper Gutman explained the terms of trade in "The Maltese Falcon": "I must tell you what I know, but you won't tell me what you know. That is hardly equitable, sir. I don't think we can do business along those lines."
Bluntly, Mr. Obama's partners are concluding that they cannot do business with him. They don't trust him. Whether it's the Saudis, the Syrian rebels, the French, the Iraqis, the unpivoted Asians or the congressional Republicans, they've all had their fill of coming up on the short end with so mercurial a U.S. president. And when that happens, the world's important business doesn't get done. It sits in a dangerous and volatile vacuum.

The next major political event in Washington is the negotiation over spending, entitlements and taxes between House budget chairman Paul Ryan and his Senate partner, Patty Murray. The bad air over this effort is the same as that Marco Rubio says is choking immigration reform: the fear that Mr. Obama will urge the process forward in public and then blow up any Ryan-Murray agreement at the 11th hour with deal-killing demands for greater tax revenue.
Then there is Mr. Obama's bond with the American people, which is diminishing with the failed rollout of the Affordable Care Act. ObamaCare is the central processing unit of the Obama presidency's belief system. Now the believers are wondering why the administration suppressed knowledge of the huge program's problems when hundreds of tech workers for the project had to know this mess would happen Oct. 1.

Rather than level with the public, the government's most senior health-care official, Kathleen Sebelius, spent days spewing ludicrous and incredible happy talk about the failure, while refusing to provide basic information about its cause.

Voters don't normally accord politicians unworldly levels of belief, but it has been Barack Obama's gift to transform mere support into victorious credulousness. Now that is crumbling, at great cost. If here and abroad, politicians, the public and the press conclude that Mr. Obama can't play it straight, his second-term accomplishments will lie only in doing business with the world's most cynical, untrustworthy partners. The American people are the ones who will end up on the short end of those deals.

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