A major player in the burgeoning business of renting single-family homes is cashing in on its portfolio — to raise money to buy more.
Colony American Homes — an arm of Santa Monica-based Colony Capital LLC — plans to issue $513.6 million in bonds backed by the rental income on 3,400 homes it owns, including 840 in California, according to reports by ratings agencies Thursday.
The deal comes about a year after Colony, along with a few other private equity and Wall Street-backed firms, scooped up thousands of homes on the cheap in the wake of the housing crash. They plan to transform the rental business, now largely a mom-and-pop operation, into a well-oiled institutional machine.
Over the last two years, a dozen big investors have spent more than $20 billion accumulating about 130,000 homes, according to estimates in a January report by investment bank Keefe, Bruyette & Woods. But their buying has slowed lately, partly because of rising home prices and partly because some companies have run low on cash.
Selling bonds — debts to be paid back with the rent from thousands of tenants — is one way to refill the till. If Colony and others are successful in the bond market, they could kick off a new round of buying, companies and analysts say.
A healthy market in rent-backed bonds could spark a "paradigm shift" in the U.S. housing market, wrote KBW's Jade Rahmani in January. The bonds could pull more investors into the sector, raising home prices and making the entire housing industry less cyclical.
"The investment and lending opportunities are immense, and perhaps just beginning," he wrote.
The sector has its critics, including housing advocates who say the big investors are crowding out first-time home buyers with all-cash offers and driving prices out of reach. But analysts expect it could grow to a $100-billion industry.
Colony is the second big player in the buy-to-rent business to try and tap the bond market.
Blackstone Group — which through its Invitation Homes unit owns an estimated 41,000 houses nationwide — raised $479 million in October by selling bonds on some of its houses. Unlike Colony, Blackstone did not use the proceeds to buy more homes.
Colony declined comment Thursday. But Colony American Homes Chief Executive Justin Chang said in November that a securitization deal would "further our ability to actively acquire homes."
Other would-be bond sellers have the same idea.
American Homes 4 Rent, an Agoura Hills-based rental firm that owns about 25,000 houses nationwide, said last week that it's talking with ratings agencies about a bond offering. The company hopes to go to the market within 60 days. Until then, it is slowing down purchases to preserve capital.
"Cash right now is a commodity," Chief Executive David Singelyn told analysts. "We're hoping to have more of it soon, but we don't right now."
American Homes 4 Rent did not return calls seeking comment on Colony's bond offering.
The Colony bond issue is something of a test case for the industry, and ratings agencies are sorting out how to assess the bonds. Moody's, Morningstar and Kroll Bond Rating Agency all gave AAA ratings to a $291 million Class A slice of the bonds, in part based on Colony's management of its holdings so far.
"(Colony) has demonstrated its ability to effectively handle the day-to-day business of managing a national single-family rental platform," Moody's wrote.
Colony hopes to close on the bond sale next month, Morningstar said.
The challenge of efficiently managing thousands of scattered single-family homes has long scared big institutional money away from the rental sector. But companies such as Colony and American Homes 4 Rent say improved technology and economies of scale are helping them overcome that.
Another risk of securitization is that rents fall or vacancies rise, leaving less money to pay back the bonds. But industry-watchers say they don't see either of those scenarios happening any time soon. Many would-be home buyers are priced out of the market or prefer to rent. That means strong demand for rental homes, said Dave Bragg, who heads the residential research team at Green Street Advisors, a real estate research firm based in Newport Beach.
"I don't think revenue will prove to be very volatile," he said in an interview last week. "Occupancy rates should stabilize. We should see some rent growth."
And if that happens, you may see more big players cashing in and shopping for more.
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