Blackstone's plan to cash in on a $10 billion housing bet

Blackstone Group’s (BX) Invitation Homes, the country’s largest owner of single-family residences, is planning to go public next year. The goal is to monetize Blackstone’s nearly $10 billion investment in residential properties that began when the real estate market collapsed during the housing bust, sparking the worst U.S. economic downturn since the Great Depression.

Dallas-based Invitation announced its IPO plans in a confidential filing Tuesday with the Securities and Exchange Commission, according to a person familiar with the deal. Blackstone, whose real estate holdings top $100 billion, probably will sell very little of its stake in Invitation during the IPO. Invitation and Blackstone declined to comment for this story. Details of the IPO were reported earlier by The Wall Street Journal.

According to a recent report by financial services firm KBW, Blackstone rapidly vaulted to the top of the home rental market, acquiring 48,000 properties at bargain prices since April 2012, 70 percent of which are on the West Coast and Florida. Blackstone also was the first firm to issue bonds backed, or securitized, by thousands of rental payments. These are similar to the mortgage-backed securities that many blame for exacerbating the financial crisis. Invitation’s rivals in the home-rental business have also issued the securities.

“Many times, the kinds of homes that these firms are renting out may be larger, may have more high-end finishes than a comparable single-family rental home,” said Sarah Edelman, a housing market expert at the left-leaning Center for American Progress. “Traditionally, single-family rental has been among our more affordable sources of rental housing. There’s a risk here if you move more toward the luxury end, possibly at the expense of our more affordable [homes].”

KBW estimates that Invitation invests about $200,000 per home, which is above the $170,000 industry average, because it focuses on upscale real estate markets with good school systems that can command higher rents. The U.S. has approximately 16 million single-family rental homes, 45 percent of which are owned by investors with just one property, while 1 percent are in the hands of mega-owners with 1,000 or more houses, like Invitation. Larger players have been buying out smaller institutional investors in recent years. 

The timing of Invitation’s IPO also is curious. Several of its rivals, including American Homes 4 Rent (AMH), Starwood Waypoint Residential Trust (SWAY) Silver Bay Realty Trust (SBY), have been public for several years. Moreover, data from CoreLogic shows that home prices have surged 30 percent since 2010, making bargains harder to find. CoreLogic expects prices to rise another 5.4 percent over the next 12 months.

“It will be interesting to see how their profit model fares now that it’s not easy to scoop up affordable stocks,” Edelman said. “I do have concerns that when companies are locked into generating a certain return or in their effort to attract broad investment capital, they’ll need to push up rents.”   

Some media accounts have said some Invitation renters have faced substandard living conditions, but it’s hard to get a clear view of how Invitation operates. That’s because its holdings -- unlike multifamily dwellings such as apartment buildings -- are spread out, and tenants aren’t usually organized. Also, owners of single-family homes don’t have to meet standards as stringent as those their multifamily counterparts do, according to Edelman.

Another thing owners have going for them are the high prices for so-called starter homes in markets such as Miami and Atlanta that would normally attract first-time homebuyers. Said Edelman: “There will still be potential homeowners on the sidelines for some time.”

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    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.