When Blackstone Group makes a play in a new sector, people pay attention.
From warehouses to life sciences to troubled casinos, the company’s deals generate headlines and typically herald major trends. But when the news broke that the investment giant was jumping back into single-family rentals with a $6 billion bet on Home Partners of America, it wasn’t quite clear what made Home Partners’ 17,000 homes worth so much.
When the deal was announced in June, unprecedented price growth and unrelenting demand for housing had been seen for almost a year. But as the summer heated up, the market had already started to cool. Rather than a trailblazer, Blackstone looked more like it was hopping on the bandwagon at the peak.
It may have appeared that Blackstone was trying to get back into the party it had left 18 months earlier, before the pandemic and the housing market’s roaring rise, when the company sold its remaining stake in Invitation Homes, which Blackstone President Jonathan Gray had built into the largest operator of single-family rentals in the U.S.
Instead, Home Partners represents a change in strategy for Blackstone. Instead of seeing America becoming a nation of renters, the firm is betting that the allure of homeownership will drive would-be buyers with poor credit and insufficient savings into rent-to-own programs.
Home Partners’ model involves buying a home and renting it to tenants on one-year renewable leases over a five-year period. The tenant then has the option to purchase the home at a preset price, which increases between 3.5 and 5 percent each year, while rents rise 3.75 percent a year.
The rationale is that the renter, who aims to buy the house from the start, is incentivized to purchase it quickly.
As soaring prices — coupled with high standards among mortgage lenders — render homeownership unattainable for a growing number of prospective buyers, Home Partners’ institutional approach could be ready for its time in the sun.
The median FICO score for Home Partners’ rent-to-own residents is 640, while almost 70 percent of homebuyers who took out new mortgages in the third quarter had credit scores above 760, according to the Federal Reserve Bank of New York.
“We’ve had a strong conviction in residential housing for a number of years, and it’s really driven by an undersupply of aggregate housing in the U.S. since the Great Financial Crisis,” said Jacob Werner, a senior managing director in Blackstone’s real estate group. “We’re giving access to housing that people wouldn’t otherwise have.”
Blackstone’s success with Invitation Homes helped usher in a flood of institutional investment into single-family homes, and many look at the Home Partners deal as the start of a broader adoption of rent-to-own programs.
“The idea of working with residents to purchase a home is not that new, to be honest,” said David Howard, executive director of the National Rental Home Council. “But they’re the first to take it to scale.”
Still, some question whether the model will work as intended once the boom times end.
“There’s definitely a market for this,” said Norman Miller, professor of real estate finance at the University of San Diego. “But how long it will last, I don’t know.”
First rodeo
In the wake of the financial crisis, as Gray was spending $125 million a week to build up Invitation Homes, his critics were throwing their support behind then-newly launched rent-to-own specialist Hyperion Homes. Among the most vocal was billionaire Sam Zell.
In an interview with The Atlantic in 2013, Zell, who was and continues to be one of the largest multifamily owners in the U.S., called the prospect of managing thousands of homes across the country “a hell of an operation to run.” Zell pointed to Hyperion, which he invested in, as a less risky way to enter the single-family market.
“You’re not buying the house until the client identifies it as the one he wants,” he said. “That’s a whole different kettle of fish.”
A year later, BlackRock and KKR took a majority stake in Hyperion, which by then had been rebranded Home Partners of America.
Home Partners flew mostly under the radar as it grew, while Invitation Homes’ portfolio and brand recognition grew significantly faster. At its peak, Invitation Homes had more than 82,000 properties in its portfolio, but backlash began to mount. Tenants spoke out about shoddy repairs, a stream of fees for everything from utilities to “convenience” charges to pay rent through an online portal. In some cases, aggrieved tenants reached out to Blackstone executives including CEO Stephen Schwarzman directly for help, according to accounts cited by the New York Times.
After Invitation Homes became a publicly traded REIT in 2017, Blackstone began divesting its shares. By the time its final stake was sold in late 2019, it had made $7 billion over the course of the seven-year investment, but it also had a target on its back — so much so that it closed out its investment in Invitation Homes with a statement “correcting the record” on a company it no longer had any stake in.
“Some have made false, misleading claims about Invitation Homes’ business and practices, but here are the facts,” the statement read. “We are proud of Invitation Homes and the positive impact it has had on local communities.”
Meanwhile, by 2018, Home Partners had quietly spent $2 billion buying homes for more than 12,500 renters. Less than three years later, a competitive bidding process for the firm saw Blackstone prevail with its all-cash, $6 billion offer.
“One of the benefits about this business is that the residents are going to take us there,” said Blackstone’s Werner. “People are really good at this — people know what’s a fair value for their homes and what isn’t.”
Among Home Partners’ biggest allies has been brokerage giant Realogy. In 2019, Home Partners and Realogy launched an iBuying joint venture called RealSure, which provides sellers with instant cash offers to buy their homes. The venture hired its first CEO in October, but Werner stressed that RealSure is in “very early” stages and the partners will be “very methodical in how we roll it out,” a nod to the implosion of Zillow’s iBuying business. (Home Partners notes in marketing materials that it will not purchase homes sold by iBuying giants Zillow, Opendoor or Offerpad.)
Asked whether the backlash toward Invitation Homes gave Blackstone any pause about jumping back into the space, Werner said the fund’s past experience with residential investments informs future bets.
“With all things, when you do it, you get to learn lessons along the way,” said Werner. “With Invitation Homes, we learned lessons in that business, and bringing that to bear here was important.”
If the music stops
Miller called Blackstone’s professed goal to increase homeownership through Home Partners “nice rhetoric.”
“But it’s just rhetoric. I don’t buy it,” he said. “[Home Partners] is providing something that’s not going to be a bargain in 70 percent of the markets.”
Its pricing will only be competitive if a market is seeing major price growth, he said. If the market slows more dramatically — which could happen if the Federal Reserve increases interest rates — Home Partners’ offerings could begin to look too pricey.
For Blackstone, an end of the housing boom times is not on the horizon. Werner noted that historically, when rates rise, so do economic growth and real estate values, particularly when assets have shorter lease terms.
To the National Rental Home Council’s Howard, risks are part and parcel of homeownership, and he doesn’t view the rent-to-own model as disproportionately risky for consumers, Home Partners or Blackstone.
“More options are a good thing when it comes to housing,” he said.