(Bloomberg)—Front Yard Residential Corp. acquired property manager HavenBrook Partners LLC and a portfolio of 3,200 rental homes, both majority-owned by a Pacific Investment Management Co. fund, for $485 million in a milestone for the asset class.
The purchase, facilitated by a $509 million loan through Freddie Mac, marks the biggest deal the mortgage giant has done in its single-family-rental program. The loan was originated by Berkadia, a joint venture of Berkshire Hathaway and Jefferies Financial Group Inc., and subsequently acquired by Freddie Mac. Front Yard, a single-family landlord, is using the acquisition to start bringing property management in-house.
“We’re growing the size of the company,” Front Yard Chief Executive Officer George Ellison said in an interview. “We’re internalizing the property management so we can control it and hopefully get more expenses out, and one of the GSEs gave us the money. That’s a good day.”
He added that Freddie Mac, a government-sponsored enterprise, or GSE, won the deal over an insurance company and an investment bank. Front Yard is using the loan to refinance about 2,800 homes it acquired in the deal and 2,000 homes it already owned.
Long the domain of small, local landlords, single-family rentals started attracting large investment funds in the aftermath of the U.S. foreclosure crisis, when firms like Blackstone Group LP snapped up houses cheaply at bank auctions. Now there are signs that the asset class is attracting new institutions and going through a wave of consolidation as funds that entered early seek to return money to investors.
Pimco, which invested in Duluth, Georgia-based HavenBrook through a real estate fund with a limited term, declined to comment.
Front Yard, which reports quarterly earnings Thursday, now owns 15,000 homes. The company, based in the U.S. Virgin Islands, is focused on buying less-expensive homes that command lower rents than its larger competitors Invitation Homes Inc. and American Homes 4 Rent.
As of the end of March, the company’s rental properties charged average annual rent of $14,844, according to a filing. That’s a little more than $1,200 a month, in line with average rents charged by Cerberus Capital Management LP’s FirstKey Homes and Tricon Capital Group Inc. Tricon recently launched a $750 million joint venture with Teacher Retirement System of Texas and Singapore’s GIC Pte.
That focus on lower rents made Front Yard a good match for Freddie Mac, which has been running a test program to lend to single-family landlords that focus on providing affordable housing. Under the terms of the pilot, at least 75 percent of the homes in the financing deal have to be affordable to households earning no more than 80 percent of the area’s median income.
“These are homes that, but for the investment and those capital improvements, probably wouldn’t be occupied and in many cases would be blights on the neighborhood,” said David Leopold, who leads the affordable-housing program at Freddie Mac Multifamily. “Instead, they’re leased to families at affordable rents.”
Counting a handful of deals that have already been announced and loans currently in the pipeline, Freddie is close to the $1.3 billion cap on the amount it is allowed to lend under the pilot, according to Leopold.
Berkadia was the lender on the first single-family loan Freddie Mac acquired through its pilot program, an $11 million deal that closed in January. In addition to competitive pricing, the financing comes with a longer duration than what single-family landlords are used to, said Anthony Cinquini, a managing director at Berkadia.
“Lengthening maturities are important to this industry,” he said. “If I’m really in this to be a viable ongoing organization, I’d want to extend my maturities as far as possible.”
--With assistance from John Gittelsohn.To contact the reporter on this story: Patrick Clark in New York at [email protected] To contact the editors responsible for this story: Daniel Taub at [email protected] Peter Jeffrey, Dan Reichl
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