Be Ready for Renter-Backed Bonds and Meet the Beneficiaries

NEW YORK (TheStreet) -- Just when I thought that nothing could be more perilous than mortgage-backed-securities (MBS) a couple of market mavens are ready to hatch something new.

DeutscheBank ( DB) may be the financial entity that will structure and sell this new breed of bond. What is this new product anyway?

This will sound familiar, but for the first time in U.S. history a well-known private equity firm is thinking about bundling monthly rental payments from upwards of 1,700 rental homes it owns and selling them to investors as "securities."

Which firm is considering this brilliant idea? BlackstoneGroup ( BX), the publicly-traded money manager which I recently wrote a story about is one of the master-minds.

Besides private equity BlackstoneGroup invests in real estate, hedge funds and high-yielding credit funds. It buys when everyone else is selling with the biggest profits coming from its private equity and real estate holdings.

Over the past few years it's been accumulating thousands of houses that BlackstoneGroup then converts to rentals. Many of these houses were in foreclosure and purchased at low pricing so the rent covers the usual costs of ownership such as property taxes, maintenance and management.

Analysts who remember the recent mortgage debacle and the impact it had on MBS values are understandably gun shy. There is little information if any on how reliable rental payments are for this latest breed of debt instruments.

Questions abound about vacancy rates, turnover and whether renters have a reliable long-term record of paying the monthly rent on time. This data is critical in determining the safety of what I'm calling "renter-backed securities" (RBS).

The details of the deal with Deutsche Bank are sketchy but the first tranche may be in the $250 million range. Indications are the structure will be like the multi-layered residential and commercial-backed mortgage securities of recent years.

The first "layer" would most likely be securities that are directly collateralized by the rental houses and other equity. Then like in the bad-old days of MBS there would be securities collateralized by the first layer.

The further each RBS is from being secured by the rental properties the more risk, the lower the rating, and the higher the interest rate offered to investors.

Blackstone owns approximately 32,000 single-family rental houses that it paid around $5.5 billion to buy. The next largest company in this business is American Homes 4 Rent which completed an initial public offering on Aug. 1 of 44.1 million shares for $16 a share.

Another publicly-traded rental housing company is SilverBayRealtyTrust ( SBY). SBY is trading below its IPO debut in December of $18.50 a share and closed Thursday at $16.10.

BlackstoneGroup's smart real estate track record may help to reduce investor angst about this deal and the efficacy of keeping the underlying rental houses occupied and the residents paying rent on a timely basis.

The involvement of Deutsche Bank also makes sense as it has been one of the leading lenders to real estate companies who purchase foreclosed homes.

One would think the fact that Deutsche Bank originated loans to BlackstoneGroup to the tune of more than $3.5 billion this year should make them suitable partners.

For those who would like a better picture of how Deutsche Bank shares have done in the past 12-months I offer the following chart for your viewing pleasure. DB Chart DB data by YCharts

Deutsche Bank's Return on Invested Capital cratered at the end of 2012 and has improved slightly so far in 2013. The teaming of Deutsche Bank with BlackstoneGroup on a new bond backed by house rental payments may help ROIC for both companies. Only time will tell on that score.

But for those income-starved investors who may be tempted by the RBS products all I can say is remember the famous Latin words "Caveat Emptor" -- buyers beware!

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of www.ChecktheMarkets.com.

Courtenay holds a Master's of Science degree in Psychology from California Polytechnic State University, and is a former senior vice-president of Investments for two major brokerage firms. He's been a fiercely independent investment "investigator" and a consulting contributor to the investment publishing world for over 30 years. In addition to his role as an investment publisher and analyst, he serves as a marketing consultant to the investment media industries.

In his role as a financial editor, he specializes in unique investment strategies, overlooked stock investments, energy and resource companies, precious metals, emerging growth companies, the prudent use of option strategies,real estate related opportunities,wealth preservation, money-saving offers, risk management, tax issues, as well as "the psychology of investing". Because of his training and background in Clinical Counseling and Psychology, he enjoys writing about investor behavior, the herd mentality, how to turn investment mistakes into investment breakthroughs and the stock market's behavioral trends and patterns.

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