The Wall Street Journal, October 3, 2012


Waypoint Real Estate Group LLC, one of the biggest investors in U.S. foreclosed homes, said it secured a $245 million loan from Citigroup Inc. C +2.41%to help beef up its portfolio of properties to rent out.

The deal comes within weeks of Citi's initial $65 million loan to Waypoint, and marks an important step for an expanding market that craves debt. Real-estate investors have raised around $8 billion to buy foreclosed homes, relying almost exclusively on equity financing.

Waypoint, which owns more than 2,400 homes in four states, has emerged as an early leader in the business of snapping up single-family homes out of foreclosure and renovating them before renting them out. These investors aim to profit from the rental income the homes produce and, eventually, from their sale once prices rise. In tapping the debt markets, investors like Waypoint say they can lower their financing costs and buy more properties.

"What we're doing is really helping to support the housing market," Waypoint managing director Gary Beasley said. "We're finally starting to see the private sector coming in and providing a solution. It was just equity and now it's debt. We're seeing meaningful price appreciation in a number of markets across the country," as investors buy up more homes, he says.

Waypoint's loan from Citi is a multi-year "revolving credit facility," meaning the firm can borrow and repay the bank depending on its financing needs. The structure is a hybrid, Mr. Beasley said. The stream of rental payments from tenants, which will help to pay down the debt, is similar to commercial-loan structures, and the value of the house as the ultimate asset backing the deal draws from residential financing structures.

The loan also represents Citi's growing comfort with the emerging institutional investment strategy.

"We have been studying the emerging single-family rental space for some time, and have decided to take a leadership position by identifying experienced operators and structuring a loan to help finance their business," Susan Mills, head of Citi's residential finance group, said in a statement. "This deal underlines Citi's confidence in the investment strategy, which could help clear the backlog of foreclosures that has slowed the U.S. housing market's recovery."

The debt financing is "an important first step toward ultimately a securitized market," Mr. Beasley said.

As they do in bonds backed by mortgages and other assets, banks would pool the rents of thousands of tenants living in the formerly foreclosed properties and sell to investors a promised return based on the income the homes produce.

Waypoint closed a shorter-term loan from Citi in late August.

Waypoint's loans follow the 2010 financing secured by American Residential Properties Inc., a Scottsdale, Ariz.-based owner of more than 1,200 homes in five states, from Wells Fargo & Co., according to people familiar with the deal. Wells Fargo declined to comment.

While the number of debt deals is growing, overall financing has remained scarce for the burgeoning class of investors jumping into the market. Debt financing has also centered on major players who already own a significant number of homes.

"There's certainly a lot more interest from major banks getting into this space than there was two months ago," Waypoint's Mr. Beasley said. "Having a deal like ours get done is probably just that much more of a validation for major banks to dip their toes in the water."

The buy-to-rent market is nothing novel—smaller "mom and pop" investors have long been buying up foreclosed homes on the cheap to rent out—but the growing number of institutional investors in the space, and the large number of homes they own, is new.

"We expect the REO-to-rental market to experience robust growth over the next 18 to 24 months, potentially emerging as an institutional asset class," Jade Rahmani, a research analyst at investment bank Keefe, Bruyette & Woods, Inc., wrote in a 53-page published in September about the market. Mr. Rahmani estimated returns of 5% to 7% over three to four years, which includes funds spent to renovate and maintain the properties.

The firm projects potential returns of 15% to 20% with debt financing, typically a cheaper form of funding, and the assumption of an annual home price appreciation of 2%, he said.