Promise Homes secures $200M to expand single-family rental portfolio

The Promise Homes Co. secured a $200M debt facility to expand its portfolio of single-family rentals, a significant milestone for a Black-owned firm in the housing market.

The deal with investment firm Barings is part of a recapitalization to form a new joint venture. It could grow The Promise Homes Co.'s portfolio of 663 homes across the South and Midwest to more than 10,000 houses across the country over the next four years, the company said.

Promise Homes offers its residents free financial literacy courses, rent credits for on-time payments and credit score enhancements in its bid to promote eventual homeownership, which some residents have achieved, according to the company’s founder, John Hope Bryant. The capital infusion will help Promise Homes bring more technology into the company and expand its vendor contracting, said Bryant, who is major shareholder and one of the managing principals of the company.

“This is a signal bearer: You can do institutional quality, scaled business, in underserved neighborhoods that affect people of color and still make a reasonable profit without gouging people,” he said in an interview with National Mortgage News.

Promise Homes claims it is the largest Black-owned firm among investors flocking to the single-family rental market, and the debt facility is likely the largest to a minority-owned company in the market, Bryant claimed. He said data for similar transactions to firms owned by people of color is lacking.

Deutsche Bank served as a financial advisor in the deal, Kirkland & Ellis as legal advisor, while Aprio and Ernst & Young were tax and accounting advisors to Promise Homes, the company said.

Both major investment firms like Blackstone and smaller-scale investors have spent billions on single-family rentals, helping to drive up home prices more than 20% on average, according to a Moody’s Analytics analysis. Investors accounted for a little more than a quarter of single-family home purchases in Q3 2021, according to a December CoreLogic report. The highest investor shares of housing market purchases were recorded in the Southeast. In the Atlanta-Sandy Springs-Roswell metropolitan statistical area, investors accounted for 42.8% of single-family home purchases, the report found.

“We cannot link the surge to any single condition in the market, making this difficult to predict,” Economist Thomas Malone wrote in the CoreLogic report. Not included in CoreLogic’s data were homes built by investors themselves, which lack transaction records.

The investment surge is just one of many factors contributing to rising home prices. Supply chain issues and increasingly expensive building materials have also constrained the supply of homes for sale, which has had a knock-on effect for rentals. Single-family rent growth increased 10.9% last October, the fastest year-over-year growth in 16 years, according to a December CoreLogic Single-Family Rent Index report.

The road to homeownership is made more complicated for people of color, with racial bias and discrimination evident in almost every step of the process, according to several recent reports. The mortgage denial rate for Black applicants was 84% higher than for white applicants in 2020, according to a new Zillow analysis of data from the Home Mortgage Disclosure Act. Black applicants were denied a mortgage in 19.8% of applicants, the highest among races.

Bryant said Promise Homes is focused on creating a company culture that empowers its tenants by putting them on path to homeownership. In an effort to build equity in underserved communities, Promise Homes offers rewards, like a 10% reduction in rent when tenants raise their credit score to 700. Also, 65% of Promise Homes’ vendors are minority- or women-owned.

“Investors on Wall Street should look for a longer view, not just quarter-to-quarter profits,” Bryant said. “If it’s out-of-sync with the community, and you’re just trying to make money alone, you probably should do that somewhere else or you’re going to get nailed in underserved neighborhoods.”

Promise Homes launched in 2017 with $130 million raised from private investors. Ares Management co-founders Tony Ressler and Michael Arougheti provided founding investments and served on the company’s investment committee until last year. Ares is no stranger to the single-family rental market; it joined Pretium Partners in a $2.4B joint-venture purchase of Front Yard Residential Corp. which closed in 2021. The transaction brought Pretium’s portfolio to total more than 55,000 single-family rentals.

While large investors had started scooping up single-family homes in the wake of the Great Recession, Bryant entered the space in 2017 when other investment funds were closing and leaving less attractive neighborhoods and inventory, Bryant said.

The CRA-qualified neighborhoods in which Promise Homes operates makes it attractive for a range of patient money investors, Bryant said. Promise Homes last June secured an investment from First Republic Bank, and the CEO hinted at more investment announcements on the horizon.

“If you stay [renting] with me for three to five years, I’d give you a shot to help you buy a house,” Bryant said of tenants at Promise Homes rentals. “I made a bet, if I did that, I’d create enterprise value above the line. That bet worked.

Editor's Note: A previous version of this story incorrectly stated John Hope Bryant's title at Promise Homes.