Job Market Paper

Keeping Up with the Blackstones: Institutional Investors and Gentrification

Abstract

Policy makers worry that institutional investment in residential real estate drives up house prices and crowds out minority residents. Using mergers of private-equity backed firms to isolate quasi-exogenous variation in concentration of ownership at the neighborhood level, I find that shocks to institutional ownership indeed cause higher prices and rents — but, contrary to popular opinion — increase rather than decrease neighborhood diversity. The reason for increased diversity is that some minorities benefit from the relaxation of borrowing constraints as a result of higher house prices and take out mortgages for home improvement, increasing the attractiveness of their homes; other minorities move in because more rental properties become available as institutional ownership crowds out predominantly white individual home ownership. Institutional investors benefit from increased market values of their houses in increasingly attractive neighborhoods, but also extract value by challenging tax assessors’ valuations and thus reduce their tax bill by an estimated $4.1b nationwide. This is a hitherto unknown source of rent extraction by institutional investors. I conclude that policy makers are right to be worried about some aspects of institutional investment in residential real estate, but they are mostly worried about the wrong thing.

Publications

Decomposing Value Gains - The Case of the Best Leveraged Buy-Out ever

with Ludovic Phalippou.

Journal of Corporate Finance, Forthcoming

Abstract

The story of Blackstone and Hilton is a defining moment of the private equity industry. This story involves a high stakes leveraged buyout, layoffs, allegations of corporate espionage, the revival of an iconic brand, a $14 billion capital gain, the largest ever in private equity, and the emergence of the largest private market firm. Moreover, this success occurred with a highly-leveraged and cyclical business going through the worst financial crisis since 1933. Somebody deserves a box of chocolates; but who? The answer might be surprising and shows both the difficulty and pertinence of carefully decomposing the sources of value creation in private equity buyouts.

Selected Working Papers

Heterogeneous Creditors and Cov-Lite Loans

Abstract

I propose a theoretical framework in which lenders may suffer repayment preference shocks that encourage early and costly termination of a loan contract. Cov-lite loans limit the circumstances in which lenders can withdraw or renegotiate credit agreements, and thus insulate lenders from inefficient liquidation arising from shocks to other syndicate members. I find cov-lite lending is preferred where monitoring is imperfect and the probability that the other lender will suffer a repayment preference shock is higher. However, if the lenders are able to costlessly trade their loan shares, maintenance covenants reduce the cost of lending (the face value of debt) relative to cov-lite contracts.

Work in Progress

REITs and Local Market Competition (co-authored with Ludovic Phalippou and Martin Schmalz)

We examine the competitive impacts of concentration of ownership by real estate investment trusts (REITs) in the hotel industry. We hand-collate franchise ownership history for over 5000 hotels across the United States, which we match to ultimate owners using the OpenCorporates database. We show that REITs use franchising agreements to operate seemingly competing hotel brands in the same geographic area. Using over 2 million reviews we scraped from Tripadvisor, we find that increased concentration of ownership of franchise operations is correlated with lower reviews. Further work will examine whether these observed negative reviews are causally connected to concentration of ownership.

Private Equity and Industry Trade Shocks (with Johan Cassel Pegelow)

Herd from Wall Street: Institutional Investors and House Flippers