Single-family rental securitizations are finally the
"real deal"
Opens the door to a new class of borrower
February 12, 2015
Brent Taggart
housingwire.com
Single-family rental: Is it really a new asset class or a
just trade? When institutional investors started buying large pools of these
assets three or four years ago, no one was really sure. However, the steady
stream of new SFR deals in 2014, the market’s appetite for them and the
potential liquidity that multi-borrower transactions could bring this market
all suggest that SFR is definitely a business, not an anomaly.
In a little more than a year, the number of SFR
securitizations has gone from zero to 10. At the end of 2014, Keefe Bruyette
& Woods reported the first generation of SFR deals contained 38,000
properties with a collateral value of $7.5 billion came to market. Already this
year that figure has grown by another $1 billion. Put another way, this
emerging market is now nearly the size of the more mature private-label RMBS
market, which struggled to hit $8.8 billion in securitizations last year.
Structurally, the single-borrower deals that we have seen so
far are a hybrid of RMBS and CMBS in that their collateral is individual
residential properties, but there is a single institutional borrower and the
bonds are backed by rental cash flows. Invitation Homes’ second deal, valued at
$993 million, was the largest transaction to date both in terms of dollars and
the number of properties included. Most of the deals have had relatively short
terms: usually two or three years with one-year options to extend. But one
deal—American Homes’ second offering last fall—sold bonds with 10-year
terms and sent a clear message to the market that institutional investors are
in this business for the long term.
At yesterday’s SFR securitization panel at ABS Vegas, John
Gibson from PWC, noted that the SFR market had made great strides
already, and co-panelist Ryan Stark from Deutsche Bank said that he expected
$10 to $12 billion in SFR transactions in 2015. In the next two years, Stark
estimated that tens of thousands of these properties would find their way into
securitizations.
But the main focus of the panel was the next generation of
SFR securitization, multi-borrower transactions, which represent a potentially
much bigger market opportunity. Based on KBW’s calculations, multi-borrower
deals could eventual become a $300-billion market: efficiently connecting the
owners of the nation’s 14 million single-family rental properties to the
capital markets.
Most observers believe that several of the large
instructional players in the SFR space are working on multi-borrower deals, and
the first could come in early 2015. The big question marks: who will be first
and what will the deal look like?
While the panelists on Tuesday were tight lipped about the
timing of the first deal, their comments provided insight into the challenges
of structuring multi-borrower deals, and the differences between these deals
and the current single-borrower securitizations.
The consensus was that these new deals would most likely
include a mix of borrowers that would vary in size and sophistication.
“We’re seeing borrowers across the spectrum,” said Beth
O’Brien from Colony American Finance. The universe of potential
borrowers, she said, includes large regional owners of hundreds of properties,
private equity-like funds buying distressed assets, build-to-rent players and
mom and pop investors with just a handful of rental homes.
According to O’Brien, loan sizes could vary from $3 to $4
million for some borrowers down to $1 million for others. Her prediction: “$2.5
billion is the belly of the market.”
The loans will most likely be both recourse and non-recourse
with fixed five- and 10-year terms.
O’Brien and other speakers were quick to point out that the
size and diversity of the borrowers wasn’t necessarily a negative. Some smaller
borrowers, for example, have been in the property management business for 20
years; while some may do their reporting on Excel or QuickBooks, others use the
latest multifamily rental reporting software. Depending on the borrower,
property might be done internally, like to large institutional players, or
externally. “This is not correlated to size, ” O’Brien noted.
Similarly, Kruti Muni from Moody’s Investor Services noted
that while the big institutional borrowers in the single-borrower deals enjoyed
operational and cost advantages, smaller borrowers may be able to do rehabs and
repairs themselves.
Carefully underwriting the sponsors, the property managers
and units, and the markets will be essential, said O’Brien.
Several speakers noted the importance of reporting
multi-borrower deals. “Reporting will be absolutely critical, and it must be
consistent,” said Muni. Stacey Berger from Midland Servicers added that
servicers will need “metrics to monitor the transactions and to aggregate and
report to bondholders.”
Not everything will be “new”
SFR investing isn’t new, and many of the new borrowers have
been doing it successfully for some time. What is new is that these deals will
give a new class of borrowers an opportunity to access the capital markets.
Servicing these transactions will be similar to small
balance multifamily loans, said Berger. Also, the structure of the new
securitizations wouldn’t be radically different from single-borrower
securities, according to Seth Messner from Katten Muchin Rosen. The
documents in these deals would be similar to the single-borrower deals, but
there would be multiple loan agreements and a pooling and servicing agreement,
he said.
At the end of the session, Stark said he expects the first
multi-borrower deal will come this year, “and once we see it, they’ll be
more.”
