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Investments

Morningstar gives thumbs up to REO-to-rental deal

Invitation Homes expects vacancy rates to decline

for rent
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Morningstar Credit Ratings was the first to rate Invitation Homes’ REO-to-rental securitization, and now the firm has a follow-on report on its performance.

Morningstar awarded a triple-A to the tranche, citing very high credit levels for Invitation Homes 2013-SFR1.

"Given the limited historical performance data for the single-family rental asset class as a whole, Morningstar recognizes the importance of sharing detailed portfolio and property-level performance information with the market,” the report states. “For the distribution dates in December 2013 and January 2014, payments were made in full to the certificate holders, according to the transaction documents."

With initial lease expirations scheduled to peak from January 2014 through March 2014, the percentage of vacant and delinquent properties hit 8.3% in January 2014.

“However, of the leases that expired in December 2013, 78.5% renewed. As the number of lease expirations decline throughout 2014, and the vacant properties are filled, we expect the vacancy rate to stabilize and to potentially decline,” the report concludes.

This is a vote of confidence for REO-to-rental as an asset class, as the Invitation Homes deal is only the second such rated.

Blackstone Group (BX) spent the past two years building an expansive portfolio of single-family rental homes via subsidiary, Invitation Homes, spending $7.5 billion to acquire 40,000 houses. Blackstone then packaged rental income from single-family homes into a pass-through security, which is functionally not unlike a mortgaged-backed security.

In January, Goldman Sachs (GS) arranged a bond backed by house rental payments for American Homes 4 Rent, the nation’s second-largest single-family landlord. Sachs started coverage on American Homes 4 Rent at a neutral rating and a price target of $18, reports say. American Homes 4 Rent has spent some $3.5 billion to acquire more than 21,000 rental homes.

With millions of homeowners who lost homes to foreclosure and millions more unable to meet new lending requirements, the home rental market is seeing a lot of demand, and investors see a lot of potential for growth in REO-to-Rental if it can be made viable.

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