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Investments

Wanted: High-quality renters only, please

New-wave rental securitization will tighen application guidelines

December 11, 2013

Morningstar analyst Brian Grow released a research report surrounding the recent Invitation Homes single-family rental securitization.

Grow brings up an excellent point in that not everyone holds the bandwidth to issue a large rental securitization and manage all of the individual properties as well. Invitation is a Blackstone (BX) subsidiary and the real estate investment trust spent year building the inventory up and out.

Does this mean fewer securitizations for the asset class? No.

As Grow mentions, securitization is borne from necessity: make financing available and manage risk. It is an innovative product, and it's malleable.

 "One solution may be to pool together properties owned by smaller investors/property managers into a single securitization trust," Grow states.

However, the risk here is with the differing quality levels of management. Poor property upkeep could mean a greater tenant turnover. This drives up the credit enhancement levels need for an investment-grade rating.

"Loose tenant underwriting policies and/or a track record of exceptions to the underwriting policies may result in higher cash flow volatility and credit enhancement requirements," writes Grow.

So the obvious balance to this is to simply tighten up credit requirements.  The creation of a single form to have renters fill out and then verify would likely standardize this process to a degree more acceptable to a credit ratings agency such as Morningstar.

This would also cutout potential tenants with a lower credit score. For those renters, the benefit of being in a securitized rental will carry the benefit of a well-financed landlord.

But the new wave of rental securitizations will likely be reserved for only the high-quality tenant.

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