FeatherStone Investment Group is setting the stage as one of the few issuers in a developing asset class: real estate-owned-to-rental securitization.
The company has designed a new program to provide liquidity to the sector, which will allow investors to participate in both the immediate rental cash flow as well as the potential capital gains from the sale of the properties within the deal, according to the company.
The size of the deal is expected to be around $100 million to $300 million with monthly rental payments on about 1,000 to 3,000 homes.
NewOak Capital CEO and co-founder Ron D’Vari said deals less than $400 million tend to be private ‘club’ deals and simple in structure, meaning it’s well enhanced.
Additionally, the bonds issued through FeatherStone’s program are expected to have a five-year maturity, floating rate coupon and at least one rating by a major ratings service.
"The end buyer probably will end up being less than a handful of the portfolio side or mortgage conduit lending side of the banks or insurance and would combine rating with some form off internal rating," D’Vari explained.
He continued, "These private buyers may do a lot of independent analysis and will ‘grill’ the issuer and the rating and impose their own required enhancement."
In May, FeatherStone Investment announced that it began structuring its first rental income securitization, with the company owning 50% of the investment.
"This is a huge structural achievement for FeatherStone Investment Group," says FIG General Counsel Scott Manson. "This also opens our other two securitization structures to the public."
FeatherStone Investment Group also plans to assemble single-family properties into pools and issue securities to investors in the secondary mortgage market as a Real Estate Investment Conduit (REMIC) – similar to collateralized mortgage obligations.
Put simply, REMIC is a special vehicle that is used to pool mortgages and issue mortgage-backed securities. This type of conduit also holds commercial and residential mortgages in trust, and issues interests in the loans to investors.
Investors should expect a substantial liquidity premium charged on these notes, potentially as high as 300 basis points to 500 basis points depending on the enhancement, D'Vari pointed out.
"While the mortgage conduits may not be able to invest in individual reo-to-rental loans, but they could participate in investment grade highly enhanced senior notes," D’Vari concluded.