A client note from Keefe, Bruyette & Woods says that major institutional players have now invested $25 billion in the single-family rental market, acquiring some 150,000 properties nationwide.
This amounts to 6% of distressed sales since 2012 and 7% of current seriously delinquent loans and foreclosures.
The single-family rental market has always been an atomized beast funded with capital from smaller investors.
But the rise of institutional interest over the past couple of years has come, given the large foreclosure inventory leftover from the housing crisis and a secular shift toward renting.
What’s happening now?
Ten securitizations have been completed totaling $7.5 billion in collateral value on 38,000 properties.
“We believe the underwritten cash flows, ratings agency analyses, public company disclosure, and analyst research provide the foundation of a historical dataset on the economics of institutionally-managed SFRs,” say Jade Rahmani and Ryan Tomasello at KBW. “While investor acquisitions have moderated over the past 12 months, we believe larger SFR operators have focused on portfolio stabilization while selectively acquiring assets that offer attractive yields and complement their existing footprints.
“We believe the sector has the potential to emerge as a long-term institutional asset class. We estimate unlevered cash returns in the 5-7% range, while levered internal rates of return could reach or exceed the low to mid-teens including home price appreciation,” they say.
While leverage was previously limited to secured credit facilities, KBW analysts say that other financing options have begun to emerge, including securitization, convertible and high-yield debt, and preferred equity, which should bolster returns on equity.
Future catalysts include earnings and dividend growth, non-performing loan and bulk portfolio acquisitions, M&A, and securitization,including multi-borrower transactions.
As such, they say, they expect more players to get into the single-family rental game, and existing players to continue their investment.
There are currently five public REITs focused on single-family rentals—American Homes 4 Rent, American Residential Properties, Altisource Residential, Silver Bay Realty Trust, and Starwood Waypoint Residential Trust. Three other public companies—Blackstone, Colony Financial, and Tricon Capital—have made significant investments directly or through fund vehicles.