Investments

Starwood Waypoint becomes latest to offer single-family rental bond

REIT launches first REO-to-rental securitization

There’s a new player in the single-family rental bond game. Starwood Waypoint Residential Trust (SWAY), which was spun off of Starwood Property Trust (STWD) in January as a real estate investment trust, is prepping its first securitzation based on income-producing single-family rental homes.

When Starwood Waypoint launched in January, sources told HousingWire that the REIT would not be securitizing its investments. Now it appears that Starwood has shifted its business strategy and plans to offer its first rental bond soon.

The offering, called SWAY Residential 2014-1, will be collateralized by a $531 million loan secured by first priority mortgages on 4,095 income-producing single-family homes, which makes it the fourth-largest single-family rental bond in terms of property count.

Starwood Waypoint’s first offering marks the 13th single-family rental bond since Invitation Homes launched the first REO-to-rental securitization in October 2013.

SWAY 2014-1 is the eighth single-family rental bond to be collateralized by an interest-only loan. The loan is a floating rate loan that will require interest-only payments and has a two-year term with three 12-month extension options.

The relative youth of both the asset class and Starwood Waypoint itself are negative credit drivers, according to Kroll Bond Rating Agency, which issued its presale report on SWAY 2014-1.

Morningstar also issued a presale report for SWAY 2014-1, and both KBRA and Morningstar awarded $234.23 million in AAA ratings to the deal.

“SWAY experienced tremendous growth through September 2014, increasing its total investment in single-family rental homes to approximately $1.6 billion from $749 million as of Dec. 31, 2013,” KBRA said in its presale report.

“While such a rapid increase in the number of owned properties provides some revenue diversification, it could negatively impact management’s ability to run the business by straining management resources and increasing expenditures,” KBRA continued. “Due to the manager’s limited operating history, combined with the fact that almost all of the properties only recently became stabilized, it is uncertain how effectively the manager will be able to maintain and lease the properties over an extended period of time.”

Also of note is the age of the underlying properties. According to KBRA’s data, the average age of the properties is 33 years, which is the oldest of all previously rated single-family rental bonds.

“The prior 12 transactions had average property ages between 12 to 30 years,” KBRA said. “However, the age of the properties in SWAY 2014-1 is somewhat similar to the prior Invitation Homes transactions, which had average home ages ranging from 26 to 30 years.”

Morningstar also noted the age of the properties in its presale report. “Properties in this SWAY 2014-1 transaction are relatively older with an average year built of 1981,” Morningstar said in its report. “The range of year built varies from 1900 through 2012. Only about 28.8% of the properties were built after 1990.”

Additionally, the average size of the underlying properties is on the smaller side compared to previous SFR offerings. According to KBRA’s report, the homes have an average size of 1,752 square feet, which is the third smallest of all the previous SFR bonds.

Despite the size of the properties and perhaps owing the properties’ age, SWAY invested an average of nearly $20,000 to rehabilitate each property.

“Single-family homes that have been vacant for extended periods of time or occupied by a borrower in financial distress often experience deferred maintenance and suffer occasional vandalism,” KBRA said in its report.

“On average, SWAY has invested an additional $19,640 per home over the purchase price on rehabilitation costs. This equates to a 14.7% capital investment, relative to the purchase price, which is the fourth highest when compared to prior transactions.”

The occupancy rate in SWAY 2014-1 is 97.9%, which makes SWAY 2014-1 the fifth SFR bond to not be fully leased. Both KBRA and Morningstar said that they build in expected vacancy rates into their credit modeling systems.

On the positive side, KBRA said that SWAY 2014-1’s average lease term is high compared to other similar transactions. “The weighted average in-place lease term of the properties is 16.9 months,” KBRA said.

“The WA remaining lease term for all of the underlying homes is approximately 10.7 months, which is the highest when compared to the WA remaining lease term of the prior transactions, which ranged from 5.7 to 9.7 months, with an average of 7.8 months.”

Both Morningstar and KBRA cited the length of the lease term as one of the reasons for awarding AAA ratings to the offering.

“SWAY’s first half year’s tenant retention rate is 71.1%, and its average renewal rate is 52.6%,” Morningstar said in its report. “SWAY’s retention underwritten assumption is 66.7%, and Morningstar applies an annualized 55% renewal rate conservative assumption. Speaking with Realtors, higher renewal rates seem to make sense for single-family product relative to multifamily. Single family tenants generally like staying in neighborhood/community and moving from a house may be more difficult. Also keeping the same school district is often important for tenants in single-family property.”

When Starwood Waypoint was established, its parent company said that the REIT’s business plan would be based on owning and operating single-family rental homes and investing in non-performing loans.

The REIT grew its non-performing loan holdings in September with a $73.3 million purchase of 430 non-performing loans and 81 REO homes. At the time, the company stated that the purchase increased its third-quarter total for NPL investments to $308.7 million, which included 1,800 NPLs and more than 300 REO homes.

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