Oil prices have dropped substantially over the past few months, triggering concerns across various markets on areas with high exposure to oil.
Housingwire has already looked at what effect the price of oil could have on housing prices, but now Barclays turns its eye to single-family rental securitizations in oil-industry heavy markets.
“While the drop in energy prices will likely be a broader positive for disposable incomes, some areas with heavy dependence on oil-/drilling-related jobs may be negatively affected as a result of the declines,” according to a client note from Barclays. “…(O)ver the past 5/10 years the biggest growth in oil production has come from parts of North Dakota (Bakken Shale Formation) and Texas (predominantly from the Eagle Ford formation in South Texas and from the Permian Basin in West Texas). The first casualty of lower oil prices is likely to be new drilling in these areas as can be seen by the sharp dropoff in drilling activity since October.
“Overall, while many parts of the country have oil related economies, the most oil dependent regions among these are probably the Bakken shale formations in North Dakota and Montana, the Permian Basin around Odessa/Midland in Texas, and the Eagle Ford formations in South Texas (South East and South West of San Antonio),” Barclays says. “Other areas in Texas also have considerable exposure to oil including areas around Houston and Dallas (though these areas are not as completely dependent on oil in the short term as the ones mentioned before).”
They note that in addition, other large oil producing regions, such as in Kern County in California, Oklahoma, Louisiana Coast and North Eastern Colorado, could be affected as well but they usually have smaller concentrations in single-family deals and have been excluded from the analysis. Some parts of Texas/Louisiana have refining facilities in addition to drilling and so the effect on the overall local economies could be more muted
“…(M)any of the SFR deals, especially outside the IHSFR shelf, have substantial exposure to properties in Houston and Dallas,” Barclays says. “As a percentage of BPO, properties in these two Texan cities constituted more than 20% of the entire underlying for ARP 2014-SFR1, SWAY 2014-,1 and couple of AH4R deals, too. The Houston and Dallas economies depend on revenue from oil but, arguably, are not as directly dependent as some of the more concentrated regions, such as the Permian Basis, Eagle Ford regions of Texas, or the Bakken shale formation in North Dakota/Montana. As a result, while these regions could be exposed, we think that oil will need to remain low for a reasonable period before we start seeing an adverse effect on the vacancies/rents in these regions.
“We would highlight that many of these deals have sufficient debt-coverage that even if vacancies in Dallas and Houston increase by 20-30pp, the trust will continue to receive sufficient rent to cover the interest payments on the notes. For example, ARP 2014-SFR1, the deal with highest exposure to the two cities, had a net cash flow of ~$2mn in December remittance to cover $615k of interest payments on certificates. A 20-30pp increase in vacancies in both Houston and Texas, would increase the overall vacancy rate by 10-12pp,” they say. “That would in turn pull the net rental income down by 10-12% and net cash flow by 20-25%, assuming that the expense ratio remains stable near the current level of ~50%. In other words, even a 20-30pp increase in vacancy in the two cities would bring the net cash flow down by ~$0.5mn a month but it would still be more than enough to cover the interest payments on certificates.”