Single-family rental: Is it really a new asset class or a just trade? When institutional investors started buying large pools of these assets three or four years ago, no one was really sure. However, the steady stream of new SFR deals in 2014, the market’s appetite for them and the potential liquidity that multi-borrower transactions could bring this market all suggest that SFR is definitely a business, not an anomaly.
In a little more than a year, the number of SFR securitizations has gone from zero to 10. At the end of 2014, Keefe Bruyette & Woods reported the first generation of SFR deals contained 38,000 properties with a collateral value of $7.5 billion came to market. Already this year that figure has grown by another $1 billion. Put another way, this emerging market is now nearly the size of the more mature private-label RMBS market, which struggled to hit $8.8 billion in securitizations last year.
Structurally, the single-borrower deals that we have seen so far are a hybrid of RMBS and CMBS in that their collateral is individual residential properties, but there is a single institutional borrower and the bonds are backed by rental cash flows. Invitation Homes’ second deal, valued at $993 million, was the largest transaction to date both in terms of dollars and the number of properties included. Most of the deals have had relatively short terms: usually two or three years with one-year options to extend. But one deal—American Homes’ second offering last fall—sold bonds with 10-year terms and sent a clear message to the market that institutional investors are in this business for the long term.
At yesterday’s SFR securitization panel at ABS Vegas, John Gibson from PWC, noted that the SFR market had made great strides already, and co-panelist Ryan Stark from Deutsche Bank said that he expected $10 to $12 billion in SFR transactions in 2015. In the next two years, Stark estimated that tens of thousands of these properties would find their way into securitizations.
But the main focus of the panel was the next generation of SFR securitization, multi-borrower transactions, which represent a potentially much bigger market opportunity. Based on KBW’s calculations, multi-borrower deals could eventual become a $300-billion market: efficiently connecting the owners of the nation’s 14 million single-family rental properties to the capital markets.
Most observers believe that several of the large instructional players in the SFR space are working on multi-borrower deals, and the first could come in early 2015. The big question marks: who will be first and what will the deal look like?
While the panelists on Tuesday were tight lipped about the timing of the first deal, their comments provided insight into the challenges of structuring multi-borrower deals, and the differences between these deals and the current single-borrower securitizations.
The consensus was that these new deals would most likely include a mix of borrowers that would vary in size and sophistication.
“We’re seeing borrowers across the spectrum,” said Beth O’Brien from Colony American Finance. The universe of potential borrowers, she said, includes large regional owners of hundreds of properties, private equity-like funds buying distressed assets, build-to-rent players and mom and pop investors with just a handful of rental homes.
According to O’Brien, loan sizes could vary from $3 to $4 million for some borrowers down to $1 million for others. Her prediction: “$2.5 billion is the belly of the market.”
The loans will most likely be both recourse and non-recourse with fixed five- and 10-year terms.
O’Brien and other speakers were quick to point out that the size and diversity of the borrowers wasn’t necessarily a negative. Some smaller borrowers, for example, have been in the property management business for 20 years; while some may do their reporting on Excel or QuickBooks, others use the latest multifamily rental reporting software. Depending on the borrower, property might be done internally, like to large institutional players, or externally. “This is not correlated to size, ” O’Brien noted.
Similarly, Kruti Muni from Moody’s Investor Services noted that while the big institutional borrowers in the single-borrower deals enjoyed operational and cost advantages, smaller borrowers may be able to do rehabs and repairs themselves.
Carefully underwriting the sponsors, the property managers and units, and the markets will be essential, said O’Brien.
Several speakers noted the importance of reporting multi-borrower deals. “Reporting will be absolutely critical, and it must be consistent,” said Muni. Stacey Berger from Midland Servicers added that servicers will need “metrics to monitor the transactions and to aggregate and report to bondholders.”
Not everything will be “new”
SFR investing isn’t new, and many of the new borrowers have been doing it successfully for some time. What is new is that these deals will give a new class of borrowers an opportunity to access the capital markets.
Servicing these transactions will be similar to small balance multifamily loans, said Berger. Also, the structure of the new securitizations wouldn’t be radically different from single-borrower securities, according to Seth Messner from Katten Muchin Rosen. The documents in these deals would be similar to the single-borrower deals, but there would be multiple loan agreements and a pooling and servicing agreement, he said.
At the end of the session, Stark said he expects the first multi-borrower deal will come this year, “and once we see it, they’ll be more.”