As Mark Fleming, chief economist at CoreLogic [CLGX] noted in his blog yesterday, one of the more upbeat housing-related topics at the ABS East in Miami this week is the emergence of a new asset class: securitized single-family rentals.
And no wonder: Two years ago no one had ever done a bond deal backed by the home values and cash flows of SFR properties. Since then, nine successful deals—valued between $7 and $8 billion—have come to market, and a tenth was announced this week. According to Ryan Stark, and investment banking director at Deutsche Bank [DB] to date, approximately 38,000 SFR properties have gone into securities out of a total of roughly 200,000 to 250,000 properties that have been purchased by institutional investors—mainly hedge funds and private equity—over the past few years.
Next year, industry observers expect that institutional investors could bring another $7 to $8 billion in deals to market. This is good news for issuers, bankers, credit agencies, institutional property managers, renters and (full disclosure) our firm, which has done the due diligence and the property valuations on all of the current deals.
However, the real excitement at ABS East wasn’t about single-investor deals, like the ones we’ve seen, but about the potential for multi-borrower deals.
At the conference, a panel led by Ron Tarantino, a vice president at Credit Suisse [CS] looked into the reasons why the current deals have done well, and what it will take to make the next phase of SFR deals a reality.
Tarantino categorized the first phase of SFR deals as being about “homes” and the next round about “loans”: referring to the prospect of lending to mid-tier and smaller SFR investors.
Why is the market so exciting?
These smaller investors—ranging from mom & pop investors to regional property managers with portfolios of hundreds or even thousands of homes—already own more than 12 million SFRs. Recently, Keefe, Bruyette & Woods sized the potential value of the multi-borrower SFR lending market at between $280 and $300 billion.
Yesterday’s panel included Beth O’Brien, the head of Colony American Finance — one of the first institutional lenders set up to take advantage of the multi-borrower opportunity — as well as credit agency executives, investment bankers, and a partner from a national accounting firm. All of the speakers noted that no sponsor has formally proposed a multi-borrower transaction, yet. But many observers believe that such a deal will come to market soon, if not before the end of the year, then certainly by mid-2015.
What might the first deal look like? It could include a mix of larger and smaller investors, but most participants agreed that it was more likely to include similar sized operators and loans. So probably not $500,000 and $50 million loans in the same security. To make the economics worthwhile, the panelists suggested that the first deals could be in the $300 million-range, or roughly the size of the recent single-investor deals.
In parsing the risks inherent in SFR deals, the credit agency panelist noted that they have characteristics of both commercial and residential real estate risks. The first phase of SFR deals were easier to rate, because they involved only one investor with deep financial resources, advanced systems and proven property managers.
For a variety of reasons, the panelists agreed, multi-borrower deals may be more challenging to structure and rate. For example, the borrowers may have different levels of experience and sophistication and may or may not be used to providing the kinds of data and transparency that bondholders will require. Likewise, their properties may be older, may have been rehabbed less professionally and the improvements may be harder to document.
The take away from the panel: Multi-borrower deals are coming, and could be, as Stark noted, “a potential much larger next wave.” But before this can happen issuers, credit agencies and investors will have to get comfortable with the diversity of the borrowers, their property managers and properties. They will also have to agree on data and systems standards and put in place an ongoing mechanism to provide oversight and monitor performance.