CREFW-Fall2015

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CRE Finance World Autumn 2015
22
T
WonJu Sul
Associate, Capital Markets
Cadwalader, Wickersham &Taft, LLP
he fledgling single-family rental (SFR) market—formed in
the wake of the financial crisis as institutional investors
amassed large portfolios from foreclosure auctions and
short sales—is on the verge of some major developments.
Deals securitized since the first-ever SFR securitization
by Invitation Homes in November 2013 have been substantially
alike, with investors primarily being large institutions. But that is
about to change as new lending programs alter the profile of the
collateral and the investor base expands.
The SFR market has expanded substantially in the past few years
and will continue to do so as demands for SFR homes and rents are
expected to continue to increase, property management becomes
more efficient and historical performances have demonstrated
generally low rental vacancy and delinquency rates. With housing
prices rising, institutional investors will seek to cash out their SFR
portfolios and, together with heightened demand for SFR houses
from millennials and availability of new lending programs for retail
SFR investors, SFR market is likely to shift from large institutional
players to smaller individual investors. What is more, a new asset
class—landlord loans—is expected to grow substantially.
Where We Are
Exhibit 1
REO-to-Rental Securitizations Timeline (as of August 19, 2015)
Source: Bloomberg Terminal, Asset-Backed Alert
To date, there have been 23 SFR securitizations. Exhibit 1 shows
the timeline of these securitizations. SFR industry has expanded
tremendously in the past two years. According to Commercial
Mortgage Alert, the US CMBS issuance was about $94 billion and
the US SFR issuance was about $6.8 billion in 2014. As of July
2015, year-to-date US SFR issuance is $5.42 billion up 53% from
$2.85 billion for the same period in 2014 whereas year-to-date US
CMBS issuance is $55.74 billion up 22% compared to the same
period in 2014. The SFR bond market is currently estimated to be
a $12.65 billion market with Blackstone’s Invitation Homes unit
having a leading market share of 42.1% through its seven offerings
totaling $5.32 billion. American Homes 4 Rent stands second at
$2.08 billion followed by Colony American Homes at $1.75 billion.
Typical structure is as follows: an investor first forms a REIT or
LLC and raises debt and/or equity financing to acquire a portfolio
of SFR homes and then transfers such portfolio to a borrower
(typically an LP or LLC) where it serves as the general partner
owning 100% of the borrower. The borrower then obtains a loan
secured by the first priority mortgage on such portfolio. The loans
typically have two to three year terms with the borrower’s option
of multiple one-year extensions for a total of five years. The lender
then transfers the secured loan to depositor (typically an LP or
LLC) who will deposit such loan in a special purpose entity that
is bankruptcy-remote and will issue debt securities. These debt
securities are callable and/or non-callable bonds with first lien
security interest over rental incomes from the collateralized SFR
homes and sometimes are also backed by pledge of equity interest
in the borrower and guarantees from sponsors. Similar to CMBS
issuances, these SFR offerings typically elect REMIC structure.
Every SFR offering to date has received triple-A rating on its most
senior tranche. Credit rating agencies have adopted methodology
that leverages elements of CMBS and RMBS criteria because the
collateral underlying an SFR transaction has both commercial and
residential characteristics. Loan-to-value (LTV) ratio ranges from
63.1% to 78.9% with an average of approximately 73%. Later
deals tend to have higher LTV ratio as the industry becomes more
comfortable with the asset class and issuers consider structuring
deals with an added risk retention tranche (5%) that allows the
securities to be sold in Europe, as was the case with the Invitation
Homes 2014-SFR2 offering. All but four offerings have been
priced using LIBOR with coupon size for its top tranche ranging
from 113.7 to 163.6 basis points. Two of the four fixed rate bonds
have been issued by American Homes 4 Rent in September 2014
and March 2015 respectively; and the other two fixed rate deals
were by FirstKey Lending in April 2015 and Progress Residential
in May 2015. The underlying portfolios for the SFR securitizations
issued during the past year ranged in size from 2,876 to 4,661
properties with an average of 3,728. The largest offering to date
is the $1.2 billion floating rate, interest-only offering by Invitation
Homes secured by mortgages on 7,265 income-producing SFR
homes issued in June 2015.
As SFR securitization market develops, there have been several
structural variations. The first three deals offered were structured
to amortize whereas the following seven deals have been structured
as interest-only loans. The offerings by FirstKey Lending and
B2R Finance in April 2015 were the first multi-borrower SFR
securitizations (backed by multiple loans to one or more entities).
Prior to these offerings, transactions have been backed by
one loan from a single borrower. Some later offerings involved