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CREFW-Fall2014 10.15.14

Little Pink Houses for You and Me An Introduction to Single-Family Rental Securitizations Radhakrishna Gowrishankara he heady rise and subsequent collapse of the residential market left a vast swath of distressed mortgages and vacant houses across the country. As a result of this dislocation, house values dropped to levels below replacement costs, and rental yields became very attractive. While the singlefamily rental market has historically been dominated by smaller owner/operators, the surge in available product and high returns enticed institutional investors into the arena. The largest seven of these firms have invested $20bn in singlefamily rental properties, amassing sizable portfolios totaling over 115,000 homes. In spite of this rapid growth, these institutional investors own only a small fraction of the market. According to the most recent American Housing Survey, an estimated 14mn houses are designated as rental properties, accounting for 11% of the US housing stock, leaving considerable room for expansion. As they have begun to seek additional leverage, institutional investors have turned to the securitized products market. Between November 2013 and August 2014, five of the seven firms have issued eight deals totaling $4.4bn, and the remaining two have indicated that they plan to come to market in the next few months. Total 2014 issuance is likely to reach $6bn, and by the end of 2015, we estimate the total size of the market will increase to $12-17bn. Because the performance of these transactions rests on expected rental streams, like commercial real estate, as well as home price appreciation, as in the residential market, we believe these transactions will appeal to a wide cross section of securitized products investors. Given this potential for broad appeal as well as the “newness” of this sector, we provide an introduction to singlefamily rental market, focusing on the sponsors, deal structure, and expected performance. To date, these transactions have been structured very similarly to Single Asset/Single Borrower CMBS deals, consisting of a single loan to one borrower. However, recent CRE Finance World Autumn 2014 24 commentary suggests multi-borrower deals may be forthcoming as institutional investors implement lending platforms to smaller owner/operators. Institutional Investors Following the subprime crisis, institutional investors rapidly expanded into the single-family housing market, with the largest seven firms acquiring a portfolio of 97,510 homes as of year-end 2013. Initially, the firms acquired these properties through foreclosure auctions, broker sales, and portfolio sales from government agencies and financial institutions. The firms have targeted properties in areas affected by the subprime crisis, with the largest state concentrations in California, Florida, and Arizona. The typical property is smaller than the national average of 2,169sf, and the firms have invested an average of $151,000 per home, significantly below median home prices of $222,900. As the residential market has stabilized, opportunities for discounted purchases have declined, causing the initial explosion in growth to stabilize. The firms increased their holdings by 18% during the first half of this year, and several indicate near-term growth to remain at a rate of 8-10% per quarter for the remainder of the year. While these firms continue to explore acquisitions, they are also adjusting their strategies to increase yields by pushing occupancy and rent levels across their current holdings, investing in non-performing loan portfolios, and providing lending platforms to smaller owner/operators. Investment from the three biggest investors, Blackstone, American Homes 4 Rent, and Colony Financial, makes up almost 80% of the total. While many of these firms have tapped the equity market for funding and are organized as real estate investment trusts, the single-family rental businesses of Blackstone and Colony remain private. In May 2013, Colony Financial retraced its initial efforts to launch its single-family rental business, as it believed the offered price did not fairly reflect its portfolio value. T Research Analyst Nomura Securities International, Inc. Lea Overby Research Analyst Nomura Securities International, Inc. Steve Romasko Research Analyst Nomura Securities International, Inc. Figure 1 Single-Family Rental Portfolio for the Top 7 Investors Source: Recent filings, Nomura research


CREFW-Fall2014 10.15.14
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