Single-Family Rental Securitization A publication of Autumn issue 2013 sponsored by CRE Finance World Autumn 2013 43 n many ways the securitization of single-family rental (SFR) real estate makes good sense: it is similar to established property types of CMBS in its operations, it contributes to the stability of a sector that was in crisis, and it is simple to identify and understand its revenue and expense drivers. However, given the newness of the sector, it may be difficult to quantify the sector’s potential size. Since the publication of a Request for Information (RFI) on rating bonds backed by singlefamily rental, DBRS has received input from a number of potential lenders, issuers, owners and operators, data providers, consultants and other interested parties. The responses have yielded many answers to the concerns that were listed in our original RFI, and also raised additional questions that need to be addressed. Particularly, it is possible that the securitization of single-family rental pools will not be sustainable in the future because they are reliant upon the massive market dislocation that unfolded in the late 2000s. Whether recent market conditions are such that there is an opportunity to securitize portfolios of SFR is one question. Whether portfolios of SFR can be securitized on an on-going basis is another. Will the same economics that make institutional SFR plausible today persist as the housing market recovers? Can the economies of scale that are gleaned from centralizing and professionalizing SFR operations, create enough benefit for the product to survive in the long run? The answers to these questions will be seen in the coming years. This report discusses the current state of the SFR market and the pros and cons associated with securitizing this product type. Overview The Single-Family Rental Space has experienced an elevated public profile with a flurry of activity in the past 12 months as a few large operators have issued public debt through IPOs and several others have been exploring the viability of securitizing single-family rental pools. Meanwhile, market participants continue to learn about the product and accumulate performance data. Since the first tenant renewals from institutionally owned properties purchased in the past two years are just starting to happen, we are just beginning to see statistics with regard to length of stay and the ability to pass through rental rate increases to SFR tenants. In 2011 there were an estimated 91 million year-round single family housing units in the United States, 14.8 million (17%) of which are considered to be rental real estate1. The vacancy rate in the space in 2011 was 15%2. History has proven that renters of single-family homes are more likely to be families, therefore neighborhood and schools do matter. Many institutional players have leasing velocity that is strong and has improved quite dramatically in the past year. They use a variety of approaches to reach their target renters and screen them for credit. Some demand is generated from individuals that are recovering from the recession and may have otherwise been homeowners, but lack the required minimum down payment or credit score. There is also pent up demand from low housing starts and the constrained multifamily market which is just now starting to experience additional supply after a period of more than three years of elevated rental increases coupled with low vacancy. Continued demand for single-family rental homes is difficult for DBRS to predict for a number of reasons. First, new family formation (a significant component of the target market for single-family rentals) remains low. Second, given the housing recovery experienced over the last few years, baby boomers may begin to put their houses on the market and downsize or may also become landlords themselves if they are looking for a supplemental source of monthly income. If they have owned their homes for years, they are likely to have a very low basis risk in their properties and therefore could undercut or cap the rents. As a result, renters may decide to accept a tradeoff for lack of efficient service from the “mom & pop” landlord for a reduced rental rate. Third, renters may start to repair their credit and prefer to purchase homes, ultimately creating higher than expected turnover and/or causing the landlords to lower their standards on the credit worthiness of renters. These concerns contribute to the wider question of whether the securitization of single-family rental real estate is viable in the long term. The Value of Institutional SFR Historically, the single-family rental market has been a fractured “mom & pop” business, which operated in an unsophisticated setting. Recently, substantial declines in value and capital markets dislocation in many markets has allowed large institutional players to purchase homes out of foreclosure for less than the replacement costs. These institutional players have access to two very important things that the “mom & pop’s” lack: cash liquidity and an ability to exploit economies of scale. However, the primary question that remains open is if the institutional investor will stick around once one takes away or levers the home appreciation. I David Nabwangu Senior Vice President, CMBS DBRS Inc. Rich Carlson Senior Vice President, Operational Risk DBRS Inc. Erin Stafford Managing Director DBRS Inc.
CRE Finance World, Autumn 2013
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