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CRE Finance World, Autumn 2013

The value that institutional players provide the SFR market are 24/7 responsiveness to the needs of renters, purchasing power on materials for repairs and capital expenditures, and an established brand as a good neighbor within home owners’ associations. This level of service provides tenants with the comfort and familiarity of an established brand manager. DBRS research shows that this level of responsiveness and service is something the “mom & pop” or individual entrepreneurs would be challenged to compete with. Therefore, the institutional SFR has the ability to add real value to the economy. Consumers (Renters) could expect consistent and prompt responsiveness from professional property managers (with a mandate that is pro-tenant), that show up at the door in uniform. As with traditional multifamily, operators of a certain size can leverage their “buying power” for appliances, paint, HVAC equipment, and management services. Therefore, centralization of purchasing and contracting will help to keep expenses in check. Having standard appliances or finishes across all properties helps to reduce the disadvantage of properties not being in one location. The Case for Rating SFR DBRS issued a request for information in May 2012 looking for additional information on the single-family rental market in order to mark the beginnings of methodology exploration. The asset class can neatly borrow from both CMBS and RMBS rating approaches: CMBS has cash flow producing assets and the SFR assets, when rented, are income producing. RMBS relies on market value declines and the houses as the tangible saleable asset should the cash flows prove to be insufficient to cover the debt service payments. Both CMBS and RMBS rely on servicers to manage the payments and in this asset class it would also heavily rely upon the property manager and the leasing agents whose jobs resemble that of an apartment manager. In CMBS, cash flow is considered to be the key driver of credit risk. The element of the single-family rental market that would make it different from an RMBS or a liquidating trust is the ability to recognize the cash flow of the underlying assets. Factors that influence the rental cash flow of the asset include the assessment of the viability of each rental market, the appropriate credit loss or vacancy factor, the lease structures, the assessment of property quality and the expenses associated with the upkeep and operation of the assets at a property and portfolio level. CRE Finance World Autumn 2013 44 Concerns and Mitigating Factors Market vacancy & market rents There are many sources of market vacancy and rents, including a potential issuer’s own holdings and the national housing surveys which look at rental vacancies nationally. The challenge for SFR is that market dynamics (in terms of vacancy and rental rates) contain block by block and neighborhood considerations. Many times rental rates can change drastically if you are on the wrong side of the street (and, potentially, in a different school district). This issue is being addressed by players who are now seeking to more closely monitor the SF rental space and have the knowledge to gather, scrub and analyze the data. Corelogic is amalgamating public rental listing data to track rental rates, which is helpful. The multiple listing service (MLS) data can provide insight into how the asset class behaves, on average. However, drilling down into each neighborhood or block is problematic using MLS data for a variety of reasons. Many times the listings are simply not granular enough, lack data on concessions, or rely on data from properties that are not adequately comparable to each other. For this reason, market participants that are gathering, storing, cleaning and controlling raw data are adding clarity to the cash flow volatility of this property type. For example, Rentrange.com is using public, proprietary, and MLS data to track rental prices in these markets. The construction of appropriate comparable sets can yield substantially different results in terms of implied cash flow volatility, as seen in the chart below which compares raw listing data to cleaned Rent Range data. Chart 1 Change in Average Cash Flow (Houston, Q1 2009–Q2 2013) Single-Family Rental Securitization


CRE Finance World, Autumn 2013
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