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CRE Finance World, Autumn 2013

A publication of Autumn issue 2013 sponsored by CRE Finance World Autumn 2013 45 DBRS believes it is still too early to form an opinion on the resilience of rents and ongoing demand of the tenants. The data has only begun to be gathered on a systematic integrated basis in the recent past as institutional interest in SFR increased. It is therefore difficult to find clean data that predates 2009. Assessment of the Property Condition Rented single-family homes allow more limited access for site visits than commercial properties, which may pose challenges for servicers or issuers that need to visit and assess the collateral. This concern could be mitigated somewhat by sampling both vacant and occupied homes to gain a qualitative sense of the markets and neighborhoods where the properties are located. Sampling the pool for inspection would be made easier by the fact that homes in SFR pools are often clustered locally in order to take advantage of leasing & maintenance practicalities and market research conducted by the issuer/borrower at the time of acquisition. With multifamily, CMBS market participants get comfortable that there are third-party reports including an environmental and engineering report that will assess the condition of the asset — combined with annual servicer site visits and often a site visit by the investors. In the case of a portfolio of hundreds or thousands of homes, it is difficult and more often legally prohibited to gain access to a rented home without prior notice to the tenant and may not be practical for a third-party to perform additional independent verification of all of the assets in a timely fashion. This concern can be mitigated if the issuing entity or servicing entity ‘touches’ each asset on a periodic basis. Visits to the property can be justified in order to perform regular maintenance such as changing the batteries in fire alarms, replacing the furnace filter, or other on-going maintenance tasks which permit an inspector to walk through and take stock of nearly every room in the house. DBRS believes that this could form the basis for the service site visit that the market has grown accustom to in CMBS to ensure that the quality of the assets are being maintained. Expenses There have been strong and positive developments made toward making the management side of the equation efficient with call center technology and the outsourcing of maintenance and leasing agents. Most of the homes require a level of renovation prior to being made available for rent. This is true not only for institutional players, but the “mom & pop” scenarios as well. Certain things are expected to be in the capital expenditure budget much like multifamily, such as new paint, repairs of deferred maintenance and replacement of damaged appliances. Unlike multifamily, SFR leases are structured such that renters are required or otherwise encouraged or incentivized to do some basic upkeep of the home like: mowing the lawn, shoveling the sidewalks and performing certain routine maintenance items. DBRS finds the “treat it like you own it” philosophy to be a very delicate balance for these landlords and believes it is more successful when renters are incentivized through rental concessions or through a cap placed on the rent which offsets the maintenance. In theory, by eliminating some common maintenance items typical in multifamily, this should help to keep the expense ratio lower than the multifamily equivalent. In addition, bulk operators of SFR will have the advantage of vastly improved purchasing power with the major national home improvement chains that are amenable to providing discount pricing and integrated information technology and purchasing software. The economies of scale of centralized buying are significant. But, in other ways SFR pools do not benefit from scale: SFR pools will have more HVAC units with limited useful lives, more washers & dryers (if provided), more roofs, more garages, etc. Those things will be more costly to replace because they are one per house as opposed to a multifamily property where some of those expenses can be spread across multiple units. Estimates for the cost of these items are untested. Many of the recent pools being contemplated for securitization have undergone significant recent renovation and refurbishment. They likely have new furnaces, refrigerators, ovens, washing machines, dishwashers, AC units, and other major appliances. The expense ratio experienced in the first 2 years of operation of a newly rehabbed SFR pool will certainly be different as the assets season and the end of the useful life of those appliances approaches. This concern can be overcome if operators have, or are partnered with, players who have deep experience, and who can provide a detailed maintenance budget that considers the depreciation of the major appliances and capital items — and includes these in underwriting. With multifamily properties, as expenses rise rents will often follow suit, keeping an expense ratio of 45% on average. It has been untested as to whether or not rents can be as easily raised without effecting occupancy in the single-family rental space. It would appear to be a better value for a family to rent a single-family house than an apartment because of the price per square foot, but the real expense ratio of these properties is not something that has been historically tracked against institutional standards. Single-Family Rental Securitization


CRE Finance World, Autumn 2013
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