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CRE Finance World, Winter 2014

A publication of Winter issue 2014 sponsored by CRE Finance World Winter 2014 55 These large investors have employed a “cherry picking” approach to building their portfolios giving significant consideration to the prospects for future rent growth and home price appreciation. In the chart below, we present our estimates of where the institutional investors have purchased homes. Figure 7 Almost All of the PE Purchases Have Been in the South and West Regions Source: Deutsche Bank, RentRange, various company reports The large investors have not been active in the Northeast region primarily because of the relative lack of available distressed inventory in this region and higher prices. On the other hand, the South has much lower prices and had the second-highest (the West had the highest) distressed inventory levels over the last few years. As a result, of all the homes the private equity firms have purchased, 57% are in the South and the West region represents another third of their portfolio. In terms of home appreciation we observe that market selection mattered. As shown in the HPI series below, the net effect of the large scale purchases in selected markets was a slowdown in the actual appreciation rate compared to the national average over the last two years since these purchases put a floor under prices. However, going forward our analysis indicates the impact of these purchase on HPI in these markets will wane and the superior fundamental outlook will drive appreciation rates higher in these markets than the national average. The difference won’t be large — only around 100bps — but the reversal of the trend is still meaningful. Figure 8 Home Price Appreciation for PE Portfolios Has Slightly Outpaced the National Average Source: Deutsche Bank, CoreLogic, various company reports Although the collateral type is new to the market, a few of the transaction’s distant cousins can be found in the single-asset CMBS market. In the last year, there have been four portfolios that have been financed through the market, and Blackstone has been a co-sponsor on two of them – one of which the JWRZ portfolio is detailed below. The other portfolio, the Kyo-ya, also serves as a useful comparison in that it is a large floating-rate loan, sponsored by a large private equity firm with a large number of underlying rooms. Moody’s used an 18% values haircut compared to 48% on the Kyo-ya loan and 41% on the JWRZ loan. Judging by the success (based on the tighter than expected pricing and oversubscription of every bond) of the IH-2013 transaction, the “mold” has been set and the next few transactions will closely mirror the transaction in terms of structure, single sponsor and conservative underwriting. Home Rental Securitizations Are Born


CRE Finance World, Winter 2014
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