Single Family Rental Securitization Market

The Single Family Rental Market

The single family rental market has existed for decades as a thriving part of the U.S. housing market. Investment in single family homes for rental purposes has provided many opportunities for the American “mom and pop” investors to build and maintain wealth, prepare for retirement, and hold residual cash flow producing assets. According to the National Rental Home Council (NRHC) (“Single-Family Rental Primer”; Green Street Advisors, June 6, 2016) as of year-end 2015, the single-family rental market comprised approximately 13% (16 million detached single-family rentals) of all occupied housing and roughly 37% of the entire United States rental market.

Single-Family Rental Securitization Structure

Introduce the credit crisis of 2008. Limited credit for non-prime borrowers in combination with record setting delinquency and foreclosure rates prompted a significant reduction of housing prices. According to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, since the index’s launch in May 18, 2006 (initial index value = 184.38), national house prices had dropped 25% (index value = 138.5) by April 2012.

The market dynamic combination of low prices and post-crises rental demand along with highly restrictive mortgage credit qualifications alerted particular investors to an opportunity. Specific private institutional investors, mostly private equity firms, began acquiring large quantities of distressed single family homes. According to the working paper entitled “The Emerging Economic Geography of Single-Family Rental Securitization” by the Federal Reserve Bank of San Francisco (Fields, Kohli, Schafran; January 2016) the entrance of these “large institutional investors into their new role as ‘corporate landlords’ [represented] a paradigm shift for the single-family rental market.”

Not only did they rehabilitate the homes and rent them out to non-prime borrowers, they then in turn introduced these assets into the capital markets by pledging the collateral and rental receipts into publicly issued REIT’s as well as issuing single-family rental securitizations (SFR). The issuance of single family rental securitizations was a new concept utilizing an old vehicle, the issuance of a bankruptcy remote special purpose vehicle for the purpose of issuing debt via pledged collateral assets.

In this case, the collateral is generally a loan secured by a first priority mortgage (that was placed in an LP or LLC) backed by the pledging or sale of the underlying single family homes operated as rental properties (also normally placed in a previous LP or LLC). Not only did this provide a strong exit strategy for investors because it allowed them to obtain immediate capital, but they were also able to increase their leveraged return on equity.

When Did Single-Family Rental Securitization Begin?

The first securitization transaction was issued in November 2013 by Invitation Homes (IH, 2013-1), a subsidiary of the Blackstone Group BX. As of July 2016, 32 single-borrower (26) and multi-borrower (six) SFR transactions have been issued. The table below provides a list of all SFR single and multi- borrower securitization transactions rated as of July 2016.¹²³

Table: SFR Securitization Transactions Rated as of July 2016

Interestingly, the current inventory owned as well as securitized is only approximately 1 to 2% of the overall market. Also of particular interest is the recent consolidation of institutions active in this market and the introduction of new participants. American Homes 4 Rent (AM4R) acquired Beazer Rental Homes in July 2014 and Colony American Homes (Colony) merged with Starwood Waypoint Residential Trust (SWAY) in January 2016. Subsequent to the Colony and SWAY merger, this newly formed company issued its own SFR securitization in June 2016 of approximately 3,600 properties with a loan balance of $536 million (CSH, 2016-1). Moreover introducing themselves into the SFR securitization market was Home Partners of America (formerly Hyperion Homes, Inc.), which issued its first single-family rental securitization earlier this year (approximately $654mm, property count of 2,232).