Within the span of a year, institutional investors with large portfolios of single-family properties have tapped the securitization market with nine deals, creating an alternative form of exposure to the housing market.
But the players sponsoring these transactions hold roughly a quarter of a million properties, in aggregate. That’s a cozy village against the massive sprawl of fourteen million or so rental homes held by smaller operators. And as housing prices rise, institutional investors have been slowing their own purchases. Rather than compete with these smaller operators, they are actually financing them.
And the little guys from the mom and pops to the medium-sized investors are in a market that is still growing, as the share of Americans preferring to own instead of rent keeps slipping.
Structured finance players believe this category of real estate investors will be tapped for the first conduit single-family rental securitization in early 2015.
The collateral in question consists of loans to small-to-medium operators of single-family homes and potentially other kinds of rental properties as well. The three most recognizable lenders in the field Colony American Finance, B2R Finance and FirstKey Lending are all under two years old and offer similar but not identical products.
CAF, a unit of Colony American Homes, funds purchases and refinancings of portfolios of five to 500 homes. The loans range from $500,000 to $100 million and can last up to five years.
“The range is extensive because the investor base in this product spans quite a large range,” said Beth O’Brien, president of CAF, who pointed out that within a week in August the company was closing both a loan of about $60 million and one for closer to $600,000. But the bulk of demand, she added, is likely to remain closer to the lower end. “There aren’t a ton of people who need the larger loans so I wouldn’t expect that to be the bread-and-butter of the market,” O’Brien said.
B2R, for its part, lends to landlords and rental-home owners who are looking to purchase between five and 1,000 properties, which includes single-family homes as well as two-to-four family homes, townhouses, condominiums and multifamily apartment buildings. The loans run from $5 million to $50 million and are five-year floating- or fixed-rate or 10-year fixed. On its website the lender says it can provide a “blanket mortgage against assets in different states.”
Officials at B2R did not respond to requests for interviews.
FirstKey Lending provides loans of $75,000 to $500 million for one-to-four family rental homes, townhouses, and condos. For smaller loans of $75,000 to $1 million, terms are for 30 years and the rate is fixed. The next tier fixed-rate loans from $500,000 to $3.99 million have terms of five and 10 years. The largest clients those seeking between $4 million and $500 million can take out fixed-rate loans of five, seven and 10 years.
Officials at FirstKey Lending did not return requests for comment on this article as of press time. All the lenders have a potentially wide geographic scope and are open to operating in most, if not all, the states, though demand is widely expected to be concentrated in a dozen or so.
CAF and B2R both have related companies that have already completed single-borrower single family securitizations. CAF’s is its parent, Colony American Homes, which has priced two securitizations to date. In the case of B2R, parent company Blackstone also owns Invitation Homes, which issued the first single family rental securitization in November and has followed up with two more.
A key difference with the single-borrower and multiborrower is one of scale: while the former accounts for properties hundreds of thousands the latter is in the millions, perhaps up to fourteen. The sheer size of the potential market, and the fact that single-borrower deals have become a viable asset class only this year, have many in the structured finance market looking forward to the debut multiborrower transaction.
Sources consulted for this article agreed that the first quarter OF 2015 is the likely time for a debut.
“It’s going to happen,” said Stephen Blevit, a partner at Sidley Austin. “I know the volume that the lenders who are making these loans have made and I think I have a good idea of where they’ll be at that time.”
Nitin Bhasin, an analyst with Kroll Bond Rating Agency, said that there already does seem to be enough collateral from the three new lenders to justify a maiden SFR multiborrower deal of at least a quarter of a billion, which may be large enough to make the transaction economical.
O’Brien said that securitization was CAF’s goal. “All the three main players are building books looking towards securitization,” she said, adding that in the case of CAF financing has so far been with the kinds of warehouse facilities that are typically the precursor to securitization. She predicted that the volume of a first deal would likely be between $300 million and $350 million, the amount needed to ensure enough secondary market liquidity.
No one in the market is disputing that this sector will generate securitizations but there is skepticism about whether it can grow into a hefty asset class, in the neighborhood of, say, the residential or commercial mortgage-backed markets.
Laurie Goodman, director of the Urban Institute’s Housing Finance Policy Center, is one of the skeptics. “I think the potential is much smaller than what most people think,” she said, adding that smaller real estate investors who own a few properties are covered by the GSEs and that many that are too large to meet the GSE limits may find that financing is more economical from banks than from the new crop of lenders.
“I have some real doubts as to whether a hedge fund, or a private equity firm, is going to be the most efficient provider of funding to these entities,” she said.
A Freddie Mac spokesperson did not return a request about which products might compete with CAF, FirstKey and B2R.