The single family to rent (SFR) securitization market has grown in the past couple of years, with deals coming to the market on a regular basis from numerous SFR institutional investors. The market has continued to evolve, with the latest evolution being the multi-borrower SFR securitizations from First Key (a unit of Cerberus) and B2R (a subsidiary of Blackstone). Year-to-date, we have seen more than ten transactions (multi-borrower & single-borrower) come to the market, with forecasted issuance for full year 2015 of $10-15 billion.
The SFR business is not new. According to the American Housing Survey, there are more than 11 million single family occupied homes that are rented. Additionally, based on Morgan Stanley research, during the peak of 2005 through 2007, approximately 30% of rental units were single family homes owned by investors (this number has risen to approximately 35%, according to Morgan Stanley). What is new is the level of participation by institutional investors such as Blackstone and American Homes for Rent. These institutional investors have transformed and assisted in the recovery of the overall housing market by 1) picking up the slack in demand left by individuals who have found it difficult to obtain credit to purchase a home and 2) removing from the market some of the distressed housing inventory. Although there has been strong job growth, the low labor participation rate and high debt levels for millennials (consisting of student loans and other debt) have made it difficult for first time buyers to obtain a mortgage to purchase a home in recent years. Additionally, post the 2008/2009 housing crisis, renting does not have the negative connotation it once had. These factors, among others, have led to strong demand for rental housing.
The first SFR securitizations were from large institutional investors such as Blackstone, American Homes for Rent, and Colony American Homes, among others. The structures were relatively simple, with one loan made to the loan seller, cross collateralized by multiple single family residential properties. This loan was deposited into the trust, with the trust issuing various classes of bonds from AAA down to non-investment grade. The structures were taken from the large loan floating rate CMBS market. These early SFR deals benefited from strong house price appreciation. The challenge going forward for the larger institutional buyers will be finding enough supply at the right price that still makes their overall return objectives attainable.
The multi-borrower transactions look more like conduit CMBS where there are multiple loans to multiple borrowers with each loan secured by the respective borrower’s SFR properties. The structure is not the only difference between the single borrower and multi-borrower SFR transactions. The initial multi-borrower transactions had smaller properties that were generally older than many of those secured by the single-borrower transactions. This could lead to higher turnover, maintenance, and repair costs; leading to more variability in net cash flow.
We think the multi-borrower SFR securitizations may dwarf the institutional deals in terms of number and overall issuance volume in the coming years. Additionally, we expect continued evolution in the market such as multi-borrower deals backed by smaller loans to individual investors who own fewer properties. We believe the SFR securitization market offers a strong diversification opportunity in both core and unconstrained accounts for investors who have a disciplined, fundamental research capability.