Who says bigger is better?
Some of the smaller landlords that Colony American Finance lends to have pretty sophisticated – and innovative – ways to manage credit. “One guy offers all of his tenants free Direct TV, and if the rent is one day late, he cuts off the TV,” chief executive Beth O’Brien said at IMN’s ABS East conference.
“I’ve never seen such on-time rent performance,” she said.
Another operator refuses to install microwave ovens in properties that he rents, opting instead for high end, stainless steel stoves, says O’Brien. “He did an analysis of repairs, and microwaves, ice makers and fridges [generate] a lot of phone calls, so he just got rid of them.”
The ice makers and microwaves, that is.
“People can bring their own microwaves and [the landlord] doesn’t get calls” when they break, she said.
Colony American lends to landlords of different sizes; some of the largest have 1000 or more rental properties. These tend to be non-recourse loans – the borrower is not personally liable for them – similar to a loan that would end up in a commercial mortgage conduit. They are available to landlords who can handle the cash management and recording required for such financing. At the other end of the scale, the firm makes loans to smaller landlords that are full recourse loans.
Until recently, companies like Colony American turned to the securitization market for their own financing. But this activity came to a halt over the summer, when spreads widened. Ryan Stark, a managing director at Deutsche Bank and another panelist, noted that the larger institutions all have warehouse lines of credit that allow them to accumulate – and hold on to – collateral. Some of them have multiples lines. So they could afford to wait until the cost of funding via securitization improves, he said.
“People said, ‘I don’t want to lock myself in at these spread levels, I can afford to wait’.”
Stark predicts that there will be a “relatively busy” issuance calendar in the fall.
He and other panelists expect to see more consolidation among investors in single family rental homes now that home prices have picked up in many once-depressed markets.