The first multi-borrower single-family rental securitization is on its way, and it could be just the beginning.
Ryan Stark, a managing director at Deutsche Bank, predicts that there will be $10 billion to $12 billion of deals this year, and he expects that at least $1 billion of this will be multi-borrower deals.
“Next year there will be even more multi-borrowers,” he said. That’s because, once a big operator gets its first deal done, it becomes easier to do repeat deals.
In the aggregate, smaller operators run far more properties than large institutional investors. This gives the multi-borrower segment greater potential.
Invitation Homes, a subsidiary of the Blackstone Group, served up the sector’s first deal of the year in January: Invitation Homes 2015-SFR1 is backed by a single, $540.9 million floating-rate loan that pays only interest throughout its two-year term.
There’s talk at IMN’s ABS Vegas conference that the first multi-borrower deal could come as soon as March.
In fact, most of Tuesday’s single-family rental panel was devoted to a discussion of how a multi-borrower deal might differ from a single-borrower deal and the challenges in managing, analyzing and rating a portfolio of loans that could range from as small as couple of million dollars to $25 million or more.
Colony American Finance, another large scale landlord, has a subsidiary that lends to smaller landlords. “We’re seeing borrowers across the spectrum, form the very small to mid-sized just below being able to access the capital markets,” Beth O’Brien, the firm’s president, said at the panel. She noted that, “just because a borrower is small doesn’t mean it’s unsophisticated.” One loan that just went before her firm’s committee was to a property manager that had managed single-family properties for 20 years.
Kruti Muni, senior vice president at Moody’s Investors Service, noted that some smaller borrowers have been around for much longer than the big operators that have done single-loan securitizations. (All of the deals to date are backed by a single loan that in turn is backed by several thousand single-family rental properties.) “Clearly [the smaller borrowers] have been able to perform, the challenge is to be able to bring information in line with what rating agencies and lenders need,” Muni said.
There are some benefits to a multi-borrower deal, namely the diversification of borrowers and the potential geographic diversity, she added. “On the other hand, there’s limited cross collateralization that you see in a single-borrower deal. Each borrower is exposed to local home price movements.”
Another benefit to single, large landlords is the strong relationships with their vendors and contractors; their purchasing power gives them economies of scale. That’s not going to be the case for deals backed by loans to multiple landlords of different sizes, Muni noted. On the other hand, some of the smaller landlords may be able to handle repairs and other management services themselves.
The biggest landlords still have plenty of inventory that has yet to be securitized. Stark said less than half of the properties held by the likes of Invitation Homes and Colony American are currently serving as collateral in securitizations. “And they are still acquiring properties, though maybe not at the rapid pace that they did in 2011 and 2012,” he said.