Players in the REO-to-Rental space see a bright future in pooling the cash flows of many operators into conduit transactions.
Speaking on a panel at ABS Vegas, Deutsche Bank Director Ryan Stark said that the 14-million-home rental market is very fragmented. He characterized most operators as the “mom n’ pop” variety, with one or two homes.
Stark predicted that as this asset class evolves — it is still very green with the sector’s debut deal by large operator Invitation Homes pricing only last November — there will different tiers of transactions conditioned by the size of the corresponding originators.
Blackstone, which owns Invitation Homes, and Cerberus Capital each have firms that cater to the smaller operators as well, Stark said. Cerberus’s firm, FirstKey Lending, recently expanded its rental mortgage program beyond the $5 million to $100 million range to include $1 million to $5 million mortgages.
But with smaller operators there would complicated challenges for assessing risk.
“There were so many questions on the single-borrower deal,” said Brian Grow, a managing director at Morningstar Credit Ratings. “With the multi-borrower deal, there are new risks the cash flow mechanics, and replacement and back-up property managers have to be addressed.”
Glen Costello, a senior managing director at Kroll Bond Rating Agency, said gathering information to estimate default rate would be trickier for a multi-operator deal. Sidly Austin Partner Stephen Blevit added that for the very small operators, the evaluation of the collateral might resemble that done for a residential mortgage.
The ratings analysts on the panel pointed out that while the sector shares some similarities with multi-family CMBS, the fact that the homes are dispersed as opposed to a single building makes it a different animal. “We stress the cash flow more than in a multi-family side,” said Kruti Muni, a manager at Moody’s Investors Service.
Stark said the REO-to-rental product could grow to a $15-$20 billion market. Analysts at Deutsche have already forecast $5 billion in issuance this year.
There are a slew of single-family home rental securitizations already planned. Among them deals by American Homes 4 Rent, American Residential Properties and Colony American Homes are the catalysts for growth in the space, according to analysts at Morgan Stanley earlier this month.
Some clearly believe the market is getting ahead of itself.
In an earlier panel, Vincent Fiorillo, global sales manager at the DoubeLine Group said he found the pricing on the Invitation Homes deal too tight. The deal was oversubscribed five times, according to Stark.
Fitch Ratings at least would apparently not have given the senior piece of Invitation homes a triple-A as Kroll, Moody’s and Morningstar did.
Last October Fitch said that it would likely cap its ratings on REO-to-rental deals at A’ level. “Insufficient history along with a number of structural challenges prevents Fitch from considering AAA’ ratings on single-family rental (SFR) securitizations at this time,” said analysts at the agency.