Since the 1970s the residential mortgage market has played a major role in the various crises that have erupted onto the financial markets. Usually residential housing has been the troubled asset class seeking an innovative bailout to keep balance sheets, and even whole industries, from imploding completely under the strain of overextended credit and complex deal structures.
This time the story is taking a different turn. Single-family rental (SFR) securitizations, which emerged as an asset class as a way to bring liquidity to the mortgage market after the financial crisis of 2008, saw healthy issuance levels during the pandemic. High demand for more spacious dwellings contributed to a favorable home price environment. That has buoyed the sector, and supported a healthy securitization deal pipeline, even though some home renters experienced financial difficulty and were unable to pay their rent.
Demand from owner-occupied and investor property loans show that prices continue to rise and the appetite across the single-family, residential mortgage sector housing has been tremendous, according to Roelof Slump, a managing director at Fitch Ratings. Performance has varied, depending on the location of the properties, but lower appreciation has only occurred in a few markets. Performance of the underlying collateral has also been strong. The performance of investor and owner occupied properties has been favorable due to increased liquidation prospects given the healthy house prices.
"Ultimately we expect the asset class to grow, but might experience a slip at some point if purchasing of owner-occupied properties and rents lets up,” Slump said. “However, we believe that purchasers will continue to be active and competition will be there in terms of who wants to get into the market. Given the interest rate environment, this should help to sustain home prices."
Pandemic Impact
Single-family rental securitizations can be viewed as a hybrid, product that blends commercial-style loans taken out by institutional-level borrowers, which are collateralized by income producing residential properties. The trusts are collateralized by loans that are commercial in nature, with the primary source of income coming in the form of rents generated by the tenants, explains Daniel Tegen, a senior director at Kroll Bong Rating Agency. They recently rated Progress Residential 2021-SFR5.
The COVID-19 pandemic was the first time that the asset class was subjected to economic disruption since sponsors began originating the loans in 2013, Tegen said. Prior to the pandemic, the sector operated in an environment characterized by rising home prices, increasing cash flows, and rising rental income. All of this was relative to the retail and lodging in the CMBS sector, both of which were more severely impacted during the pandemic — SFR performed well in comparison to looking at the CMBS asset class as a whole.
“Home values and prices showed resilience over that time and the sector performed well. In rating securitizations, we look at rent collection, which has remained relatively strong with most tenants showing they have the ability to pay rent,” Tegen said. “We did see a dip in rent collection levels, but as the economy recovered, the percentage of rent collection received recovered to near or at pre-pandemic levels generally from the low- to mid- 90 percent.”
In general, Tegen said that there is heightened interest from owner-operators, issuers and investors. In addition to operators constructing their own purpose-built communities, along with joint ventures and partnerships between institutions that manage SFR and builders, there have been increased prospects in the build-to-rent sector. As far as the growth in SFR demand, the rise is driven by the millennial demographic who are relocating from densely populated urban areas to suburban locations.
Performance Considerations
"When we compare the multifamily default rate in the U.S. conduit transactions that we rate, there is a slightly higher default rate for SFR transactions,” says Britt Johnson, senior director in the CMBS group at Fitch Ratings. “The numbers are skewed by the fact that the universe is smaller. If you look at the rating actions in SFR securitizations, you can see that ratings have been affirmed or upgraded across the board."
Fitch tracks delinquency by property type. For U.S. conduit multifamily loans that Fitch rates as of May 2021, there was a 1.93% in the 60-plus day delinquent loans and 0.52% for the U.S. Fitch rated multifamily universe. Meanwhile, the delinquency rate for SFR securitizations that Fitch rates as of May 2021 was 2.36%.
"That has actually come down from the roughly 4% rate in mid-2020, so performance has actually improved since then," Johnson said.
Tegen said that, From the perspective of the stability of home prices, the potential for home price appreciation, and in terms of the potential growth of rents and cash flows, the management of expenses by the operators — and just the overall data point of the performance of the institutional portfolios of homes — there have not been any loan delinquencies or defaults experienced to date. Strong underlying conditions like these suggest that should the revenue to the trust fail to pay off the notes and the underlying portfolio need to be liquidated, the appreciation of home prices will support the sale of collateral to pay off the notes.
Slump and Johnson said that, in terms of the effect on SFR deals of employees going back to work post pandemic, they are not seeing any impact as of yet. Employees with more room in their rental homes may likely not move back to a dwelling with a smaller space. Also, given the current hybrid work arrangements that have proliferated, workers do not have to be in the office all of the time.
Pipeline Ahead
Current market conditions suggest that the SFR has positive forward momentum, with a healthy stream of about 10 SFR deals in the securitization pipeline through the end of 2021, Tegen says. He added that KBRA is expecting strong issuance into 2022. This is comparable to the benchmark relative to the past year — in 2020, issuance of single borrower and institutional multi-borrower SFR was at $9.5 billion with 16 deals issued during the entire year. For 2021, to-date, 11 deals representing nearly $7 billion have been issued, so on a deal count and on a dollar basis, full-year issuance is expected to exceed 2020 levels.
"The pace of acquisitions by most operators growing their portfolios, the resilience of home prices throughout the course of the last year, strong home prices prior to pandemic, along with a low interest rate environment have resulted in increasing interest in the asset class. These factors, when combined with the relatively strong performance of the SFR sector, have contributed to the healthy issuance volume," said Akshay Maheshwari, a director at KBRA.
