Last week, FeatherStone, a private equity firm that is not exactly a household name, queue jumped when it said it was ready to go with its first securitization of debt financing repossessed single family homes.
Despite announcing in its press release that a deal would be ready in “weeks,” FeatherStone told ASR in an interview that it has yet to select a ratings agency to rate the deal, nor has the group selected a lead underwriter to lead the transaction.
ASR spoke with several securitization industry players, including ratings agency and banks that are said to prepping their own real-estate-owned-to-rental structures, but none were familiar with FeatherStone.
Obtaining a rating for this asset class is just one of the challenges that stalled what many see as a potential market for REO-to-rental securitization. Another challenge for issuers has been acquiring enough assets to collateralize deals.
FeatherStone said that it has been purchasing REO properties for conversion to rentals since 2008. Through its joint venture partnerships with mom-and-pop operations across the U.S., it has built a portfolio of 35,000 properties managed by several different property managers. The group did not disclose which investors it has joint ventured with.
“FeatherStone is made up of actual property owners and investors that own their assets,” said James Larkin, the co-chairman and an investor in the group. “It is literally made up of asset owners pretty much across the country [and] that is how we scale our assets.”
Once the group understood the securitization platform, which Larkin says has been a year-long process; FeatherStone was able to readily scale a portfolio of properties that have three to four years of seasoning.
Featherstone said it securitization program allows investors to participate in both the immediate rental cash flow as well as the potential capital gains from the sale of the component properties in the deal.
Kevin Blaser, a former senior portfolio manager at Shay Financial Services, has been hired to take charge of the securitizations of the company’s REO-to-rental portfolio.
Blaser said that the structure raises the profile of the deal and accesses a broader investor class. If things go sideways, meaning that the loan isn’t paid off and the value of the property falls, the investor is exposed to that in a traditional securitization trust. Investors are still exposed to this risk under the proposed FeatherStone structure, but Blaser said that investors also have the opportunity to participate on the upside.
Allowing investors to participate on the upside adjusts the risk profile of the securitization.
“We combine the onward benefits of the debt side, meaning that you get a targeted maturity date, a coupon payment, principal returned to the investor, but we also add onto that an ability to participate on the upside that offsets some of the risks of being exposed to the value of the property,” he said.
Blaser said that this makes the FeatherStone structure “unique” and he expects it will spark some interest in the structure from other REO-to-rental players. It should bring down borrowing costs.
The bonds issued through FeatherStone’s program are anticipated to have a five-year maturity, a floating-rate coupon, and at least one rating by a major ratings service; and the deal will be issued via the 144A market, Blaser said.