Single-Family Rental Securitizations Here To Stay?

photo by David McBee

Kroll Bond Rating Agency has released Single-Borrower SFR: Comprehensive Surveillance Report. It has lots of interesting tidbits about this new real estate finance sector (it has only been four years since its first securitization):

  • Six single-family rental operators own nearly 180,000 homes. (3)
  • Of the 33 SFR securitizations issued to date ($19.2 billion), nine deals ($4.6 billion) have been repaid in full without any interest shortfalls or principal losses. (4)
  • the Federal Housing Finance Agency (FHFA), which regulates Freddie Mac and Fannie Mae, announced that it had authorized Freddie Mac to enter the single-family rental sector on a limited basis to provide up to $1.0 billion of financing or loan guarantees. Freddie Mac reportedly is expected to focus on small-scale and midsize landlords that invest in SFR properties that the GSE considers to be affordable rental housing, not institutional issuers such as Invitation Homes, which owns and manages nearly 50,000 SFR properties. (5)
  • The largest five exposures account for 39.4% of the properties and include Atlanta (11,822 homes; 13.0%), which represents the CBSA with the greatest number of properties, followed by Tampa (6,374; 7.0%), Dallas (6,199; 6.8%), Phoenix (5,780; 6.3%), and Charlotte (5,733; 6.3%). (6)
  • The highest home price appreciation since issuance was observed in CAH 2014-1, at 30.7%. On average, collateral homes included in the outstanding transactions issued during 2014, 2015, 2016 and 2017 have appreciated in value by 25.0%, 18.0%, 8.7% and 3.2%, respectively. It is worth noting that the rate of the home price appreciation on a national basis and in the regions where the underlying homes are located has slowed in recent years. (7)
  • Since issuance, the underlying collateral has generally exhibited positive operating performance with the exception of expenses. Contractual rental rates have continued to increase, vacancy and tenant retention rates have remained relatively stable, and delinquency rates have remained low. Servicer reported operating expenses, however, continue to be higher than the issuer underwritten figures at securitization. (7)

Analysts did not believe that single-family rentals could be done at scale before the financial crisis. But investors were able to sweep up tens of thousands of homes on the cheap during the foreclosure crisis and the finances made a lot of sense. It will be interesting to see how this industry matures with home prices appreciating and expenses rising. I am not making any predictions, but I wonder when it will stop making sense for SFR operators to keep buying new homes.

The Single-Family Rental Revolution Continues


The Kroll Bond Rating Agency has released its Single-Borrower SFR: Comprehensive Surveillance Report:

Kroll Bond Rating Agency (KBRA) recently completed a comprehensive surveillance review of its rated universe of 23 single-borrower, single-family rental (SFR) securitizations. In connection with these transactions, 132 ratings are outstanding, all of which have been affirmed. The transactions have an aggregate outstanding principal balance of $13.0 billion, of which $12.6 billion is rated. These transactions have been issued by six sponsors, which own approximately 159,700 properties, 90,649 of which are included in the securitizations that are covered in this report. (3)

This business model took off during the depths of the Great Recession when capital-rich companies were able to buy up single-family homes on the cheap and in bulk. While the Kroll report is geared toward the interests of investors, it contains much of interest for those interested in housing policy more generally. I found two highlights to be particularly interesting:

  • The 90,649 properties underlying the subject transactions have, on average, appreciated in value by 10.2% since the issuance dates of the respective transactions . . . (4)
  • The underlying collateral has exhibited positive operating performance with the exception of expenses. Contractual rental rates have continued to increase, vacancy rates declined (but remain above issuance levels), tenant retention rates have remained relatively stable, and delinquency rates have remained low. (Id.)

KBRA’s overall sector outlook for deal performance is

positive given current rental rates, which have risen since institutional investors entered the SFR space, although the rate of increase has slowed. Future demand for single-family rental housing will be driven by the affordability of rents relative to home ownership costs as well as the availability of mortgage financing. In addition, homeownership rates are expected to continue to decline due to changing demographics. Recent data released by the Urban Institute shows the percentage of renters as a share of all households growing from 35% as of the 2010 US Decennial Census to 37% in 2020 and increasing to 39% by 2030. Furthermore, 59% of new household formations are expected to be renters. Against this backdrop, KBRA believes single-borrower SFR securitizations have limited term default risk. However, there has been limited seasoning across the sector, and no refinancing has occurred to date. As such, these transactions remain more exposed to refinance risk. (9)

Kroll concludes that things look good for players in this sector. It does seem that large companies have figured out how to make money notwithstanding the higher operating costs for single-family rentals compared to geographically concentrated multifamily units.

I am not sure what this all means for households themselves. Given long-term homeownership trends, it may very well be good for households to have another rental option out there, one that makes new housing stock available to them. Or it might mean that households will face more competition when shopping for a home. Both things are probably true, although not necessarily both for any particular household.

The (R)evolution of Single-Family Rental Securitization

Kroll Bond Rating Agency distributed its Single-Family Rental Securitization Methodology. Because this is a new asset class, it is interesting to watch how rating agency’s assess the risks inherent in it. And it will be interesting, of course, to evaluate down the road whether they got it right or not. The Methodology states that

Single-family Rental (SFR) securitizations are a new class of asset-backed securities with characteristics of both commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS). Like CMBS, the primary source of certificateholder distributions during the term of an SFR transaction are loan debt service payments that are generated by income producing real estate collateral. Also like CMBS, there is an element of balloon risk, as SFR loans do not fully amortize over their terms, and the repayment of ultimate principal on the certificates is dependent upon a successful refinance of the loan or loans that serve as trust collateral. However, there is a broader source of demand for the single-family homes underlying an SFR securitization, which can be sold into the vast market for owner-occupied homes, totaling approximately 79 million units. In the event that the pool of single-family homes backing an SFR securitization needs to be partially or entirely liquidated due to an event of default either during the loan’s term or at the loan’s maturity, the expected recovery from such a distressed sale of homes would be largely determined by the conditions in the larger market for single-family homes, which is a primary focus of RMBS analysis.

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the SFR securitization market is currently characterized by large institutional sponsors that have engaged in purchasing and refurbishing large numbers of single-family homes in distressed markets over relatively short periods of time.

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As this is an evolving asset class, we will modify or adjust our methodology to address new transaction features as they emerge. SFR securitizations to date have been collateralized by a single large loan that is in turn secured by mortgages on several thousand income producing single-family homes. While this methodology is designed for this structure, it is also applicable to securitizations secured by a few large loans. Structures featuring a larger number of loans to distinct borrowers, many of whom may be non-institutional in nature, pose additional credit considerations that are not addressed herein. (3)

This summary demonstrates that there are a lot of new characteristics for this asset-class that Kroll is trying to capture in its rating methodology. These include the hybrid nature of the security itself; the hybrid nature of the underlying collateral for the security; the innovative business model of institutional investors entering the single-family market in a big way; and the possible entry of new players in that market, such as non-institutional ones; and changes in the type of collateral underlying the securities.

The takeaway for readers: don’t mistake the apparent simplicity of a rating (AAA, Aaa) as a signal of the solidity of the reasoning that went into it. Ratings, particularly those for new types of securities, are constantly evolving. To think otherwise is to risk being left holding a bag filled with all of lemons that the market has to offer to unsuspecting investors.