REO to Rental: Closer, but No Securitization

FEB 6, 2013 10:53am ET

Other options for financing REOs include secured credit lines, lending syndicates, high-yield debt, and financing from government-sponsored enterprises.

Waypoint Real Estate Group, a private equity real estate fund that owned more than 2,200 homes in California, Phoenix, Chicago and Atlanta in 2012, plans to ramp up its purchases to 11,000 homes by the end of 2013. In September, Citigroup made a $65 million loan to Waypoint for investments in distressed single-family houses converted to rentals. By October, Citi had already topped off that loan with a $245 million revolving credit facility for the renovation, long-term ownership and management of Waypoint’s portfolio, according to a press release.

Beasley told ASR that, although this type of balance sheet lending serves as a precursor to executing securitization transactions, beyond the ongoing preliminary, exploratory conversations, the company is not actively working on any securitizations at present. “We are very happy with our bank facility with Citi and will be keenly observing how the securitization market develops over the upcoming year,” he said. “We are in good shape on debt for now and focused on exploring additional avenues for raising additional equity capital over the upcoming months.”

D’Vari also noted that at this point, investors don’t really “need a whole lot of leverage to generate relatively ‘juicy’ cash-on-cash returns, which by themselves are very attractive even without much home price appreciation on the investment exit.”

“After expenses and management fees, the generated cash-on-cash often range in high single digits but gets adjusted down by vacancies,” he explained. “Therefore, the flexibility of bank lines makes them more attractive versus somewhat rigid terms in securitization.”

Another financing trend developing for financing acquisitions of single-family home rentals is unsecured debt raised by specialized real estate investment trusts.

According to D’Vari, while portfolio lending to a well-sponsored lender is available, ultimately the discussion is moving toward a REIT structure—where the assets are alternating, and the vehicle is more dynamically managed than what you would find in bank fund or securitization vehicles.

D’Vari said that because REITs have audited financial reporting, research coverage, regular dividend and possibly rating, it makes them a natural exit for the REO-to-rental private equity funds over the four-to-five-year horizon. This matches the typical funds redemption period.

And within the REIT space, some players are looking to broaden their access to debt capital by going public. Silver Bay Realty Trust Corp., a REIT that buys single-family homes to be held for rental or resale, completed an initial public offering in December that raised $245 million. American Residential Properties is another REIT that has filed the initial paperwork to go public.

“Having the ability to go public is one of the exit strategies for these single-family rental operators and gives them a chance to monetize their assets,” said Ray Huang, an analyst with Green Street Advisors.

But this option of going public is only really for REITs that can achieve the right economies of scale; it still continues to be a challenge for players in the space to acquire a sizable portfolio large enough to go public. “In this space, the bigger you are, the more access to capital you typically have, so bigger is definitely better in the REIT space,” said Huang.

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