REO-to-Rental Edges toward Conduit Deals
Players in the REO-to-rental space see a bright future in pooling the cash flows of many operators into conduit transactions.
The 14-million-home rental market is very fragmented, Deutsche Bank director Ryan Stark said while speaking on a panel at ABS Vegas. He characterized most operators as the “mom-and-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 be 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 be complicated challenges for assessing risk.
“There were so many questions on the single-borrower deal. With the multi-borrower deal, there are new risks. The cash flow mechanics, and replacement and back-up property managers have to be addressed,” said Brian Grow, a managing director at Morningstar Credit Ratings.
Gathering information to estimate default rate would be trickier for a multi-operator deal, Glen Costello, a senior managing director at Kroll Bond Rating Agency, said.
For the very small operators, the collateral evaluation is similar to that done for a residential mortgage, added Sidley Austin, a partner at Stephen Blevit.
The ratings analysts on the panel pointed out that while the sector shares some similarities with multifamily commercial mortgage-backed securities, 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 [on the] multifamily side,” said Kruti Muni, a manager at Moody’s Investors Service.
The REO-to-rental product could grow to a $15 to $20 billion market, Stark said. There will be at least $5 billion in issuance this year, analysts at Deutsche have forecast.
There are a slew of single-family home rental securitizations already planned. Among them are deals by American Homes 4 Rent, American Residential Properties and Colony American Homes. These are catalysts for growth in the space, analysts at Morgan Stanley said earlier this month.
Some clearly believe the REO-to-rental market is getting ahead of itself.
The pricing on the Invitation Homes deal was too tight, Vincent Fiorillo, global sales manager at the DoubleLine Group said in an earlier panel. 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.
Fitch caps 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 securitizations at this time,” said analysts at the agency in October.