Financing for single-family rental properties has expanded significantly over the past five years as several large financial institutions entered the market, but Redwood Trust still sees plenty of room to grow.

Last month the real estate investment trust announced it was acquiring a 20% stake in 5 Arches, a lender based in Irvine, Calif., that originates and manages loans used to acquire or refinance rental homes, bridge loans on multifamily properties, and “fix and flip” loans.

Redwood now has exclusive access to 5 Arches' single-family loan rental loan production, which includes up to four properties, and a one-year option to buy the remaining 80% of the company.

Marty Hughes will retire as CEO and member of the board of directors of Redwood Trust effective May 22.
Marty Hughes will retire as CEO and member of the board of directors of Redwood Trust effective May 22. Bloomberg News

It’s a market that has already attracted large players including CoreVest Amercan Finance, which is now controlled by Fortress Investment Group. American Homes 4 Rent, one of the nation’s largest landlords, has also been financing landlord loans by purchasing them from two lenders, Lima One Capital and Visio Financial Services.

During a conference call Monday to discuss first-quarter financial results, Dashiell Robinson, Redwood’s executive vice president said that “secular trends” such as a lack of supply of rental homes and the relative affordability of renting versus owning should continue to drive demand.

What’s more, the market for financing these rental properties is “inefficiently served,” Robinson said.

5 Arches has originated over $1.3 billion of business-purpose residential mortgage loans since its inception. In its April 30 press release announcing the deal, Redwood noted that 5 Arches has “thoughtfully grown its production from approximately $150 million in 2015 to $470 million in 2017, and is off to a strong start in 2018 with first quarter production of over $175 million.”

On Monday’s conference call, Robinson said that 5 Arches initial efforts “have just scratched the surface,” and that integrating the business into Redwood’s platform “will drive additional scale.”

Once Redwood achieves that scale, it will look to securitize these loans, Chris Abate, Redwood’s president, said during the same conference call.

Abate said that Redwood, via 5 Arches, will initially originate fixed-rate single-family rental loans with five-, seven- and 10-year terms that amortize on a 30-year scale, resulting in a large balloon payment at maturity. Gross weighted average coupons will initially be in the high 5s, and well into the 6s, he said.

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