With the $342.67m American Residential Properties 2014-SFR1 securitisation set to hit the market, the relatively new single-family rental securitisation asset class is keeping pace with early projections for a breakout year.
The offering is the seventh securitisation of SFR homes to date after Blackstone spawned the new asset class in November.
The current players – Blackstone, Colony American Homes, American Homes 4 Rent, Silver Bay and now American Residential Properties – have brought the asset class from obscurity into the mainstream, combining to launch $3.8bn of securities in just nine months.
“The space has been growing rapidly and I think the pace will continue this year and well into next year,” said Nitin Bhasin, an analyst at Kroll Bond Ratings Agency.
While unable to give names, Bhasin said at least two new players plan to enter the market in the near future.
The American Residential Properties securitization – backed by a single floating rate loan secured by the first priority of mortgages on 2,880 income-producing properties in eight states – is the third SFR deal to appear in just weeks.
Silver Bay Realty ventured into the asset class with the $312.67m SBY 2014-1 securitisation about two weeks ago, and last week Blackstone brought its third offering – the $720m Invitation Homes 2014-SFR2.
KBRA and Morningstar Credit Ratings have issued preliminary ratings for the American Residential Properties securitization, awarding the coveted “AAA” to the $184.9m top tranche. Similar to previous offerings, key risk factors include leverage, managers with limited operating history, volatility of home prices and the infancy of the asset class.
Among concerns, Morningstar noted that the vacancy rate on the underlying properties, just over 4%, lags that of previous securitizations, some of which were 100% occupied; and KBRA noted that it is the fifth consecutive offering backed by a loan requiring interest-only payments.
“[Interest only] loans are riskier than amortizing loans, which provide for natural deleveraging over the loan term that results in lower risk of maturity default,” KBRA wrote in its pre-sale report.
However, the LTV, based on KBRA’s portfolio’s aggregate brokers’ valuation (or BPO), is 70%, at the low end of the spectrum compared with previous SFR transactions. (Blackstone’s $720m Invitation Homes 2014-SFR2 carried the highest LTV so far, at 79%).
Bhasin, who worked on the KBRA report, said performance across the securitizations has “been very much in line with our expectations,” noting that fluctuations in vacancy are not concerning, and very much expected – as long as they hover below 10%.
After institutional buyers spent as much as $25bn plucking some 200,000 properties out of foreclosure after the recession.
Blackstone has said it intends to exit the business via IPO in the coming years. While it is likely that many sponsors may exit the businesses via IPO or private sales, Bhasin said the companies built will likely stay intact and refinance the debt at maturity.
“After the first round of financing you may see a little bit of a dip and lull, but for some this will remain a perpetual business,” he said.