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New players, smaller landlords in next wave of SFR bonds

By Joy Wiltermuth

NEW YORK, Oct 31 (IFR) - Market participants are preparing for the next phase of single-family rental (SFR) bonds, as a fresh crop of players gain momentum in financing smaller batches of rented out homes.

Bankers are readying a new style SFR bond, bundling debt lent to a mix of smaller landlords who control far fewer properties than institutional players like Blackstone Group, which launched the rental bond sector a year ago.

The DNA is being tweaked to accommodate what some say is the real opportunity for securitisation in the single family rental business.

Randy Reiff, CEO of FirstKey Lending, which finances large and small landlords, said his firm could be first off the blocks next year with a US$250-$300mm debut deal already in the works.

"In the US$2trn rental finance market, over 90 percent of people own less than 10 properties," said Reiff.

"Over time, the more granular stuff takes over the market."

His firm has already signed up some US$700m in loans through its lending platforms, which offer mortgages that range from US$75,000 to US$500m.

Smaller-sized deals are not regarded as a significant hurdle, even though the bulk of the US$5.5bn SFR bonds pitched to investors so far have been at least US$500m. The smallest bond to date was a US$312.7m issue priced by Silver Bay Realty Trust in August, according to IFR data.

"The real market is this market," said an investment banker focused on putting together deals that package loans to investors with US$1m to US10m in rental properties.

"It's where everything is actually going to get to."

Credit Suisse, Deutsche Bank, Goldman Sachs and JP Morgan have all helped pioneer the asset class.


CASHING OUT

Until now, SFR bonds have been based on single, large loans to brand-name landlords, who have used the securitisations to pay for things like renovations, maintenance and the ongoing leasing of US foreclosed homes initially bought with cash for the purpose of being rented.

After Blackstone's latest deal, called Invitation Homes 2014-SFR3, the firm has now financed more than a third of the US$8.7bn it spent buying 46,000 homes in the aftermath of the financial crisis, according to a Kroll Bond Rating Agency pre-sale report.

The newcomers to the sector say targeting smaller landlords is the natural next step in the evolution of the SFR securitization market.

Private equity firms are still playing a key role, with Cerberus Capital Management stumping up the cash for FirstKey to lend to investors, instead of taking on the hassle of managing the properties directly.

Veteran bankers are also heavily involved. Reiff, for instance, used to be co-head of the global commercial real estate group at Bear Stearns. He likens multi-borrower SFR deals to small business lending.

Low interest rates meanwhile are helping smaller firms grow their rental footprint.

"While rates remain low, you can borrow cheaply and your dollar goes further," said Don Ganguly, CEO of HomeUnion, which set up shop in 2011 and now operates more than US$20m in single-family properties.

The firm manages homes in 15 locations, mostly for first-time retail investors wanting exposure to the US real estate market.

"Rents are attractive enough, where you actually can see 5%-9% cash on cash returns," he said.


LEVERAGING UP

The big advantage is leveraging up with a mortgage to deploy more money.

Instead of buying one house for US$100,000 in cash, investors can buy three or four homes by borrowing at rates of 4.5% or 4.75%, Ganguly said. "People are taking advantage of that."

The lowest rates are only available to borrowers qualifying for a mortgage from one of the government-sponsored enterprises. But private loans from FirstKey, Blackstone's B2R Finance or Colony American Finance are still attractive in the 5.5% to 6.5% range, Ganguly said.

Private capital also comes with less restrictive terms for investors than what the GSEs will offer.

Still, the idea of US renters handing a big slice of their paychecks over to landlords that benefited from the house price crash does not sit well with everyone - even if that was the plan outlined by the Federal Reserve Board three years ago.

Its white paper back then called on private capital to help heal the US housing crisis by converting bank-owned homes into rentals, and so far SFR bonds have been a good bet.

Recent data show that SFR transaction portfolios outperform the overall market from which collateral is sourced, according to a Moody's Investors Service report in late October.

Vacancy rates stood below 6% in four out of five SFR deals that Moody's rated between November 2013 and June 2014, versus 5%-10% for the top 10 metro areas where these homes are located.

(Reporting by Joy Wiltermuth; Editing by Anil Mayre and Natalie Harrison)