The Single-Family Exit Game: Stocks or Bonds

When it comes to exiting single-family rental investments, the answer appears clear: Securitize rental revenues through a rental bond. When The Blackstone Group and its single-family rental subsidiary, Invitation Homes, securitized the rental revenues of roughly 10 percent of its more than 35,500 homes in November 2013, it opened a new path to capital for the fledgling sector. Widely praised for its CMBS-style qualities, investors clamored to get a slice of the first new real estate asset class in a decade. The $479.1 million bond offering was more than five times oversubscribed, with the top tranches pricing at an aggressive 115 basis points over LIBOR. For Blackstone’s rivals, it set in place exit strategies for their own aggregated portfolios of foreclosed, short-sale, and for-sale housing. Silver Bay Realty Trust, American Residential Properties (ARPI), and American Homes 4 Rent (AMH), the second-largest manager in the space, had earlier taken the IPO route, only to see their platforms price at the low end of expectations. Colony Capital postponed IPO plans in June for its subsidiary, Colony American Homes, citing market conditions. Today, however, Colony, ARPI, and AMH are all working on securitizations. On a Q4 2013 earnings call, ARPI confirmed it had hired Blackstone’s banker, Deutsche Bank, to help it structure a $300 million securitization that would “emulate” the Invitation Homes deal. Colony and AMH, which has hired Goldman Sachs, are also expected to launch securitizations within the next 60 days. Yet exiting the single-family REO-to-rental business isn’t a choice between bonds and REITs. Given the size and scope of the investments—more than $16 billion of equity in 100,000 homes in just two years—it will take both vehicles to successfully liquidate them.

Sizing the bond opportunity

Blackstone’s Invitation Homes 2013-SFR1 deal was the only such securitization in 2013, but the market is set to take off. Harris Trifon, a CMBS analyst at Deutsche Bank, expects the rental bond market to grow to $5 billion in 2014. “There’s more than enough investor appetite to absorb that amount of supply,” he tells PrivcapRE. “It represents the first new asset class that we’ve seen in about a decade. By that metric, it’s exciting and interesting.” Investor concerns about the long-term viability of the sector, however, could temper future demand, no matter the success of the Blackstone securitization. When the rating agencies Moody’s, Kroll, and Morningstar awarded triple-A ratings to the biggest tranche of the Invitation Homes 2013-SFR1 deal, eyebrows were raised. The top ratings helped sell the rental bond to institutional investors, but it was “terribly mispriced” for the risk, a senior sales manager said at a recent mortgage conference. Questions center on occupancy (78 percent of Invitation Homes’ rental bond portfolio had remaining leases of less than 12 months, as of November 2013), the geographic concentration of properties within rental bonds (34 percent percent of IH 2013-SFR1 was in Phoenix), and the demands of operating such a portfolio. New issuers will undoubtedly need to offer juicier yields than Blackstone to entice the same level of investor interest. But rental bonds offer only part of the single-family exit landscape. The Blackstone deal represented a small fraction of its portfolio. And given current CMBS underwriting standards, it likely represented some of the more desirable homes. The very nature of single-family rental investing centers on buying foreclosed short-sale homes in need of renovation and turnaround. Looking at the occupancy levels of some of the largest players in the space, the average total portfolio occupancy is 80 percent. Owners of the remaining 20 percent will need another way out.

REIT routes

Despite the poor performance of early single-family rental IPOs, REITs can be expected to provide a long-term exit route for managers. Indeed, Starwood Capital and Waypoint Real Estate launched their REIT, Starwood Waypoint Residential Trust (SWAY), on Feb. 3 to manage and grow a portfolio of more than 7,000 homes and nonperforming loans. For cofounder Colin Wiel, [watch his interview on single-family rental asset management on p. 7], the REIT structure provides the best means to exit single-family rentals. But that’s not to say a SWAY securitization isn’t on the way as well.