Content area
Full Text
If I had a way of buying a couple of hundred thousand single family homes and had a way of managing them... I would load up on them.
Warren Buffett (CNBC) [2012]
T he Oracle of Omaha may have seen the opportunity, but in less than three years, a small group of visionary institutional investors seized it: investing nearly $27 billion to buy between 175,000 and 200,000 homes and in the process laying the groundwork for a new asset class--the single-family rental (SFR) bond market (KBW [2014]). Over the past two years, SFR securitizations have gone from zero to 23 deals, valued at $13.5 billion.
This article will discuss the following topics:
the forces behind the rapid growth of the SFR market;
how the first round of deals was valued and structured;
the way this market is evolving and what this may mean in terms of expanded liquidity for non-institutional SFR investors and returns for bondholders;
the differences between the current single-borrower deals and multi-borrower securitizations; and
why SFR is a sustainable asset class, not just a trade.
THE SINGLE-FAMILY RENTAL MARKET
Owning single-family rental properties as investments isn't a new concept. Historically, approximately 10% of all single-family properties--or roughly 14 million homes--have been owned by investors and rented to tenants, according to Keefe, Bruyette & Woods (KBW [2014]). However, the foreclosure crisis created new interest in these assets from institutional investors. Much of this activity was focused in a handful of major markets: California, Arizona, Nevada, Illinois, Georgia, Florida, and North Carolina. These markets, of course, were the ones hit the hardest by falling house prices and foreclosures.
What investors saw in these markets was a large number of displaced, former homeowners and a supply of properties either being vacated or vacant. These properties were valued at steep discounts, 35% to 45% below their peak, and could often be acquired for less than their replacement values.
Raising capital wasn't an issue, because private equity firms had already raised funds to acquire non-performing loan portfolios and REO (real estate owned) portfolios. However, for a number of reasons, including greater regulatory scrutiny of servicers and bank accounting treatments, these deals hadn't materialized. So, capital was available when programs like Fannie Mae's REO-to-Rental began in late...