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Single-Family Rental Giants Adapt to Changing Housing Market

Investors Curtailing Widespread Spending as They Turn into Operators
March 19, 2014
The fast-emerging business in which big investors scooped up thousands of single-family rental homes continues to morph along with the erratic housing recovery.

The big institutional investors that have acquired portfolios of thousands of homes for rent are shifting their acquisition strategies away from buying huge bulk portfolios to become more disciplined and market directed.

In addition, they are looking to reduce their outstanding loan repayment obligations through single-family rental securitizations.

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The largest of the investor outfits, The Blackstone Group, announced last week that it was narrowing future single-family home purchases to a handful of markets: Seattle, Atlanta, Miami, Orlando and Tampa. It also said its acquisition pace has declined 70% from its peak last year. Blackstone owns more than 43,000 homes in 14 cities.

The reasons for the change in strategy are pretty clear.

According to CoreLogic, national home prices increased 12% year-over-year as of January 2014, but prices ranged from mid-single-digits to as high as 27% in Northern California.

"The housing recovery has been uneven across the nation and we are no longer able to buying some of our Western markets, although we remain excited about many others, where we can still acquire homes at a discount to replacement cost and attractive rental yields," said. David Miller, president and CEO of Silver Bay Realty Trust, which was the first company to convert to single-family REIT. "Florida, for example, leads the nation with the highest foreclosure inventory at 6.7%, which should provide a continuing supply of distressed inventory in 2014."

Like Blackstone, Silver Bay has decided to narrow its new purchases to select markets, including Texas and Atlanta. Not mentioned were two cities where it has its largest home ownership concentrations, Phoenix and Columbus, OH.

Silver Bay owned a portfolio of 5,642 single-family properties as of year-end.

American Residential Properties Inc., with 6,073 single-family homes in Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Nevada, North Carolina, Ohio, South Carolina, Tennessee and Texas, said it intended to maintain the pace of its acquisition activity, but it too planned to focus within certain target markets.

“We would like to have at least 1,000 homes in four markets, Houston, Dallas, Atlanta and Phoenix, with 500 or more homes in Nashville, Charlotte, Orlando, Tampa and Chicago. We intend to continue to be opportunistic with respect to our acquisitions,” said Stephen Schmitz, chairman and CEO of American Residential.

American Homes 4 Rent and Colony American Homes, the second- and third-largest single-family landlords, also have been scaling back their purchase volumes or markets, but for different reasons.

For the next 60 days or so, American Homes 4 Rent, plans to slow down its pace of acquisitions as it prepares a single-family rental securitization.

In the fourth quarter of 2013, it acquired 2,001 homes with 1,043 at auction or about 52%. So far this year it has acquired 1,900 homes and expects to acquire an additional 300 through the end of the quarter. It has surpassed 25,000 homes owned.

“We expect the securitization to happen in the next 60 days, but we're going to have to slowdown a little bit on our acquisition pace until we have a better view or actually certainty of the capital being available,” said John E. Corrigan, COO of American Homes 4 Rent.

Corrigan said the firm has approximately $220 million left on its credit line and plans to slow down its acquisition pace by focusing auction purchases until the capital expected from the securitization is available.

Always the innovator, Blackstone Group completed the first and so far only such securitization backed exclusively by loans secured by single-family rental units, and all the SFR aggregators have taken notice.

The securitization generated financing proceeds for Blackstone equal to 75% loan-to-value for approximately 88% loan-to-cost, with an all-in pricing of approximately 2% for a fully extended five-year term.

“This is obviously very attractively priced debt capital and the Colony American Homes management team is actively analyzing various financing solutions, including securitization for its own purposes,” said Richard Saltzman, CEO and president of Colony Financial, its parent company.

In fact, Colony started marketing an SFR-backed securitization today, according to a Reuters news report. The new US$500m securitization deal from Colony is being led by JP Morgan and Credit Suisse. Investor meetings begin on Thursday and will carry into next week.

As the single-family rental (SFR) sector continues to evolve, with projected securitizations in both the single- and multiple-borrower segments, Standard & Poor’s Ratings Services said it has yet to see an SFR transaction with the level of credit enhancement and other risk-mitigating features that warrants the highest investment-grade rating.

Standard & Poor’s primary reservations regarding the sector revolve around the industry’s operational infancy, historical performance, the current business model’s ability to withstand extreme economic conditions, and the ultimate liquidation values of the underlying properties, given the risks associated with short liquidation periods.

Colony American Homes has been trying to address those concerns in the past year. Its portfolio totaled 15,300 homes across nine states at year-end 2013. It has been averaging 330 acquisitions per month, but it recently started culling homes from its portfolio that it said were not a good long-term strategic fit. It sold about 250 homes at an average gross sale price of 117% of its cost, including renovation expenses.

Colony American Homes' postponed an initial public stock offering last summer to focus on property management, renovations, leasing and information technology operations.

However, Saltzman said Colony American could likely re-approach the public markets and he is confident that its additional scale and operational maturity, debt capital markets executions and other key structural changes to the business would significantly improve the likelihood of consummating a successful public offering.

Moody’s Investors Service cited several factors why it expects demand for SFRs will continue to grow. In addition to the slowly improving economy creating a boost in the number of households, Moody's expects increasing interest rates and increasing housing prices will make single-family homes less affordable for those looking to form new households. In addition, the availability of a mortgage remains limited for borrowers with checkered credit histories.

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