Two new single-family rental (SFR) securitization deals sponsored by large institutional players — often described as “Wall Street” investors — hit the private label market in June, bringing the total deal count so far this year to 10.
The healthy volume of SFR offerings over the first half of 2022 is being fueled by a strong SFR market resulting from fast-rising interest rates and tight housing supply. Those dynamics are making it much harder for many to purchase homes, helping to expand demand for rental properties, triggering fast-rising rents.
That rental income serves as the underlying revenue-stream collateral for these institutional-sponsored private-label securitizations.
The upward pressure on interest rates was given another boost, with the Federal Reserve announcing today, June 15, that it will bump the federal funds rate up by 75 basis points — a rate-hike pace not seen since 1994. With rising interest rates expected to continue fueling demand for rentals, SFR securitizations are likely to continue rising in count as well going forward — with institutional players seeking to expand their reach into the market that in many ways is made more attractive in an up-rate cycle.
“Despite the growing appetite, institutional equity ownership in SFR today is still estimated at only around 2%,,” a market insight report from MetLife Investment Management (MIM) states. “MIM believes that institutional SFR ownership is likely to grow significantly over the next decade.
“MIM’s analysis indicates that simply moving institutional ownership of SFR from 2% today to 10% [of the investment-property market] in the future will result in a need for over $200 billion in incremental debt financing.” The bulk of second homes and investment properties today are owned by smaller real estate firms and so-called “mom-and-pop” investors.
One of the new SFR deals hitting the private label market this month involves the largest player in the space, Progress Residential. The SFR platform recently unveiled its fifth securitization deal of the year, dubbed Progress 2022-SFR5, a single-borrower, single-loan transaction.
The new Progress SFR offering involves a $632.3 million fixed-rate, five-year loan from German American Capital Corp. secured by mortgages on 2,273 income-producing single-family rental homes, according to a presale bond-rating report by Kroll Bond Rating Agency (KBRA).
About two-thirds of the properties involved in the Progress transaction are in the Sun Belt markets of Atlanta, Jacksonville, Las Vegas, Phoenix, Tampa and Nashville, the KBRA report states. The Progress Residential SFR platform was launched in 2012 “to capitalize on dislocation in the U.S. housing market” in the wake of the global financial crisis, KBRA reports.
“As of June 2022, Progress Residential had invested approximately $19.9 billion in its portfolio of more than 80,000 properties,” the KBRA report continues. “Progress is the largest private owner and operator dedicated to the acquisition, leasing and management of SFR properties throughout the U.S.”
Also out with a new SFR offering this month is FirstKey Homes. It’s recent securitization deal, titled FirstKey Homes 2022-SFR2, (despite the label) represents FirstKey’s third SFR offering so far in 2022. Its securitization deal is collateralized by a $1.4 billion fixed-rate, five-year loan originated by Morgan Stanley Mortgage Capital Holdings. The loan, like the Progress offering, is secured by a pool of 3,882 income-producing single-family rental homes
The bulk of the properties involved in the FirstKey securitization are in Sun Belt markets as well, with Atlanta, Charlotte, Houston and Dallas leading the pack. FirstKey Homes single-family rental-home portfolio includes some 45,000 properties, according to KBRA.
Unlike more traditional residential mortgage-backed securities (RMBS) deals, in which bonds are backed directly by pools of mortgages, a single-family rental securities offerings is collateralized by a single loan that is, in turn, backed by a pool of income-producing single-family homes.
KBRA bond-rating data show that the 10 SFR securitization deals it has tracked to date this year involved some $7.8 billion in loans secured by a total of some 25,500 single-family rental properties.
“The historically low inventory of homes to buy, coupled with apartment vacancy rates hovering around 2.5%, have positioned SFR owners for success in today’s housing market,” said Rick Sharga, executive vice president of marketing for real-estate research firm RealtyTrac, a subsidiary of Attom Data Solutions.
Sharga added that in addition to acquiring existing single-family homes in target markets, “there’s also been a bit of a shift in recent quarters by the institutional investors to more of a ‘build-to-rent’ model.” That model involves “working with homebuilders to create new SFR inventory,” Sharga explained, “instead of competing with mom-and-pop investors and consumer homebuyers for extremely limited inventory.”
As evidence of that trend, Indianapolis-based Onyx+East earlier this year partnered with Pretium, an investment management firm with some $44 billion in assets under management. Pretium is Progress Residential’s parent company.
The joint venture “will invest approximately $600 million to develop, build, and operate new single-family, build-to-rent communities across key Midwestern markets and Florida’s West Coast,” states the press announcement of the build-to-rent partnership.
The joint venture plans to eventually build more than 2,000 single-family rental homes, with some 700 new homes planned this year in suburban communities in Indiana, Ohio and Florida.
“Progress Residential, Pretium’s single-family rental platform and a leading manager of build-to-rent communities, will operate and manage the new single-family build-to-rent communities on behalf of the joint venture,” the press announcement states.