Single family rental backed bond deals still attractive

Investors in single family rentals can continue to feel good about the market, according to a report from bond-ratings Morningstar Credit Ratings, which summarizes all Morningstar-rated single family rental securitizations.

“Everything seems healthy,” says Brian Grow, managing director, RMBS and ABS, Morningstar Credit Ratings, a division of the analytical company, which monitors more than 108,000 properties and related monthly rental and expense data.

Highlights of the report include:

• Lower vacancy rates. Thanks to increased demand, fewer homes sat vacant. The average vacancy rate among single-borrower, single-family rentals declined to 5.1 percent in December 2016, down from a revised 5.3 percent in November. Morningstar says it expects the rate to drop even lowermore over the next few months.

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• Rising rents. Property managers raised rents on single-family rentals included in these bond transactions an average of 3.4 percent in December compared to the terms of the previous leases. This was the smallest rent increase in 2016, but it resembles the pattern in 2015, so Morningstar believes that rents will rise over the next few months.

• Slightly fewer renters paid on time. The average delinquency rate for single-family rentals packaged as bonds rose to 0.9 percent in December from 0.6 percent in November. The average retention rate for full-term leases was 77.1 percent in November, the latest full month for which data was available.

Eight of the bond deals covered by Morningstar Credit Ratings saw delinquency rates rise, including AMSR 2016-SFR1, where the delinquency rate was 2.6 percent. Morningstar Credit Ratings suspects that this may reflect the high number – 10.5 percent – of Section 8 tenants in these properties whose government subsidized payments may have come after the delinquency reports were compiled.

Overall, most tenants don’t receive Section 8 assistance, says Brian Alan, vice president, RMBS, Morningstar Credit Ratings. “The majority of the issuers have 0 percent to less than 1 percent.” he said.

Most of the tenants in these properties are “… people who want to live in houses, but can’t get a mortgage, either because they do not have enough cash for a down payment or they have damaged credit,” says Grow.

This is a significantly different profile than the homebuyers who lost their homes during the subprime era, and makes these bond deals more attractive, Grow adds. “This time around, institutions are the ones maintaining the properties and the ones on the hook for rent, maintenance, taxes and HOA fees.”

This seems especially significant in light of the deal that Invitation Homes, which filed for an IPO last month, announced this week in an updated filing, revealing that it had secured a $1 billion, 10-year loan commitment from Fannie Mae and Wells Fargo. The loan will be securitized and backed by a pool of single-family rental properties.

This deal is different than the subprime deals, Alan and Grow say, because analysts are on top of it and other real estate-backed bond deals, tracking collateral to see how it’s performing, and communicating that information to investors. “If anything were to come up, we can track it early and be on top of it. It is very important for us,” Alan says.

By Jennie L Phipps

By Chuck Epstein

A coalition of global financial firms, including asset managers and asset owners, with assets of more than $17 trillion, has launched a new initiative to formulate a set of principles governing the stewardship of investments and corporate governance.

The new Investor Stewardship Group (ISG) is designed to improve governance standards and practices among US asset managers and asset owners, including corporate and state pension funds.

The ISG’s framework of corporate governance principles “reflects the common corporate governance beliefs that are embedded in each member’s proxy voting and engagement guidelines, and are designed to establish a foundational set of investor expectations about corporate governance practices in US publicly-listed companies,” the group said.

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While this may be the first time asset managers and asset owners have come together to formulate a set of corporate governance principles, the idea is to launch a framework for US stewardship and governance, “a historic, sustained initiative to establish a framework of basic standards of investment stewardship and corporate governance for US institutional investor and boardroom conduct,” according to the group’s website.

Initial members of the ISG include BlackRock, CalSTRS, Florida State Board of Administration (SBA), GIC Private Limited (Singapore's Sovereign Wealth Fund), Legal and General Investment Management, MFS Investment Management, MN Netherlands, PGGM, Royal Bank of Canada (Asset Management), State Street Global Advisors, TIAA Investments, T. Rowe Price Associates, Inc., ValueAct Capital, Vanguard, Washington State Investment Board, and Wellington Management. The ISG said this group represents the long-term savings of millions of investors worldwide.

While the ISG is just now being launched, corporate governance standards in the UK were established by the Cadbury Report and its Corporate Governance Committee in May 1991 by the Financial Reporting Council, the London Stock Exchange and the accountancy profession. What prompted the report was “continuing concern about standards of financial reporting and accountability,” according to the group’s website. The Cadbury Code “is widely seen as the first comply-or-explain governance code” in the UK, and covered such issues as gender diversity, board composition and performance, and the dissemination of corporate information.

The ISG’s goal is to establish “initial standards [that] focus on corporate governance principles for listed companies and investment stewardship principles for institutional investors. Taken together, the standards form a framework for promoting long-term value creation for US. companies and the broader US economy.”

Developed over two years, the ISG Framework goes into effect January 1, 2018, to give US companies time to adjust to these standards in advance of the 2018 proxy season. The specifics about the framework can be seen at the group’s website.

The impetus for forming the ISG began in the fall of 2014, when asset owners questioned proxy voting procedures and raised issues about whether asset managers were blindly following proxy recommendations from proxy advisory firms. Had this been the case, it would have violated corporate governance standards, but it was a misperception, according to Rakhi Kumar, Head of Corporate Governance at State Street Global Advisors.

This misperception in the institutional marketplace pointed to the need for improved transparency and establishing a framework for corporate governance standards.

But establishing common corporate governance standards in the US also faced another hurdle: governance standards are determined on a state-by-state basis depending on where a company was incorporated. While there were core beliefs among institutional investors and global asset managers, there still was a need for a common corporate governance principles platform to be created.

This would allow corporate boards and institutional asset managers to have easy access “to clear, accessible governance standards that are all in one place,” corporate governance advisory board member Allison Bennington said.

While the ISG intends that its “governance prescriptions are not intended to be prescriptive or comprehensive in nature,” according to its website, the group also will not go into specific regulatory issues, such as the DOL’s fiduciary standard regulation. “We are saying this money belongs to other people and you have specific policies in place already in terms of accountability. We are trying to achieve accountability. There is no intent to go into the legal realm of fiduciary rules. The ISG stops at board accountability to shareholders and to financial beneficiaries. It is not meant to apply to any current or proposed regulations,” Bennington said.

“We are starting a long-term effort to get asset managers and owners to sign onto the principles and accountability from a corporate governance guide. Wewe are all on the same page and US public companies will come to be on the same page with their shareholders, as well.

What we have now is a basic corporate governance standard that is not radical. We believe these are principals that will foster the long-term concept about the stewardship of capital, and transparency to shareholders and retirees. These are policies that are understandable and work towards the benefit of all public companies, their boards and institutional investors,” Bennington said.

The ISG initially will be a virtual organization and will conduct its meetings online, but over time it may have a physical presence in a location that is yet to be decided, Bennington said.