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.

• 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