Another single-family rental (SFR) securitization deal sponsored by a large institutional player, Progress Residential, is slated to hit the private-label market this month, bringing the total securitization-deal count for Progress to seven so far this year.
This latest transaction, Progress 2022-SFR7, will be secured by a single $426.8 million fixed-rate loan backed by mortgages on 1,434 single-family rental (SFR) homes. The deal represents Progress’ 36th securitization to date, with a total note issuance of $20.5 billion, according to a bond-presale report by the Kroll Bond Rating Agency (KBRA).
The homes in SFR mortgage pool backing the note to be issued through the securitization are in 11 states, but the three largest state exposures account for nearly 76% of the portfolio, with Florida leading the pack (32.1%) followed by Texas (28.0%) and Georgia (15.3%).
“The largest five exposures [at the metro level] account for 59.2% of the total property count and include Atlanta (235 homes, 16.4%) … followed by Houston (179, 12.5%); Jacksonville (168, 11.7%); Orlando (150, 10.5%); and Dallas (117, 8.2%),” KBRA’s presale report on the offering states.
The Progress Residential SFR offering is the most recent deal in a sector that has been red hot this year. The volume and number of SFR securitization transactions this year to date already exceeds total issuances for all of 2021.
Last year, there was a total of nine SFR transactions involving 30,471 income-producing single-family rental properties valued at $7.7 billion at issuance, according to deal data tracked by KBRA. Year to date through mid-September, KBRA has tracked 13 institutional-sponsored private-label securitization transactions involving 30,247 single-family rental-properties valued at $9.1 billion.
These SFR securitizations are often referred to as Wall Street deals because they involve large corporations that own thousands of rental properties. The notes issued in the institutional SFR deals are typically collateralized by a single loan, which is in turn secured by a large pool of mortgages on income-producing single-family homes.
Since the initial SFR securitization in 2013 through August of this year, according to a separate KBRA market-sector report, 16 sponsors have undertaken 113 SFR securitizations involving notes with a total principal balance of $69.6 billion. At issuance, the notes in those SFR transactions were collateralized by some 355,000 underlying properties. That doesn’t include Progress Residential’s latest offering, which would bump the deal count to 114 and push the note total past $70 billion.
“The business model for large-scale institutional ownership and management of SFR properties in the U.S. was born out of the Great Recession of 2008,” the KBRA presale report states. “… The sector’s inaugural transaction was eventually issued by Invitation Homes in November 2013.
“The securitization, IH 2013-SFR1, was collateralized by a single $479.1 million floating rate loan secured by first mortgages on 3,207 income-producing SFR homes.”
The KBRA SFR sector report, called “SFR Securitizations: A Decade in the Making,” reveals that the bulk of the outstanding note issuance as of the end of August can be attributed to four issuers, “each of whom have more than $5 billion outstanding.” Those issuers, and their outstanding note balances from SFR securitizations, are Progress Residential, $14.1 billion; FirstKey Homes, $10 billion; Amherst Residential, $6.3 billion and Home Partners of America, $5.2 billion.
The 11 currently active institutional issuers in the SFR market owned or managed in total an estimated 390,000 properties as of the end of August, according to the KBRA sector report. Progress Residential and Invitation Homes led the pack at 83,000 SFR properties each, followed by American Homes 4 Rent, 58,700; FirstKey Homes, 44,500; Amherst Residential, 42,000; and Tricon Residential, 33,000.
Although the institutional SFR market has proven a lucrative play in recent years, there are headwinds on the horizon, according to the KBRA bond-presale report. The report points out that the performance of the sector historically has benefited from a period of strong economic growth marked by increasing rents and home prices.
“However, the asset class is now being subjected to economic and geopolitical disruptions,” the KBRA report continues. “Additionally, rising interest rates may put downward pressure on home prices, and inflation may put pressure on operating margins.
Should home prices, rental rates, and/or operating margins decline meaningfully, the sector could come under a stress that it has not previously endured.”
– KBRA report
“Should home prices, rental rates, and/or operating margins decline meaningfully, the sector could come under a stress that it has not previously endured.”
The KBRA SFR sector report states that if such a scenario developed, the workout could be problematic for those affected. “The customized nature of the loan and related collateral may limit the universe of buyers willing to purchase the loan in a distressed situation, and substantial workout negotiations may be required to restructure the loan,” the report states.
In addition, KBRA points out that the institutional SFR sector has come under increasing governmental scrutiny over concerns that it is impacting home affordability and prices in some areas of the country.
In fact, institutional players in the SFR market were recently the targets of a congressional hearing in which they faced accusations of gentrifying minority neighborhoods and allegedly displacing large numbers of people of color — Black residents in particular.
“Securitized SFR homes are heavily clustered in the Sunbelt, which comprises the Southeastern, Southwestern and Western U.S. region, and in communities that previously experienced high foreclosure rates following the 2008 financial crisis,” a report introduced at the congressional hearing states. “For example, in the third quarter of 2021 alone, institutional investors bought 42.8% of homes for sale in the Atlanta metro area and 38.8% of homes in the Phoenix-Glendale-Scottsdale area.”
In addition to the onset of volatile market conditions not faced by the institutional SFR market previously and the scrutiny at the federal level, KBRA’s sector report notes that there are headwinds developing at the local level as well for the industry.
“There also are some efforts at the grassroot level by homeowner associations and local municipalities on adding restrictions on acquiring and operating single-family properties for rental purposes,” the KBRA report states. “All of the above could result in a wide range of outcomes (legislative or otherwise) that could negatively impact the industry’s growth and/or performance.”
Institutional ownership in the overall SFR sector is estimated to represent only around 2% of the market currently, a market insight report from MetLife Investment Management (MIM) states. Most SFR properties nationwide are now owned by smaller mom-and-pop landlords,
MIM predicts, however, that institutional SFR ownership Is poised to expand significantly over the decade — assuming the sector can overcome the headwinds now on the horizon. That growth, if it materializes, bodes well for the growth of the private-label securitization market.
“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,” MIM’s market insight report states.
