News — First Single-Family Rental Loan-Backed Bond Deal To Test Market

October 03, 2013

The emerging single-family rental business took another step towards market acceptance this week as VFC Partners, one of the early investors to buy up large numbers of foreclosed single-family homes, made plans to bring the first commercial mortgage bond offering to market backed in part by loans on such properties.

The deal is being viewed as a test case and, if all goes well, other major buyers of SFR portfolios are expected to get their Wall Street bankers on the phone and securitize deals of their own.

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Värde Partners Inc. and FirstCity Financial Corp. jointly completed a $185.5 million private bond issuance.

The securitization - VFC Series 2013-1 - is the first securitization executed by the VFC Partners. The bonds are backed by a pool of seasoned performing and non-performing secured and unsecured commercial loans and real estate owned properties (REO). It also includes loans backed by single-family properties primarily in Detroit and Ohio.

VFC Partners purchased the underlying assets from banks, special servicers and other financial institutions.

The third largest loan relationship in the pool ($30.88 million) consists of 31 loans secured by Class B multifamily and single-family residences. A portion or all the units at each property are included in the Low Income Housing Tax Credit program.

The collateral includes a total of 977 SFRs in Detroit and various cities in Ohio (Dayton, Lorain, Mansfield and Youngstown). Occupancy for the portfolio was 93% as of March/April 2013.

The multifamily collateral consists of eight properties totaling 402 units, three of which are in Detroit and the remaining properties in Ohio (Norwalk, Bowling Green, Ashtabula and Cleveland).

Fitch Ratings issued a nonperforming loan presale report on the notes expecting to give the $185.5 million notes a 'BBB-sf' rating with a stable outlook.

The deal priced at par with a coupon of 3.13% and was well-received with strong participation from leading institutional investors, according to officials with Värde Partners.

Next Step: CMBS Backed Entirely By Single-Family Loans

The next step in the evolution of SFR financing would be a CMBS deal backed entirely by such properties. And that deal may not be far behind.

FeatherStone Investment Group LLC this week announced that it selected a Wall Street investment bank to act as securitization underwriter and distributor for its single-family portfolio. It has yet to name the firm but said it would do so within the next few weeks.

FeatherStone has created a program in which property owners and investors can monetize their assets by contributing their properties to our securitization pipeline (conduit) and receive cash at the closing of the securitization.

By securitizing the SFR rental income, FeatherStone said it is able to provide an exit strategy that it claims is more appealing and profitable than those offered investors by hedge funds or private equity firms.

FeatherStone has acquired about 10,000 distressed homes this year and had a goal of investing nearly $30 million in the Destin, FL, market. It hired the residential property management arm of brokerage firm FirstService to manage the properties.

The bonds to be issued through Featherstone’s program are anticipated to have a 5 year maturity, a floating rate coupon, and at least one rating by a major ratings service.

FeatherStone is in negotiations to bundle monthly rental payments on about 1,000 to 3,000 homes. The size of the FeatherStone Investment Group deal is expected to be around $100 million to $300 million.

Also in the running to issue CMBS bonds backed solely by SFR are American Homes 4 Rent, which owns more than 17,900 single-family properties, and Blackstone Group, which has acquired approximately 25,000 homes.

Blackstone Group is reportedly in negotiations to bundle monthly rental payments on about 1,500 to 1,700 of its homes. The bond comprised of the Blackstone homes would be structured and marketed to investors by Deutsche Bank AG.

American Homes 4 Rent is in discussions with potential lending institutions and national rating agencies regarding potential financing and securitization transactions. Those discussions remain preliminary, the company said.


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