Browning Real Estate Schools Topic: REO-to-Rental: The New Asset Class

Education & Training with Browning Real Estate School/REO Institute


REO-to-Rental: The New Asset Class



Prior to completing the pivotal FHFA REO-to-Rental Initiative transactions in 2012, the scale of institutional involvement in acquiring single-family homes for the purpose of “rent and hold” was small to almost nonexistent.

Things have certainly changed in just over a year.

Anyone who has read just one of the many articles appearing in Mortgage Servicing News and other financial publications during the past several months is familiar with the players, their target markets and their voracious appetites to place the billions of dollars they have raised through the private and public markets. The level of interest and excitement around this space is nothing short of explosive.

Real estate markets initially targeted by investors include the areas hardest hit by the foreclosure crisis, where the sheer number of displaced borrowers created an immediate demand for rental stock.

However, shrinking inventories, increasing prices and shifting rental supply/demand dynamicsin these markets have forced investors to expand their acquisition parameters, seek new acquisition channels, target new market areas and most likely a combination of all of the above.

An unintended consequence is that this extraordinary level of demand has resulted in “hyper home price appreciation” in these markets, changing many of the assumptions, as well as expectations, around projected yield and return, and modeling an exit strategy.

In addition to HPA, the evolution of this new asset class has created opportunities along every step of the way, bringing new and positive meaning to the tired and overused cliché “from Wall Street to Main Street.” In addition to the investment banks, local real estate agents, escrow offices, contractors and property managers have certainly seen the benefits and profited from this activity.

During the past several months, we have seen increased activity in the capital markets arena, a trend that will definitely continue.

The progression of the REO-to-rental (single-family aggregation) model to date has involved private offerings and equity raises to purchase the properties, followed by revolving credit facilities, REITs and IPOs to leverage the properties and replenish capital within the funds.

In late 2012, Citi extended a $245 million facility to Waypoint Homes, followed by Deutsche Bank and a number of high-profile syndicate partners extending a $2.1 billion credit facility to Blackstone’s Invitation Homes, and more recently, Bank of America Merrill Lynch and JPMorgan extending a $200 million facility to SilverBay. At least a dozen more of these types of transactions are currently in progress or have funded.

In December 2012 SilverBay raised approximately $250 million with the first public REIT to facilitate investment in single-family homes for rent, and most recently American Residential Properties raised $287 million through an IPO to finance their portfolio of homes.

REITs offer a very attractive cost of capital to institutional investors, expanding their ability to continue to acquire homes. REITs also offer a unique opportunity for small investors to participate in this asset class without personally becoming a landlord. We expect to see several more coming to market by year end as the demand for shares in the previous deals was very strong.

The obvious next phase of the model will be the securitization of this new asset class.

At the Miami IMN Single Family Aggregation Conference in April 2013, a panel discussion was dedicated to this topic, and Ryan Stark, director at Deutsche Bank, informed the audience that his firm will take a deal to market this year.

The evolution of this space has called for the collaboration of the top institutional lenders, investors, law firms and rating agencies to devise and implement best practices around the construct of the credit facilities, the use of individual mortgages in certain facilities and the upcoming securitization of this asset class.

As the diligence agent, Green River Capital’s Component Services Division has performed diligence on more than $4.5 billion in assets placed into eight revolving credit facilities, performing BPOs, rental evaluations and collateral file reviews on more than 30,000 assets. Leveraging the data and knowledge it has amassed through its diligence activities, GRC is currently working with rating agencies to identify various metrics and model stress-analysis around the rental streams that will back the bonds issued in the securitizations coming to market.

I am not certain anyone could have predicted the effect REO-to-rental activity would have on certain real estate markets, nor the velocity in which a new asset class could be created. And at this point no one is willing to predict where this market will go in the next five to seven years.

If you like the Topic, please like us on Facebook and Activerain. Thanks, James

Posted by

James A. Browning MRE, CIPS, CDEI, REOCertified®, CEC, BPOR, ShortSaleCertified®, SFR

NAR, ABR, REBAC, CAR, CREOBA, REO Institute, National Speaker/Educator

CEO, Founder, REO Institute

Author, Best Selling: BPO & REO Simplified, "How to Work With Asset Managers"!

Office: 303-465-2889

Cell: 303-668-7053

Fax: 303-465-3778


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