AH4R puts new shine on toxic real estate holdings

Thu May 15, 2014 4:18pm EDT

NEW YORK, May 15(IFR) - American Homes 4 Rent's REO-to-rental trade this week achieved the unexpectedly tight pricing that may herald a new era of funding for a sector long dependent on bank loans.

Despite the real estate securitization woes that sparked the global financial crisis, investors piled into AH4R's new deal - indicating that those concerns are starting to wane.

That is welcome news for companies like AH4R that have amassed huge inventories of foreclosed homes, renovated them for rental - and now want to monetize their investment by selling bonds backed by rental payments on those homes.

AH4R's deal is just the third ever in the nascent single-family rental (SFR) securitization market, but a slew of other deals - including perhaps a multi-borrower trade - is already in the works.

And the fact that AH4R printed the Triple A tranche of its deal at Libor plus 100bp bodes well for a sector that did not exist until last year's inaugural trade from Invitation Homes (IH), owned by private equity giant Blackstone.

"If these deals can come at 100 over, a lot of big SFR players that have been financing in the bank market will start to look at the bond market, especially if the velocity of deals picks up," one senior banker not involved in the trade told IFR.

Perhaps most surprising of all is that investors are clamouring to buy securitizations of the same houses that, when they first went underwater, sparked the last global meltdown.

All six tranches of the AH4R trade tightened by 10-15bp in the secondary market after pricing on Tuesday.

GREAT PERFORMANCE

Colony American Homes followed Invitation Homes in April with the second SFR deal. The latest success in the new sector has already sparked talk of loads more deals, and sources say Invitation Homes will be back to market within a month.

Not everyone, however, is convinced about the long-term viability of this new asset class.

"One deal is not enough to tell us about the longevity of the market," said Eric Thompson, head of CMBS ratings at Kroll Bond Ratings.

"But ... providing spreads remain attractive and the deals continue to perform well, the short-term outlook is positive."

So far, at least, AH4R's trade has performed better than well. And it remains appealing to the buyside even after the tight pricing on the Triple A - which came a full 15bp inside guidance.

"There are not a lot of products in this maturity offering this type of spread," said Gary Greenberg, an investor at Payden & Rygel.

He cited as an example the L+80bp pricing on the Triple A tranche of CGBAM 2014-HD, a CMBS deal backed by the Hudson Hotel in New York and the Delano in Miami Beach.

That was 20bp tighter than AH4R's top-rated slice.

"We've now got three established players," Greenberg said. "People are assessing how big this market can grow."

Goldman Sachs (structuring), JP Morgan and Wells Fargo were bookrunners on the AH4R deal.

Meanwhile Deutsche Bank, which structured the Invitation Homes deal, is in the driver's seat for an SFR trade from American Residential Properties Inc, which said this week it is looking to print at least a US$300m trade.

"Pretty soon, we will have seen several deals come in close proximity," said one banker who asked not to be named.

"Investors are looking at this as an asset class, not a trade."

STRONG DEMAND

Bankers make some of their highest fees on subordinated tranches of debt, and they have been cheered by the strong demand for this first wave of SFR transactions.

While it was perhaps no surprise that AH4R's Triple A tranche attracted around US$1bn in demand with about 30 investors participating, according to one source not directly involved, the sub pieces were also heard to have all sold out.

That demand allowed AH4R to price the BB+ rated Class F piece at L+325bp - 35bp inside guidance, yet some 25bp wide of the lower rated CMBS hotel trade.

But while initial indications are positive, the sector carries some degree of significant headline risk.

Invitation Homes has already been in the news over a lawsuit in California concerning mold in one of its properties.

Normally, mold in a single property would hardly merit consideration in a securitization deal - but the fact that it has gained media traction points to the sensitive nature of the sector.

"The problem is, the sector is still new," said one senior Wall Street banker. "There is still no information on how these are going to perform over time."

The next step for the asset class - multi-borrower deals - is another matter altogether.

Those trades would securitize loans on multiple properties owned by multiple managers, all bundled together in one bond - an even newer and untested product in a new and untested asset class that is not yet one year old.

"How do you ensure the quality of the property management?" asked Michelle Patterson, Kroll's head of RMBS ratings. (Reporting by Natalie Harrison and Joy Wiltermuth; Editing by Marc Carnegie)