Morningstar: With Few Bulk Buying Opportunities, Rental Home Buyers Shift Focus to Southeast

Morningstar Credit Ratings LLC, New York, said fewer distressed buying opportunities for institutional investors in single-family rental houses has led to a shift of securitized properties from the southwest United States to the southeast.

Morningstar Perspective authors Brian Alan, Rohit Jadhav and Yash Agarwal said composition of future issuance will depend on market-driven property acquisition and disposition strategies.

“After peaking in 2014, fewer single-borrower, single-family rental properties have been securitized, and the geographic makeup of recent securitized pools is concentrated in the broader southeast, including Florida and Texas rather than in California, Nevada and Arizona,” the report said. “This shift is likely due to lower acquisition costs and more attractive yields in the southeast. Future pools will depend on issuers’ ability to add assets based on these factors but will also hinge on their ability or willingness to refinance existing pools of collateral and to pare assets to realize house price gains.”

Morningstar rated all 31 single-borrower, single-family rental transactions brought to market since 2013, seven multi-borrower transactions and one deal backed by residential rental mortgages. The report noted because institutional investors accumulated their properties over time, early-vintage single-family rental securitizations are largely backed by houses purchased from 2012 through 2014. Meanwhile, 2016 securitizations included the refinancings of previous single-family rental issuance, so they contain a mix of older and newer purchased homes.

“In the absence of large-scale distressed buying opportunities, the future geographic makeup of single-family rental transactions will depend on how successfully issuers can selectively add properties in markets based on their yield and home price appreciation expectations,” the report said. “Additionally, institutional investors may choose to leave regions where the economics are no longer optimal or where they choose to sell properties to monetize the value of house price appreciation.”

The report noted geographic concentration will also depend on institutional investors’ ability and willingness to stay in certain markets by refinancing existing securitizations backed by earlier acquired properties.

“Property performance has been strongest in California, Arizona and Nevada, regions from which institutional investors may no longer be able to add assets,” Morningstar said. V”acancy metrics in securitized pools have benefited from properties in these high-demand regions, and while performance in the broader southeast and Texas has been within Morningstar’s expectations, if pools become more concentrated in these locations, overall vacancy may increase.”