Potential issuers of securities tied to U.S. home rentals may not be able to obtain the credit ratings they seek because of a dearth of historical data on the business, according to Moody’s Investors Service.
The risk to investors with the unprecedented rental-home bonds would be tied mainly to the quality of property managers and the variability in net revenues from tenants and eventual home sales, the New York-based ratings firm said today in a report. Moody’s listed the types of data it will probably seek, saying debt issuers may not always be able to overcome limited information by structuring deals with more investor protection.
“In some stressed cases, credit enhancement would not be able to mitigate the concern associated with limited historical information and requested ratings would not be achievable,” analysts led by Kruti Muni and Joseph Snailer wrote.
Investors including Colony Capital LLC, KKR & Co., Och-Ziff Capital Management Group LLC (OZM) and Two Harbors Investment Corp. (TWO) have been accelerating purchases of foreclosed homes to offer as rentals, or raising funds for buying properties. The Federal Reserve said in a January paper that government encouragement for the business could help a housing market that’s now showing signs of recovering after its worst real-estate slump since the 1930s.
The overseer of Fannie Mae and Freddie Mac told lawmakers last month the taxpayer-supported companies will continue with bulk sales of foreclosed homes that can fuel the industry after initial auctions by Fannie Mae. Washington-based Fannie Mae owned 109,266 of foreclosed single-family properties as of June 30, after seizing 91,483 in the first half of the year and selling 100,745, according to a securities filing.
Tom Barrack’s Colony Capital, the investment firm that plans to acquire $1.5 billion of rental homes within a year, was among those awarded about 2,500 properties sold in Fannie Mae’s auction, whose winners were informed in July, people with knowledge of the sale said last month.
Ratings companies, which helped create the U.S. housing bubble that began to burst in 2008 by granting inflated grades to mortgage bonds, have begun commenting on how they would approach assessing bonds created through private securitizations that such investors could use for financing.
With securitizations, the graders compare potential losses on the underlying assets with the so-called credit enhancement provided for specific classes of the deals. That can include some bonds taking losses before others, cash reserves or asset cash flows that exceed coupons on the securities created.
Moody’s has been approached by “numerous real-estate market participants” seeking insight into how it would assess such deals, though none has presented “a specific transaction or deal structure to us,” according to its report today.
The ratings company said it’s unclear whether the transactions will involve securitization trusts owning homes or loans to operators. Each approach carries different risks, Moody’s said.
Fitch Ratings said Aug. 8 that it’s unlikely to grant investment-grade ratings in the top AAA or AA categories to deals backed by single-family rental properties.
The reasons include the “limited performance data for the sector and individual property management firms” as well as for “market rents, rent roll histories, vacancy rates, and supply and demand.” The “ambitious growth strategies by regional operators looking to expand their portfolios rapidly over the near term” is another concern, New York-based Fitch said.
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