Rental-Home Securitizations Unlikely to Get Best Fitch Ratings

Fitch Ratings said it’s unlikely to grant the best credit grades to securities backed by single-family U.S. rental properties, a move that may curb potential sales of the debt if other ratings companies follow suit.

The firm has “identified several performance/data issues that are likely to result in the imposition of a rating cap,” its analysts wrote in a report yesterday. Those include “limited performance data for the sector and individual property management firms” as well as “market rents, rent roll histories, vacancy rates, and supply and demand.”

Investors including Colony Capital LLC, KKR & Co., Och-Ziff Capital Management Group LLC and Two Harbors Investment Corp. have been buying foreclosed homes and other properties to rent out, or raising funds to do so, at an accelerating pace, helping to stabilize housing after the worst real-estate slump since the 1930s. Their use of securitizations for financing may be stalled or carry higher costs without the best ratings.

“Although some firms have a few years’ operating history, most do not have a proven track record managing in a down cycle, outside their footprint, or on a large-scale basis,” Fitch analysts including Suzanne Mistretta and Rui Pereira said. “This concern is further heightened by ambitious growth strategies by regional operators looking to expand their portfolios rapidly over the near term, which will make it unlikely that Fitch will consider high investment-grade ratings.”

Single-Family Rentals

The New York-based ratings company “generally” considers its AAA and AA categories as high investment grades, Sandro Scenga, a spokesman, wrote in an e-mail.

The U.S. government has been encouraging the development of the single-family rental market, with taxpayer-supported Fannie Mae this year conducting regional bulk home sales whose winners were informed in July. Tom Barrack’s Colony Capital, which plans to acquire $1.5 billion of rental homes within a year, was among those awarded about 2,500 foreclosed properties auctioned off, according to four people with knowledge of the sale.

Edward DeMarco, the Federal Housing Finance Agency head who oversees Fannie Mae and Freddie Mac, told lawmakers in a July 31 letter that “based on the success of this initial transaction, we are planning for additional sales in the near future.”

Turning homes into rentals amid the limited ability of potential owner-occupant buyers to absorb a wave of foreclosures can help “narrow the gap” between supply and demand, Fitch said. More than 2 million mortgages are delinquent by at least 60 days or have already been turned into seized properties, it said.

Alternative Investment

Rental-home securities also may provide an alternative to investors faced with the almost non-existent issuance of U.S. residential-mortgage bonds without government backing, it said.

Two Harbors, the real estate investment trust run by Pine River Capital Management LP that mainly buys home-loan securities, is purchasing properties at an accelerating pace both to profit and to gain insight into housing markets, Chief Executive Officer Thomas Siering said in a telephone interview.

The REIT, which bought $48 million of homes in July to bring its total since starting this year to about $120 million, is “seeing research out there that suggests a total return of 10 to 20 percent on an unlevered basis” is possible, he said.

-- With assistance from John Gittelsohn in Los Angeles. Editors: John Parry, Shannon D. Harrington

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