Single-Family Rental Primer, 5th Edition
Single-Family Rental Primer, 5th Edition
Single-Family Rental Primer, 5th Edition
212 887 7740 2010 and 1.3% of the existing single-family rental housing stock.
[email protected]
What’s New? In the 5th Edition of Our Industry Primer, We Provide Several
Brian Jones Updates: 1) summary of major institutional participants; 2) analysis of implied
212 887 7716 cap rates for the public sector including comparisons to other equity REITs; 3)
[email protected] overview of M&A activity to date including analysis of individual deal
economics; 4) KBW’s updated single-family rental model, including a review of
same-home portfolios and comparisons to multifamily; and 5) updated analysis
of underwritten securitization cash flows, including multi-borrower deals and
recent collateral performance.
As the Acquisition Pace Has Moderated, Major SFR Operators Have Focused
on Portfolio Stabilization. Incremental capital deployment and recent merger
activity have targeted increased scale in existing markets and at the enterprise
level. Rent growth has ranged from 4.5-5.5% on a blended basis for
securitization collateral and 4-5.5% on new leases for the public companies as
demand has been robust with occupancy levels averaging 95%. Portfolio
stabilization and operational improvements have driven improved margins and
asset yields based on same-home portfolios. Additionally, while there is concern
about rent deceleration and increased supply in certain property sectors including
multifamily, the single-family rental market appears on a positive trajectory. As a
result, public sector stock prices have appreciated meaningfully and the gap
between market value and net asset value (NAV) has narrowed.
Keefe, Bruyette & Woods, Inc. does and seeks to do business with companies covered in its research reports. As a
result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this
report. Investors should consider this report as only a single factor in making their investment decision.
Please refer to important disclosures and analyst certification information on pages 94–98 of this report.
Table of Contents
Part III: An Alternative Look at Valuation – Implied Capitalization Rates for Single-Family Rental REITs .. 39
Introduction .............................................................................................................................................. 39
Analysis .................................................................................................................................................... 39
Comparisons to Other Equity REIT Sectors ............................................................................................. 41
Conclusion................................................................................................................................................ 44
Part IV: Mergers & Acquisitions (M&A) in the Single-Family Rental Sector ................................................. 45
Benefits .................................................................................................................................................... 45
Structure ................................................................................................................................................... 45
Summary of Notable M&A Transactions To-Date ................................................................................... 46
Part V: Analysis of Single-Family Rental Securitizations ................................................................................ 56
Single Family Rental Securitization – Part CMBS, Part RMBS............................................................... 56
SFR Securitization Issuance to Date......................................................................................................... 56
Exploring the Economics of Single-Family Rental Securitization ........................................................... 60
Collateral Performance for Single-Borrower SFR Securitizations ........................................................... 71
Specialty SFR Lenders ............................................................................................................................. 73
Appendix .......................................................................................................................................................... 79
Implied capitalization (“cap”) rates for public SFR REITs with comparisons to other
equity REIT sectors.
By our account, major institutional players have invested nearly $36 billion of capital to
acquire approximately 208,000 properties since 2010. While this is meaningful, it
amounts to approximately 0.1% of the housing stock, 1% of vacant properties, 6% of
mid-2012’s seriously delinquent loans, and 3% of estimated distressed home sales since
2010. Additionally, this amounts to approximately 1.3% of the estimated 15.8 million
attached and detached single-family rental homes. At the same time, we estimate
investors in aggregate (both small and large) have purchased 5.3 million homes since
2010 (roughly 17% of home sales).
Others, 99%
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Note: Based on the top 17 institutional portfolios in KBW’s SFR database and an estimated single-family
rental housing stock of 15.8 million units (RentRange). As of September 2016.
Source: Company reports and KBW Research.
Despite increased institutional investment following the 2008-2009 financial crisis and the
subsequent increase in foreclosures, the single-family rental market in the U.S. remains
fragmented, dominated by smaller investors and so-called “mom and pop” owners.
According to data from RentRange, nearly 45% of the estimated single-family rental
housing stock of 15.8 million units is owned by individuals with just one single-family rental
property. Further, more than 85% of the SFR stock is owned by investors with 10 or fewer
properties. RentRange estimates 5% of the SFR stock is owned by investors with more than
50 properties, while just 1% is owned by investors with more than 1,000 properties.
26 - 50
11 to 25
6 to 10
1 unit
2 to 5
Note: Based on estimated attached and detached single-family rental housing stock of 15.8 million units. As of
September 2016.
Source: RentRange.
Additionally, recent data from the public SFR players as well as single-borrower SFR
securitization collateral show strong rent increases. For single-borrower SFR
securitizations, blended rent growth has ranged from approximately 4.5-5.5% over the
last 12 months. Further, we estimate the major public SFR players achieved blended
average rent growth of 4.5% over the last 12 months including 5% on new leases and 4%
on renewals.
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At the same time, CoreLogic data shows U.S. single-family home prices up 30% since
2010. As of July 2016, prices were up 6.0% year over year, 36% above the trough and
9.4% from the prior peak, and CoreLogic projects 5.4% growth over the next 12 months.
Additionally, median existing home prices are at a 25% discount to new home prices,
while real estate-owned (REO) properties historically have been at significant discounts
to non-distressed homes, suggesting a continued discount to replacement cost.
Recent same-home data from the portfolios of the public SFR REITs validate these
economics with an estimated average last twelve months (LTM)/annualized core NOI
margin of 60.3% and NCF margin of 53.3%. We estimate this equates to average asset
yields of 5.9% before recurring capital expenditures (“capex”) (NOI yield) and 5.1% after
capex (NCF yield). Assuming 30-50% leverage would equate to a return on equity of 5-
8% before home price appreciation.
Tricon American Homes’ acquisition of a portfolio from BLT Homes in April 2015.
Cerberus’s acquisition of the remaining BLT Homes portfolio in June 2015 and Five
Ten Capital in February 2015.
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In the public markets, share prices of the SFR REITs, particularly those of the larger
players (SFR, AMH), have exhibited positive momentum, outperforming the broader
market in 2016, including other property REIT sectors. Recent mergers highlight the
scale benefits of combinations given anticipated expense synergies. As the gap between
share prices and net asset value (NAV) has narrowed, we believe shares of the public
entities have become an attractive form of currency for additional M&A.
An Alternate Approach to Valuation: Implied Cap Rates for Public SFR REITs
As the major public players have largely stabilized their portfolios, we believe implied
cap rates are becoming an important valuation tool for public single-family rental REITs.
For the broader equity REIT universe, cap rates are most commonly used in determining
portfolio NAV.
Given the size and liquidity of the U.S. single-family residential market, market values
based on broker price opinions (BPO) of value are readily available. As a result, many
institutional SFR players have used a BPO approach in determining NAV to date.
Based on our analysis, we estimate the public SFR REITs (including AMH, SFR, and
SBY) are trading at average implied nominal cap rates of 5.2-5.7% and economic cap
rates (after recurring capex) of 4.7-5.1% based on our 2016-2018 projections. This
compares to major multifamily REITs at an estimated average implied nominal cap rate
of 5.2% and economic cap rate of 4.8% (based on annualized 2Q16 results). Additionally,
we estimate other equity REIT sectors, including office, industrial, and retail, trade at
average implied nominal cap rates of 4.9-5.0% and economic cap rates of 4.7-4.9%.
Securitization has been a meaningful source of financing for SFR REITs. Since late 2013,
27 single-borrower SFR securitizations have been announced or completed totaling $20.9
billion in collateral value and $15.4 billion in debt issuance on 104,000 properties.
Additionally, since April 2015 six multi-borrower transactions have been completed by
three individual specialty SFR lenders totaling $2.4 billion in collateral value and $1.5
billion in debt issuance on more than 20,000 properties. We provide an updated dataset
of underwritten SFR securitization cash flows (including property operating expenses,
capex, margins, and asset yields) for both single- and multi-borrower deals.
As single-borrower deals have tenured, a time series of actual performance data from
underlying collateral is available, including occupancy, turnover, retention, and
delinquency. Importantly the data shows strong average LTM occupancy of 95%+ with
tenant retention above 75%. At the same time, delinquencies remain low (under 1%).
We believe the underwritten cash flows of SFR securitizations and growing amount of
actual performance trends provide the foundation of a historical dataset on the economics
of institutionally managed SFRs.
Broadtree Homes 506 SFRs in GA, FL, Rochester, and MN; $53 million total investment
Publicly traded Canadian firm; 565 single-family units in FL, GA, NJ for $35 mil.; FKA
Firm Capital American Realty Partners
Delavaco Residenital Properties
Jacksonville Wealth Builders Has purchased 2,000 SFR properties in northeast FL
Landsmith Manages over 1,000 homes through its Landsmith Residential Impact Fund
Silver Bay Realty Trust (SBY) via its December 2012 IPO raising gross proceeds
of $282 million.
Altisource Residential (RESI) via the December 2012 spin-out from Altisource
Portfolio Solutions (ASPS) with an initial equity base of approximately $100
million.
American Residential Properties (ARPI) via its May 2013 IPO raising gross
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American Homes 4 Rent (AMH) via its July 2013 IPO raising gross proceeds of
$812 million.
Starwood Waypoint Residential Trust (SWAY) via its January 2014 spin-off
from Starwood Property Trust (STWD) with an initial equity base of approximately
$1 billion. SWAY subsequently merged with Colony American Homes in January
2016 to form Colony Starwood Homes (SFR).
Colony Starwood Homes via the merger between Colony American Homes with
Starwood Waypoint in January 2016.
Colony Capital (CLNY), a diversified REIT and investment manager, has a 14%
stake in Colony Starwood Homes (SFR) with a carrying value of $326 million
(10% of CLNY’s equity) and a market value of approximately $455 million based
on SFR’s recent stock price. CLNY previously had an approximate 23% stake in
CAH, and was issued 15.1 million shares of SFR stock as a result of the merger.
The Blackstone Group (BX) via its fund investments in Invitation Homes,
which was founded in 2012 and has invested approximately $9.6 billion into the
single-family rental strategy.
Company Ticker Price Rating Target Mkt. Cap. GAAP Adjusted Tangible GAAP Adjusted Tangible Yield Cap.
Pure-Play
American Homes 4 Rent AMH $21.62 MP $22.00 $6,355 $11.84 $13.04 $12.63 1.83x 1.66x 1.71x 0.9% 0.36x
Colony Starwood Homes SFR $30.15 MP $35.00 $3,253 $24.91 $27.61 $25.23 1.21x 1.09x 1.20x 2.9% 0.58x
Silver Bay Realty Trust SBY $18.03 MP $18.00 $678 $14.28 $15.92 $15.92 1.26x 1.13x 1.13x 2.9% 0.50x
10
NPL/SFR
Altisource Residential RESI $10.75 MP $11.00 $586 $18.47 $15.05 $15.05 0.58x 0.71x 0.71x 5.6% 0.48x
Other
Tricon Capital Group TCN-TSE $7.00 NC NC $786 $6.24 $6.24 $5.99 1.12x 1.12x 1.17x 3.7% 0.19x
Pure-Play: Total/Avg. $10,286 1.43x 1.29x 1.35x 2.2% 0.48x
Pure-Play: Median 1.26x 1.13x 1.20x 2.9% 0.50x
Total/Avg. $11,657 1.20x 1.14x 1.18x 3.2% 0.42x
Median 1.21x 1.12x 1.17x 2.9% 0.48x
FFO/EPS AFFO P/FFO P/AFFO Implied
certification information on pages 94–98 of this report.
Company 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E Cap Rate
Pure-Play
American Homes 4 Rent $0.95 $1.07 $1.16 $0.80 $0.86 $0.95 22.8x 20.2x 18.6x 27.0x 25.1x 22.7x 5.2%
Please refer to important disclosures and analyst
Colony Starwood Homes $1.64 $1.90 $2.01 $1.30 $1.55 $1.64 18.4x 15.9x 15.0x 23.2x 19.5x 18.4x 5.4%
Silver Bay Realty Trust $0.83 $0.93 $1.03 $0.58 $0.67 $0.76 21.7x 19.4x 17.5x 30.9x 26.8x 23.8x 5.7%
NPL/SFR
Altisource Residential ($0.79) $0.60 $0.85 NA NA NA NM 17.9x 12.6x NA NA NA NA
Other
Tricon Capital Group $0.62 $0.69 $0.81 NA NA NA 11.3x 10.1x 8.7x NA NA NA NA
Pure-Play: Total/Avg. 21.0x 18.5x 17.0x 27.0x 23.8x 21.6x 5.5%
Pure-Play: Median 21.7x 19.4x 17.5x 27.0x 25.1x 22.7x 5.5%
Total/Avg. 18.5x 16.7x 14.5x 27.0x 23.8x 21.6x 5.5%
Median 20.1x 17.9x 15.0x 27.0x 25.1x 22.7x 5.5%
Notably, Invitation Homes became the first company to complete a single-family rental
securitization in November 2013.
As of June 30, 2016, AMH’s portfolio totaled approximately 48,000 homes with a cost
basis of $8.1 billion, including homes held for sale, across 42 markets in 22 states.
Primary markets include Texas (18%), Florida (10%), Atlanta (8%), Indianapolis (6%),
Phoenix (6%), and Charlotte (6%). The average cost basis per home including renovation
costs is $171,000 and the average age is 13.3 years. Overall occupancy at 2Q16 totaled
94.8% excluding homes held for sale.
In addition to its purchase of ARPI, AMH has grown through other large acquisitions,
including the purchase of Beazer Pre-Owned Rental Homes in August 2014
(approximately 1,300 homes) and the Ellington Housing Single-Family Portfolio in
December 2014 (approximately 900 homes).
As of June 30, 2016, SFR’s portfolio totaled 31,000 properties with a cost basis of
approximately $5.9 billion across 10 states. Primary market concentrations include
Florida (31%), Atlanta (19%), Texas (16%), and California (12%). The company has an
average of 2,800 homes per market in each of its top ten markets. The average investment
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per property is $193,100, which includes the write-up of legacy SWAY homes to market
value, and the average age is 29 years. Overall occupancy at 2Q16 totaled 95.4%.
We discuss the merger of Colony American Homes and Starwood Waypoint in more
detail in the M&A section of this report.
Additionally, prior to the merger with SWAY, CAH operated a lending subsidiary,
Colony American Finance (CAF), which originates loans to small to midsize owners of
single-family rental portfolios. CAF was not included in the merger consideration and
now operates as a separate entity. We discuss CAF along with other SFR lenders in more
detail in the securitization section of this report.
Notably, Colony American Homes filed for an IPO in May 2013, which would have raised
as much as $260 million. However, the planned June 2013 offering was cancelled as the
company cited difficult market conditions.
Immediately prior to the merger, as of December 31, 2015, SWAY’s portfolio totaled
12,881 properties with a cost basis of $2.1 billion. Primary market concentrations
included Florida (37%), Texas (24%), and Atlanta (20%). The average investment per
home was $162,000, and the portfolio had an average age of approximately 34 years.
Additionally, SWAY’s legacy assets included a portfolio of NPLs. This was a strategy
initiated originally by STWD and carried on following the spin-off of SWAY with the
intent of 1) modifying and disposing of the loans, or 2) converting to REO for the rental
portfolio or for property sale. The company largely ceased purchasing NPLs in 2014,
citing unattractive pricing and essentially exited the NPL business following several bulk
sales in 2016. The remaining NPL/REO assets include $120 million of primarily REO
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assets, which the company expects to dispose of by the end of the first half of 2017.
In 2012, Colony Capital formed a joint venture (JV), CSFR Operating Partnership (CSFR),
to acquire single-family homes for rent. The initial JV was managed by Colony American
Homes, an affiliate of Colony Capital. Prior to Colony American Homes’ merger with
Starwood Waypoint, Colony Capital owned a 23.3% stake in Colony American Homes
with a carrying value of $326 million (excluding its interest in Colony American Finance,
the company’s lending unit, which was not contributed as part of the merger).
As part of the merger consideration, Colony Capital was issued 15.1 million shares of
SFR in January 2016, representing an initial stake of 13.8% in the combined entity.
Today the company’s ownership represents a 14% stake following share buybacks by
SFR. As of SFR’s most recent stock price, Colony Capital’s investment is valued at
approximately $455 million (40% above carrying value). Colony Capital’s shares have an
approximate nine-month lock-up period from the closing of the merger (ending in
October 2016).
Notably, HPA has completed two securitizations to date encompassing 3,600 properties,
or approximately 75% of its total portfolio by unit count.
As of June 30, 2016, and pro forma for a recently announced portfolio acquisition of 320
homes, SBY’s portfolio totals 9,200 homes with a cost basis of $1.3 billion across 13
markets. Primary market concentrations include Atlanta (30%), Florida (27%), Phoenix
(16%), and Charlotte (8%). The average investment per home is $135,000 and the
portfolio has an average age of 27 years. Overall occupancy at 2Q16 totaled 97.6%.
Notably, in April 2015 SBY completed the acquisition of The American Home, whose
portfolio totaled approximately 2,500 homes.
As of June 30, 2016, TAH’s portfolio consisted of 8,018 homes with a total investment of
$1.0 billion across 14 markets. Primary markets include Texas (18%), Charlotte (18%),
and Atlanta (15%). The average total investment per home is $126,000. Overall
occupancy at 2Q16 totaled 88.9% (excluding homes held for sale).
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Altisource Residential Corp. (RESI): $739 Million Investment (including REOs under
evaluation)
Altisource Residential was spun out as a REIT from Altisource Portfolio Solutions
(ASPS) in December 2012. The company is externally managed by Altisource Asset
Management Corporation (AAMC). RESI was initially created to pursue a strategy of
acquiring nonperforming loans with the intent of modifying and disposing for a gain or
for the conversion to REO and to rental. In this manner, RESI believed it could source
rental properties at a significant discount while also generating strong gains from NPL
and REO modifications and dispositions. We estimate RESI has acquired nearly 17,000
NPLs since inception at an average cost of 65% of BPO value.
Beginning in 2Q15, management noted a strategic shift away from NPL purchases noting
that given aggressive pricing in the NPL market, it believed direct SFR purchases were
more attractive than NPLs. As a result, RESI plans to acquire single-family rental assets
on a one-by-one and portfolio basis. The company is also accelerating the monetization
of its NPL portfolio via bulk portfolio sales. Through its partnership with ASPS, RESI is
pursuing an acquisition strategy focused on high-yielding properties. Management is
targeting gross asset yields of 11-13% and net asset yields of 6-7%. RESI believes that its
long-term service agreement with Altisource Portfolio Solutions provides RESI’s rental
portfolio with operational scale.
As of June 30, 2016, RESI’s rental portfolio totaled approximately 4,000 homes. Primary
markets include Georgia (49%), Florida (15%), and North Carolina (8%). The estimated
average investment per stabilized home is $111,000 and the average age is 35 years.
Overall occupancy at 2Q16 totaled 75.7% as the company continues to grow its portfolio.
The company has an additional 1,400 REO properties under evaluation for potential
rental. Including these assets, the company’s SFR investment totals $739 million. RESI
has completed two bulk purchases to date from Invitation Homes totaling 1,300
properties (July 2015) and 590 properties (March 2016).
The company’s remaining NPL portfolio totaled 4,072 loans with a carrying value of
$707 million and unpaid principal balance (UPB) of $963 million as of June 30, 2016. Of
this amount, 806 are current (RPLs) and the rest delinquent or going through foreclosure.
Additionally, RESI has 1,174 REOs with a carrying value of $226 million, which it plans
to sell.
Main Street Renewal was founded in 2012 by Amherst Holdings to acquire single-family
properties and convert them to rentals. Amherst Holdings is a private financial services
holding company based in Austin, TX that specializes in real estate and related structured
finance markets. According to the company, Main Street Renewal’s portfolio totals
approximately 10,000 homes. Assuming an average investment per home of $125,000
would equate to a total investment of $1.3 billion. Per the company’s website, Main
Street Renewal’s portfolio is located across 13 states (AL, FL, GA, IN, KS, KY, MN,
MS, MO, NC, OK, TN, and TX) in 22 markets.
Cerberus’s aggregate portfolio totals approximately 5,700 homes. Total cost basis is $615
million, implying an average investment per home of approximately $108,000. The
portfolio is located approximately 76% in the Midwest (including Indianapolis, Memphis,
Chicago, St. Louis, and Kansas City), 18% in Florida, and 6% in other markets.
At the time of PIMCO’s acquisition of Sylvan Road’s stake in the JV in March 2015, the
portfolio totaled approximately 4,000 homes, according to Bloomberg. Assuming an
average investment per home of $150,000 would equate to a total investment of $600
million. According to the company’s website, primary markets include Birmingham,
Alabama; Atlanta, Georgia; Southeast and Southwest Florida; and Minneapolis,
Minnesota.
Southeast and Midwest markets where it believes it can achieve higher yields. CONREX
currently manages more than 3,500 properties and continues to actively buy. Markets
include Georgia, Alabama, South Carolina, North Carolina, Ohio Kentucky, Indiana,
Missouri, and Tennessee. Assuming an average investment per home of $150,000 would
equate to a total investment of $525 million.
The funds aggregate approximately 3,400 homes with an estimated total investment of
$510 million (assuming an average investment of $150,000 per home). Major markets
include California, Florida, Phoenix, Atlanta, and Chicago.
GTIS Partners is a global real estate investment firm based in New York with $3.3 billion
in AUM. 643 Capital Management is a San Francisco-based private equity firm focused
on debt and equity real estate investments. The partnership considers itself one of the
earliest institutional participants in the single-family rental sector.
The firm launched its first fund (Fund 1) in December 2011, which acquired
approximately 600 single-family homes for $42 million across 8 markets. The fund
reached stabilized occupancy of 95% within 18 months and is financed through debt
provided by FirstKey, a subsidiary of Cerberus Capital Management. Fund II was
launched in 2014 and deployed over $80 million of capital across 750 single-family
homes. The company provides internal property management through its Brandywine
Homes USA brand.
According to company filings, as of June 30, 2016, FCA owned a portfolio of 565 single-
family properties with a cost basis of $35.4 million and fair value of $33.7 million
Other Companies
Roofstock
Roofstock (roofstock.com) is an online, single-family rental marketplace that launched in
March 2016 and caters to institutional and individual investors. The company works with
buyers and sellers from large institutions, as well as high net worth individuals.
Roofstock certifies each rental home on the marketplace and each of the vendors it
recommends. Roofstock currently operates in 10 markets. Investors are able to either buy
homes outright or invest in diversified SFR funds. The funds are managed by SFR
operators with properties selected from the marketplace with Roofstock providing fund
administration and local property management oversight. In its first year of operations,
Roofstock expects to have sold more than $70 million of leased SFR homes with average
days on market trending to under 35 days. Longer-term, the company plans to build out
asset management capabilities, which would provide additional transparency into asset
performance.
HomeUnion
HomeUnion, based in Irvine, CA, has developed an online platform to provide an end-to-
end suite of services to efficiently and remotely invest in single-family rental homes in
more than 20 markets across the U.S. The company offers property selection, acquisition,
renovation, management, and disposition services, as well as financing. In this way,
individuals can build a custom portfolio of investment properties and benefit from a
passive investment in cash flow generating real estate.
American Homes 4 Rent (AMH) 46,456 44,021 94.8% $170,603 1,958 13.3 $1,461 10.3%
Colony Starwood Homes (SFR) 30,410 29,011 95.4% $193,081 1,850 29.0 $1,519 9.4%
Silver Bay Realty Trust (SBY) 8,911 8,700 97.6% $134,840 1,644 26.8 $1,190 10.6%
Altisource Residential (RESI) 3,977 3,010 75.7% $110,981 1,496 35.0 $1,085 11.7%
Tricon American Homes 7,904 7,025 88.9% $126,000 1,513 NA $1,191 11.3%
Progress Residential 17,333 15,929 91.9% $175,924 1,947 14.5 $1,447 9.9%
Total / Weighted Avg. 114,991 107,696 93.7% $169,450 1,857 19.9 $1,425 10.1%
AMH, SFR, and Tricon American Homes portfolio metrics exclude properties held for sale. RESI portfolio excludes REOs under evaluation
for potential rental strategy. RESI average investment per home and gross yield based on stabilized portfolio.
Source: Company reports and KBW Research.
Geographic Concentration
We compiled data on geographic concentrations from the major SFR operators where
disclosure was available (including from securitization data). Our analysis encompasses
approximately 150,000 properties across eight major operators. The data shows the
majority of large institutional SFR portfolios concentrated in the “sun belt” of the U.S. in
states with favorable population and growth trends.
We estimate that approximately 22% of homes are located in Florida (including Tampa,
Orlando, and Miami), 15% in Georgia (primarily Atlanta), 12% in Texas (including
Houston, Dallas, Austin, and San Antonio), 8% in Arizona (primarily Phoenix), and 8%
in California.
Other/NA
IN 12%
FL
2% 22%
TN
3%
IL
3%
NV
4%
OH
4%
GA
NC 15%
7%
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CA
8% TX
AZ 12%
8%
Note: Encompasses 150,000 properties from Invitation Homes, American Homes 4 Rent, Colony Starwood
Homes, Progress Residential, Silver Bay, Tricon American Homes, Altisource Residential, VineBrook Homes,
and Lafayette RE. Invitation Homes data based on securitization collateral across approximately 31,000
properties (approximately 65% of the company’s total portfolio).
Source: Company and ratings agency reports and KBW Research.
Gross Yields
Gross yields vary by market and home price. According to data from RentRange, the
average gross rental yield on estimated market values in 18 top SFR MSAs totals 9.5%.
At the higher end of the range, markets with yields above 10% include Chicago, Houston,
Indianapolis, Dallas-Fort Worth, and Atlanta. Depending on the time of acquisition, gross
yields for major players’ portfolios in these markets may be higher due to cumulative
price appreciation.
We believe lower price point homes are generally associated with higher gross yields
partly due to higher long-term operating costs relative to property price and potentially
lower residual value. For example, Tricon American Homes, with an average investment
per property of $126,000 (versus a sector average of $169,000) has achieved an average
gross yield of 11.3% (versus a 10.2% peer average). Data from RentRange supports this,
showing a clear correlation between home values and gross yields.
14
12
Percent 10
8
6
4
2
0 Indianapolis
Dallas-Fort Worth
Phoenix
Orlando
Austin
Houston
Charlotte
Nashville
Inland Empire
Jacksonville FL
Tampa
Seattle
Miami
Sacramento
Chicago
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Note: Based on RentRange data from nearly 2 million, 3-bedroom SFR properties. Rents and home prices
based estimated current market levels as determined by RentRange’s automated valuation model (AVM).
Source: RentRange.
35
30
Average gross yield %
25
20
15
10
0
0 200,000 400,000 600,000 800,000 1,000,000
Average AVM $
Note: Based on RentRange data from nearly 2 million, 3-bedroom SFR properties. Rents and home prices
based estimated current market levels as determined by RentRange’s automated valuation model (AVM).
Based on same MSAs as data in Exhibit 8.
Source: RentRange.
Exhibit 10 shows the portfolio growth of the major institutional players where company
disclosure is available. As the graph shows, acquisitions accelerated meaningfully
through 2014. Beginning in 2015, the pace of growth tapered as companies shifted focus
to stabilization and operational improvements.
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180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
2012 2013 2014 2015 2016
AMH Invitation Homes SFR
Progress Residential SBY Tricon American Homes
RESI VineBrook Homes Colony American Homes
ARPI
Note: SFR represents Starwood Waypoint homes prior to 2016 and includes STWD legacy portfolio prior to
2014. Intra-period data estimated where not available.
Source: Company and media reports and KBW Research.
As a result of operational improvement, the public SFR players (including AMH, SFR,
and SBY) have reported improved results based on same-home portfolios. We estimate
an average LTM/annualized core NOI margin of 60.3% and NCF margin of 53.3%,
which equate to average assets yields of 5.9% before capex (NOI yield) and 5.1% after
capex (NCF yield). Further, we estimate average same-home NOI growth of 9.7% in
2Q16 driven by a 5.8% increase in revenues and 1.1% increase in expenses.
Exhibit 11 shows historical average occupancy for the major players (as available).
100%
90%
80%
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70%
60%
50%
40%
30%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
2013 2014 2015 2016
AMH SBY SFR CAH ARPI TAH Progress Average
Note: Represents leased rate where occupancy unavailable. Legacy ARPI data excludes preferred operator
properties with 100% contractual occupancy. SFR includes legacy SWAY data.
Source: Company reports.
5.0%
4.0%
3.0%
2.0%
3Q15 4Q15 1Q16 2Q16
10.0% 6.0%
8.0% 5.0%
6.0% 4.0%
4.0% 3.0%
2.0% 2.0%
3Q15 4Q15 1Q16 2Q16 3Q15 4Q15 1Q16 2Q16
Note: SFR re-lease rent growth not available for 3Q15 and 4Q15 periods. Blended rent growth as disclosed by SFR and calculated for AMH
and SBY based on the simple average of reported renewal and re-lease rent growth. SFR data based on same-home portfolio; AMH and
SBY data based on aggregate portfolio. Averages represent simple averages.
Source: Company reports and KBW Research.
Recent data from SFR securitizations show similar rent increases across 23 single-
borrower securitizations encompassing approximately 90,000 properties. According to
servicer reports compiled by Morningstar Credit Ratings (Morningstar), rent increases on
SFR securitization collateral peaked at 5.7% in May 2016 on a blended basis at the height
of the spring leasing season in April 2016.
Additionally, Morningstar stratifies securitization rent increases by re-leases (vacant-to-
occupied) and renewals. The data shows average renewal rent increases ranging from
3.5% to 4.5% and re-lease rent increases ranging from 2.5% to 7.0% over the 18-month
Leverage %
Debt/ Debt/ Unsecured
Company/Sector Capital Equity Debt
SFR REITs:
American Homes 4 Rent (AMH) 36.4% 0.57x 3.6%
Colony Starwood Homes (SFR) 57.6% 1.36x 18.5%
Silver Bay Realty Trust (SBY) 49.8% 0.99x 0.0%
SFR REIT average 47.9% 0.97x 7.4%
Equity REITs:
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Debt/Capital
70%
SFR Other Equity REITs
58%
60% 52%
50% 48%
50% 47% 46% 45% 45%
40% 40% 39% 38%
40% 36% 35%
30%
20%
10%
0%
Note: As of 2Q16. Excludes accumulated depreciation where applicable and available. AMH and SFR
unsecured debt represents convertible debt. Leverage calculated on book equity.
Source: Company reports, FactSet, SNL, and KBW Research.
American Homes 4 Rent (AMH) internalized its former manager in June 2013 prior
to the company’s IPO in July 2013. We estimate total consideration of $130 million
equated to approximately 7.3x revenues and 12.6x EBITDA.
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In September 2014, Silver Bay Realty Trust (SBY) completed the internalization of
its prior manager. As consideration, SBY issued 2.2 million shares (5.8% of shares
outstanding) for approximately $36 million, or approximately 4.1x revenues and
6.8x estimated EBITDA.
In November 2014, Colony American Homes internalized its manager. The terms of
the deal were not disclosed.
In connection with its merger with Colony American Homes, Starwood Waypoint
Residential Trust (SWAY, since renamed Colony Starwood Homes [SFR])
internalized its prior manager. The company issued 6.4 million shares (equivalent to
17% of total share count at the time) for approximately $166 million (based on the
share price at the time of the announcement). We estimate this equated to 8.5x
revenues and 9.6x EBITDA.
Altisource Residential Corp. (RESI), whose strategy has focused on both NPLs and
SFRs, is externally advised by a separate public company, Altisource Asset
Management Corp. (AAMC). AAMC receives a graduated base fee based on rental
portfolio size in addition to certain incentive fees based on return hurdles and
leasing activity. RESI’s management agreement was amended in March 2015 from a
prior agreement, which included more onerous incentive fees paid to the manager
based on low return hurdles. Investors who dislike externally managed structures
may choose to own shares of both the REIT as well as its manager.
Credit loss (21) (248) (1.5% ) (1.6% ) (0.1% ) 1.5% bad debt expense, in-line with public co's
Effective gross rent $1,321 $15,852 96.0% 100.0% 9.4%
Implied occupancy rate 95.0%
Implied occupancy rate after credit loss 93.5%
Expenses
Property management fee ($99) ($1,189) (7.2% ) (7.5% ) (0.7% ) 7.5% of revenue, could improve long term
Property taxes (246) (2,953) (17.9% ) (18.6% ) (1.8% ) 1.75% of cost basis
HOA fees (20) (238) (1.4% ) (1.5% ) (0.1% ) 1.5% of revenue
Insurance expense (25) (300) (1.8% ) (1.9% ) (0.2% ) Blanket policy of $200-$400 per home
Repairs and maintenance (83) (1,000) (6.1% ) (6.3% ) (0.6% ) Approx. $80 per month
Turnover costs (50) (594) (3.6% ) (3.7% ) (0.4% ) $1/sqft or $1,800/turn (assumes 33% turnover)
Total expenses ($523) ($6,274) (38.0%) (39.6%) (3.7%)
Net operating income (NOI) $798 $9,578 58.0% 60.4% 5.7%
Recurring capital expenditures (capex) (83) (1,000) (6.1% ) (6.3% ) (0.6% ) $1,000 per year
Net cash flow (NCF) $715 $8,578 51.9% 54.1% 5.1%
Note: Total R&M, turnover, and capex ($216) ($2,594) (15.7%) (16.4%) (1.5%) In-line with public same-home results
Purchase price per property $150,000
Upfront renovation cost 18,750 12.5% of purchase price
Total investment per property $168,750 In-line with major players
After accounting for a stabilized 95% occupancy and 1.5% in bad debt expense, we
project an effective rental yield of 9.4%.
NAA also stratifies the data between garden properties (2,575 properties with
699,488 units) and mid- and high-rise (395 properties with 119,612 units).
934 square feet, including 938 square feet for garden and 910 square feet for mid-
and high-rise. For the major SFR players, we estimate an average home size of
approximately 1,900 square feet.
This compares to $840 per unit, or $40 per month and 3.7% of revenue for
multifamily, which likely includes some turnover costs (per NAA, including
contract services such as landscaping). This is inclusive of garden properties at
$800 per unit and mid- and high-rise properties at $1,100 per unit.
For major public multifamily REITs (including EQR, AVB, and ESS), we
estimate average R&M per unit (including turnover costs) of $1,300 based on
YTD/LTM same-property results.
Turnover Costs
We assume approximately $1,800 per turn ($1 per square foot), or $600 per
property assuming 33% turnover.
This compares to 52% annualized turnover for multifamily per NAA (including
53% for garden and 52% for mid- and high-rise).
NAA and major public multifamily REITs do not explicitly break out turnover
costs, which we assume are mostly included within R&M.
Property Management
We assume 7.5% of revenue, which could improve over the long term with a scaled
portfolio.
Additionally, we estimate an average of 3.1% for the five largest public multifamily
REITs (EQR, AVB, ESS, UDR, and MAA) based on YTD 2Q16 results.
Property Taxes
We assume 1.75% of cost basis, or approximately 18.5% of revenue. Property taxes
can vary depending on property age and location.
This compares with 11.8% of revenue for multifamily (per NAA) including
11.4% for garden and 13.5% for mid- and high-rise.
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HOA Fees
We assume 1.5% of revenue, equivalent to $240 per year. We note that some
properties may not require HOA fees depending on the neighborhood.
Insurance Expense
We believe that scaled operators can secure cheaper, blanket insurance policies for
their portfolios for around $200 to $400 per property. Our model assumes
approximately $300 per home or 2% of revenue.
This compares with $260 per unit or 1.9% revenue for multifamily (per NAA). This
is inclusive of $250 per unit for garden and $300 per unit for mid- and high-rise.
This compares with 61% for multifamily based on NAA data including garden at
61% and mid- and high-rise at 62%.
This compares with $1,180 per unit or 8.8% of revenue for multifamily (per
NAA), inclusive of $1,130 per unit for garden and $1,500 for mid- and high-rise.
For major public multifamily REITs (including EQR, AVB, and ESS), we
estimate average recurring capex per unit of $1,440 based on YTD/LTM same-
property results.
For major public multifamily REITs (including EQR, AVB, and ESS), we estimate
average R&M, turnover, and recurring capex of $2,740 per unit based on YTD/LTM
same-property results (although this could include some expenses the SFR REITs
allocate elsewhere as an apples-to-apples comparison is not available).
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At the higher end, the triple net lease sector has an average NOI margin of 93%. In a net
lease, the tenant is typically responsible for a majority of the property operating expenses,
which results in the above-average margin. For multifamily, the most comparable equity
REIT sector to SFR REITs, we estimate an average NOI margin of 65%. We note that the
two largest public SFR REITs, AMH and SFR, have guided to core NOI margins
following recent merger integrations of 62-64%.
100% 93%
40%
20%
0%
Note: Equity REIT NOI margins based on most recent fiscal year data per SNL Financial.
Source: FactSet, SNL, and KBW Research.
We assume our same gross rental yield and property operating expense assumptions,
equating to a 60% NOI margin.
The largest public SFR REIT, American Homes 4 Rent (AMH), currently
operates with corporate G&A of 0.37% of assets (for 1H16).
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In our unlevered example, our analysis equates to a return on equity (ROE) of 4.7%
on funds from operations (FFO) and 4.1% on adjusted FFO (AFFO) after recurring
capex. Including an assumption for annual HPA of 3.5%, we calculate an ROE of
8.0% on FFO and 7.4% on AFFO.
In our levered example, we assume 50% debt to capital (1.0x debt to equity, in line
with the average for the public players) and a 3.0% cost of funds. Our analysis
equates to an ROE of 6.3% on FFO and 5.2% on AFFO after ongoing capex.
Including an assumption for annual HPA of 3.5%, we calculate an ROE of 13.0% on
FFO and 11.8% on AFFO.
Exhibit 18 summarizes this disclosure including occupancy, turnover, rent increases, NOI
increases, per property expenses for repairs and maintenance (R&M), turnover, stabilized
capex, and asset yields. Our analysis is based on LTM data where available, or otherwise
annualizes year-to-date 2Q16 results.
Note: SFR data for turnover-rate, LTM/Annualized Core NOI margins, per property costs, and property
management % of rental revenue based on YTD 2Q16 annualized data. AMH R&M and turnover includes in-
house maintenance expenses. SFR R&M includes landscaping and pool services expenses. SFR recurring
capex includes recurring capex and turnover-related capex. Core NOI margins based on individual company
definitions. SFR NOI margin includes asset management fee income. SBY R&M and turnover based on
property operating and maintenance expense, which removes an estimated $350 per home per year for
insurance costs. Asset yields based on disclosed same-home portfolio average investment per home for AMH
and SFR, and total portfolio average investment per home for SBY.
Source: Company reports and KBW Research.
Core NOI in 2Q16 increased by an average of 9.7% year over year driven by 5.8%
revenue growth and 1.1% expense growth. At the same time, we estimate an average
core NOI margin in 2Q16 of 60.7%, up 1.9% year over year.
SFR is the only company to break out R&M and turnover separately ($934 for
R&M and $494 for turnover [$1,503 per turn] on a 2Q YTD annualized basis).
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Silver Bay Realty Trust (SBY). Management is targeting property-level cash costs
per year of approximately $2,500-$3,000, which includes R&M, turnover, and
recurring capex. We estimate total R&M and turnover per home on an LTM basis
on SBY’s same-home portfolio of $3,670, which includes $2,570 for R&M and
turnover and $1,110 for recurring capex. We estimate SBY’s R&M and turnover
based on property operating and maintenance expense from which we remove an
estimated $350 per home per year for insurance costs.
# of Avg. Home Rehab % Property Capex Per Home Per Year Report
Deal Homes Age (yrs.) of Purchase Size (sq.ft.) Underwritten Actual Type
American Homes 4 Rent
AH4R 2014-SFR1 3,852 12 12.1% 2,028 $450 $1,012 9M Annualized (2015)
AH4R 2014-SFR2 4,487 12 10.0% 1,912 $450 $854 Full Year 2015
AH4R 2014-SFR3 4,503 12 10.9% 2,028 $450 $767 Full Year 2015
AH4R 2015-SFR1 4,661 13 12.3% 1,933 $450 $669 9M Annualized (2015)
Total/average 17,503 12 11.3% 1,973 $450 $817
Same-home portfolio 25,288 $2,157 LTM 2Q16
Colony Starwood Homes
SWAY 2014-1 4,081 33 14.7% 1,752 $1,003 $1,374 Full Year 2015
Same-home portfolio 24,657 $2,968 YTD 2Q16 Annualized
Silver Bay
SBY 2014-1 3,011 24 15.8% 1,703 $750 $1,015 Full Year 2015
Same-home portfolio 5,942 $3,671 LTM 2Q16
Invitation Homes
IH 2013-SFR1 3,191 30 13.1% 1,698 $450 $1,201 TTM June 2015
IH 2014-SFR3 4,011 28 14.1% 1,908 $450 $1,212 Full Year 2015
IH 2015-SFR1 3,026 27 12.5% 1,849 $750 $1,091 Full Year 2015
IH 2015-SFR2 3,521 28 13.3% 1,920 $750 $1,113 Full Year 2015
IH 2015-SFR3 7,192 29 14.4% 1,795 $750 $1,105 Full Year 2015
Total/average 20,941 29 13.7% 1,831 $647 $1,139
Progress Residential
Progress 2014-SFR1 3,138 14 7.6% 2,045 $450 $1,603 Full Year 2015
Progress 2015-SFR1 3,995 13 8.5% 1,978 $450 $1,259 11M Annualized (2015)
Progress 2015-SFR2 3,311 13 8.6% 1,917 $450 $1,071 6M Annualized (2015)
Total/average 10,444 13 8.3% 1,979 $450 $1,303
Tricon American Homes
TAH 2015-SFR1 3,505 35 23.0% 1,534 $489 $1,544 8M Annualized (2015)
Securitization weighted average 59,485 22 12.8% 1,869 $575 $1,107
Source: Kroll Bond Ratings Agency, servicer reports, company reports, and KBW Research.
As the portfolios of major single-family rental players have begun to stabilize, we believe
implied cap rates are becoming an increasingly relevant valuation tool for the public
sector. While we believe other valuation metrics should also be considered (such as
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earnings multiples, dividend yields, BPO-based NAV), implied cap rates provide another
baseline for comparing the SFR sector to other public equity REITs, including
multifamily. Given similarities between multifamily and SFR, including their history of
institutionalization, we believe multifamily REITs will become an increasingly relevant
comparable for SFR REITs over time.
Our analysis suggests the public SFR sector trades at an average implied nominal cap
rate of 5.2%, 5.5%, and 5.7% and economic cap rate of 4.7%, 4.9%, and 5.1% based on
our 2016, 2017, and 2018 forecasts.
Analysis
We performed a cap rate analysis for the three pure-play public SFR REITs, including
American Homes 4 Rent (AMH), Colony Starwood Homes (SFR), and Silver Bay Realty
Trust (SBY). We used our 2016-2018 forecasts for NOI to look at cap rates on a forward
basis. Utilizing a full year estimated NOI figure captures seasonality throughout the year,
as well as our expectations of long-term earnings power following recent merger
integrations. Our forecasts include an assumption of modest portfolio growth ranging
from 1-3% annually for each company.
Mae portfolio joint venture). Excluding this income, we calculate a comparable core
NOI margin of 60.7% in 2016, 61.4% in 2017, and 61.7% in 2018.
Our implied cap rate estimates for SFR exclude asset management income from
NOI. Ascribing a value to this fee stream would increase the implied cap rate on
SFR’s single-family rental assets. For example, capitalizing this fee stream at a 6-8x
multiple would increase the implied cap rate by 6-8 basis points.
We calculate the economic cap rate for each of the prior scenarios by incorporating
our individual company assumptions for recurring capex.
Our 2016-2018 forecasts for AMH, SFR, and SBY assume recurring capex of
approximately $750-$1,000, $1,200-$1,300, and $1,000-$1,100 per property per
year, respectively.
We note that AMH and SBY reported same-home recurring capex of $717 and
$1,098 per home over the LTM period ended 2Q16, while SFR reported 1H16
annualized capex per home of $1,540.
Exhibit 20 summarizes our analysis of implied cap rates utilizing our 2016-2018
forecasts, including cap rates before recurring capex (nominal cap rates) and cap rates
including recurring capex (economic cap rates).
5.0% 4.8%
4.5%
4.0%
3.5%
3.0%
SBY SFR AMH Avg. SBY SFR AMH Avg. SBY SFR AMH Avg.
2016 2017 2018
We calculate an average implied cap rate based on annualized in-place 2Q16 NOI of
5.2%. Assuming 5% annual forward NOI growth would translate to an average
Exhibit 21 summarizes implied nominal and economic cap rates for the multifamily
REITs versus SFR REITs.
Exhibit 21: SFR REITs versus Multifamily REITs - Implied Cap Rates
Nominal Cap Rate
SFR
SFR
UDR
EQR
SBY
Avg.
SBY
Avg.
SBY
Avg.
ESS
AVB
AIV
Avg.
AMH
AMH
AMH
MAA
CPT
SFR
SFR
UDR
EQR
SBY
Avg.
SBY
Avg.
SBY
Avg.
AVB
ESS
AIV
Avg.
AMH
AMH
AMH
MAA
CPT
Note: Multifamily REIT cap rates based on annualized 2Q reported NOI. Economic cap rates include company-disclosed recurring
capex/non-revenue enhancing capex. Calculations include non-consolidated JV NOI where material and disclosure available. No incremental
value applied to other assets or fee streams.
Source: Company reports and KBW Research.
For a subset of major office and industrial REITs, including BXP, DCT, FR, PLD,
SLG, and VNO, we calculate an average implied nominal cap rate of 4.9% based on
annualized 2Q16 NOI. Assuming 5% forward NOI growth would result in a cap rate
of 5.2%.
We calculate an implied economic cap rate for office and industrial REITs of 4.7%
based on annualized 2Q16 NOI. Assuming 5% forward NOI growth would result in
a cap rate of 4.9%.
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According to RCA, the average LTM acquisition cap rate (as of 2Q16) for U.S.
office properties totals 6.7%. This includes 5.7% for central business district
(CBD) office and 7.0% for suburban office. Certain markets are well below these
levels, including Manhattan office at 4.4%.
For U.S. industrial properties, the average LTM acquisition cap rate (as of 2Q16)
totals 6.8%.
For a subset of major retail REITs, including BRX, FRT, GGP, KIM, MAC, and
SPG, we calculate an average implied nominal cap rate of 5.0% based on annualized
2Q16 NOI. Assuming 5% forward NOI growth would result in a cap rate of 5.3%.
We calculate an implied economic cap rate for retail REITs of 4.9% based on
annualized 2Q16 NOI. Assuming 5% forward NOI growth would result in a cap rate
of 5.1%.
According to RCA, the average LTM acquisition cap rate (as of 2Q16) for U.S.
retail properties totals 6.5%. This includes 7.0% for “strip” retail and 5.9% for
malls.
Exhibit 22: SFR REITs versus Other Equity REIT Sectors – Implied Cap Rates
3.0%
SFR REITS - SFR REITs - SFR REITs - Multifamily Retail Office/Industrial
2018E 2017E 2016E
4.0%
3.5%
3.0%
SFR REITS - Retail Multifamily SFR REITs - Office/Industrial SFR REITs -
2018E 2017E 2016E
Note: Multifamily, office/industrial, and retail cap rates based on annualized 2Q16 NOI. Certain adjustments
made where materially applicable in order to calculate run-rate cash NOI. Calculations include non-
consolidated JV NOI where material and disclosure available. Economic cap rates include company-disclosed
recurring capex/non-revenue enhancing capex. No incremental value applied to other assets or fee streams.
Source: Company reports and KBW Research.
Conclusion
For the broader equity REIT universe, cap rates are most commonly used in determining
portfolio NAV. Given the size and liquidity of the U.S. single-family residential market,
market values based on BPO value are readily available. As a result, many institutional
SFR players have used a BPO approach in determining NAV.
However, as the long-term cash economics of the institutional single-family rental sector
become more certain and institutional acceptance grows, we believe cap rates will
become a more meaningful source for determining net asset values for the public sector.
Benefits
We believe the primary benefits of M&A in the institutional SFR sector are scale and
operating leverage. At the enterprise level, scale benefits can come in the form of general
and administrative (G&A) reductions and overhead consolidation. Within individual
geographic markets, increases in property density can lead to property-level efficiencies
such as repairs and maintenance (R&M) and turnover costs.
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Market density efficiencies can also drive more operating leverage in property
management such as through the elimination of excess field personnel, leasing offices,
and call centers. However, it is important to note that the benefits of scale have
diminishing returns—for example increasing a portfolio from 5,000 properties to 10,000
properties versus from 30,000 properties to 35,000 properties.
As a result of these operational efficiencies, we believe M&A both on a large and small
scale should be accretive at the margin for acquirers depending on price and structure.
However, color from the public participants has been vague regarding which specific
qualifiers management observes in order to determine the economic viability of a
transaction. Accretion considerations can be made both with regards to net asset value
and earnings. Depending on the structure, certain transactions may be accretive to
earnings and not necessarily NAV, or vice versa.
To date, we believe M&A both at the large and small scale has focused on building out
existing markets rather than expanding footprint. We believe this strategy echoes the
benefits of market density and the resulting scale efficiencies at the property level.
Structure
We believe mergers structured on an NAV-for-NAV basis similar to the SWAY-CAH
deal are possible and that existing shareholders may need to accept shares in other SFR
REITs for companies to achieve the scale benefits that may eventually allow the names to
trade closer to NAV. Additionally, we believe the contribution of portfolios into umbrella
partnership REITs (UPREITs) in exchange for operating (OP) units of a public REIT
may represent an attractive exit strategy for smaller property owners as such transactions
would create liquidity, preserve upside from dividends and price appreciation, and take
place on a tax-deferred basis.
Consideration for smaller acquisitions has primarily been in the form of cash on hand and
through the use of existing credit facilities. For larger transactions, public companies
have used their shares as currency. Depending on acquirer valuation levels, it is possible
share issuance below certain benchmarks can be dilutive to NAV and book value.
8 Silver Bay Realty Trust The American Home Feb-15 $263 2,460 $106,911 $66 $960 10.8% 5.6% Cash
Orlando
9 Cerberus Five Ten Capital Feb-15 NA 1,500 NA NA NA NA NA FL, IL, TX
10 PIMCO Sylvan Road/HavenBrook Homes Mar-15 NA 4,000 NA NA NA NA NA GA, FL, MN, AL Sylvan Road's JV stake
11 Tricon American Homes BLT Homes Apr-15 $150 1,385 $108,303 $74 $1,070 11.9% 6.8% NC, SC, TX Cash
12 Cerberus BLT Homes Jun-15 $402 4,200 $95,714 NA NA NA NA IL, FL, MO, IL, TN
13 Altisource Residential Invitation Homes Jul-15 $111 1,314 $84,779 $54 $848 12.0% 6.8% Atlanta Cash
Atlanta, FL, TX, CA, CO,
14 Starwood Waypoint Colony American Homes Jan-16 $3,710 17,763 $184,029 $97 $1,486 9.7% 5.7% Stock (NAV-to-NAV)
Las Vegas, Phoenix
Phoenix, Dallas, Houston,
15 American Homes 4 Rent American Residential Properties Feb-16 $1,495 8,924 $146,649 $80 $1,272 10.4% 5.7% Stock
Atlanta, Nashville, FL
16 Altisource Residential Invitation Homes Mar-16 $65 590 $109,785 $76 $1,010 11.0% 6.3% IL, NC, SC, GA, FL Cash
17 Silver Bay Realty Trust NA Oct-16 $42 320 $129,688 $72 $1,215 11.2% 6.0% Atlanta, Tampa, Orlando Cash
18 Altisource Residential NA Pending NA 4,000-4,500 NA NA NA NA NA NA Under LOI
certification information on pages 94–98 of this report.
Note: Estimated acquisition capitalization rates calculated based on assumed NOI margins ranging from 55-62% and stabilized occupancy of 95%.
Please refer to important disclosures and analyst
Despite the pick-up in activity, we believe potential transactions both large and small
have failed to come to fruition given still wide bid-ask spreads. Over time, we expect deal
activity to accelerate as bid-ask spreads narrow and as more public companies are able to
use their shares as currency.
Following the close of the deal, SFR owned approximately 30,500 homes (including 12,700
from SWAY and 17,800 from CAH) with a total asset value of $7.7 billion ($5.4 billion in
cost basis). Management highlighted the significant overlap in each company’s primary
markets, which included Atlanta, Florida, California, Texas, Denver, Las Vegas, and
Phoenix. Post-merger, the combined companies’ top ten markets made up approximately
90% of the total portfolio with an average of 2,700 homes in each top ten market.
Structure
To finance the merger, SWAY issued 64.9 million shares in exchange for all shares of
CAH equivalent to $1.46 billion or 171% of market capitalization at the time of the
closing. The merger’s ownership allocation was determined based on each company's
NAV, including an estimated $1.3 billion for SWAY and $2.1 billion for CAH, which
was not subject to adjustment following the agreement. Assuming a normalized NOI
margin of 62-64%, we calculate an acquisition cap rate of 5.7-5.9%.
As consideration for the internalization, SWAY issued 6.4 million OP units, equivalent to
16.9% of shares outstanding and a market value of $144 million at the close of the
transaction. We estimate that the cost of the internalization equated to 7.4x revenue and
8.3x EBITDA of the manager.
As a result, immediately following the merger, prior SWAY shareholders owned 35.2%
of the combined entity, Starwood Capital owned 5.8% (as a result of the internalization),
and prior CAH shareholders owned 59.0%. Colony Capital (CLNY, which had a prior
23% stake in Colony American Homes, or 13.2% CLNY’s book value) owned a pro
forma 13.7% of the entity.
Financial Impact
Since SWAY’s stock issuance exceeded 50% of its outstanding shares, SWAY was
considered the acquirer for legal purposes and the target for accounting purposes. As a
result, SWAY’s assets were written up to fair value upon the closing of the transaction,
leading to an increase in pro forma GAAP book value to approximately $29 per share, or
7% increase from prior GAAP book value of approximately $27 per share. However,
based on a constant accounting basis, we estimate pro forma book value declined to
approximately $24 per share, or a 12% decline. Management cited a pro forma NAV of
$3.5 billion, equivalent to an approximate $32 per share based on the pro forma share
count. This compared to prior NAV of approximately $35 per share. The dilution is the
result of share issuance below book value and NAV.
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Management believes the merger’s strong property-level synergies were driven by the
concentrated overlap of each company’s top markets. Exhibit 24 provides a graphic of the
overlap of SWAY and CAH’s portfolio in Atlanta, Miami, and Tampa.
One month following the close of the merger, the company had realized 70% of expected
synergies, which was ahead of management’s initial expectations. By May 2016 (five
months post-close), the company had realized 95% of synergies, and 100% of synergies
were reported realized by the end of 2Q16. As evidence of these synergies, post-close of
the merger in February 2016, the board of directors raised the quarterly dividend by 22%
to $0.22 per share from $0.19 per share.
Concluding Thoughts
We believe the merger resolved several strategic issues, helping position Colony
Starwood Homes as a best-in-class SFR operator. Additionally, we view the transaction
as a significant milestone for the industry. Given the successful execution of synergy
realization, we believe the transaction highlights the scale benefits of the business model
and accretion potential from M&A in the sector.
The merger increased AMH’s portfolio by approximately 23% to more than 47,000 homes
with a cost basis of more than $8 billion. Immediately following the merger, approximately
85% of the combined portfolio was located in AMH’s top 20 markets versus 83%
previously, and 60% located in the company’s top 10 markets versus 56% previously.
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Structure
As consideration for the merger, ARPI shareholders received 1.135 AMH shares for each
ARPI share, representing a value of $19.01 per share based on AMH’s closing price on
the day prior to announcement. This represented a 19.8% premium over the volume
weighted average price of ARPI’s stock over the preceding 20 days and an 8.7%
premium over ARPI’s closing price on the day prior to the announcement. As a result,
AMH issued approximately 38 million shares, or approximately 14.5% of its stand-alone
market capitalization before the merger. At the close of the merger, ARPI shareholders
owned approximately 12.6% of the combined company.
Financial Impact
ARPI’s weak legacy operations (with NOI margins of 48-57%) are expected to
negatively impact financial results in the first year following the merger (2016).
Specifically, AMH highlighted approximately 15% of ARPI’s portfolio (1,300 homes),
which was managed under the company’s legacy preferred operator program or originally
sourced though local operators under this program. Including these homes, AMH
identified approximately 1,400-1,500 homes for strategic sales.
Additionally, management noted ARPI’s average property level cost per home (including
R&M, turnover, and capex) of approximately $3,800 versus AMH’s $2,500 at the time.
As a result, the company initially guided to $8-10 million of deferred maintenance costs
($0.03/share) it expected to incur and expense or capitalize primarily during turns.
However, management has recently noted that the cost to complete this deferred
maintenance may be less than originally projected.
2017 NOI margins of 62-64%, or approximately 100 bps higher than stand-alone
AMH margin expectations in 2016.
Concluding Thoughts
While ARPI’s weaker legacy operations are expected to be a near-term drag on margins,
we believe the longer-term expected accretion from G&A and property management
synergies demonstrate the scale benefits of M&A.
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Total consideration was $263.4 million, consisting of the issuance of 8.2 million Class A
shares of common stock (valued at $145 million at the time of the closing), $5 million in
cash held in an indemnification escrow, and the repayment of $112.8 million of outstanding
debt. Management noted that it was not the highest bidder for the portfolio, but was able to
prevail in negotiations due to the attractiveness of AMH’s stock as a currency.
The purchase price equated to an estimated $192,000 per home (versus AMH’s average
$170,000 at the time). Management cited an average cost per foot of $99 and we
estimated an initial gross rental yield of 8.4% based on the purchase price (versus AMH’s
9.9% at the time). Assuming a normalized NOI margin of 60-64%, we calculate an
acquisition cap rate of 4.8-5.1%.
Given the small size of the portfolio relative to AMH’s size and pace of acquisitions at
the time, the acquisition had an immaterial impact on our earnings estimates. However,
we believe it bolstered scale and could have been moderately accretive at the margin due
to the elimination of overhead in the prior Beazer portfolio.
Given the small size of the portfolio relative to AMH’s size and pace of acquisitions at
the time, the acquisition had an immaterial impact on our earnings estimates.
In March 2016, RESI acquired a second portfolio of approximately 590 homes from
Invitation Homes at a purchase price of $65 million paid in cash. The portfolio consisted
of properties located in Illinois, North Carolina, South Carolina, Georgia, and Florida.
The purchase price equated to $110,000 per home, or $76 per square foot, with an
average gross rental yield of 11.0%. Assuming a normalized NOI margin of 60%, we
calculate an acquisition cap rate of 6.3%.
Additionally, in July 2016, RESI entered into a non-binding letter of intent to acquire
4,000-4,500 rental homes from an unrelated third party. The transaction is subject to
continuing due diligence and financing arrangements and is expected to close in 2H16.
Management noted it is also considering other large SFR portfolio purchases available in
the market. RESI expects the rental portfolio to total 10,000 properties by year-end 2016.
Financial Impact
The purchase price equated to a gross rental yield of 10.8% (versus SBY’s 10.3% at the
time), and management cited expected net yields on the acquisition of 5.5-6.0%. The
portfolio was 90% leased at the time of acquisition. Management noted that the
transaction would be immediately accretive to core FFO and NAV. Additionally,
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The $41.5 million purchase price equates to approximately $130,000 per home (versus
SBY’s $135,000 as of 2Q16) and $72 per square foot. Average monthly rents are $1,215
per month, which equates to a gross yield of 11.2% versus SBY’s 10.6% as of 2Q16.
Assuming a core NOI margin of 55-60% (versus our 56.5% forecast for SBY in 2016),
we estimate the acquisition equates to a net yield of 5.9-6.4% (before recurring capex).
We raised our estimates by approximately 3% after incorporating the acquisition into our
financial model. We believe the portfolio will require immaterial incremental G&A given
management’s previous discussion of minimal incremental G&A for The American
Home portfolio.
were not disclosed. Five Ten Capital was previously a Piedmont, California-based asset
manager focused on single-family rentals. We believe the transaction marked Cerberus’s
initial entry into the institutional single-family rental sector.
BLT Homes
Following BLT Homes’ 1,400 home portfolio sale to Tricon in March 2015, the company
sold its remaining portfolio, approximately 4,200 homes, to Cerberus Capital
Management in June 2015 (according to Bloomberg). As a result, the sale completed
BLT Homes’ exit from the market. The portfolio was primarily concentrated in the
Midwest, such as Indianapolis and Chicago, as well as in Florida. The terms of the deal
were not disclosed. According to private equity firm GTIS Partners, the total deal value
was $402 million, or approximately $96,000 per home.
This low cost of capital should increase the investable opportunity set for investors and
provide a mechanism to monetize HPA since the financing advance rate would be based
on market value estimates rather than initial cost basis. Over the long run, we believe this
should lead to higher home prices and improved neighborhood quality, particularly at the
low end of the market, as well as higher eventual NAVs for SFR portfolios. On the other
hand, it is worth noting that declining affordability is a risk as investor demand for rental
properties could further raise both home prices and rents.
Single-borrower issuers have included Invitation Homes (seven deals), American Homes
4 Rent (six deals, including one from American Residential Properties), Progress
Residential (five deals), Colony Starwood Homes (five deals, including three from
Colony American Homes, one from Starwood Waypoint, and one from the combined
entity), Silver Bay Realty Trust (one deal), Tricon American Homes (one deal), and
Home Partners of America (two deals).
Number of deals 5 1 3 1 2 7 5 1 1 1 27
Amount (mil.) $2,553 $342 $1,746 $536 $851 $5,344 $2,796 $313 $531 $381 $15,393
Cost of Funds (floating) L+1.54% L+2.11% L+1.76% L+2.22% L+2.51% L+2.14% L+2.27% L+1.92% L+2.37% L+1.96% L+2.13%
Cost of Funds (fixed) 4.327% NA NA NA NA NA 3.770% NA NA NA 4.158%
Cost basis (mil.) $3,547 $450 $2,144 $686 $1,079 $6,271 $3,347 $410 $647 $448 $19,028
BPO value (mil.) $3,760 $489 $2,400 $783 $1,092 $6,867 $3,758 $481 $721 $517 $20,868
58
Leverage (LTV) on BPO 67.6% 70.0% 71.2% 62.0% 74.1% 75.0% 71.3% 65.0% 70.0% 70.0% 73.8%
Leverage (D/E) on BPO 2.10x 2.33x 2.49x 1.63x 2.86x 3.00x 2.49x 1.86x 2.33x 2.33x 2.81x
Leverage (LTV) on cost 72.1% 76.1% 79.9% 70.8% 74.8% 82.7% 79.6% 76.3% 77.9% 80.8% 80.9%
Leverage (D/E) on cost 2.81x 3.18x 4.04x 2.42x 2.98x 5.06x 3.98x 3.22x 3.53x 4.21x 4.23x
UW NCF Yield (on cost) 6.3% 5.1% 4.5% 4.8% 4.5% 4.8% 5.2% 4.7% 5.8% 6.5% 5.2%
Est. all-in cost of funds 4.3% 3.3% 2.9% 3.7% 3.8% 3.3% 3.9% 3.1% 3.5% 3.1% 3.6%
Est. ROE 12.8% 10.8% 10.7% 7.4% 6.5% 13.3% 10.4% 10.0% 13.8% 20.6% 11.7%
% AAA-rated 55.5% 54.0% 51.9% 49.7% 50.8% 46.5% 47.4% 47.3% 44.1% 44.8% 48.9%
% of purchase price 11.3% 6.0% 13.3% 14.8% 2.0% 14.6% 8.2% 20.3% 14.7% 23.1% 13.3%
Avg. total inv. per prop. $163,671 $156,450 $194,489 $192,372 $299,241 $201,264 $174,113 $132,642 $158,104 $127,558 $183,084
Avg. BPO per prop. $173,999 $170,063 $217,941 $219,656 $301,913 $221,417 $194,506 $155,722 $175,997 $147,278 $200,786
Please refer to important disclosures and analyst
Implied HPA 6.6% 8.7% 12.1% 14.2% 1.0% 10.3% 11.7% 17.4% 11.3% 15.5% 9.7%
Avg. square footage 1,976 1,908 1,888 1,963 2,347 1,837 1,979 1,703 1,752 1,535 1,903
Avg. property age (yrs) 12 12 24 23 23 28 13 24 33 35 21
Median acquisition date Aug-13 Jun-13 Jun-13 Nov-13 NA Feb-13 Mar-14 Dec-12 Aug-13 Aug-13 Jul-13
Avg. lease term (months) 12.4 14.3 12.5 12.4 12.9 15.8 13.9 20.6 16.9 12.6 14.2
Avg. monthly rent $1,405 $1,280 $1,432 $1,549 $2,210 $1,480 $1,396 $1,139 $1,424 $1,168 $1,443
Gross rental yield 10.3% 9.8% 8.8% 9.7% 8.9% 8.9% 9.6% 10.3% 10.8% 11.0% 9.5%
NOI margin 66.1% 58.5% 59.0% 60.1% 57.0% 61.3% 59.6% 55.7% 63.0% 65.1% 61.1%
NOI margin (incl. capex) 63.3% 55.0% 55.0% 54.4% 52.9% 57.8% 56.4% 49.8% 56.8% 61.5% 57.5%
Note: ROEs based on LIBOR at the time of issuance. Averages represent weighted averages.
Source: Kroll, Moody’s, Morningstar, Bloomberg, company reports, and KBW Research.
Deal Size
The 27 single-borrower SFR securitizations completed to date have had an average deal
size of approximately $570 million, ranging from $300 million to $1.2 billion. We
believe the minimum size for efficient execution to be approximately $300 million given
the fixed overhead costs associated with a transaction. Assuming a 70% loan to value
(LTV) and average BPO value per home of $200,000 (in line with securitizations to
date), this would equate to 1,400-2,150 properties.
Funding Cost
We believe funding costs on floating-rate securitizations have ranged from L+1.54% to
L+2.70%, with an average of approximately L+2.10%. Including the amortization of
fees and hedging costs over the expected life of the loan amounting to an estimated 100
bps, we estimate an average all-in funding cost of L+3.1%. Additionally, of the six
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fixed-rate deals completed to date, average costs have ranged from 3.5-4.4% with five-
to 10-year terms. Assuming 3.0% of issuance costs amortized over 10 years would
equate to all-in costs of 3.8-4.7%.
Leverage
Leverage (based on BPO value) on SFR securitizations to date has ranged from 62-75%
(LTV), equivalent to debt-to-equity ratios of 1.6-3.0x. On cost basis, leverage has ranged
from 67-88% (LTV), equivalent to debt-to-equity ratios of 2.0-7.5x. This compares to
typical SFR credit facility advance rates of 50-70%.
Monetizing HPA
The BPO premium over cost basis (including capex) on properties securitized has ranged
widely, depending upon acquisition date, geographic concentration, and property age.
Overall, we calculate an average premium over cost basis of 10% with a mean acquisition
date of July 2013. We note that this premium to cost basis does not necessarily
correspond to cumulative HPA over the period as reported by a home price index, but
would also recognize the market discounts at which the properties were acquired as well
as the value added through initial renovation.
We estimate advance rates on current credit facilities are typically in the 50-70% range
with a cost of funds of approximately 2.0-4.0% on average. As securitization advance
rates are based on BPO, advance rates on the underlying cost basis can reach or exceed
80% depending on cumulative home price appreciation to date, allowing SFR operators
to monetize home price appreciation and achieve potentially significant ROEs due to
greater leverage.
Including other costs such as amortized issuance fees, servicing fees, miscellaneous
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operating expenses, as well as hedging costs, we estimate average total funding costs for
a typical floating rate deal of approximately 3.0%. As a result, assuming asset yields of 4-
7% and all-in funding costs of 3%, we estimate that ROEs on SFR securitizations could
total 10-25% depending on leverage and HPA. Additionally, annual rent increases could
drive upside to unlevered yields and result in stronger incremental returns.
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
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0.0%
Note: Based on underwritten cash flows and funding costs (LIBOR) at the time of deal close. Does not include
assumption for future rent growth.
Source: Kroll, Moody’s, Morningstar, company reports, and KBW Research.
This analysis compares with our baseline margin expectations for the sector of 60.4%
(NOI) and 54.1% after recurring capex, as well as our asset yield assumptions of 5.7%
(NOI yield) and 5.1% (NCF yield).
% of Per
Total (all securitizations) $ mil. EGI Property
Rental revenue $1,786.8 106.1% $17,411
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Note: Represents data across 27 securitizations encompassing 103,000 properties. Averages represent
weighted averages.
Source: Kroll, Moody’s, Morningstar, company reports, and KBW Research.
Repairs and maintenance can vary widely from operator to operator due to property age,
portfolio scale (both nationally and by individual market), technology, degree of vertical
integration, and extent of initial renovation. We believe technology can help promote
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efficient property visits via route optimization and mobile computing capabilities.
Additionally, we believe differences in capitalization policies and difficulty in
categorizing certain property-level expense items can drive variances among operators.
$1,800 12%
$1,600
10%
$1,400
Per Home (annual)
$1,200 8%
% of Rev.
$1,000
6%
$800
$600 4%
$400
2%
$200
$0 0%
By comparison, our baseline model assumes turn costs to total approximately $1,800 per
turn or approximately $600 per property per year. The data shows a wide range, which
we believe is a function of the average property age, degree of internalization, and extent
of initial renovation work.
certain property-level expense items can drive variances among operators. As a result,
public players largely refer to property-level expense expectations as one category
including all cash costs of R&M, turnover, and capex.
$5,000 7%
$4,500
6%
$4,000
$3,500 5%
$3,000
% of Rev.
4%
Per Turn
$2,500
$2,000 3%
$1,500 2%
$1,000
1%
$500
$0 0%
Note: Per turn assumes 33% turnover. Average represents simple average.
Source: Kroll, Moody’s, Morningstar, company reports, and KBW Research.
$1,200 7%
$1,000 6%
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5%
Per Home (annual)
$800
% of Rev.
4%
$600
3%
$400
2%
$200 1%
$0 0%
Property Management
We calculate the average property management fee equates to 6.5% of revenue. Property
management can be provided in-house for companies with internal property management
or be fully or partially contracted out to a third party.
This compares with our long-term assumption of 7.5% and an estimated 5-9% on a
consolidated basis for the major public SFR REITs. We believe differences in G&A and
property management expense classification may drive variances among operators.
$2,000 10%
$1,800
$1,600 8%
Per Home (annual) $1,400
$1,200 6%
% of Rev.
$1,000
$800 4%
$600
$400 2%
$200
$0 0%
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Property Taxes
As a percentage of revenue, property taxes equate to an average of 15.8%. On a per
property per year basis, this equates to $2,700, or 1.4% of BPO value. Our baseline
model assumes approximately 18.5% of revenue and 1.8% of BPO. Property taxes are
determined based on the appraised value of the home and thus are correlated to average
property age and location.
$6,000 25%
$5,000 20%
Per Home (annual)
$4,000
15%
% of Rev.
$3,000
10%
$2,000
$1,000 5%
$0 0%
$450 3%
$400
$350
Per Home (annual)
$300 2%
% of Rev.
$250
$200
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$150 1%
$100
$50
$0 0%
Insurance Expense
As a percentage of revenue, insurance expenses equate to an average of 2.2%. On a per-
property per-year basis, the data shows an average of $365. We believe the major
operators have access to low-cost blanket insurance policies. For example, we estimate an
average insurance cost per property for AMH of approximately $200. Our baseline model
assumes $300 per home per year.
$600
4%
$500
Per Home (annual) 3%
% of Rev.
$400
$300 2%
$200
1%
$100
$0 0%
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10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
65.0%
60.0%
55.0%
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50.0%
65.0%
60.0%
55.0%
50.0%
45.0%
1.0%
0.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Occupancy
The time-series shows expected seasonality with modestly lower occupancy in the
summer months when turnover is high. Average occupancy as of July 2016 was 95.1%
and over the prior 12-month period averaged 95.3%. We believe the strong occupancy
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levels are a testament to the robust tenant demand for single-family rentals.
96.5%
96.0%
95.5%
95.0%
94.5%
94.0%
93.5%
Feb-16
May-15
May-16
Jun-15
Jan-16
Jun-16
Apr-15
Jul-15
Oct-15
Apr-16
Jul-16
TTM Avg.
Nov-15
Dec-15
Mar-15
Aug-15
Sep-15
Mar-16
Turnover rates, defined as the number of move-outs over total properties in a given
period, have averaged 35.7% over the last 12 months on an annualized basis. Industry
participants have cited expectations of 33% normalized turnover rates in the long term,
implying a three-year average tenancy. While the securitization collateral performance
appears modestly below these expectations, this may relate to maturing lease-expiration
schedules given the recent rapid pace of lease-ups.
Retention Rate
80%
79%
78%
77%
76%
75%
74%
73%
72%
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71%
Feb-16
May-15
May-16
Jun-15
Jan-16
Jun-16
Apr-15
Jul-15
Oct-15
Apr-16
TTM Avg.
Nov-15
Dec-15
Mar-15
Aug-15
Sep-15
Mar-16
Turnover rate (annualized)
50%
40%
30%
20%
10%
0%
Feb-16
May-15
May-16
Jun-15
Jan-16
Jun-16
Apr-15
Jul-15
Oct-15
Apr-16
TTM Avg.
Nov-15
Dec-15
Mar-15
Aug-15
Sep-15
Mar-16
1.2%
1.0%
0.8%
0.6%
0.4%
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0.2%
0.0%
Feb-16
May-15
May-16
Jun-15
Jan-16
Jun-16
Apr-15
Jul-15
Oct-15
Apr-16
Jul-16
TTM Avg.
Mar-15
Aug-15
Sep-15
Nov-15
Dec-15
Mar-16
Note: Delinquency typically defined as past due by 30 days or more and owing at least $200-$500 or more.
Encompasses 89,619 properties across 23 securitizations as of July 2016.
Source: Morningstar and KBW Research.
Loan terms generally include 5- and 10-year loans with 30-year amortization periods,
interest rates of 5-10%, 60-80% LTVs, and prepayment penalties. Larger loans would
generally be non-recourse, while smaller loans would have borrower recourse. B2R and
Colony American Finance also offer shorter-term, floating-rate loans to fund SFR
acquisitions and stabilization.
Note: FirstKey ceased offering its “express” loan product as reported by Kroll Bond Ratings Agency in May
2016.
Source: Kroll Bond Rating Agency and KBW Research.
As their portfolios have grown, specialty SFR lenders have begun to contribute these
blanket mortgages, which encompass multiple encumbered assets with individual legal
descriptions, to multi-borrower securitizations. To date, six multi-borrower SFR
securitizations have been completed, totaling $1.5 billion in issuance, including two deals
from Colony American Finance, one from FirstKey, and three from B2R Finance.
Collateral
The underlying collateral of the deals completed to date has varied. While two deals consist
primarily of single-family properties as collateral (FKL 2015-SFR1 and B2R 2015-1), four
deals (CAF 2015-1, CAF 2016-2, B2R 2015-2, and B2R 2016-1) are also collateralized by
a large amount of 2-4 unit properties, multifamily properties, and condo collateral. Single-
family properties comprised 75-80% of these three deals. The mix of collateral complicates
comparisons and analysis of underwritten cash flows, in our view, given the difference in
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On average, deals are backed by 115 individual loans on 3,400 properties. As a result, the
average loan is backed by 30 individual properties. Average loan sizes have ranged from a
low of $1.2 million for B2R 2016-1 to a high of $15.1 million of FKL 2015-SFR1.
Coupons on these loans range from a high of 6.3% to a low of 5.1% on average. Loan terms
of the underlying collateral range on average from a low of 4.3 years to a high of 7.7 years.
Margins. We calculate an average NOI margin of 57% and NCF margin of 53%.
This compares to the single-borrower average of 61% and 58%, respectively. This is
not surprising, in our view, given that larger single-borrower operators are able to
achieve greater economies of scale given portfolio sizes and market density.
Net Yields. We calculate an average NOI yield on BPO of 6.4% and NCF yield of
6.0%. This compares to the single-borrower average of 5.0% and 4.7%,
respectively. Cost basis for the underlying properties in the multi-borrower deals is
not available; however, it is reasonable to assume yields on cost basis would be
higher due to HPA. For single-borrower deals, we calculate an average NOI and
NCF yield of 5.5% and 5.1% on cost basis. We believe yields on cost basis are more
indicative of actual returns for the borrower. We believe a likely driver of the higher
yields for multi-borrower deals is the lower average price points of the underlying
homes ($120,000 for multi-borrower and $201,000 for single-borrower [based on
BPO]).
Distressed sales % 7.0% 11.0% 10.0% 7.0% 6.0% 6.0% 5.0% (16.7% ) (28.6% )
Home Prices
Case-Shiller M/M 0.7% 0.2% 1.0% 1.1% 0.9% 0.8% 0.6% 0.6% NA
Case-Shiller Y/Y 4.5% 4.6% 4.8% 4.7% 4.4% 4.3% 4.2% NA 4.2%
CoreLogic (ex. distress) M/M 0.3% 0.3% 0.9% 0.9% 0.6% 0.7% 1.0% 0.6% NA
CoreLogic (ex. distress) Y/Y 4.5% 4.7% 4.7% 4.7% 4.5% 4.6% 5.4% NA 0.3%
Housing Inventory & Months Supply
Existing homes 2,260 1,870 1,960 2,120 2,140 2,110 2,130 0.9% (5.8% )
New homes 215 242 243 241 239 240 233 (2.9% ) 8.4%
Total 2,475 2,112 2,203 2,361 2,379 2,350 2,363 0.6% (4.5% )
Non-performing loans
30-60 Days 1,503 1,479 1,330 1,415 1,434 1,485 1,591 7.1% 5.9%
90+ Days 886 772 733 730 719 692 695 0.4% (21.5% )
Foreclosures 711 655 631 595 574 558 550 (1.5% ) (22.7% )
Total Non-Current 3,100 2,907 2,693 2,741 2,727 2,736 2,836 3.7% (8.5% )
Months Supply
Existing and New Homes 5.0 4.5 4.5 4.7 4.7 4.6 4.7 2.3% (5.6% )
Serious Delinquencies 3.2 3.1 2.8 2.7 2.6 2.4 2.5 1.3% (22.9% )
Total 8.2 7.6 7.3 7.4 7.2 7.0 7.2 2.0% (12.4% )
Housing Starts
Total Housing Starts 1,147 1,213 1,113 1,155 1,128 1,186 1,211 2.1% 5.6%
Single-family Housing Starts 760 845 751 764 737 766 770 0.5% 1.3%
Multi-family Housing Starts 376 356 353 378 386 400 433 8.3% 15.2%
Delinquencies (%)
Total noncurrent loans 6.1% 5.7% 5.3% 5.4% 5.4% 5.4% 5.6% 0.2% (0.5% )
Source: CoreLogic, NAR, U.S. Census Bureau, Case-Shiller, RealtyTrac, Black Knight Financial Services, and KBW Research.
The vacant housing stock includes 12.9 million year-round vacant (9.5%) and 3.2
million homes listed for rent (2.4%). An additional 7.3 million units are held off
market (5.4%).
Exhibit 51 summarizes the national housing stock based on U.S. Census Bureau data.
Units in thousands
2014 2015 2016
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr
All Housing Units 133,087 133,209 133,331 133,453 133,575 134,603 134,797 134,991 135,184 135,474
Vacant 18,326 18,082 18,021 16,806 17,335 17,317 17,443 17,216 17,677 17,195
Year-round vacant 13,791 13,596 13,447 12,683 12,828 12,843 13,141 13,014 13,120 12,904
For-rent 3,712 3,350 3,346 3,214 3,280 3,196 3,391 3,233 3,267 3,213
For-sale-only 1,521 1,425 1,370 1,449 1,410 1,380 1,421 1,446 1,312 1,305
Rented or Sold 1,021 1,121 1,158 958 977 1,130 1,190 1,014 969 1,079
Held off Market 7,535 7,700 7,573 7,062 7,161 7,138 7,139 7,321 7,572 7,307
Occ'l use 2,284 2,426 2,282 1,925 1,888 2,037 2,085 2,026 2,084 2,076
URE 1,364 1,300 1,389 1,363 1,433 1,279 1,266 1,415 1,568 1,423
Other 3,888 3,975 3,902 3,774 3,840 3,822 3,788 3,880 3,920 3,807
Seasonal 4,537 4,486 4,575 4,122 4,507 4,475 4,303 4,202 4,557 4,291
Total Occupied 114,762 115,127 115,310 116,647 116,240 117,286 117,353 117,775 117,508 118,279
Owner 74,404 74,458 74,240 74,606 74,018 74,407 74,745 75,194 74,656 74,417
Renter 40,357 40,669 41,070 42,041 42,222 42,878 42,609 42,581 42,852 43,862
The inventory of existing homes totaled 2.1 million in July 2016, equivalent to a 4.7
month supply.
The new home inventory totaled 233,000 units in July 2016, equivalent to a 4.3
month supply.
Exhibit 52: Existing Home Inventory Exhibit 53: New Home Inventory
Inventory units in millions Inventory units in thousands
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Inventory (l.axis) (mil.) Mos. Supply (r.axis) Inventory (l.axis) (000s) Mos. Supply (r.axis)
700 14.0
4.50 14.0
4.00 600 12.0
12.0
3.50 500 10.0
10.0
3.00
8.0 400 8.0
2.50
2.00 6.0 300 6.0
1.50 200 4.0
4.0
1.00
0.50 2.0 100 2.0
Mar-12
Jan-03
Nov-03
May-06
Jan-08
Nov-08
May-11
Jan-13
Nov-13
May-16
Sep-04
Sep-09
Sep-14
Jul-05
Jul-10
Jul-15
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Vacant Homes for sale (l. axis) Vacant Homes for sale as a % of Total Homes (r.axis)
2,500 1.8%
1.6%
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2,000 1.4%
1.2%
1,500
1.0%
0.8%
1,000
0.6%
500 0.4%
0.2%
- 0.0%
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Vacant Homes (l.axis) Vacant Homes (%) (r.axis)
20,000 16.0%
18,000 14.0%
16,000
12.0%
14,000
12,000 10.0%
10,000 8.0%
8,000 6.0%
6,000
4.0%
4,000
2,000 2.0%
- 0.0%
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Vacant Homes for rent (l. axis) Vacant Homes for rent as a % of Total Homes (r.axis)
5,000 4.0%
4,500 3.5%
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4,000
3.0%
3,500
3,000 2.5%
2,500 2.0%
2,000 1.5%
1,500
1.0%
1,000
500 0.5%
- 0.0%
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Vacant Homes for rent or sale (l. axis) Vacant Homes for sale or rent as a % of Total Homes (r.axis)
7,000 6.0%
6,000 5.0%
5,000
4.0%
4,000
3.0%
3,000
2.0%
2,000
1,000 1.0%
- 0.0%
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Total Single Family Rentals Single Family Rentals as % of Total Occupied Housing Stock
16,000 14.0%
14,000 12.0%
12,000
10.0%
10,000
8.0%
8,000
6.0%
6,000
4.0%
4,000
2,000 2.0%
- 0.0%
1973
1974
1975
1976
1977
1978
1979
1980
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Total Single Family Rentals Single Family Rentals as % of Total Occupied Rental Housing Stock
16,000 36.0%
14,000 35.0%
12,000 34.0%
10,000 33.0%
8,000 32.0%
6,000 31.0%
4,000 30.0%
2,000 29.0%
- 28.0%
1973
1974
1975
1976
1977
1978
1979
1980
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
60%
50%
40%
% of Sales
30%
20%
10%
0%
Feb-09
Feb-14
May-10
May-15
Jan-12
Jun-12
Jul-09
Oct-10
Apr-13
Jul-14
Oct-15
Sep-08
Dec-09
Nov-12
Mar-11
Aug-11
Sep-13
Dec-14
Distressed Mar-16
12.0
10.0
8.0
6.0
Units in mil.
4.0
2.0
0.0
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Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Existing+New Homes Sales Inventory 30-60 90+ Foreclosure
Source: National Association of Realtors, U.S. Census Bureau, LPS, and KBW Research.
25%
20%
15%
10%
5%
0%
Feb-13
Feb-14
Feb-15
Feb-16
May-12
May-13
May-14
May-15
May-16
Nov-12
Nov-13
Nov-14
Nov-15
Aug-12
Aug-13
Aug-14
Aug-15
According to data from the NAR, distressed transactions have totaled an average of 19%
of home sales since 2008. Distress sales totaled 5% of home sales in July 2016, down
from an average of 8% in 2015, 11% in 2014, 16.5% in 2013, and a peak of 50% in
March 2009.
Exhibit 61: Distressed and Cash Sales versus Investor Purchases (Existing Home
Sales)
45%
40%
35%
30%
% of Sales
25%
20%
15%
10%
5%
0%
Feb-10
Feb-11
Feb-12
Feb-13
Feb-14
Feb-15
Feb-16
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Oct-10
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Distressed Cash Investors
Source: National Association of Realtors and KBW Research.
Looking at the mix of existing home sales back to 2008, we estimate first-time
homebuyers have accounted for approximately 32% of home sales. We estimate first-
time homebuyers reached 45-50% as a result of the first-time homebuyer tax credit, but
have since steadily drifted to slightly above 30%. We estimate a normalized historical
participation rate for first-time homebuyers would be in the 35-40% range and that
ultimately this level of participation will be required for the housing market to normalize.
Exhibit 62: Mix of Investors, Repeat, and First-Time Buyers (Existing Home Sales)
70%
60%
50%
% of Sales
40%
30%
20%
10%
0%
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May-10
May-11
May-12
May-13
May-14
May-15
May-16
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
First Time Repeat Investors
Homeownership Rate
The homeownership rate has declined from its peak of 69.2% in 2004 to 62.9% as of
2Q16. Exhibit 63 shows the correlation between single-family housing starts and the
homeownership rate.
2,000 70.0%
1,800 69.0%
1,600 68.0%
1,400 67.0%
1,200 66.0%
1,000 65.0%
800 64.0%
600 63.0%
400 62.0%
200 61.0%
0 60.0%
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
400,000 140%
350,000 120%
300,000 100%
250,000
80%
200,000
60%
150,000
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100,000 40%
50,000 20%
0 0%
Mar-10
Feb-06
Feb-13
Nov-07
Jun-08
Jan-09
May-11
Dec-11
Nov-14
Jun-15
Jan-16
Sep-06
Aug-09
Sep-13
Jul-05
Apr-07
Oct-10
Jul-12
Apr-14
Foreclosures % Chg.
Source: RealtyTrac.
120,000
100,000
80,000
60,000
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40,000
20,000
0
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Source: RealtyTrac and KBW Research.
Notice of Default. The process starts when a borrower can no longer pay the
monthly mortgage payment and subsequently defaults. After 30 to 45 days of
missed payments, the lender files a public default notice called the Notice of Default
(NOD). This provides the borrower with notice that he/she could potentially face
foreclosure, and starts a grace period (pre-foreclosure) of time for the homeowner to
repay the lender the required amount and return the loan to good standing.
Filing for Foreclosure. If the default is not repaid in three months, the lender will
typically proceed with foreclosure. There are two types of foreclosures: judicial and
non-judicial. In a judicial foreclosure, the lender will file a lawsuit in order to
receive a court order to sell the property. In a non-judicial case, the process typically
goes along with the procedures detailed in the deed of trust that allows a trustee
(bank or mortgage company) to sell the property.
Trustee Auction. After three weeks, the property is auctioned in public (usually at
the county courthouse) to the highest bidder. The bidder must pay the high bid price
in cash, and usually must have a deposit up front and the remainder of the cost
within 24 hours. Once paid in full, the bidder will receive a trustee’s deed to the
property.
Source: RealtyTrac.
Although the above list is the general process for the majority of foreclosures, it is also
possible for the process to end early if the borrower/owner were to pay off the loan
during the pre-foreclosure period, or if the borrower were to sell the property to a third
party during the same period. The lender could also buy the property, either through a
short sale or buy it back at the auction.
In order for an investor to purchase REOs at an auction, he/she must be registered with
the company running the auction. The highest bidder must give the auctioneer a deposit,
payable in cash, or a cashier’s check. Deposits are usually between 5% and 10% of the
outstanding loan amount, and the bidder must close in cash within 30 days. Some states
There are several ways to locate and buy a bank-owned REO. First, investors can contact
lenders and banks directly. Large banks have departments that primarily deal with selling
bank REOs and lenders will often post REO lists on their websites. Investors can also
search for REO properties using web databases. For example, RealtyTrac has extensive
REO listings by state.
For investors and homebuyers, REO properties have significant advantages. First, liens
against the properties are removed and taxes are paid. REOs are also sold at discounts to
the actual property’s value and often come with attractive terms, such as low down
payments and low interest rates. Oftentimes, REOs are restored to a readily salable
condition by the lending bank. Buyers can also negotiate with the bank to have them pay
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for all or part of their closing costs since the seller is the lender.
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based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall
firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.
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