SFR Financing and the Other Half of the Capital Stack

As institutional investors flock to this asset class, a growing number of lenders are following, according to Matthew Putterman of JLL Capital Markets.
Matthew Putterman

Few asset classes outperformed the broader commercial real estate industry in 2020 like single-family rentals, and 2021 is already shaping up to be another strong year for SFR.

Rent growth, occupancy gains and reduced turnover throughout 2020 magnified the appeal of single-family rental to real estate investors. Known as a mom-and-pop asset for decades, institutional investors have adopted SFR as a viable asset class seemingly overnight. Comparisons have been drawn to the decades-long institutionalization of other alternative assets like self-storage or manufactured housing.

With the billions of capital identified for the sector, which includes large announcements by partnerships between Lennar, Centerbridge and Allianz ($4 billion), Invesco and Mynd ($5 billion) and Blackstone and Home Partners of America ($6 billion) in just the past four months, new entrants still have questions on lenders’ interest and capacity to finance the many variations of asset types and strategies of SFR. Equity capital generally accounts for 25 to 40 percent of total deal capitalization, so from where is the other 60 to 75 percent coming? It comes from development and/or aggregation facilities to permanent and/or term loan structures; differing strategies of deployment require a wide array of financing vehicles.

Included among them are bank bridge facilities, single-borrower securitized loan pools, individual portfolio loans and multi-housing-like single community term loans.

Bridge Loans for Acquisitions

Buyers and operators of single-family rentals employ multiple strategies to aggregate homes, including portfolio acquisitions, single home aggregation and new build home acquisitions from rental builders. The path to achieving a term loan generally starts with an acquisition facility either from a bank or non-bank bridge lender.

These acquisition facilities allow borrowers to leverage individual or portfolio acquisitions through semi-monthly draws. Pricing ranges considerably based on facility size, borrower experience, leverage and credit enhancement to the lender. Local bank or private lender facilities can be as small as $1 million or less, while larger investment bank facilities often exceed $150 million. At the lowest end of the range, rates for these floating-rate facilities (over LIBOR or SOFR) have gotten below 3 percent spreads. Rates at the higher end of the spectrum can exceed 8 percent for high LTC, non-recourse structures.

Term Loans, Size Matters for Scattered SFR

For the largest and most established operators with thousands—or tens of thousands—of homes owned, the single borrower securitization market has been a great source of liquidity, already exceeding $6.5 billion of total loan volume through July 2021. This compares to total volume of $8.9 billion in all of 2020 and $3.9 billion in 2019. These pools span in term from two to 10 years and can be structured as either fixed- or floating-rate loans. Due in part to the steepened yield curve, historically low U.S. Treasury yields and bond investor appetite for U.S. Residential securities, rates below 3 percent are not uncommon for these structures.

For investors with fewer homes who are unable to tap the direct bond market for financing, there are fewer options, and, while they carry higher rates, those rates are declining with more lenders entering the space. Historically, securitized CMBS-type lenders were the only option for borrowers seeking non-recourse, fixed-rate term loans of more than five years for loans less than $75 million. Rates were often 150-plus basis points wide of similarly leveraged multifamily or commercial properties. That spread compressed in 2018 and 2019, expanded during 2020 and is slowly compressing again. All-in rates range from 4 to 4.5 percent for these securitized loan structures. Local and regional banks are growing their book of these term loans as well, with rates falling below 3.5 percent for some borrowers.

Contiguous Communities

BTR, BFR, B2R, SFR, Horizontal Multifamily: They all mean similar and different things depending who you ask, and lenders are no exception. Few debt providers have offered precise definitions of what they will or won’t lend against. Lenders approach requests on a case-by-case basis. For example, banks, insurance companies and the agencies—Freddie Mac and Fannie Mae—have financed types of SFR for years, knowingly or not. These have taken the shape of attached or detached townhome and duplex communities. Only in the past few years have these properties been thoughtfully re-branded as ‘Single Family Rentals’ because they offer more space, can have attached garages and, often, come with small yards.

Fixed-rate, term multifamily financings are generally based on debt service coverage ratios, with Freddie Mac and Fannie Mae at the lower end of the spectrum willing to go sub 1.30 times on an amortizing basis, and life companies and banks at the higher end, with 1.35 times or greater.

What Comes Next

Lender participation in the SFR sector has been limited to a few players, but the breadth and depth of the pool is growing. As more portfolios trade or get recapitalized, debt providers will have more data to work from and gain support for what many in the SFR industry have known for the last decade or more: The institutionalization of this asset class is here to stay and will continue to expand.

Matthew Putterman is senior director, JLL Capital Markets.