DBRS Morningstar’s Takeaways from IMN’s Virtual ABS East: The Single-Family Rental Industry Faces its First Test—Getting Through a Full Economic Cycle

As part of its takeaways series, DBRS Morningstar is publishing several write-ups about pertinent topics discussed at IMN’s Virtual ABS East, an industry conference for the asset-backed securities sector. Anna Deriy, Vice President at DBRS Morningstar, was one of the speakers on a panel about single-family rental properties. The other panelists included Ricardo Rivera Saad, Vice President at Morgan Stanley (who was the moderator); Caroline Chen, Senior Vice President at Income Research & Management; Mukund Narayanan, Director at Fortress Investment Group; Beth O’Brien, Chief Executive Officer of CoreVest; and Daniel Choquette, Senior Managing Director at Cerberus Capital Management.

One of the weaknesses of the single-family rental market was that it had never gone through an economic downturn, having emerged after the prior global financial crisis. But now the Coronavirus Disease (COVID-19) pandemic is finally testing this relatively new industry. According to Deriy, the delinquency rate is 3.8% as of September 2020 for DBRS Morningstar-rated deals. “In absolute terms it’s still pretty low, but it’s a sixfold increase from prepandemic levels,” she said. The pandemic has also centered the home as a safe place for people; it’s where they live and work. Because of this, people are less likely to move out, which has kept vacancy very low. Across DBRS Morningstar-rated deals, vacancy was 2.6% in September 2020, whereas it was 4% before the pandemic.

Like other industries, the pandemic has accelerated trends that were already there. Deriy pointed out that millennials were already thinking about moving to the suburbs as they grow a family. Certain cities were becoming unaffordable, causing some to move to relatively cheaper locales. Demand for larger home office space is adding on to the existing suburban trend. In addition, single-family housing supply has been limited for a while now. Some panelists also highlighted existing trends for single-family rental operators. New technologies have increased operational efficiency. Even smaller operators, which don’t have the resources to create their own technology, can use external software and cloud-based systems available off the shelf. For example, systems similar to Venmo can help collect rent payments, eliminating the need for automated clearing house payments.

Some securitizations have come to market in 2020 with higher loan-to-value ratios, about 90%. While more leverage is concerning, DBRS Morningstar still reviews securitizations on two basic levels. First, are the rental payments enough to cover the debt service? Second, in a worst-case scenario, are the asset valuations enough that liquidating all of the houses in the pool will pay off the outstanding principal balance of the rated securities at the maturity date?

Although the metrics show that the single-family rental industry is holding out for now, DBRS Morningstar has some concerns about the future. Deriy said, “We still are remaining cautious on single-family rental due to the economic uncertainty that is still in the market and especially if unemployment levels continue to rise.” The longer the downturn continues, the more workers will be affected, especially with no more economic stimulus in sight. This could contribute to higher delinquencies down the line. However, she said, “It’s a little too early for us in the economic cycle to really discuss changes to the methodology or our current stresses.”

Written by Caitlin Veno

Notes:
For more information on single-family rentals, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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