Bison Financial Group principal, David Repka, was recently interviewed by a national commercial real estate publication to discuss his views on where the Single Family Rental Financing Sector is headed for the remainder of 2020....
Q: What are your predictions for single-family rental lending going forward?
David Repka: Tremendous amount of interest from institutional debt and equity investors in allocating capital to scattered-site single-family rentals. Investors view this property type as “horizontal apartments” with much greater “tenant stickiness” than traditional apartment communities. Tenants enjoy the lifestyle and stay longer than in traditional rental apartments. More capital will go into this sector as confidence in office, retail and hospitality assets drops off a cliff. Capital will continue to dive into the space for one simple reason: housing demand continues to grow. People gotta live someplace.
Q: What will be the biggest trends/changes in single-family lending going forward because of the pandemic?
David Repka: Demand for detached, single-family, suburban rental homes has skyrocketed. The pandemic has taught people to embrace technology and work from home. It has also taught the lesson that the fabulous hipster rooftop pool and gym overlooking the city skyline that looked so great when they toured the property is worthless in a pandemic when all the common spaces are shut down. A single-family home with your own patch of grass for your kids/dog, garage for your car/bikes, and personal swimming pool is pretty cool.
Q: How will underwriting change for these loans going forward?
David Repka: A lender’s number one concern is understanding rent recollections since the pandemic started in March 2020 compared to previous months. There is also increased scrutiny in the tenant profile. Do the tenants have dependable jobs that will continue to provide the landlord a recurring, durable cash flow? or are they in industries like hospitality and restaurant workers that have been devastated by COVID-19? Lenders are also more deeply scrutinizing the financial capabilities and track record of their borrowers.
Q: What type of single-family rental properties and projects will lenders target? (class, location, size, number of units)? How has this changed since the pandemic?
David Repka: Top 100 MSAs in a blend of primary, secondary, and tertiary markets. The sweet spot is workforce housing for “neighborhood heroes” like nurses, first responders, teachers, government workers, etc. that will continue to get paid no matter how long the pandemic lingers. Small markets, rural markets, and markets with an over-concentration on any one industry will find it hard to attract financing. Lenders are biased to strong sponsors with 5 or more assets to be financed, a meaningful track record in the space, and solid liquidity.
Q: What will be the typical leverage on these deals?
David Repka: Up to 75% LTV for a cash-out refinance of a portfolio of stabilized properties. For acquisitions of transitional assets requiring renovations up to 90% LTC subject to 75% as-renovated LTV. Ground-up construction at up to 80% LTC.
Q: What will be the typical interest rates?
David Repka: Stabilized properties will be financed at a fixed rate in the 4s and 5s depending on LTV and dollar amount. Risk-based pricing applies: best rates for larger pools with lower leverage. Transitional properties will have rates in the high single digits.
Q: What will be the typical debt yield for this property type? DSC?
David Repka: DSC 1.2 to 1.25 on stabilized properties. This is not a factor on transitional properties since they are typically purchased vacant. We are not seeing lenders in this space as hyper-focused on debt yield as their CMBS counterparts.
Q: How much recourse will lenders require?
David Repka: The majority of the permanent lenders in the space offer non-recourse terms for loans over $1 million. Smaller loans (under $1 mm) and higher leverage loans are more often full recourse.
Q: What will be the hot markets for single-family rentals this year? What markets will lenders shy away from?
David Repka: Hot markets will be Florida and the Sunbelt.
Cold markets: There will be continued flight from very dense urban markets to suburban markets and Southern, warm weather, low state income tax markets. An unintended consequence of Covid-19 is that people that can work from home will work from home. A person that was paying $4,000 a month to live in a cramped urban market in the Northeast can rent a beautiful detached home with a state-of-the art home office for $2-2,500 a month.
Q: What will lenders look for from sponsors when underwriting? (certain net worth, liquidity, number of other properties, etc.) How has this changed since the pandemic?
David Repka: Lenders will want the borrower to have a net worth of at least 25% of the loan amount. Lenders will require post-closing liquidity for at least 5% of the loan amount. The ideal borrower will have 3 to 6 months of post-closing cash reserves to pay debt service on their portfolio if there is another Covid-19 problem that impairs cash flow and their tenants ability to pay rent.
Q: Are the banks active in this space? If so, what specific banks?
David Repka: The banks that are active in this space are typically community banks in the local markets they serve. These banks are not lending on this as an asset type as much as they are lending to a relationship borrower based on their global cash flow. These lenders typically will require full personal recourse and require a much shorter amortization period than the non-bank lenders. Non-Bank lenders compete because they don’t have compensating balance requirements, lending limits to one borrower issues and are often non-recourse terms.