This year, several of the nation’s biggest landlords introduced a new feature to one of their most important sources of financing – bonds that are ultimately backed by thousands of single-family rental properties. They gave themselves more flexibility to swap out homes backing these bonds for other properties.
Since 2013, operators backed by large private equity firms have raised hundreds of millions of dollars by securitizing rental payments on large pools of homes. The pools of homes backing the initial deals were relatively static while the bonds were outstanding. But some new deals completed this year give the operators the ability to voluntarily substitute a certain percentage of the homes in the pools of collateral for their bonds.
Now, at least one operator, American Homes 4 Rent (AH4R), is amending an older deal to allow for voluntary substitution. In a report published Tuesday, Moody’s noted that the single mortgage backing American Homes 4 Rent 2015-SFR1 was being amended to allow the sponsor to replace up to 10% of the properties over the life of the loan. As with more recent transactions that allow voluntary substitution from the get-go, substitutions in the collateral for AH4R 2015-SFR1 are subject to certain limitations, including a property value test, a geographic diversity test and a rents and cash flow test.
Moody’s said that the proposed amendment would not in and of itself result in a downgrade or withdrawal of its ratings on the outstanding bonds.
Moody’s view “is based primarily on its opinion that the borrower's ability to voluntarily substitute properties would not materially reduce or delay the payments to the rated securities given the conditions for substitution as outlined in the proposed amendment to the loan agreement, the positive performance of the transaction, the amortization of the loan, and the build-up of equity in the properties securing the loan since closing,” the report states.
Moody’s ran several stress scenarios to account for limited diligence to be performed by an independent third party on the substituted properties, the potential for an increase in metropolitan statistical area concentration, and for the likely reduction in the number of properties released that will pay an additional premium to the trust.
Why would AH4R want to swap out properties backing the 2015 transaction? The Moody’s report is mum on the subject; however, one of its rivals, Kroll Bond Rating Agency, has noted that the feature provides operators with more "operational flexibility" to manage their overall portfolios.