American Homes 4 Rent is pushing the maturity envelope with its latest single family rental securitization.
AH4R 2015-SFR1 is backed by a single mortgage that matures in 30 years. That compares with 10 years for the sponsor's previous two securitizations; all of the other deals in this sector are backed by five-year loans.
With a legal maturity of April 2045, the loan is technically more susceptible to term default than loans of comparable credit quality with shorter terms. That is because longer term loans have more payments over which a default can occur, leading to a higher term probability of default, and a higher lifetime probability of default.
However the loan has an anticipated repayment date (ARD) of 2025. If it isn’t paid in full by that time, the interest rate kicks up, and income from the property cash flow can be used to pay down the principal, according to Morningstar's presale report.
This is a new feature for the single family rental market. ARDs are most commonly associated with commercial mortgage securitizations.
According to Kroll, “the structure provides the borrower with more flexibility at the ARD if the loan cannot be refinanced because failure to repay the loan in full on the ARD will not constitute a default as long as the loan is paid in accordance with its terms through the legal maturity date.”
This flexibility could come in handy. Of the 15 single-family rental securitizations completed to date, 13 are backed by loans with five-year terms, according to Kroll, which is also rating the latest deal. That means that the market may potentially have over $7 billion of single-family rental bonds maturing around the same time.
Another notable difference in AH4R's latest deal is the geographic concentration. The loan backing 2015-SFR1 is secured by 4,769 single-family residential properties located in 14 states, with the largest concentration by Broker Price Opinion, or BPO, value in Texas (16.7%). Previous SFR transactions have seen heavy concentration in California, Arizona, and Florida. AH4R 2015-SFR1 has no properties in Arizona and only 1.9% and 12.4% of the properties are in California and Florida, respectively.
Gross rental yield for the current pool is 10.1%, in line with previous single-family rental transactions. Rental yield is an important metric that a single-family rental investor considers when looking to buy properties, according to Morningstar.
AH4R 2015-SFR1 has a loan-to-value (LTV) ratio of 70.0% based on the portfolio’s aggregate BPO value of $725 million. By comparison, eight prior deals had higher LTVs, four had the same LTV and three had lower LTVs; the LTVs for the previous securitizations ranged from 65.0% to 78.9%, with an average of 72.5%, according to Kroll.
Kroll and Morningstar expect to rate $315.5 million of class A notes AAA’/ AAA’, $42.5 million of class B notes AA+’/ AA+’ , $46.5 million of class C notes, A+’/ A+’, $34.4 million of class D notes A-/ BBB+’, $97.5 million of class E notes, BBB-/ BBB’ and $30 million of class F notes, BB’/ BB+’.
Goldman Sachs, J.P. Morgan Securities and Wells Fargo Securities are the lead managers.