Bond ratings agencies have a limited history of single-family rental home securitizations to measure against when sizing up new deals backed by residential lease income.
That could be why both Morningstar and Kroll Bond Rating Agency take such disparate views of net cash flow from the new $247.7 million Colony American Finance 2016-1 transaction – and why each also varies widely from the issuer’s own estimates of incoming receivables.
In a presale report issued Monday, Kroll gave a so-called “haircut” of 19.3% to Colony’s projected $22.5 million annualized cash flow in the prospectus, shaving the figure to just $18.2 million in its net-cash flow analysis. Morningstar scissored Colony’s figure even more, providing an anticipated cash flow of only $11.5 million – or 48.8% lower than Colony’s.
The differences in the figures, in Morningstar’s case, included adding up more than $5 million in capital expenditures not accounted by in the issuer’s analysis. For Kroll, the haircut was applicable to higher property management fees that Colony expects to incur, as well the potential for an above-average number of vacancies due to oil-and-gas related job cuts in markets like Houston with heavy energy-industry employment sectors.
The Kroll haircut is slightly higher than the 16.6% gap between its cash flow work and that of Colony’s in that firm’s previous single-family residential securitization pool (2015-1).
Both Morningstar and Kroll have issued preliminary ‘AAA’ structured finance ratings on the Class A notes atop the capital stack, totaling $168.3 million. Those senior notes have 34% credit enhancement.
According to Kroll, this is only the fifth-ever single-family residential (SFR) securitization collateralized by multiple loans originated to multiple borrowers, and only the second to be issued by Colony American Finance LLF (CAF). The loans were originated by Colony American and FirstKey Lending, and are being sold through Colony’s subsidiary real estate investment trust (CAF Sub REIT, INc.), which is affiliated the public REIT Colony Capital Inc. (NYSE: CLNY).
Kroll notes the esoteric class of SFR securitizations is a “relatively new business model” as related securitization structures continue to evolve. The first multi-borrower SFR emerged only in April 2015. “Since then, although there have been 23 traditional single-borrower SFR securitizations and four multi-borrower SFR securitizations, there has been limited seasoning of the transactions and the sector lacks long term credit performance data,” the Kroll presale report noted.
Unlike residential mortgage-backed securities of individual home loans for newer homes, single-family resident securitizations involve aging homes (41 years on average) with greater potential stress on maintenance risk and for potential deterioration in property values.