Real estate investment trust Colony Starwood Homes is issuing its first securitization of single-family rental homes since it was created out of the merger of Colony American Homes (CAH) and Starwood Waypoint Residential Trust (SWAY) last January.

Colony Starwood Homes 2016-1 is backed by a single $538 million loan secured by the investor-owner mortgages in 3,566 homes, with the principal and interest waterfall delivered from rental income.

The notes being sold include six classes that pay principal and interest; one that pays principal only and another paying residual interest.

The top of the capital stack is a $266.3 million Class A tranche with 34% credit enhancement, with preliminary triple-A ratings from both Kroll Bond Rating Agency and Moody’s Investors Service. A Class B tranche totaling $58.7 million is rated ‘AA+’ by Kroll and ‘Aa2’ by Moody’s; the $47 million in Class C notes are rated ‘A’/‘A2’; and the Class D notes ($43 million) are ‘BBB+’/‘Baa2’. Both the Class E notes ($70.4 million) and the Class F notes ($23.5 million) are only rated by Kroll at ‘BBB-’ and ‘BB+’, respectively.

The purchase price of the underlying properties is $550.4 million, with a loan balance of $535.9 million. The issuer’s broker-price opinion valuation of the properties is $701.9 million, bringing the transactions loan-to-value ratio to 68.4% of the portfolio - which according to Kroll makes it the second-lowest leverage of the 10 previous single-borrower single-family rental securitizations it has rated. Those deals had LTVs between 66.6% to 78.9%, with an average of 47.4%. The new transaction is also below the LTV of prior standalone transactions of CAH and SWAY.

As with the previous securitization of rental homes by CAH, Kroll and Moody’s are applying steep haircuts to the cash flow from issuer projections. Kroll has shaved the issuer’s net cash flow projections of $32.7 million by 21% to $25.8 million, while Moody’s has put net cash flow at $26.5 million annually (or 18.74). Cash flow projections from rental income derive from examinations of subjective data such as projected management fees, potential vacancies and maintenance costs.  

Moody’s notes that the cross-collateralization of the securitization means that the trust can use excess cash flow from one property to augment that of another.

The homes are located in 27 metropolitan statistical areas across eight states.

Sponsor Colony Starwood Homes is the third-largest owner and operator of single-family rentals in the country.  

Both Moody’s and Kroll caution that SFRs are a fledgling securitization class with limited performance history to gauge data and performance metrics, including recoveries. Both CAH and SWAY have had previous securitizations, but both firms have limited histories – CAH was formed in 2012 and SWAY in 2014.

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