CoreVest Amercan Finance is marketing its first securitization of single-family rental properties since being acquired by Fortress Investment Group.
The company, formerly known as Colony American, completed three previous transactions, the last one in 2016, before rules requiring sponsors to keep “skin in the game” of their deals took effect.
Like the three previous transactions, CoreVest American Finance 2017-1, is backed by loans to multiple borrowers. By comparison, most of the transactions in the single-family rental sector have been backed by a loan to a single borrower with a portfolio of rental homes.
Collateral for the latest deal consists of the income streams and values from 87 mortgage loans that are backed by a mix of 2,294 single-family residential rental properties, condominiums and townhomes, as well as 33 multifamily properties, according to rating agency presale reports.
The properties are distributed across 27 states and 91 MSAs in the United States.
Unlike the prior Colony American deals, which used an offshore CLO structure, this transaction is structured as a U.S. Real Estate Mortgage Investment Conduit (REMIC) pass-through vehicle. That means the collateral is sold to the trustee (rather than pledged), and pass-through certificates (instead of notes) are issued.
There are seven classes of rated certificates the senior Class A tranches, which benefit from 38% credit support, are provisionally rated AAA by Morningstar Credit Rating and Kroll Bond Rating Agency. There are also six subordinate tranches with ratings ranging from AA- to B.
Morgan Stanley and Wells Fargo Securities are the lead managers.
In order to satisfy risk retention requirements, CoreVest American Finance BPH (a majority-owned affiliate of the sponsor) will hold on to the Class F, Class G, and Class H certificates which represent an “eligible horizontal residual interest” in the deal.
Both Morningstar and Kroll cite as risks to the deal the fact that multiborrower, single-family rentals are a relatively new asset class with limited performance history. The first transaction was issued in April 2015, and there have only been eight to date, including CoreVest’s current deal. Collectively, they are comprised of 765 loans (at issuance), of which to date 39 loans have fully paid off, while 22 loans have been in special servicing at least once, according to Kroll. None of the deals have experienced any losses to date, and neither have any of the underlying loans.
In addition, the sector has a limited number of lenders, which leads to heightened refinance risk, per Kroll. To account for this risk, the rating agency applies “haircuts” to data on cash flow and property values.
In particular, historical data for tenant management, operational efficiencies, and cost containment have yet to be established among the smaller noninstitutional borrowers, Morningstar noted.
At the same time, the rating agencies see the collective experience of CoreVest’s senior management team, led by chief executive Beth O’Brien, as a positive. In its presale report, Kroll noted that they have experience working in the mortgage capital markets and single-family rental housing through all stages of a housing economic cycle.
The homes that ultimately back the transaction are older, on average, than those included in the 19 prior single-family rental securitizations (both single borrower and multiborrower) that Kroll has rated, with a weighted average age of 56 years (versus an average of 22 years for all the deals).
The weighted average square footage per unit of 1,229 sf in this transaction is the smallest when compared to the seven prior multiborrower transactions.
“The older age and smaller size of the homes in this portfolio has the potential to negatively impact the ability to sell the collateral (or the price obtained in any sale) following an event of a default, since older, smaller homes may be less desirable to potential purchasers, all else being equal,” the presale report stated.