Revenue from a portfolio of 9,238 single-family rental homes will secure a $2.1 billion securitization that Bank of America and Morgan Stanley are preparing for the market.
Just one loan underpins the securitization, which will issue notes through nineteen classes. In the capital structure, 12 classes of notes are entitled to monthly principal and interest distributions, while six will receive principal-only payments and the remaining class is a residual interest, according to Kroll Bond Rating Agency.
An industry of building a portfolio of single-family rental homes grew out of the 2008 Great Recession, with the first securitization completed in 2013.
One area of credit concern is the high leverage level in the pool, 90%, based on the portfolio’s book price opinion (BPO) value, according to KBRA. The level exceeds the average leverage of 80.8% for the 23 transactions in KBRA’s comparison group.
Also, the deal’s sponsor, Cerberus SFR Holdings Partners, L.P., will be allowed to remove properties without prepaying any yield maintenance or additional release premium to the trust when using the transaction’s ECR feature. An ECR feature empowers the issuer to re-leverage the transaction close to its loan-to-value, if the transaction deleverages due to home price increases or other reasons.
KBRA noted that the transaction sponsor indicated the intent to use the ECR feature to issue a new transaction to finance the same properties when home prices have appreciated significantly.
But that feature carries an obligation in the part of the issuer. FirstKey Homes will need to obtain updated BPOs for 100% of the collateral properties and declining LTV constraints. The constraints stipulate that the LTV cannot exceed 83% for any ECR, based on the updated BPOs.
The properties that ultimately collateralize the deals are highly geographically diverse, relative to pools in the comparative set.
The top three CBSAs are Atlanta (15.8%), Miami (8.5%) and Charlotte (6.9%) which together represent 31.2% of the whole pool.
Debt service coverage from the issuer for the underlying loans is 2.27x and 1.73x, and both are higher than the averages in the comparable set of fixed-rate transactions. In the comparable deals, the metrics averaged 1.91x and 1.43x, respectively.
