Home Partners of America is marketing its third-ever securitization of single-family rental homes, featuring lease-to-own properties that potentially provide higher quality collateral over other asset-backs.
Home Partners of America 2017-1 is a $336 million, single-loan transaction backed by available property equity (through first-priority mortgage lien) and lease cash flow on 1,393 rental homes in 20 states.
Both Moody’s Investors Service and Morningstar Credit Ratings assigned triple-A ratings to the $168.2 million Class A notes tranche, which received 50% credit support from the trust. Both gave AA-level ratings to $29.6 million in B notes, single-A ratings to the $22.21 million in C notes and lower investment grade ratings to the $26.4 million Class D series (Baa2 by Moody’s, BBB+ by Morningstar).
HPA, which was founded in 2012, leases all of its homes through a right-to-purchase arrangement with tenants. The arrangement is considered a method to pool together rental homes of higher value and better-maintained homes from tenants who have the intention to purchase the home when they have the necessary credit and cash to take out a mortgage.
The homes average 23 years of age, with valuations averaging $303,727 per property and an average monthly rent of $2,229. Most require pre-lease rehabilitation costs that amount to an average of $8,318. All of the leases and properties support the single loan that has an initial term of two years, with three consecutive one-year options.
HPA’s program allows a tenant to typically choose their rent-to-own house, rather than selecting from an inventory of vacant homes. The lease-to-own concept distinguishes Home Partners, as well as it wider geographic distribution (it owns 6,535 properties in 50 metropolitan statistical areas, with an aggregate investment total of $2 billion. A small percentage of homes are leased without a purchase agreement – typically homes from which original lessors decided against purchasing, allowing HPA to rent out at a premium, according to presale reports.
Both Moody’s and Morningstar provided haircuts to Home Partners’ projected net cash flow stream, but had disparate results over differing assumptions in expected effective gross income. Moody’s projects net cash flows will be just over $16 million, a 20% slice against Home Partner’s $20.1 million issuer estimate. But Morningstar cut the projected annual net cash flow to just $12 million.