Moody's Investors Service is the latest rating agency to put its stake into the expanding ground of single-family rental securitizations.
The rating agency published a report today that outlined the main type of risks this type of collateral represents.
Moody's said in its report that the risks relate to the performance of an operator or manager of the properties and are caused by the variability of cash flows from the rental and ultimate sale of the properties.
The lack of historical data on the single-family rental market is another thing the agency is worried about.
The rating agency's concerns should come as little surprise for the investors and issuers looking to expand into the asset class as the report highlights some of the same issues other rating agencies have pointed to in similar reports issued over the last six months.
Fitch Ratings in an Aug. 7 report also warned that "the lack of historical data and ambitious growth strategies by regional operators will make high investment grade ratings on these transactions difficult to attain.”
Morningstar Credit Ratings also cited its reservations about the lack of historical data on the newly-emerging asset class in a report published the week of June 4.
On May 4, Standard & Poor's stated similar concerns in their report on the emerging asset class, highlighting that "the property manager's expertise in large-scale residential real estate management and ability to manage subservicing arrangements may also be a credit consideration."
The Moody's report said that market interest in launching real estate owned (REO)-to-rental securitizations has increased over the past several months, driven partly by the sizable inventory of REO properties held by GSEs, RMBS trusts and various financial institutions.
“Numerous real estate market participants have asked how we would analyze the credit quality of these securitizations, ” said Kruti Muni, a Moody’s vice president and co-author of the report. “No one has yet presented a specific transaction or deal structure to us, therefore, we have not yet completed development of a formal methodology.”
Moody’s said the transactions would likely incorporate two key structural elements. First, an operator or manager that will be in charge of renting, maintaining and ultimately selling the underlying properties in the transaction. Second, having the rental and then the sale of the properties as sources of cash flow.
“The risk that an operator could fail to perform its duties would be one of the key risks these transactions would present," Muni said. “The presence of a manager that actively handles all aspects of the properties would be similar to what is present in cell tower or container lease asset-backed securities (ABS).” Moody’s also notes that the securitization will also likely benefit if the operator is the sponsor with its economic interests aligned with those of investors.