Colony Starwood Homes, a former major investor in distressed loans now focusing on managing single-family home rentals, is structuring a new asset-backed deal of SFRs offering the largest cash flow projection of any recent peer deals in the nascent asset class.  

The Scottsdale, Ariz.-based real estate investment trust is packaging a single-loan securitization backed by the rental income from 3,997 rental properties – an annual net cash flow estimated at $43.2 million by Morningstar Credit Ratings, according to a presale published Monday.

The total outstrips the projected cash flow from its first-ever deal in May ($39.2 million), which itself had been the largest of five other SFR deals this year cited by Morningstar such as Home Partners of America and Altisource Residential Corporation.

The notes in the deal, dubbed Colony Starwood Homes 2016-2 Trust, are sized at $580.72 million.

Morningstar and Kroll Bond Rating Agency each assigned a preliminary ‘AAA’ structured finance rating to $306 million in Class A notes, and a range of ‘AA’ to ‘BBB-’ on five subordinate notes (a sixth class G series of bonds totaling $30.6 million is unrated).

Colony Starwood in August sold off its non-performing loan portfolio to concentrate on acquiring and rehabbing single-family home rentals. The REIT was formed out of the merger of two REITS, Colony American Homes (CAH) and Starwood Waypoint Residential Trust (SWAY) last January.

While it is the second deal for Colony Starwood, the riskier elements of SFR securitizations still abound for the trust issuer as part of nascent asset class. Morningstar raised its MSA-level capitalization rates to 6% or 50 basis points over its standard multifamily setting, due the “absence of historical single-family rental cap rate data.”

These are older homes (average age of 28 years), for which Morningstar added 10% in cost projections for repairs and maintenance over the underwritten expenses as well as a 28% stress-level adjustment to the leasing and marketing/turnover expenses.

There are also a lack of typical tenant credit measures such as income-to-rent ratios that prompted Morningstar to assign slight 1% reduction in the gross rent assumption compared to multifamily ratings. Colony Starwood’s gross rental revenues for the nearly 4,000 loans is $74.4 million in line with the issuer’s reported potential annual rents of $76.8 million.

The net cash flow estimate of $43.2 million (reduced by the application of taxes, HOA fees, maintenance and capital expenditures) is the largest of any of six prior SFR deals examined by Morningstar, thanks to lower projected expenses and capital costs, according to Morningstar.

The Colony Starwood trust is pooling properties distributed across nine states and 38 MSAs in the U.S., with a nearly 30% concentration in Florida.

Hurricane Matthew is not expected to be a major source of risk exposure, with only 1.3% of the properties sustaining minor damage. Of the properties in Florida, 9% were in centrally located Orlando and 8.4% in Tampa along the Gulf of Mexico coastline.

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