Progress' next single-family rental deal includes two classes of PIK notes
Progress Residential’s next securitization of single-family rentals includes a feature rarely seen in the asset-backed market: the option to pay holders of some of the riskiest notes with additional debt in lieu of interest.
This feature, which is more common in the high yield corporate bond market, can only be used in the event of a shortfall of cash flow from the collateral of the $379 million Progress Residential 2018-SFR2. Should the debt service coverage ratio falls below a certain level, interest payments on these notes will be diverted to pay property management fees and property maintenance expenses instead.
It can also be used to capture excess cash collateral to pay interest to senior notes.
Moody’s Investors Service cited the feature as a positive, at least for more senior noteholders, who will be better protected as a result.
In all, eight classes of notes will be issued in the transaction, compared to seven in Progress Residential's first deal this year.
The senior $167.9 million Class A notes carry preliminary triple-A ratings from both Moody’s and Morningstar Credit Ratings. Two of the four subordinate tranches, the $25.8 million Class F and $16.5 million in Class G notes, that have the PIK feature. (The $65.6 million Class E notes and the most subordinate Class H notes totaling $30 million are not included.)
Above those notes are $30 million in Class B notes (rated Aa2 by Moody's and AA+ by Morningstar), $24.5 million in Class C notes (A2/AA-) and $18.9 million in a Class D tranche (Baa2/A-).
Morningstar also issued a BBB- rating for the Class E tranche and BB for the Class F.
Moody's did not rate any of the notes below Class D; neither agency issued ratings for Class G or H.
Other than the PIK feature, the structure of the deal is similar to Progress' recent deals, including its debut 2018 asset-backed transaction in February.
The notes are secured by a single loan originated by Goldman Sachs, an arrangement similar to Progress’ prior deals. The five-year, interest only loan is secured in turn by both the first-priority mortgages on 2,116properties as well as an equity interest in the borrowing sponsor firm PW Master Trust A (a subsidiary of Progress) .
The loan amount represents 75.5% of the collective third-party broker price opinions of the properties.
The collateral consists largely of newly acquired homes primarily in Arizona, Florida, Georgia, Nevada, North Carolina and Texas. By comparison, some of Progress' recent deals included many houses that were recycled from previous securitizations that had been called.
The recently acquired homes have relatively little performance history that investors and agencies are keen to study, such as rent growth, vacancy rates, delinquencies history, plus total revenues and actual expenses, according to Moody's.
Progress Residential has spent $32 million to date acquiring, renovating and maintaining the home sin the pool.
The gross rental income is $37.7 million a year, similar to that of Progress’ first securitization this year.
The issuer’s estimated net operating income is $23 million; Moody’s applied a haircut to derive estimated income $18.7 million, figuring in the differences for the agency’s own higher cost estimates for maintenance, repairs, management fees and lost income through vacancies.