Progress Residential is refinancing a portfolio of single family rental properties it has previously securitized – in some cases, for a second time.
The company, which is controlled by Pretium Partners, is cashing out some equity it has built up in the underlying properties in the process, according to Kroll Bond Rating Agency.
The new transaction, Progress Residential 2018-SFR3, is backed by a single, fixed-rate mortgage from Morgan Stanley with a balance of $662.4 million; this mortgage, in turn, is backed by 3,459 single-family residential properties, of which 3,418 homes (98.8% by broker price opinion) were previously securitized in Progress 2016-SFR1. And 1,492 of those properties (44.4%) were first securitized in Progress 2014-SFR1 before being refinanced in the 2016 deal.
The 41 properties not previously securitized were held on the sponsor’s balance sheet.
If there’s sufficient demand from investors, the deal could be upsized to $1 billion, in which case it would be backed by a larger portfolio of 5,424 homes.
Since the 3.459 properties were first securitized three years ago, their aggregate value has increased by roughly 12% from $700.9 million to nearly $785.9 million. But Progress isn’t just cashing out on the additional equity it has built up; it’s also borrowing more heavily against the collateral. The amount of debt on the rollover homes has increased from $532.7 million to $655.4 million, according to Kroll. The loan-to-value ratio of the properties has also increased since the prior securitizations from 76% to 83.4%, based on broker price opinions.
Kroll puts the LTV even higher, at 91.2% versus 84.1% in the 2016 transaction. That’s the highest leverage among the eight Progress deals that Kroll has rated to date.
Progress 2018-SFR3 will be Progress’ first securitization which permits the issuer to voluntarily substitute properties in the underlying portfolio – something several of its peers are already doing. Of the outstanding single family rental securitizations rated by Kroll, about half include a voluntary substitution feature. In the new transaction, Progress is allowed to substitute up to 5% of the homes, based on the property count as of the closing date, beginning three months after the closing date.
Kroll takes a mixed view of this feature; on the one hand, it “provides the issuer with operational flexibility to manage its overall portfolio. It could also lead to “negative credit and concentration migration,” though this risk is partially mitigated by the substitution limitations and conditions.
Among other ratings considerations, Progress 2018-SFR3 has exposure to 99 vacant properties (3% of the portfolio balance), while four tenants (0.1%) were delinquent on their rent payments as of the property cut-off date. As a comparison, each of the 16 KBRA-rated transactions issued since June 2016 also included vacant properties at securitization. The vacancy rates for those transactions ranged from 2.5% to 6.5%. Issuance delinquency rates for those deals have been less than 1.6% and averaged 0.6%.
Kroll expects to assign an AAA to the senior tranche of notes to be issued in the new transaction; there are also five subordinate tranches with ratings ranging from AA to BB. Although the advance rates on the four most senior tranches of notes will change is the transaction is upsized, Kroll expects to assign the same ratings.
