Progress Residential is refinancing the bulk of a portfolio of single-family rental properties it first securitized in 2016. The company, which is controlled by Pretium Partners, appears to be cashing out some equity in the process.
The $479 million Progress Residential 2019-SFR2 Trust is backed by a single, fixed-rate loan from Deutsche Bank; that loan, in turn is backed by mortgages on 2459 single-family residences, 2,452 of which were previously securitized in a transaction called Progress 2016-SFR2; another five were securitized in Progress 2016-SFR1; only two are new to a Progress securitization.
Morningstar Credit Ratings, which is rating the deal, does not state the amount of equity Progress is cashing out via the refinancing. However, the properties have appreciated considerably since the sponsor acquired them. The average purchase price per property is $156,432, and the average current value, as measured by a broker price opinion, is $225,230.
Moreover, Progress is borrowing more heavily against the properties this time. The loan-to-value ratio of the most subordinate notes to be issued in the transaction, as measured by Morningstar, is 97%; by comparison, the most subordinate tranche of notes issued in Progress 2016-SFR2 had an LTV, as calculated by Morningstar, of 87.6%.
Moody's Investors Service puts the total leverage of 86.5%, which is lower compared to 90.83% in a transaction Progress completed its first securitization of the year, in February, but slightly higher than 83.35% for Progress 2018-SFR3 and 85.25% in Progress 2018-SFR2. "As a result of the higher total leverage, the borrower has less equity in the properties and less incentive to maintain or create value, and in stress scenarios may choose to divert resources to other properties with lower leverage," the presale report states.
Of note, Progress is not refinancing all of the original collateral for the 2016-SFR2 transaction; that deal was originally backed by 3,787, according to a presale report that Morningstar issued at the time.
The average age of the properties is roughly 18 years and the majority have three or more bedrooms.
Morningstar’s presale report does not list the vacancy rate for the portfolio; it only cites the vacancy rate of 5.2% over the sponsor’s entire managed portfolio of single-family properties. The company has a retention rate over 73%. Its eviction rate is approximately 3.3% annually.
Morningstar’s assumed net cash flow on the properties, in its base-case scenario, of $17.2 million, which is 30.3% lower than the underwritten net cash flow of $24.7 million. Morningstar underwritten net cash flow as a percentage of gross income is 37.9%, which is on the lower end of both Progress and overall securitizations from last year. Morningstar said that some of this is attributable to higher underwritten expenses, including taxes and homeowners association expenses. By broker price opinion value, 81.3% of properties are in a homeowners association.
Both Morningstar and Moody's expect to assign a triple-A rating to the Class A notes to be issued in the new deal, which represent an LTV of 37.8%; the Class B notes, which have an LTV of 47.7%, are split rated: AAA by Kroll and Aa3 by Moody's. There are four other tranches of notes with preliminary ratings of AA+/A3, A+/Baa3, A3 and BB. (Moody's is not rating the Classes E or F.)
Similar to Progress 2019-SFR1, this transaction has a debt service coverage test, that, if failed, results in interest that would normally be paid to Class F and G notes being "trapped." Failure to pay current interest to the class F and G will not result in an event of default, but the interest due will accrue to the balance of these bonds.
